Ed Yardini said the bond market is sending a warning about mounting US debt.
This is seen in the rise in bond yields, with the yield on the 10-year Treasury note exceeding 4%.
Yardini warned that returns could reach 4.5% this year and lead to a sell-off in stocks.
The bond market is issuing a warning about the US debt problem, and stocks could face a sell-off as yields on Treasury bonds continue to rise, according to market veteran Ed Yardini.
Yardeni’s head of research pointed to the increasingly attractive yield on bonds, with the yield on 10-year Treasury bonds recording 4.213% on Wednesday. Yardini said this is a sign that markets expect higher economic risks over the next decade — largely due to America’s staggering debt load.
“The problem is, the bond market now cares a lot about the federal deficit, and as we all know, fiscal policy is very wasteful. We have a growing federal deficit and a growing debt,” Yardini said. Fox Business Wednesday.
the The US federal debt stock has reached $32 trillion for the first time this year. Growing debt is less of a concern during recessions, when the government may ramp up spending to stimulate the economy, Yardini said, but debt growing rapidly while the economy is on track for 5% expansion is a concern.
Higher bond yields can also create problems for stocks, because they influence investors to move away from stocks and make it more expensive for companies to service their debt. Yardini predicted that the 10-year Treasury yield could exceed 4.5% this year, a move that could send the S&P 500 lower to its 200-day moving average at around 4,121.
He added that this means a 7% drop from current levels, but a 10% sell-off is possible.
“I’m a big fan of neural bonds because we have a very important technical level here,” Yardini said. “It could be bad hard,” he added.
The Fed has indicated that it may soon be ready to cut real interest rates, but steady inflation remains a risk that could change that calculation. Investors priced in an 89% chance that the Fed will hold interest rates level at its September policy meeting, and a 21% chance that the Fed will start cutting rates early next year, according to CME FedWatch tool.
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