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German long-term bonds have achieved yields not seen in over 15 years. The yield on 30-year German bonds exceeded 3.75% this morning. Again , these are bonds we're watching — 3.779%. Meanwhile, in the United States, 30-year bond yields have approached their highest level in nearly 20 years. You check the situation this morning.
It is now 5.33%. Ed Yardeni joins us to discuss this and the state of the markets. He is the president of Yardeni Research . He's also the one who coined the term " bond avengers" that we've all used so often ever since . Ed, where are these " bond avengers" now and are you worried? Well, the "Bond Avengers" were clearly very active in Japan.
Japanese bond yields have risen significantly. The same is true in the United Kingdom, and both countries have a large debt relative to their GDP. By the way, the United States also has this problem. The debt- to-GDP ratio in the US is very high, although not as high as in Japan or the UK. I am worried.
I believe that the yield on 10-year bonds has returned to normal, and the norm is 4-5%. This was the range we had before the great financial crisis. So when we look at how far back we have to go to see this level of return, we're actually going back to a period that I think was much more normal than the one between the great financial crisis and the great virus crisis.
But now there is reason to be seriously concerned that the indicators may be outside my range. I don't think that will happen. I think at 5% we will have a lot of buyers, as we saw in 2023. Mm . There are many sectors of the economy that have been waiting for bonds to return to the "new normal," to the lower levels that we have.
We were just talking about Home Depot, how people aren't using their home equity lines of credit the way they used to. You can look at all the debt that hyperscalers and others are accumulating . All this activity is based on the idea that 4-5% is the limit, and higher figures are not necessarily expected.
Yes, I think the bond market is finally working the way it should . It allocates capital efficiently. Well, that wasn't the case when the Fed was actually manipulating the bond market, keeping their yields near zero by lowering the federal funds rate to zero. So, this is to some extent a return to market interest rates.
Now, of course, this also means that the “ bond avengers” have much more freedom to express their opinions than when the Fed was in charge. And, of course, they are concerned about the level of debt. They are concerned that the Fed may not be monitoring inflation closely enough. They are worried about oil prices.
It is clear that the Strait of Hormuz is still not a safe passage. So there are concerns, but ultimately, there wouldn't be such bond yields if the economy wasn't performing well . So I see this as a vote of confidence in the strength of the economy. I I wanted to say, you listed a long list of concerns, but at the same time you are quite optimistic about the future of stocks.
Yes, I mean that it has a lot to do with the companies' revenues. The economy has been extremely strong, and this has turned into what I call “ fabulous earnings momentum,” to distinguish it from FOMO—fear of missing out. FOMO was something like what we had during the 1999 bubble . I don't think we have the same situation now.
Okay, describe it. Let's delve into this a little more, because there are two camps on this as well . Some say it is very reminiscent of the tremendous growth we have seen and the many events that are taking place. You have n't thought so for a long time. You were convinced that this was some kind of "bull" market that was booming.
Yes. And you were still right. Yes. I call it the " stormy 2020s." Obviously, drawing an analogy with the 1920s . Skeptics object, "Well, that did n't end well." True. And Andrew wrote a wonderful book about that whole experience. But we've put the economy through stress tests many times, even with tariffs, and tariffs were one of the reasons for the crash at the end of the " roaring 1920s," like this ...
Smoot-Hawley, this... Yes, the Smoot- Hawley Act was passed in May of 1930. If you look at the charts, commodity prices have collapsed. Lending collapsed, everything that could go wrong did go wrong. This time we had something similar, maybe not as severe. We had no response. We didn't have quite the same experience.
Tariffs are coming back, and many of these countries are actually stimulating the economy right now . Yes. If you think about it , hyperscalers stimulate the economy through huge capital expenditures . There are baby boomers like me. I still work to support myself, but many of my friends are retiring.
And baby boomers collectively have about a hundred trillion dollars in net worth. And when they retire, you know what? Their disposable income becomes zero because they no longer receive a salary and live off their savings. This means that when interest rates rise, they are actually happy because they have money market funds, the rates on which are also rising.
They are not particularly concerned about the job market, because you know why? They are already retired. So the economy is showing significant resilience, which is reflected in profits. Analysts are currently predicting $48 per share for the S&P 500 next year, but that number continues to rise every week.
And I think by the end of the year it will be $415 multiplied by 20.2 or so and we will reach 8,400 by the end of the year. So, full steam ahead for the stock markets, as far as I understand. But you are studying history. What warning signs are you looking for that might change your mind about this ?
You know, I think when you make a list of concerns, and I update it regularly, to stay disciplined and think about these things. Geopolitics continues to top the list of concerns. This is oil . But it's strange that despite everything that's happening. Apparently oil is liquid, and somehow it's still coming out of this part of the world, and oil prices haven't skyrocketed.
But regarding your point: yes, I coined the term “ bond vigilantes” back in 1983, and back then I wrote that they were worried: if the “ sheriffs,” that is, the fiscal and monetary authorities, did not maintain law and order, then they would do it themselves . They will be vigilant. At the time, I wrote that they were worried about a $250 billion deficit.
Now we have between one and a half and two trillion. So we're kind of testing the limits of when the " bond avengers" will actually start protesting. Um, they did it in 2023, and this is the market, and with the right yield, buyers came, and at a rate that didn't [ __ ] the economy.
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