"Bond vigilantes" are stirring! The AI bond issuance frenzy clashes with fiscal deficits, as the "anchor of global asset pricing" approaches the 5% threshold.

Ed Yardeni, founder and senior economist of Yardeni Research, known as the "Prophet of Wall Street," recently stated that there is currently no reason to panic about the U.S. bond market, despite increasingly evident signs of investor unease as government debt continues to rise. The veteran Wall Street analyst noted that the market is growing more concerned about the surge in credit lending related to major cloud computing giants and AI computing power, while also questioning whether the Federal Reserve will remain sufficiently vigilant against inflation if oil prices rise significantly again. In a report released on Tuesday Eastern Time, Ed Yardeni and his team of strategists wrote, "We have not pressed the panic button regarding the U.S. bond market. However, we are closely monitoring whether the bond vigilantes will press this critical button." Yardeni specifically mentioned the summer of 2023, when U.S. Treasury yields skyrocketed from 4% to 5% in just a few months. This yield level ultimately proved to be significantly attractive to buyers, and the research firm led by Yardeni believes that similar buying opportunities may arise again in the future. As shown in the chart above, the benchmark U.S. Treasury yield the U.S. 10-year Treasury yield, known as the "anchor for global asset pricing" is rapidly approaching 5%. From a theoretical standpoint, the 10-year Treasury yield corresponds to the risk-free rate indicator 'r' in important valuation models in the stock market, such as the DCF valuation model. When other indicators (especially the expected cash flows in the numerator) have not undergone significant changessuch as during earnings season when the numerator lacks positive catalyststhe higher the level of the denominator or its continued operation at historical highs, the more likely the valuations of tech stocks, high-yield corporate bonds, and risky assets like cryptocurrencies, which are closely tied to AI and are historically priced high, will collapse. What are "Bond Vigilantes"? The term "Bond Vigilantes" refers to a market discipline mechanism where bond investors, believing that government fiscal expansion is excessive, inflation policies are untrustworthy, or the debt trajectory is unsustainable, proactively sell long-term government bonds and demand higher yields to force policymakers to face higher financing costs. This concept was proposed by Ed Yardeni in the 1980s. Thus, what "vigilantes" typically attack is not the overnight policy rate but rather long-term inflation risks, fiscal risks, and the risk premium on long-duration bonds: that is, bond trading prices continue to decline under the influence of bond vigilantes, driving the yields of 10-year and 30-year U.S. Treasuries higher, exacerbating the fiscal interest burden, and compelling the government to restore fiscal discipline. The "Prophet of Wall Street," Yardeni, currently still believes that a 4%-5% yield on 10-year Treasuries is within a normal range, but as the yield has rapidly risen to about 4.75% and is quickly approaching the upper limit of this range, he has begun to watch more closely whether the vigilantes will push rates toward 5%; his core judgment is not that "a crisis in the bond market has occurred," but that 5% is transforming from a valuation anchor into a stress test of the credibility of fiscal policy under the Trump administration. U.S. Treasury yields approaching the 5% alert line! Yardeni warns that "bond vigilantes" may reassemble. Strategists from Yardeni Research wrote in their report: "We maintain our previous view that U.S. Treasury yields should continue to operate within the normal range of 4%-5%, and that it should not negatively affect U.S. economic growth or corporate earnings. However, since yields are now approaching the upper end of this normal range, we are keenly monitoring the movements of the bond vigilantes." The yield on the 10-year U.S. Treasury is currently at 4.73%, close to its highest level in over a year, driven primarily by the government's long-term massive fiscal deficits and inflation concerns. An escalation in oil prices due to an extended U.S.-Iran war may further exacerbate domestic price pressures in the U.S. and strengthen the rationale for the Federal Reserve to raise interest rates. Meanwhile, a surge in corporate borrowing driven by global AI computing investment prosperity has led Washington and Silicon Valley to compete for the same pool of limited capital. Higher U.S. interest rates will also attract global capital toward the dollar, complicating Japan's efforts to prevent the yen from falling below 160 yen to the dollar, and increasing the difficulty for China to maintain the stability of the yuan exchange rate. Yardeni indicated that since U.S. Treasuries serve as the benchmark for global debt pricing, rising U.S. interest rates will transmit globally, raising the financing costs of sovereign debt, corporate debt, and housing mortgages in various countries. As shown in the chart above, U.S. interest expenditures have quietly risen to near historical highs. Ed Yardeni, president and chief market investment strategist of Yardeni Research, coined the term "bond vigilantes" in the 1980s to describe investors who express their protest by selling bonds when unhappy with government policies they perceive as inflationary. This behavior drives bond prices down and yields up, compelling governments to return to fiscal discipline and austerity. The institute stated that in recent months, bond vigilantes globally have begun to stir, indicating that market concerns about government debt are not limited to the U.S. Strategists noted that in the UK and Japan, activities related to bond vigilantes have been especially evident, as both countries carry particularly heavy government debt burdens relative to their economic sizes. The biggest opponent to the AI super bull market may come from the bond market! In terms of the steepness of the U.S. Treasury yield curve, the current "bond vigilante trade" is more inclined to drive long-term yields up, creating a bear market steepening, rather than simply parallel shifting the entire curve upward. The reason is that the recently increased risk premiums are concentrated at the longest duration: on August 17, the yield on the 30-year U.S. Treasury reached 5.31%, the highest level since June 2007, while the 10-year yield was about 4.73%; if moderate CPI, employment, and consumption continue to constrain the Fed from further rate hikes, the short-term policy rate remains relatively anchored, but fiscal deficits, tail risks of inflation, and massive long-term bond supply compel investors to demand higher long-term returns, making it easier for the 10s/30s and 2s/10s yield curves to steepen. If oil prices rise significantly again, forcing the Fed to raise rates anew, the front-end yields will also rise in tandem, and the curve will not necessarily steepen unidirectionally. However, at this stage, what deserves investors' attention is that the long-end yield curve of 10 years and above has begun to exhibit characteristics of supply overflow and term premium, indicating "even if economic data weakens, yields cannot fall," which is the most typical market expression of bond vigilantes. The surge in AI bond issuance is upgrading this traditional "fiscal vigilantism" logic to a new version of "Washington + Silicon Valley jointly competing for capital." Data shows that large tech giants like Alphabet (Google's parent company), Amazon, and Meta (Facebook's parent company) have approached nearly $220 billion in bond financing since 2026, significantly increasing compared to 2025; by early July, just Amazon, Alphabet, Meta, and Oracle had issued about $194 billion in bonds, with AI-related debt accounting for nearly 15% of the U.S. investment-grade issuance at one point. This year, Alphabet has expanded its bond issuances beyond dollars to include pounds, Swiss francs, euros, Canadian dollars, and yen, with continuing financing of around $25 billion for data centers and AI infrastructure. The U.S. Treasury needs to finance its massive deficit, while AI giants need funding for data centers, power equipment, and network infrastructure related to AI GPU clusters, which together increase long-term capital demand and duration supplythus leading global investors to demand higher real yields and term premiumsresulting in a rise in the costs of both long-term U.S. Treasuries and corporate financing. Therefore, if the "bond vigilantes" truly mobilize, it is most likely that AI demand will not suddenly disappear but that the risk-free rate and the weighted average cost of capital (WACC) will be raised, which in turn constrains the AI supercycle from both the valuation and ROIC perspectivesthis is why a 5% yield on 10-year Treasuries in the future is more likely to become the interest rate ceiling that technology stocks and even global risk assets need to be genuinely wary of, rather than a single FOMC rate hike itself.