Wealth Insights

Bonds Commentary

Bonds: The ‘New Vigilantes’ Could Test The FOMC’s Inflation Fighting Resolve

August 2026

In the early 1980’s, famed strategist Ed Yardeni coined the phrase “bond vigilantes” to describe a prominent and vocal cadre of fixed income market participants selling U.S. government bonds in response to what they viewed as inflationary and/or fiscally irresponsible policies. Selling from the ‘vigilantes’ led to a sharp move higher in Treasury yields and a commensurate selloff in bond prices, with the 30-year U.S. Treasury yield jumping from around 10.4% at the end of 1982 to 13.6% by June of 1984 as investors pushed back on fiscal spending plans. The selloff in longer maturity bonds increased borrowing costs and forced Congress to pass deficit-reduction legislation later that year and the 30-year bond yield retraced the entirety of the move higher by June of ‘85.

Fast forward 40-plus years, and while the absolute level of Treasury yields is a far cry from the absolute levels seen in the early 80’s, the U.S. government’s annual budget deficit is projected to be over 10X greater this year than it was in 1984. The U.S. government’s debt is now just shy of $40 trillion and with rumblings of downgrades to its credit rating growing louder, fixed income investors both at home and abroad are requiring greater compensation in the form of higher yields to buy U.S. government bonds. Deep pocketed investors with long-dated liabilities will at some point find it difficult to ignore higher yields, but until the recent bout of volatility in the Treasury market subsides and prices start to stabilize, they may drag their feet.

Treasury yields could remain volatile with an upward bias in the lead-up to midterm elections in early November, particularly if the FOMC fails to back up its tough talk on inflation with action when it meets next month. Market participants initially took FOMC Chair Kevin Warsh’s comments following the Committee’s June meeting as ‘hawkish,’ which led to a flattening of the yield curve as short-term rates rose sharply. But nearly two months after that meeting, market participants, i.e. “the new vigilantes,” appear more willing to press their bets and challenge the new Chair’s resolve when it comes to fighting inflation. In the lead-up to the FOMC’s late-July meeting, the Fed funds futures market placed the odds of a rate hike prior to September at 100%, but following Warsh’s post-meeting press conference those odds fell to around 60% as he noted that the bond market had done some of the FOMC’s work for it by pushing short-term rates higher and tightening financial conditions. Historically, it has been the equity market that has often challenged new Fed chairs, but this time around, U.S. equity indices are at all-time highs, and it is the bond market and rising yields that could force the Committee’s hand.

In early August, the U.S. and Japan took steps to backstop the Japanese yen, easing concerns surrounding Japan potentially needing to sell U.S. government bonds to prop up its currency. The move spurred a rally in long-term Treasuries, but Japan will need to take steps to adjust both fiscal and monetary policies to prevent the yen from weakening relative to the U.S. dollar again, with a rate hike out of the Bank of Japan a likely first step in the months to come. Japan no longer being a forced seller of Treasuries in the near-term, combined with energy prices moving lower amid hopes of de-escalation in the Middle East, could take some pressure off Treasury yields. However, the rally in long bonds to kick off August could prove to be little more than an oversold bounce, and we remain of the opinion that downside for yields will be limited as both variables could easily reverse course and take a less constructive turn for higher quality, longer duration bonds. We’ve been a broken record this year, but with inflation sticky and the path forward for monetary policy increasingly murky, we want to maintain exposures in-line with our strategic weights as we look for volatility in rates to remain elevated and create opportunities to tactically adjust portfolios.

Rising Yields Create Greater Chance For Carry In High Yield And Emerging Market Bonds. The grind higher in U.S. treasury yields for the better part of the year thus far has left many fixed income investors underwater in 2026, but diversification has dulled that pain for investors willing to go beyond core fixed income. Of the primary bond subsectors we track, only the high yield index and emerging market debt index have been able to generate a positive total return year to date through July. These segments may not be cheaper than where they started the year from a valuation standpoint, but both subsets now offer meaningfully higher income, one of the most powerful drivers of total return. Take the Bloomberg U.S. High Yield Corporate Index which now offers a 7.4% yield-to-worst, nearly 100bps higher than the 6.5% yield it carried at the start of the year. Emerging market bonds have seen a similar boost, with the index yield-to-worst at 6.3% versus 5.7% at the start of the year. The uptick in yield improves expected total return and is likely to create a ceiling on how high valuations can get as buyers will be more willing to step in at higher yields. Emerging market bonds specifically have seen spreads continue to grind tighter as emerging economies strengthen and their currencies continue to push higher in a vote of confidence. Any hints of cheapness could present a buying opportunity, but for now we believe the carry in emerging markets is ‘paying us to wait’ for a chance to increase exposure should dislocations occur.

As of August 14, 2026