The Bond Market Is Flipping Out. Here’s Why You Should Care.

From The New York Times, I'm Rachel Abrams and this is The Daily. For months now, you might have been following the headlines about the turbulence in the bond market. And by following, I mean, you might have found yourself a little confused and maybe even kind of alarmed by all this talk of the dangers to our economy. Well today, we are going to try to mystify the headlines for those of you who might need a little bit of help. Our artillery, Ben Castleman, chief economics correspondent for The New York Times, he is going to explain what's been happening and why it matters. It's Tuesday, September 15th. Okay, Ben, we have invited you on the daily today to do the impossible, which is we are going to explain to people who may not understand how bonds work. What a bond is and why the bond markets have been going haywire. And we are going to explain that not only so that you, dear listener, understand, but that you even enjoy this conversation. Rachel, I love a challenge, but I confess that pretty much all day I was sitting here waiting for a message from you or somebody on the team, being like, you know what? We can't do it. Never mind. Too hard. Nope, we're going through with it. We are taping this episode. One question to you, Ben, is why should people care about the bond market? You have a bond market. We talk about it less than the stock market in part because it's confusing. And I'm going to do my best as we talk here to make it less confusing, but in many ways, it is more important than the stock market. It's arguably the most important market on earth. And your financial life is tied to the bond market whether or not you know it. For one thing, because you've probably got some bonds somewhere in your retirement portfolio, if you've got a 401k, if you've got an IRA, chances are there are some bonds in there. So what matters there? Even if you don't even realize it. Even if you never made a decision to go invest in bonds, it's probably in your portfolio somewhere. If you've got a pension, your pension is probably invested in bonds. And also because bond yields, and we'll talk about what that means in a second, I promise, basically decide how much it costs to borrow money everywhere else in the financial system. So if you are planning on buying a house and you want to get a mortgage, that interest rate is going to be determined by the bond market. If you want to buy a car, borrow money for student loans, any of these things open a new business, all of that is going to be based on what happens in this kind of opaque car to understand bond market. Okay. And you are going to make that less opaque for us. But before we do, I'm sure a lot of our listeners know what a bond is. But for people that need a refresher, can you just explain to us not necessarily in the style of schoolhouse rock and let's just prefer to sing it? What is a bond? A bond is, no, I'm not going to sing. A bond is just an IOU when an entity, a national government, a state government or a city, a company wants to borrow money, they sell bonds to investors. Investors could mean individuals like you and me. It could mean pension funds, hedge funds, other governments. And when you buy a bond, you are giving some money, call it $1,000 to the seller of that bond. You are lending them that money. And they are promising to give it back to you in some period of time. In a few months, a few years, 10 years, 20 years, 30 years. So I go and I buy a 10 year bond for $1,000. The seller of that bond is promising to give me back my $1,000 in 10 years. But I'm not just going to give them my money and walk away, right? And so they're going to pay me interest. They're going to agree at the time that the bond is sold to a fixed rate of interest. And they're going to pay me interest every year until that bond matures and they give me back my $1,000. That interest rate, functionally, is what we call a yield. The yield on a bond is the sort of technical term that we use. Right. So I'm lending money. You're making worth my while. You're paying me interest. It is effectively alone for some period of time, depending on what we agree on. That's right. And the bond market is this enormous financial system that encompasses government borrowing and corporate borrowing. But really, when we talk about the bond market, there is one sort of big cajuna in it. And that is the US federal government. This is a $30 trillion market for US Treasuries. That's the US government bonds or IOUs, as you call them. That's right. For a trillion dollars worth of those IOUs, change hands get bought and sold in the market every single day. So when we talk about the interest rates that determine everything else, the yields that matter the most, that is really what we're talking about is the US Treasury market. Okay. So Treasuries, our bonds issued by the federal government, continuing with our very brief econ 101 lesson, tell us how a Treasury works. So a Treasury is a bond like any other. The federal government literally auctions off bonds at a fixed interest rate. And those can be in terms that go anywhere from a few months to 10, 20, 30 years. The one that we tend to focus the most on is the 10 year Treasury note. It is just sort of the benchmark for everything else in the world. The US government has to date been the safest, most reliable borrower in the world. And so the interest rate that they can charge ends up being sort of the foundation on which everything else gets built. So if I'm willing to lend the government money for 2%, then I'm going to lend you money at a little more than 2% because I don't think you're quite as good a risk as the US government. If I'm the bank making you alone, I say I'm going to charge you 3% on top of the 2% that I'm lending the government to. So your interest rate ends up being 5%. Right. You've got to base the interest rate on something. So you might as well base it off of your most reliable borrower and everything else can be orbiting around that. That's right. And the yield on that 10 year Treasury has been going