"Bond investors are the economy's bond vigilantes. ... So if the fiscal and monetary authorities won’t regulate the economy, the bond investors will. The economy will be run by vigilantes in the credit markets.” – Ed Yardeni, 1983
"Bond investors are the economy's bond vigilantes. ... So if the fiscal and monetary authorities won’t regulate the economy, the bond investors will. The economy will be run by vigilantes in the credit markets.” – Ed Yardeni, 1983
"I used to think that if there was reincarnation, I wanted to come back as the President or the Pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody." – James Carville, 1993
The Bond Vigilantes have struck again. As far as we can tell, at least with respect to US financial markets, they are the only 1.000 hitters in history. Even though the Stock Vigilantes were clearly telling President Donald Trump that his tariff policy was misguided late last week, his advisers touted falling oil prices and bond yields as ultimately helping Main Street America. That changed as the 10-year Treasury yield surged 34 bps from below 4.0% on Friday to nearly 4.34% today (chart).
After ratcheting back all reciprocal tariffs to 10% for at least 90 days (and upping the pressure on China to a greater than 100% tariff), Trump said today: "I was watching the bond market. The bond market is very tricky, I was watching it. But if you look at it now it's beautiful. The bond market right now is beautiful…. I saw last night where people were getting a little queasy." Trump also said he listened to JPMorgan CEO Jamie Dimon's interview this morning with Fox's Maria Bartiromo, where Dimon said a recession was likely and the bond market was sending bad signals about stress in the financial plumbing.
Hedge funds were pulling back and winding down Treasury trades amid the financial market volatility, which put upward pressure on bond yields. Even after the latest tariff announcement, the 10-year yield remained relatively elevated, as investors reduced the odds of a recession and of an imminent easing by the Fed (chart).
The S&P 500 finished today up 9.5% and the Nasdaq Composite added 12%, the biggest one-day index gains since 2008 and 2001, respectively. While drastically high tariffs on China coupled with 10% on other trading partners is roughly the same average tariff rate as the cardboard-ladened tariff rates produced by the administration on April 2, markets are much friendlier to the semblance of a plan (i.e., decoupling with China) than oddly calculated tariff rates that punish allies.
The S&P 500 is still 11.1% off its February 19 high and its likely to swing back and forth for a while longer (chart). We are still targeting 6000 on the S&P 500 by the end of the year. We are still assigning a 45% subjective probability to a stagflation/recession scenario and 55% to a resumption of our Roaring 2020s scenario.
We continue to recommend overweighting S&P 500 Information Technology, Communication Services, Financials, and Industrials. Today, they regained some of their losses since the S&P 500 peaked on February 19 (chart).
