Ed Yardeni Warns Bond Vigilantes May Force Fed Into July Rate Hike As Yields Near 2007 Highs

• Data from the CME FedWatch tool indicates nearly a 45% probability that the Fed will hike interest rates by the end of the year.
• Market commentary service, The Kobeissi Letter said in a post last week, that interest rate futures now see a base case of the next Fed move being a rate hike.
• U.S. inflation rose to 3.8% in April, the highest level since May 2023, and markets expect it to rise further.

Markets have flipped the script on the Federal Reserve, with investors now increasingly betting that the central bank will move toward a rate hike instead of a rate cut amid ‘higher-for-longer’ inflation worries and surging Treasury yields.

Ed Yardeni, President of Yardeni Research, has reportedly said that he believes the Fed is “likely” to increase key borrowing rates by a quarter of a percentage point as soon as July, with incoming Chair Kevin Warsh potentially forced to push for higher levels to establish credibility.

“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 wrote on Monday, according to a report from CNBC.

When it comes to the sentiment of policymakers, Yardeni said, “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.”

The comments come amid surging Treasury yields in the U.S. and across the world as inflation pressures mount due to the ongoing war between the U.S. and Iran. Last week, the 30-year Treasury yield closed at 5.12%, the highest in nearly 19 years. Meanwhile, Treasury yields on the benchmark 10-year bonds was at 4.595% and on 20-year Treasury was at 5.145% at the time of writing, nearing 2007-levels.

Economist Steve Hanke noted that rising oil prices driven by the U.S.-Israeli war on Iran, coupled with massive fiscal deficits, have been sending yields higher across the world, adding that “bond vigilantes are riding again,” in a post on X.

Iran War Stokes Inflation Concerns

U.S. inflation rose to 3.8% in April, the highest level since May 2023, and markets expect it to rise further. The Kobeissi Letter said in a post on X that the U.S. consumer price index inflation is on track to exceed +5.0% as early as this year.

“Over the last 6 months, CPI inflation has averaged +0.4% on a MoM basis, with March and April readings as high as +0.9% and +0.6%, respectively. If this trend continues, this puts YoY inflation on pace to surge to +5.2% by the November midterms,” the market commentator said on Monday.

The Kobeissi Letter noted that it would lead to the highest level since Feb. 2023 and more than double the levels of Feb. 2026. A slowdown in inflation rise to about +0.3% would still result in the inflation rate increasing year-over-year at more than 4.4%, the highest since April 2023. “Inflation is back in full swing,” it said.

Economist Steve Hanke echoed the sentiment, saying that the U.S. inflation “genie is out of the bottle” in a post on X.  

Fed Rate Hike: Market Stance

While President Donald Trump nominee Warsh has said that the Fed could afford to lower key interest rates, the odds for a rate hike have been rising, with more market participants betting on it.

Data from the CME FedWatch tool indicates nearly a 45% probability that the Fed will hike interest rates by the end of the year. While the probability of a hike by July is at about 5.5%, this has risen from 0.9% a month ago.

“Interest rate futures now see a BASE CASE of the next Fed move being a rate HIKE. In fact, the odds of the Fed cutting interest rates before July 2027 are a mere 1%,” The Kobeissi Letter said in a post last week.  

“As inflation hits its highest level since 2023, the Fed is left with no option,” it added.

Meanwhile, U.S. equities were down in Monday’s overnight trading. The SPDR S&P 500 ETF (SPY), which tracks the benchmark S&P 500 index, was down 0.10% at the time of writing, while the Invesco QQQ Trust (QQQ), which mirrors the Nasdaq 100, fell 0.22%. On the other hand, the iShares 20+ Year Treasury Bond ETF (TLT) was up 0.06%.

Retail sentiment around SPY on Stocktwits was in the ‘extremely bullish’ territory and for TLT, it was in the ‘bearish’ territory.

For updates and corrections, email newsroom[at]stocktwits[dot]com.