Ed Yardeni says US economy can sustain higher yields; sees 6% 10-year as tipping point

Ed Yardeni, President of Yardeni Research, believes the US economy remains resilient despite a weaker-than-expected payrolls number, with productivity gains helping companies cope with a shortage of workers. He expects interest rates to remain “normal for longer” rather than “higher for longer” as the economy continues to grow strongly.Yardeni sees 6% on the US 10-year Treasury yield as the level that could begin to hurt economic growth, although he does not see current yields as a major threat to equities.

For emerging markets such as India, he cautions that higher global rates and the unwinding of the yen carry trade could lead to some capital withdrawals.This is an edited transcript of the interview.Q: Your latest take on the US economy? Last week, markets were pricing in a 70-plus percent probability of a rate hike. Now those expectations have been dampened. What's the call now on US markets, macros, and bond yields?

A: I think the payroll employment number that we received on October 2, was certainly weaker than expected. But if you look at the three-month average, it's running around 50,000, and I think most economists agree that 50,000 is probably break-even.In other words, all we really need is 50,000 per month, and the unemployment rate is probably going to continue to stay around 4%, maybe to 4.5%, which is basically full employment.So, the labour market is doing quite well.

You know what's going on? There's a real shortage of workers, and I think as a result, companies are doing the best they can to increase productivity.Real gross domestic product looks like it's growing around 3.5%, and labour input looks like it's growing about 1.5%. So, the third quarter should be a very good productivity number.Q: Is 5.5% on the US 10-year a deal breaker for equities, Ed, or not? Or you don't think so?

A: I don't think so. I think what everybody’s been saying that interest rates are going to be higher for longer. I don't really like that phrase. I think it's more accurate to say that interest rates are going to be normal for longer.We're back to normal. I mean, the abnormality was near-zero short-term rates and very low bond yields around the world. The bond market was basically rigged, if I may be so blunt about it, between the Great Financial Crisis and the Great Virus Crisis.Now the bond market's free to vote, free to express an opinion.

I think the opinion it's expressing is that the US economy and, by the way, the global economy too, have proven to be remarkably resilient.And these are the kind of interest rates that make sense in a world where the US economy is basically booming. Consumers are spending, capital spending is very strong, and the demand for credit is what's driving up the bond yield.I would say once we get closer to 6% or higher, then I'd be worrying about its impact on economic growth.

But right now, I think the causality is a strong economy pushing bond yields higher.Q: What's your view on yield curve control? Do you think we're getting to a stage where you'd want to hear something about that, or do you think that's not something that you're factoring in? Because the chatter has been getting incrementally louder. I think once the Fed went ahead and announced that buyback, they shot themselves in the foot because the yields from there actually have spiked up closer to 30 basis points.

So, wanted your view on yield curve control . A: I think the Fed is no longer in the yield curve control business. I think it is the Treasury that's very much in the yield curve control business.Treasury Secretary Scott Bessent a few weeks ago came up with a little pea shooter that didn't have much impact. It was not a bazooka. And I think there's still a possibility for a bazooka if we start to get something that really looks like a debt crisis.You mentioned France before; France looks like it's entering a debt crisis.

I don't think that's the case here, but if we do start to see bond yields going up still higher, maybe to 6%, I think there's a potential for Scott Bessent to use the bazooka in terms of yield curve control.That would mean buying not $6 billion in these auctions to buy back bonds, but it would be more like $15 billion to $20 billion or $25 billion, something that would really get the market's attention in bonds. And then they would finance that by issuing bills.That would be a classic yield curve control.Q: You said the tipping point in terms of US bond yields, when it really starts to hurt, is 6%.

We're not there yet. The 10-year is about 5.2%. The 30-year is closer to 5.6%. But from an emerging market point of view, from an investment into emerging markets like India, are the current levels uncomfortable? Is that leading to a large withdrawal from emerging markets like India? A: There's a lot to be said and be concerned about in that regard. I think some of it may relate to the so-called yen carry trade unwinding.

A lot of hedge funds and maybe other players borrowed in Japan at near-zero interest rates and used the proceeds to buy bonds in other parts of the world. It may be the United States, maybe Brazil, maybe some in India, where they could get a nice spread over their cost of money.And now that the Japanese are raising their interest rates, that may be unwinding.So, there's a lot to be concerned about in terms of looking at past experiences when interest rates went up.

But, on the other hand, the global economy has been remarkably resilient, as is India, in the face of these shocks. The latest one being the oil shock.Catch all the latest updates from the stock market here