The Fed will have to raise interest rates in July to appease 'bond vigilantes,' Yardeni says

Sent to the Federal Reserve to lower interest rates, incoming Chair Kevin Warsh instead may have to push for higher levels to establish credibility, market veteran Ed Yardeni said.

If the new central bank leader fails to signal that policymakers are attuned to inflation pressures, it could risk further market wrath in the form of escalating Treasury yields, added Yardeni, the originator of the term “bond vigilantes” to describe such incidents of investor unrest.

“Warsh is set to chair the June Federal Open Market Committee (FOMC) meeting, but who's actually in the monetary-policy driver's seat? We'd argue that it's the Bond Vigilantes,” Yardeni, the head of Yardeni Research, wrote Monday. When it comes to the sentiment of policymakers, “Warsh is going to be the odd man out. But he is the new Fed chair, and the bond market is reacting badly to his dovish stance.”

Treasury yields surged Friday, with the 30-year bond eclipsing 5% to its highest in nearly a year. The long bond on Monday morning was little changed at 5.138%. The 2-year Treasury, which is more sensitive to Fed rate moves, edged lower to 4.07%.