The bond market is currently being run by a “wild bunch” of investors; this is the next potential area of destruction they could cause.
Investors are paying a lot of attention to the bond market right now. JPMorgan has warned of a “financial accident” if yields keep increasing and prices keep falling.
“The damage to bonds has been worse and lasted longer than the damage to stocks, and you can’t help but wonder where the real damage is.” The value of bonds can only drop this much with some worry somewhere. Despite this, it’s hard to guess where it might show up; this comes after the worst month for bonds all year, according to a group of Deutsche Bank analysts led by Jim Reid on Monday.
Ed Yardeni, head of Yardeni Research, gives us our call of the day with a tip on the following market that will go down. During this time, he sounds the alarm about the “Wild Bunch,” or bond vigilantes, who he says have “seized control of the Treasury market.” He thinks that things will get better if inflation goes down.
In a note to clients, Yardeni lists proof of these bond vigilantes at work. The 10-year Treasury yield BX: TMUBMUSD10Y went up instead of down after some recent insufficient data; this shows that bond buyers are now more worried about what fiscal policymakers are doing than monetary policymakers might.
“The fear is that the growing federal budget deficit will lead to more bonds on the market than people want, forcing yields higher to clear the market. This fear has been the bond vigilantes’ entry point,” he says.
These days, Yardeni also sees vigilantes at work regarding yield curve disinversion. An inverted yield curve happens when the interest paid on short-term debt is higher than that on longer-term bonds.
“It’s funny, but bond investors may have thought that short-term rates aren’t high enough to cause a financial crisis, credit crunch, and recession now that the Fed seems ready to stop raising rates,” he said.
And this is where he’s watching out for trouble because he sees that the crazy people have strangely left the high-yield corporate debt market alone, where prices are flat and stable:
“Is it possible that some of them think government bonds are riskier than high-yield corporate bonds?” They did a lot of damage in the Treasury market, which shows that” he said, adding that they are watching out for signs that the damage is spreading to high rates.
The crazy bunch is after DC policymakers. He says they were responsible for turning around a drop in the 10-year yield from the global financial crisis to the pandemic over the last three years.
“Take meaningful actions to reduce the federal deficit now and in the future, or we will push the bond yield up to whatever level it takes to get you to do so!” says Yardeni.