The bond market had a good day Monday...because it was closed for Columbus Day. We think that yields have risen high enough to attract buyers. But plenty could still go wrong, making bond yields even more attractive, suggests Ed Yardeni, editor of Yardeni QuickTakes.
The war in the Middle East is likely to heat up again after the midterm elections, sending oil prices higher. On the other hand, core CPI gains could stabilize, which would likely postpone a Federal Reserve rate hike from later this month to early December.
(Editor’s Note: Ed will be speaking at the 2026 MoneyShow Masters Symposium Sarasota, scheduled for Nov. 30 – Dec. 2. Click HERE to register.)
For now, let's focus on the supply of debt in the US, which is a longer-term concern for the bond market. The US Treasury borrowed $749 billion during the three months through September. That's the change in marketable securities held by the public over the three months. The 10-year Treasury note yield rose from roughly 4.50% to 5.25% over that period.
In the past, federal budget deficits tended to widen the most during recessions, when tax revenues fell faster than the government’s outlays. Then the deficits would narrow during economic expansions, as revenues rose faster than outlays.
Yet over the past three years, the economy has been booming, but the government’s budget deficit remains very wide. It hasn't narrowed because outlays are growing faster than receipts.
Allowing that to happen is fiscal recklessness. That’s because it requires increasing the supply of government debt during an economic boom, when private credit demands are surging. That necessarily puts upward pressure on interest rates. If deficits are this large during good times, what happens when the bad times arrive?
For now, we believe the backup in US bond yields is driven more by better-than-expected US economic growth than by the government's deficit. In other words, the US isn't on the edge of a debt crisis. But the question is whether the Bond Vigilantes will patiently wait for better times. We're not so sure.