Treasury yields have surged since the Federal Reserve began cutting rates in September, with a renewed burst in the past few weeks. That appears to be putting pressure on the stock market as 2024 comes to a close. Blame "bond vigilantes" fearing "reckless" monetary and fiscal policies, writes economist and market strategist Ed Yardeni of Yardeni Research.
"The Bond Vigilantes are sending a loud warning message, Yardeni wrote Dec. 28. "They aren't convinced that Donald Trump, the new sheriff coming to town, will maintain fiscal law and order any better than the old sheriff has done. They are also losing their confidence in Jerome Powell, the deputy in charge of monetary law and order."
Treasury Yields Up 100 Basis Points
The 10-year Treasury has surged to 4.62% as of Dec. 27, up 102 basis points from the 52-week low of 3.6% on Sept. 17, a day before Fed chief Jerome Powell and fellow policymakers kicked off a rate-cutting cycle with a 50-basis-point move. The two-year Treasury yield, more closely tied to the Fed rate outlook, has jumped roughly 75 basis points.
After that big Fed rate cut, Treasury yields ran up on stronger-than-expected economic data, as well as growing market bets that Donald Trump would win the 2024 election, pushing inflationary policies.
Yields jumped on Donald Trump's election and the Fed's second rate cut, hitting a short-term high of just over 4.5% on Nov. 15. Yields then fell back, tumbling as Trump nominated hedge fund manager Scott Bessent to be his Treasury secretary. Bessent has called for policies to boost economic growth and rein in the deficit to 3% of GDP.
But after dropping to a 52-week low of 4.13% on Dec. 6 — the same day the S&P 500 hit a record high —the 10-year Treasury yield has surged again to their highest levels in six months. That included a huge spike on Dec. 18, as the Fed cut rates for a third straight meeting, for a total of 100 basis points. That spike in Treasury yields triggered a stock market sell-off, with the S&P 500 down nearly 3% and the Nasdaq composite off 3.6%.
"The Fed seems to be stimulating an economy that doesn't need to be stimulated," Yardeni wrote.
The 10-year Treasury yield retreated seven basis points on Monday to 4.55% with stocks tumbling, extending Friday's losses.
Bond Vigilantes Doubt Trump Policies
Meanwhile, there are renewed doubts that Trump administration policies will control the deficits or inflation.
Tesla CEO Elon Musk and Vivek Ramaswamy, co-heads of Trump's new Department of Government Efficiency, have called for $2 billion in government spending cuts, but haven't specified the time period or what those curbs might be.
"Bond Vigilantes aren't convinced Trump 2.0 policies will narrow the federal deficit and that they suspect some of the policies might be inflationary, such as Trump's plans to raise tariffs, deport illegal migrants, and cut taxes," Yardeni noted.
Fed chief Powell and his colleagues share some of those concerns. Powell noted "policy uncertainty" related to President-elect Trump's policies as among the reasons to go slow on further rate cuts.
The Fed's "dot plot" of individual policymakers' rate outlooks signals just 50 basis points in cuts next year. Markets are pricing in just one quarter-point cut in 2025, with that not coming until May or June.
Fed rate cuts on paper provide fresh monetary stimulus, or at least remove some monetary tightening. But, as a practical matter, higher Treasury yields will act as a headwind to the economy, boosting mortgage rates and other borrowing costs.
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Treasury Yields Won't Stop Bull Market
Higher Treasury yields also could focus the Trump administration on deficit control.
"We've often said that we will worry about the federal deficit when bond investors start worrying about it. That seems to be happening now."
Yardeni still sees the 10-year Treasury yield trading around 4.5% in 2025, plus or minus 25 basis points, but says it's possible that it hits the long-term peak of 5% set in late 2023.
But Yardeni, who has long championed a "Roaring 2020s" scenario for the economy and Wall Street, is "not turning bearish on the stock market." After a "pullback/correction," he expects the bull market to continue, believing Trump 2.0 will make some progress on the deficit outlook.
Please follow Ed Carson on Threads at @edcarson1971 and X/Twitter at @IBD_ECarson for stock market updates and more.
