Caution, US bond yields are soaring! "Doomsday Doctor" warns: Trump may attract "bond vigilantes" back.

"Dr. Doom" Nouriel Roubini stated that if Trump continues with his massive fiscal spending plans, his return to the US presidency throne may see the resurgence of the "bond vigilantes." Roubini said on Tuesday that if Trump pushes to make his 2017 tax cuts permanent, "market discipline will come back very quickly." He said this could curb more "radical" economic policies. Roubini said, "Trump cares about market discipline. If bond yields go up, the stock market corrects, and bond vigilantes say your policy is not sustainable - with the right economic feedback, they will warn him not to take economic policies that are more moderate than those of radical populists." Roubini said that so far, investors are still trying to determine the exact facets of Trump's economic policy for a second term. Roubini warned before the election that the combination of Trump's trade, currency, fiscal, immigration, and foreign policies posed a much higher stagflation risk than a Harris victory. He pointed out that Trump's policy plans - including imposing higher tariffs, devaluing the dollar, and taking a tough stance on illegal immigration - could slow economic growth while stimulating inflation. Roubini's pessimism proved prescient before the global financial crisis, although his predictions during the pandemic underestimated the strength of the economic rebound. US bond yields rise In the recent surge in the US financial markets, there is one notable exception: investors in the $28 trillion US Treasury market are selling bonds, pushing yields to the highest levels in months. The sell-off is a reminder from a powerful group that the so-called "bond vigilantes" are watching Trump, who calls himself the "King of Debt," as he claims "unprecedented" power to implement tax cuts and tariffs. The rise in US bond rates indicates that the financial markets believe Trump's policies may trigger inflation and increase federal debt. Higher borrowing costs could in turn impact Trump's economy, slowing economic growth in other markets. Veteran strategist Ed Yardeni said, "This is a new day for America and a new day for the bond market. Trump has garnered so much support, a fact that gives him enormous power not only in the US but globally as well. With deficits already very large, bond markets have reason to worry about fiscal policy continuing to be stimulative." Yardeni coined the term "bond vigilantes" in the early 1980s to describe investors who attempt to influence government policy by selling bonds, or even just threatening to sell bonds. The yield on 10-year US Treasury bonds has risen since Trump's election victory, reaching as high as 4.5% at one point. The yield on the 10-year US Treasury bond is the risk-free benchmark for over $50 trillion of fixed-income securities denominated in dollars. Yardeni and other investors believe that if Trump's fiscal policies anger investors, the yield may touch 5% again. Even without considering the impact of leadership changes, the nonpartisan Congressional Budget Office predicted in June that by the end of 2034, the long-term deficit in the US will increase the debt to around $48 trillion. Currently, net interest payments are equivalent to 3.06% of GDP, the highest level since 1996. Last month, the Committee for a Responsible Federal Budget estimated that due to Trump's increased deficit plan, debt will rise by $7.75 trillion by the fiscal year 2035, reaching the current projected debt level. Although the CFRB pointed out that the range could vary from $1.65 trillion to $15.55 trillion, the likelihood of a Republican sweep in Congress is increasing - the Senate is already majority Republican, and the Republicans are also leading with a slim margin in the House - increasing the possibility that Trump's plans won't be stopped by politicians. Mark Dowding, Chief Investment Officer at RBC BlueBay Asset Management, said, "Given the scale of the deficit and the size of US debt, fiscal policy is more important for investors like us." Ahead of the vote last Tuesday, US bond yields and inflation expectations were already on the rise. The 10-year breakeven rate (a market indicator measuring the long-term inflation trend) soared to a high of 2.43%, the highest since April this year. As Trump's policy agenda is seen as inflationary, some economists have already predicted that after the Fed lowers interest rates by 25 basis points on Thursday, the subsequent rate cuts may be lower than previously forecasted. This could also put pressure on the bond market.