Back in May, Jamie Dimon warned that a crack was coming in the bond market. A month later, Ray Dalio published a book arguing that the U.S. debt situation had already passed the point of no return. And with total public debt blowing past $40 trillion in August and the 30-year Treasury yield still hovering above 5% in September, you might think the pessimists are having their moment.
Not so fast, says Ed Yardeni.
The veteran Wall Street strategist and founder of Yardeni Research isn't buying the panic. In a note shared this week, he argued that the trade built on those debt fears has been a costly one, and his own gauge of bond market stress is nowhere near flashing red.
"Anyone who has followed their consistently pessimistic outlook over the past few years has missed a huge rally in the stock market," Yardeni said.
He's got a point. Over the past three years, the S&P 500, as tracked by the SPDR S&P 500 ETF Trust (SPY), has surged 75%. That rally happened even as Treasury yields climbed, which is not exactly the doomsday scenario some predicted.
The One Test He Trusts
Yardeni says he'll start worrying about the debt when the bond vigilantes do. That's a term he coined back in July 1983 to describe investors who impose discipline on governments by demanding higher yields. And his test for when they're on the loose is pretty specific.
"The Bond Vigilantes tend to be on the loose when the 10-year US Treasury bond yield exceeds nominal GDP. The yield is currently well below nominal GDP," he said.
Right now, nominal growth is running at 6.56% as of the second quarter, while the 10-year yield was near 4.60% in July. That's a comfortable gap.
He also notes that the 10-year has stayed within the 4.00%–5.00% range that was the norm from before the 2008 financial crisis right up through the pandemic. For Yardeni, that's not a sign of stress; it's evidence the economy is functioning normally.
"We've contended that this range is the old normal," he said.
The 5% Test
Ultimately, Yardeni's argument boils down to one number: 5%.
As long as the 10-year yield stays below nominal GDP, he sees little reason to think bond investors are forcing Washington to pay an unsustainable price. But here's the catch: the 10-year is creeping toward 5%, and the 30-year has already blown past it.
That makes 5% more than just a psychological barrier. It's the level where Yardeni's bond-vigilante test could face its biggest challenge. If yields break above 5% while nominal growth stays around current levels, investors might start demanding a bigger premium to hold long-term U.S. debt.
Two Backstops Before Five Percent
So why does Yardeni think the range will hold? He points to two backstops.
First, there's the Treasury. He says Secretary Scott Bessent has already shown he's willing to step in to keep yields from rising. If the 10-year hits 5.00%, Yardeni expects Bessent to sell more short-dated Treasury bills and use the proceeds to buy back longer bonds. It's a playbook Janet Yellen used in 2023, and it worked.
Second, there's the Federal Reserve. Yardeni notes that Chair Kevin Warsh has committed to restoring price stability. If inflation stays stubborn, he expects the Federal Open Market Committee, the Fed's rate-setting panel, to raise rates in September.
Hawkish now, calmer later. That's the bet.
So while the doomsayers are loading up on doom, Yardeni is sticking with his playbook: watch the data, trust the range, and don't panic until the vigilantes actually show up.
