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Market veteran Ed Yardini said bond vigilantes are “exhausting” again as the federal deficit swells.
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He coined the term bouncers, referring to investors who sought smaller deficits by sending them higher returns.
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“(W)e the federal deficit has widened when the economy is doing well. And I think bond vigilantes are very concerned about that.”
Bond vigilantes are preparing to throw their weight into the Treasury market as the federal government’s budget deficit is expected to swell, according to market veteran Ed Yardini.
The head of Yardeni Research is famous for coining the term bouncer in the 1980s, referring to traders who protested massive deficits by selling bonds to push yields higher.
Now there are signs of it moving again like Bond yields continue to rise despite signs of slowing inflation. On Thursday, the 10-year Treasury yield reached its highest level since 2007.
This comes as the supply of Treasurys is expected to increase by $2.9 trillion this year and $2.4 trillion next year.
when asked in Bloomberg Television Asked if the bond marshals were back, Yardini replied, “I think they are. They sure are tired.”
He added that the bond market is usually driven by expectations about inflation and the Federal Reserve’s expected responses to it, with supply and demand for Treasuries usually less of a factor.
Yardini explained that this is because the federal deficit has historically widened during recessions while the Fed cuts interest rates.
“This time around, the federal deficit has widened when the economy is doing well. And I think bond vigilantes are very concerned about that,” he said. “There is a lot of supply.”
Yardini expects the stock market to move sideways or continue to fall this year on concerns about what bond vigilantes will do.
However, by the end of the year, he still saw the S&P 500 rebound to 4,600 and climb to 5,400 next year. “But I think in the short term, that’s why the market has fallen since the end of July.”
The perceived power of bond vigilantes was famously exemplified in the early 1990s, when US yields jumped as investors dumped Treasurys amid concerns about federal deficits in what became known as the Great Bond Carnage.
James Carville, who was an advisor to President Bill Clinton at the time, expressed his desire to be reincarnated as a bond market: “You can scare everybody.”
Indeed, Yardini has described the 1990s as the heyday of Bond Rangers. During the Clinton administration, which worked with a Republican Congress, deficits shrank and revenues fell.
But the roots of the concept go back to an earlier era of disability. In a now-legendary comment from 1983 entitled “Bond Investors Are Economic Bond Guards,” Yardini warned, “So if the fiscal and monetary authorities don’t regulate the economy, bond investors will. And the economy will be run by security guards in the credit markets.”
explained later that bond investors were not necessarily trying to regulate the economy but were merely following their financial best interests: “the concern that inflation might erode the effective purchasing power of returns from their investment in bonds”.
Read the original article at Business interested
