Economist Edward Yardeni says the rise in bond yields and mortgage rates threatens to stall any economic rebound.
The founder of Yardeni Investments coined the term 'bond vigilantes' in 1983 to describe bond investors who dump their holdings when huge budget deficits threaten to spark inflation.
"Bond vigilantes may have more power right now than they've ever had," Yardeni tells Bloomberg Television.
"Clearly with the backup in the 10-year bond yield from 2 percent at the end of last year" to a six-month high of 3.75 percent last week, "that could put upward pressure on mortgage rates."
And that in turn, "could really squash any recovery we might have in housing sales," Yardeni says.
The 30-year fixed mortgage rate reached a three-month peak of 5.44 percent last week.
The higher rate environment puts the economy in danger. "It's not going to take much of a backup in bond yields and mortgage rates to really weaken whatever recovery we've got up ahead," Yardeni says.
And that "increases the risks that we just won't get out of this recession."
The bond market is full of concern that the government's huge budget deficit "eventually might lead to higher inflation," he points out.
Others agree. Economist James Bianco tells The Wall Street Journal, that the market figures the $1 trillion-plus deficit can't be financed without Fed assistance.
But that assistance has sparked the inflation worry, he says. "We're caught in a vicious cycle."
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