Outgoing USA Treasury Secretary Yellen believes that the fiscal spending increased by the Biden administration to combat the COVID-19 pandemic may have contributed to rising domestic inflation in the USA; stronger-than-expected economic performance has led to a repricing of market interest rate expectations, driving this round of US Treasury sell-off.

In the CNBC program on Wednesday, January 7th, Yellen stated that the stimulus spending by the Biden administration to help the economy recover from the impact of the COVID-19 pandemic was necessary, and "it is really important to invest funds to alleviate the pain of the pandemic," although this spending might have "somewhat" affected the subsequent high inflation.

Yellen believes that the widespread price increases after the pandemic are mainly due to the "supply side phenomenon" caused by the pandemic, which has led to "huge supply chain problems." A shortage of key commodities has "started to push prices up significantly."

Yellen also rebutted criticism of the Biden administration for allowing the fiscal deficit to continue expanding, stating that the Biden administration prioritizes reducing the deficit. She mentioned that one reason for the expanding deficit is that rising interest rates increase the cost of debt repayment, while noting that discretionary spending is at a historical low.

Regarding the government efficiency department that the Trump administration plans to establish for significantly reducing government spending, Yellen expressed skepticism, saying it is mathematically difficult to determine how this department would function. She stated that many people believe defense spending should be increased, and the so-called mandatory spending projects including healthcare and social security are very popular, making it difficult to cut government spending on these projects. It is hard to imagine how the government efficiency department would solve the deficit issue.

Concerning Trump's nominee for the next Treasury Secretary, hedge fund executive Basent, Yellen commented that he has extensive market experience, which is "a very helpful background" for leading the Treasury Department responsible for national financial security.

Regarding her plans after stepping down as Treasury Secretary, Yellen said she wants to take a vacation, and may then return to her previous role as a senior researcher at the Brookings Institution and "write something to reflect on the experiences of the past four years."

Hope the Trump administration takes the deficit seriously, do not wish to see the return of 'Bonds' vigilantes.

When asked on Wednesday about the reasons behind the recent drop in USA Treasury prices and rising yields, Yellen responded that it was due to stronger-than-expected economic data stimulating a repricing of market interest rate expectations, leading to a sell-off of USA Treasuries. 'When we see strong data—unexpected upward movements in the Indicators measuring economic performance—it suggests that the future path of interest rates will be slightly higher than people expect.'

Yellen stated that the so-called term premium has 'started to normalize.' The term premium had been at a 'very low level' for some time. But now, with the economy in good shape, the term premium has begun to rise.

The term premium refers to the additional yield that investors require when purchasing long-term Bonds instead of simply rolling over investments in short-term Bonds.

Although there has not been much progress on the downside of inflation in recent months, Yellen stated that she is confident that inflation is still on a downward trajectory and is certain that the labor market is not the source of price pressures.

Yellen expressed that she hopes the incoming Trump administration will take the USA fiscal deficit 'seriously' and that the USA Treasury market will not be affected by the kind of 'Bonds' vigilantes that occurred decades ago.

Wall Street Insights previously mentioned that 'Bonds' vigilantes is a Concept first introduced by veteran Analyst Ed Yardeni in the 1980s, referring to investors who force governments and central banks to change policies by driving down Bond prices and raising Bond yields.

Yellen said, 'I do not wish to see a result like the Bonds vigilantes—global investors expect the USA to manage fiscal policy responsibly rather than relying on market reactions to cut the deficit.'