up. It's been going up gradually for the past several years and it's going to pretty sharply over the past few months and on Monday actually it briefly touched 5%, which is the highest in three years. And this is what has people concerned. This is why it's in the headlines. This is why we're talking about it now on the daily is that this increase in yields has both sort of direct immediate consequences and then it raises concerns about all sorts of long term issues that we could face down the road. So why are the yields on these 10 year Treasury bonds going up? Why are you laughing? Is it because it's so easy I should know the answer? If only I would love to give you the simple one sentence schoolhouse rock version. This is going to take more than a schoolhouse rock. All right. I'm here for it. There are a lot of reasons is the short dodge answer. The simplest to understand I think is inflation. Okay. So if I'm buying a 10 year government bond, if I'm lending the government $1,000 and they're promising to give me $1,000 back in 10 years, we know that that $1,000 is going to be worth less in 10 years than it is today. All right. That's just what inflation means. Right. So with the barest minimum, I want to make sure that the money that I get back from the government, all that interest and the $1,000 at the end makes me whole with inflation. Right. $1,000 will not be worth $1,000 whenever I get it back from the US government. That's right. So if I expect 2% inflation a year, I better at least be getting 2% interest. Right. So step one at the barest minimum, I want to break even. And then of course, I'm going to want more on top of them. But when inflation goes up and when we're worried that inflation is going to stay up, then I'm going to need more interest to make me whole. If I think that inflation is going to be 3%, instead of 2%, now I'm going to demand at least 3% interest from the government. If I think inflation is going to be 4%, I'm going to expect at least 4% interest, right? Just as a baseline. And of course, what have we seen with inflation? We got some numbers on Friday. We got some numbers on Friday that suggest that inflation has picked up again, mostly right because of oil prices. But let's go back just a little bit here, right? We came through this period of really elevated inflation coming out of the pandemic. We started to get a little bit of control over it. then it's. picked up again this year. We had tariffs and now we've had the war in Iran that just pushed oil prices, up diesel prices, just hit $6 a gallon, that's a record. And so investors, lenders are getting nervous, not just the inflation today is a bit higher, but hey, maybe this inflation problem is going to stick around for a little while. Maybe it's going to take a while for inflation to come back down. And so if I'm going to lend you my $1,000 for 10 years, you better give me a little bit more to compensate me for that inflation that we're expecting over that time. Got it. Basically, if inflation continues to rise, bond yields, the borrowing costs for a bond are going to rise. All else equal. If inflation goes up, we would expect bond yields to go up to. Okay. So you mentioned there are more complicated reasons why we are seeing yields rise. What are those complicated reasons? So I kind of think of this as falling into two buckets. There's the good news and there's the bad news. Okay. Let's start with the good news. Love some good news. So the good news is that there seem like there are lots of opportunities out there. So if I've got my $1,000 that I'm going to invest somewhere. If the stock market is going up and there's an AI boom happening and they're all of these companies that seem like they're great opportunities, why would I lend my money to the federal government, which is nice and safe, but it doesn't offer a very impressive return for my money. Why would I put it there instead of putting it into this stock market boom? Right. Why would I put it there instead of lending it to, you know, anthropic or to NVIDIA or to some company that's, you know, could turn my $1,000 into a billion, I don't know. Sure. That's the optimistic argument here is, hey, there are lots of places I could put my money right now that are going to give me a much better return. And so if the government wants to borrow money, they're going to have to offer a better return too to convince me to give them my $1,000 instead of giving it to, you know, whatever cool startup is happening. Okay. So the argument here being that this is good news because if the government has to stay competitive, that means there are lots of businesses that are growing, that people believe in, that's good for the US economy, that's a signal that the economy is doing well. That's right. And this is an argument that you hear right now from the White House. It's an argument that you hear from some economists as well, that we're just in a period of faster growth and better opportunities. And so the rise in yields is at least in part a recognition that the government's got to compete for those investor dollars. And hey, that may be tough for the government, but this is good news for the economy. Do you buy that argument? Do you think that that everything you just said is in fact reflective of a positive reality right now? So when I talk to economists and I talk to investors, many of them do think that is part of what is happening here. There is real enthusiasm for some of these growth opportunities out there, but hardly anyone that I talk to thinks that's the whole story. And that's where the bad news comes in. (Music) We'll be right back. (Music) Okay, Ben. Before the break, you told us that there are some bad news reasons why yields are going up. Let's get into those. So remember when I said the US government is the safest, most reliable borrower on earth? Yes, it gave me great confidence. What if it isn't? That gives me less confidence. So the whole reason that the US government sells bonds in the first place, right, is because every year it spends more money than it takes in. It runs a deficit, right? This