'The Bond Vigilantes' First Named by Yardeni "Weak Dollar Signals Loss of U.S. Trust"

Interview with Ed Yardeni, President of Yardeni Research

First used the term 'Bond Vigilantes' in 1983

Bond market turmoil is a major reason for Trump's tariff deferral

Interpreted as being led by 'Bond Vigilantes'

Concerns about stagflation if tariff policy is enforced

"The recent weakness of the dollar is a signal that U.S. Treasury bonds are losing the trust of some foreign investors"

Ed Yardeni, a Wall Street bond guru famous for first using the term 'Bond Vigilantes' in 1983, warned the Trump administration about this on the 15th (local time).

The role of the 'Bond Vigilantes' was significant in the Trump administration's decision to defer reciprocal tariffs for 90 days on the 9th. Immediately after the announcement of reciprocal tariffs, U.S. President Donald Trump declared a deferral just 13 hours after the bond prices plummeted (bond yields surged). Reports titled 'The Bond Vigilantes are Back' and 'Home Run for the Bond Vigilantes' flooded Wall Street and made headlines in foreign media.

He, who is also the president of the leading Wall Street research firm Yardeni Research, explained that as the issuance of U.S. Treasury bonds increases, the power of the Bond Vigilantes has become stronger than ever. He also expressed concerns that stagflation could occur in the second half of the year due to tariffs. The following is a Q&A.

▶The 10-year U.S. Treasury yield once reached around 4.5%. Are the Bond Vigilantes back?

"I predicted at the beginning of the year that the 10-year U.S. Treasury yield would move between 4.25% and 4.75% this year. The problem was the rapid rise in yields in just a day or two. After the tariff deferral announcement, bond yields stabilized. The Bond Vigilantes are back and stronger than ever."

▶How do you define the Bond Vigilantes?

"It includes everyone who holds bonds. Individuals and governments alike. Recently, Warren Buffett also sold a large amount of stocks and invested in short-term Treasuries instead of long-term ones (which he doesn't trust). That's the action of the 'Bond Vigilantes'."

▶If foreign governments are included in the Bond Vigilantes, some countries fear asset freezes when conflicts with the U.S. arise.

"If China blockades or invades Taiwan, the U.S. is likely to freeze China's assets. China has an incentive to sell U.S. Treasuries, but if they sell quickly, they will incur losses, so they are likely reducing them gradually. U.S. Treasuries are still considered safe assets. However, the recent weakness of the dollar may signal that some foreign investors are losing trust. In fact, they are moving assets to the euro and yen."

▶What are the characteristics of the Bond Vigilantes this time?

"Tariffs are likely to stimulate prices for at least a few months, so the focus is more on inflation than economic slowdown."

▶What about the possibility of stagflation?

"We may feel stagflation in the second half of this year. It's a combination of rising inflation and slowing growth. Tariffs are taxes, and taxes slow down the economy. After a short-term price increase, there may even be deflationary pressures."

▶Why did the Trump administration react so sensitively to the bond market?

"The U.S. Federal Reserve (Fed) has cut rates by 1 percentage point since September 2024. Yet, if bond yields rise, it's embarrassing for the government because it means the policy is the cause."

▶Did Treasury Secretary Scott Besant's focus on lowering bond yields rather than the benchmark rate have an impact?

"Of course. Secretary Besant, Secretary Howard Lutnick, and other aides said, 'We value Main Street more than Wall Street.' That doesn't make sense. 60% of Americans own stocks, and there is significant indirect investment through retirement funds or mutual funds."

▶The Trump administration claims that enduring temporary pain from tariffs will bring long-term benefits.

"But Americans are not good at enduring pain. Voters elected President Trump to close the borders and lower prices, not to implement tariff policies that cause stock prices to fall and prices to rise."

▶What is the bond market's assessment of the U.S. fiscal deficit?

"The Trump administration's 'tax cut plan' is actually just an extension of existing tax cuts. There is talk of tax relief on tips and exemption from social security taxes, but the scale is not large. The problem is the budget. If the budget, including the extension of tax cuts, does not credibly present spending cuts or deficit reductions, the Bond Vigilantes will certainly react."

▶There are also efforts to cut the Department of Government Efficiency (DOGE) budget.

"The Trump side talked about a $2 trillion budget cut, but in reality, it's only about $150 billion. Ultimately, the Bond Vigilantes can move again if there is no practical and credible plan to reduce the fiscal deficit relative to GDP."

▶Won't the tariff deferral measure at least ease inflation concerns?

"Tariffs have already been imposed on China, and import prices are rising, so prices are likely to rise as well. The 25% tariff on cars has fortunately been delayed, but tariffs on steel, aluminum, and Chinese products (145%) remain. These factors can all stimulate inflation in the short term."

▶President Trump said, "Build factories in America, and there will be no tariffs."

"He wants to force companies to produce within the U.S., which requires permanent tariffs. Reciprocal tariffs suggest the possibility of negotiations where the U.S. will lower tariffs if other countries do. The ultimate goal of Trump's tariffs is unclear."

▶Many interpret it as jobs.

"Snapping fingers won't suddenly create factories across the U.S. and put workers in high-paying jobs. The current U.S. unemployment rate is 4.1%. This means that rather than having many workers waiting for jobs while unemployed, there are actually many people already working in the service industry or other fields with quite good wages."

▶Does that mean the ultimate goal of tariffs lies elsewhere?

"I think it's an approach that only makes sense from a national security perspective. For example, it's clearly important for the U.S. to produce resources like steel, aluminum, copper, and rare earths on its own or secure reliable supply chains. President Trump seems to see tariffs as a means to solve such national security issues. But it doesn't have to be as chaotic and disorderly as it is now."

▶From the perspective of allies like South Korea, Trump's tariff policy is too unpredictable.

"It's becoming difficult for both companies and countries to plan, and even allies of the U.S. can no longer trust it. As a result, we are entering a new 'world disorder' where the world order established after World War II is collapsing. The chaos caused by policy uncertainty can lead to a slowdown in global trade and further economic slowdown."

▶Is there a possibility that the U.S. Federal Reserve (Fed) will raise rates again?

"I see it as very low. The Fed will try to avoid intervening in this (tariff) fight as much as possible. The Fed's hands are tied. If they lower rates, they may fail to respond to inflation, and if they do nothing, the economy worsens. However, in such a case (holding rates), the responsibility can be shifted to the government."

▶What advice would you give to companies and governments sitting at the negotiating table with the Trump administration?

"I would advise choosing negotiation over head-on confrontation. Trump is a negotiator from the New York real estate industry. He yells and pushes, then ends with a smile and a handshake. The problem is that he does it in front of the public. As a president, that approach only creates more confusion. He's not a figure that fits the traditional diplomatic style."

New York = Shin-Young Park, Correspondent nyusos@hankyung.com