Yardeni Research Founder & President Ed Yardeni Talks Bond Yields

Ed Yardeni · Yardeni Research

US bond yield rise reflects a booming economy and AI borrowing, not bond vigilantes.

Yardeni sees the US yield backup mainly as a reflection of a strong economy rather than a bond-market revolt. Consumer spending is holding up, retiring baby boomers are still spending, capital spending is booming, AI hyperscalers keep borrowing heavily, and the deficit is very large. He notes TIPS real yields have led the nominal yield increase rather than inflation, which he reads as a growth signal.

“Here in The United States, I would say a more important explanation for what's going on is that we've seen an economy that's really on fire. It's booming.”at 1:22

Ed Yardeni · Yardeni Research

A 10-year yield above 6%, above nominal GDP growth, would be a real bond vigilante concern.

The 10-year yield is near 5.5%, against nominal GDP growth running about 6% to 6.5% year over year. Yardeni argues that once yields exceed nominal GDP, the economy starts to slow. The economy is less rate-sensitive than before, since retirees earn more on money market funds when rates rise and AI borrowers absorb debt readily. Speed matters: a quick move to 6% could crack the financial system and push the Fed toward liquidity facilities, while a gradual rise would do less damage. He describes a spectrum of US yield scenarios, with the good end being stronger growth that lifts neutral rates, and says the market is moving toward the danger zone.

“I would say that the bond vigilante concept would be a real concern if we started to see the bond yield get up to 6% and higher. Because I think once you get above nominal GDP, you do start to slow it down.”at 5:21

Ed Yardeni · Yardeni Research

Bank of Japan rate hikes unwinding yen carry trades explain the global rise in bond yields.

Yardeni says the unwind of the yen carry trade is probably the single best explanation for the rise in bond yields around the world. As the Bank of Japan raises rates, hedge funds and speculators that borrowed in Japan at near-zero rates are closing their positions. Those positions included many government bonds, so unwinding them pushes yields up globally.

“If you're looking for one explanation for the increase in bond yields around the world, ... it's probably the unwind of the yen carry trade. As the Bank of Japan has been raising interest rates, all those hedge funds and speculators that borrowed money in Japan at near zero rates are now unwinding their positions.”at 0:42

Ed Yardeni · Yardeni Research

France is starting to look like Greece's 2010 debt crisis, with yields rising near 5%.

French 10-year yields are almost 5%, around 4.9%. Yardeni compares this to Greece, where bond vigilantes pushed yields up to 40% in 2010, which finally got politicians' attention. Greek yields now sit below French yields, showing the adjustment Greece made. He implies France is heading toward a similar fiscal reckoning.

“No, I don't think you can really put a positive spin on France. France is starting to look like a Greek debt crisis.”at 2:18

Ed Yardeni · Yardeni Research

After the September hike, Fed officials now see policy as no longer restrictive, reflecting stronger growth.

At the start of the year, Fed officials said the funds rate was still slightly restrictive. Now Fed chair Warsh has said the 25 basis point September increase removed a dose of accommodation. Yardeni reads this shift as reflecting stronger economic activity, and says better-than-expected growth raising neutral rates is the good end of the bond-yield spectrum.

“Now the new [Fed chair], Warsh, has most recently said that the 25 basis point increase in September in the Fed funds rate was eliminating or removing a dose of accommodation.”at 3:28

Ed Yardeni · Yardeni Research

Surging oil prices are another factor pushing global bond yields higher.

Alongside the strong US economy, Yardeni points to oil prices as the other factor behind rising yields, noting they were up sharply that day. Higher and longer oil prices, combined with stronger growth and heavy credit demand, later feed into his caution about the bond market.

“But look, the other factor of course is oil prices. They're up a lot today.”at 3:48

Ed Yardeni · Yardeni Research

Investors may now trust AI hyperscaler borrowers' debt more than sovereign bonds.

The bond market is still very liquid, and AI hyperscalers keep borrowing heavily. Yardeni suggests, with hedging, that AI borrowers have become the new sovereign bonds because investors feel more comfortable owning their debt than sovereign debt, such as French or possibly US government bonds.

“And the AI borrowers, the market, as you said, is still very liquid. Maybe the AI borrowers are the new sovereign bonds in the sense that investors feel actually more comfortable owning them than they feel owning sovereign”at 5:49

Ed Yardeni · Yardeni Research

US fiscal policy, not the Fed, is the real problem driving US bond yields higher.

Yardeni says the Fed matters less than it used to because the economy is less interest-rate sensitive. The real issue is fiscal policy: the deficit is extremely large, and Treasury Secretary Bessent is trapped. His only real tool is buying back Treasury bonds and issuing more bills, a 'bazooka' Yardeni doubts will do much. Bessent's apparent concession that he cannot control yields suggests he is not convinced the bazooka is needed yet.

“Partly that's because the economy is less industry sensitive. But let's face it, the problem is fiscal policy.”at 6:26

Ed Yardeni · Yardeni Research

Yardeni Research turned cautious on US stocks in mid-September over bond-market risk.

Yardeni Research moved more cautious in mid-September because it saw higher and longer oil prices, stronger than expected economic growth, and heavy demand for credit. Together these pointed to a possible problem in the bond market, which he says has since materialised.

“That's why back in mid September we turned more cautious on the market because we did start to perceive that between higher and longer oil prices and stronger than expected economic growth and all the demand for credit, we could have a problem in the bond market and we do.”at 7:58