Rephrase the title:Don’t be fooled by falling yields – the bond vigilantes are still out there

• The bond market has recovered from its historic crash in 2023, but the US national debt is still mounting.
• While bond vigilantes have quieted down as the Fed pivots, they’re still out there, experts say.

Last year saw the return of the bond vigilantes. But just as quickly as they rode in, they went quiet again as the turmoil in the Treasury market subsided.

The market was abuzz at the end of 2023 with talk of investors selling off their US debt holdings as a protest over excessive government borrowing and spending.

Fast forward a few months, and bond yields are down but debt levels are still rising. So, are the vigilantes still out there?

They are, and they’re watching closely for the next shoe to drop.

Last year’s gyrations were stoked by a hawkish Fed and stubborn inflation, not just the rising national debt. With the federal funds rate touching its highest level in a decade, investors bailed on government paper, and the meltdown accelerated because nobody wanted to catch the falling knife as interest rates kept ticking up.

Today, now that the Fed has paused rate hikes inflation has eased, the bond market has healed. Yields on the 10-year Treasury have slipped to 4.14% after touching 5% in October.

But sticking a soft landing in the economy doesn’t change the fact that the US national debt is still massive and only growing. In December, it soared past $34 trillion, with JPMorgan describing it as a “boiling frog” situation for the economy.

And that mountain of debt is likely going to shape the market in the long run, one strategist said.

“I think it’s going to be largely the economy that shapes [bond markets] this year, and then obviously rate policy from the Fed,” Anthony Saglimbene, chief market Strategist at Ameriprise, said in an interview with Business Insider. “But longer term, the fiscal conditions of the US are very important and determining what the longer term rates are for government bond yields.”

A healing economy may have eclipsed concerns about US debt, and in the midst of last year’s chaos, Saglimbene explained, it’s hard to tell what exactly was causing the crash.

Even so, bond vigilantes haven’t gone anywhere.

“There’s the bond vigilantes that are really focused on the fiscal house of the US government and they’re always going to be there,” he said. “And as long as debt remains high or the government is issuing more debt than it typically does to finance its spending, they’re always going to be waiting for the next shoe to drop.”

Bond auctions are growing to pay the bills

While interest rates may have slipped in the past couple of months, they are still a lot higher than at any point since the 2008 crisis, which means repaying US debt is still expensive.

But that hasn’t curtailed new debt issuance, and the US is still borrowing at a historic rate to fund the government. The Treasury is looking at what might be the biggest ever government bond auction coming up, Bloomberg reported. For its five-year note auction in April, the Treasury Department is looking to sell as much as $70 billion, up 63% from last year. Per Bloomberg, Citigroup analyst William O’Donnell said that the pace and magnitude of those supply increases are completely unprecedented in a time when the economy is growing.

Already this week, the US has auctioned off $61 billion worth of five-year notes and $60 billion of two-year notes. The record amount sold is $62 billion.

That’s because right now, the demand is there. JPMorgan’s Bob Michele, head of fixed income, told Bloomberg TV on Friday that he’s not had a single client who has wanted to steer clear of bonds.

But as the US fiscal situation fluctuates and vigilantes begin to stir again, that could change.