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Well, let's continue this conversation with Ed Yardini. He is the president of Yardini Research and is knowledgeable in the bond market. Um, you know, Ed, on this issue of higher premiums, which is based not necessarily on inflation concerns , but simply because we have a huge debt that seems like it will never end.
Do you agree with Mike's general statements? Yes, definitely. Mike makes very valid points. Look, I think bond yields, 10-year bonds, have just returned to normal. 4-5% is, in my opinion, a sign of a healthy economy. One of the main reasons why bond yields are at this level is that the economy can withstand it.
And the economy can withstand this, because there is a lot of borrowing now, and not only from the government, but also from hyperscalers. Interestingly, spreads between corporate bonds and Treasury bonds have barely changed. So this is a sign that there is no particular tension in financing these things.
Overall, as Mike very aptly noted, only four basis points made everyone worry last week. The "Bond Avengers" are back , but they're not the only players in the bond market. This is what Scott Bessent is trying to convey, he has a great toolkit, and so far it's working. This will make things difficult for Kevin Warsh, because Kevin Warsh is looking for signals from the bond market, and the Treasury is using its tools to send a different signal.
You said it's working so far. Do you really think it's too early to say whether this actually works? It seems like it didn't have that much of an impact. Well, I don't think the expectations were ...I didn't expect it to lower the rates . My expectation is that the Treasury has made it clear: they don't want to see 5% on 10-year bonds, and they remind us of what the Treasury did in 2023 , not so long ago.
Bond yields rose from 4% to 5% in 3 months. August, September, October, November 1st, yields reached 5%, buyers came from everywhere, and we saw yields decline as the Treasury announced it would issue more bills. And actually, that's what Bessent said last week, and now this week, or rather today, we're just reminded that they have a trillion dollars in cash with which they can buy more bonds.
Yes, and when the Treasury did this last time, Scott Bessant was very critical, and many thought Janet Yellen was manipulating, almost acting as a fiscal player, spending this trillion-dollar TGA bill that had built up and issuing more bonds. Promissory notes versus bonds. So , this is the same thing that is happening right now.
Yes. What I find somewhat interesting, Ed, is what probably worries equity investors the most—are we borrowing and spending too much on AI? And this is the same factor that is currently increasing pressure on profitability. I think it's much more than the fiscal situation in the US. So this at least has the potential to be self-perpetuating, and perhaps that's why so much alarm was expressed last week.
Well, I think higher rates are not deterring corporate bond issuance to finance hyperscaler data centers. What's slowing down data centers is politics, and we also have the assumption that there's a shortage of semiconductors, a shortage of electricity. So, you know what we're really hoping for? Do we want them to spend all this money on data centers, or do we want them to slow down?
I think the process is slowing down, and that should help the bond market. Considering all these factors, do you think the term premium will remain structurally high? I look at it simply as the real yield plus the spread above it, and the real yield is around 2.5 %, the spread is around 2% or higher.
We see 4.5%, so when I look at that disaggregated bond yield, it doesn't look like anything has changed significantly at the structural level.
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