Yields on longer-dated U.S. 30-year Treasury bonds have breached the 4.50% threshold, a significant level last witnessed on July 25, raising alarms across global financial markets.
The 10-year U.S. Treasury yield has also seen a notable increase of 63 basis points, climbing to 4.25% since the Federal Reserve’s meeting on Sept. 18.
This surge in yields reflects mounting concerns over fiscal sustainability and resuming inflationary pressures, as stocks tumbled broadly in response.
The iShares 20+ Year Treasury Bond ETF TLT declined by an additional 0.3%, marking its fifth negative week in the last six and approaching a 10% drop from mid-September highs.
Wall Street, meanwhile, is facing its third consecutive day of declines. The S&P 500, as represented by the SPDR S&P 500 ETF Trust SPY, is poised to end a six-week winning streak.
As the presidential election approaches in less than two weeks, investor apprehension appears to center on the potential for further expansionary fiscal policies in the U.S., which could exacerbate the already substantial federal budget deficit.
Bond Vigilantes Are Back
“The Bond Vigilantes are voting early,” stated Wall Street veteran investor Ed Yardeni in a note Wednesday.
According to the expert, bond Vigilantes appear to be signaling disapproval of Fed Chair Jerome Powell‘s Sept. 18 decision to implement a 50 basis point rate cut.
This move, viewed by some as premature, has raised fears that the Fed may inadvertently stoke further economic overheating.
Yardeni maintained his forecast for bond yields to remain in the 4.00% to 4.50% range, but he expressed caution about the Fed’s ability to balance growth and inflation risks in the near term.
“The Bond Vigilantes may also be voting against Washington, figuring that no matter which party wins the White House and the Congress, fiscal policies will bloat the already bloated federal government budget deficit and heat up inflation. The next administration will face net interest outlays of over $1 trillion on the ballooning federal debt,” he added.
Macro Concerns: The U.S. Dollar And US Budget Deficits
Otavio Costa, macro strategist at Crescat Capital, raised concerns over the long-term trajectory of the U.S. dollar. In a pointed post on X, Costa highlighted the “magazine cover curse” phenomenon, referencing The Economist’s October cover depicting the U.S. dollar as a rocket soaring skyward—a symbol of America's economic dominance.
Costa warned that while the U.S. dollar might appear strong in the short term, the substantial share of GDP devoted to servicing debt (around 5%) could lead to a dollar depreciation against other fiat currencies over the next one to three years.
Adding to the growing concern, the International Monetary Fund (IMF) released a more pessimistic fiscal forecast for the U.S. on Wednesday.
The IMF now expects the U.S. budget deficit to reach 7.6% of GDP in 2024, up from its previous April estimate of 6.5%. The outlook for 2025 has also deteriorated, with the deficit projected to hit 7.3% of GDP, slightly higher than the prior 7.1% forecast.
The IMF emphasized that the U.S. deficit will likely remain above 6% of GDP until at least 2029, driven by rising debt servicing costs and persistent fiscal imbalances. It warned that both the U.S. and China face a “low probability” of stabilizing their debt levels by the end of the decade.
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