Who’s Buying US Bonds? Yellen Warns of Bond Vigilantes, Nobel Laureate Predicts Rate Hikes

TradingKey – Trump’s 2.0 policy inclination continues to impact the US Treasury bond market, driving the US bond interest rate to a 9-month high. US Treasury Secretary Janet Yellen recently commented on the intensified selling of US bonds and highlighted the role of "bond vigilantes."

As of Thursday (January 9), the 10-year Treasury yield stood at 4.665%, after hitting a high of 4.73% on Wednesday—marking the first time it surpassed the 4.70% threshold since April 2024.

[10-year Treasury Yields Trend, Source: Investing.com]

Since the Federal Reserve cut interest rates in September last year, the 10-year U.S. bond rate has rallied by over 90 basis points, with an accumulated increase of 75 basis points.

The intensified sell-off of US bonds has raised concerns, driven by investors’ growing awareness of risks related to reflation under the new administration, the government’s budget deficit, and the Federal Reserve’s cautious approach to cutting interest rates.

On Wednesday, January 8, Treasury Secretary Janet Yellen remarked, "When we see strong data — surprises to the upside on indicators to the performance of the economy — that suggests that the path of interest rates going forward is going to be a little bit higher than people expected."

Yellen also noted that the "term premium," which has remained at historically low levels, is now climbing due to strong economic performance and beginning to "normalize." The term premium refers to the additional return investors demand for holding long-term bonds instead of rolling over short-term ones.

Trump’s future policies, including tariffs and tax cuts, are widely expected to drive inflation higher. Minutes from the December FOMC meeting released on January 7 indicated that almost all participants believed the risks to the inflation outlook had increased, citing stronger-than-expected recent inflation data and the potential effects of Trump’s trade and immigration policies.

The US budget deficit and debt supply issues are also key concerns. Yellen expressed hope that the incoming administration would address the fiscal deficit to avoid a resurgence of the “bond vigilante” dynamic seen decades ago.

"Bond vigilantes" refers to investors who resist inflationary monetary or fiscal policies by selling bonds or threatening to do so. These investors, concerned about excessive public borrowing, demand higher interest rates to purchase government bonds.

Ed Yardeni, founder of Yardeni Research and a leading Wall Street analyst, observed last year that bond vigilantes are signaling a lack of confidence in Trump’s ability to maintain fiscal discipline better than his predecessor. 

He warned that higher yields could crowd out private-sector borrowing, trigger a credit crunch, and potentially lead to a recession—all rooted in unsustainable fiscal policies.

Nobel Prize-winning economist Paul Krugman recently wrote that if Trump implements any substantial part of his economic agenda, the Federal Reserve will likely pause further interest rate cuts and might even be forced to raise rates again.