year we're going to spend about seven and a half trillion dollars on defense and social security and building roads and bridges and all the other stuff that the federal government does. And we're going to bring in five and a half trillion dollars in tax revenue. And so that means we've got two trillion dollars of a gap that we've got to make up and we make up for it by selling bonds. And that's fine. But we run these deficits year after year after year, after year. And the debt keeps accumulating. And it's growing faster than the economy is. Right. What did I recently hear that we're spending a trillion dollars on just interest payments alone? It's more than we spend on the military? Yeah, that's exactly right. We have to pay interest on all of that debt, right? That's what we're talking about when we talk about yields. And right now, we're paying a trillion dollars a year in interest on the debt. That's more than we spend on defense. It's more than we spend on basically anything other than social security and Medicare. And the more that we borrow, the more interest we've got to pay, and that adds even more to the debt. And you're starting to hear investors just get a little bit nervous about how long that can continue. And how does that nervousness sort of manifest with bonds? So if you, Rachel, come to me and you want to loan, right? I'm going to evaluate a few things, right? I'm going to evaluate what other opportunities I have, right? We already talked about that. I'm going to evaluate inflation, but I also going to evaluate like how confident am I that you're going to pay me back? Right. And if I look at you and you're coming to work every day and you're limiting your spending and you're being financially responsible, right? Then I'm going to give you a lower interest rate than somebody else who's out there blowing it all at the bar every night. Right. I see where you're going with this, but if I have a terrible credit rating, maybe I can't hold down a job, maybe you're thinking you're a riskier bet. And I'm going to charge you more to borrow money from me. That's exactly right. And so the concern here is that the federal government is maybe being a little more like that person hitting the bar every night and a little bit less like the diligent responsible worker who's paying their debt. So investors are actually looking at the US government right now, and they are thinking that we are riskier than we have been. That's right. And if you're a riskier bet, you're going to have to pay a higher interest rate. And remember, remember that trillion dollars in interest we talked about earlier? Sure. Well, the higher the interest rate goes, the more interest we've got to pay, which adds even more to the debt, which makes investors even more nervous about our willingness to pay it. So they charge an even higher interest rate. And the risk becomes that you get this ratchet effect where all of a sudden interest rates go up and up and up and up and interest payments go up and up and up and they're pushing each other higher. This bad news explanation that you're giving for why interest rates are going up, this feels like it is directly in conflict with the explanation you gave us earlier about how it shows that the US is doing well because there are all these great investments that the government has to be competitive with. So how do we weigh these explanations against each other? Do we know sort of how much of the rising yields is because of the good reason? How much is because of the bad reason? What can you tell us about what's driving this predominantly? So what I can tell you is that this is what economists and bond investors are spending a ton of their time right now, arguing and fighting with each other about is trying to figure out exactly the question that you're asking. The reality is it's probably some combination of all of these things. People are worried about inflation. They're optimistic about some of the opportunities that exist in the US economy, but they're nervous about the fiscal sustainability of the US government specifically. But exactly how you tease out those different pieces, which of them is most important, how you weigh them against each other, that is a subject of a lot of debate that is not easy to answer clearly. Okay, so basically there's a lot of uncertainty, which I'm sure isn't good for anything. Investors never love uncertainty. So if you have been paying attention to any of this, you are probably aware that the US Treasury has been intervening in the bond market. Explain what they have been doing and why. Yes, so look that this increase in bond yields, it's a problem for the White House, right? It's a problem first just because it's driving up the cost of borrowing for the federal government and means paying more interest, but it's also increasing the costs for everyday Americans, for you as you think about going out and buying a house and needing to get a mortgage, for example. It's a political problem because I've been saving up maybe my whole life for a house and now suddenly I can't afford it and I'm like, what the heck, Mr. President? And so a few weeks ago when bond yields were really sort of spiking at the end of August, Scott Bessent, the Treasury Secretary, came out with this plan that was meant to at least sort of calm down markets. And what that was was to have the Treasury buy up billions of dollars worth of long-term government bonds from investors to buy them back. And what that was meant to do was to sort of ease the market and bring down yields. That was the theory. That was the theory. And it worked for like a few hours and then pretty quickly, Treasury investors said, "This isn't going to work," and yields began to rise again. And so we're now at this point where yields are up significantly. And it's not clear that there's much that the Treasury can do to bring them down. And just in the simplest way possible, Ben explained to us why that intervention by Besson did not work. So remember, if part of the reason that yields are rising here is that the government is trying to entice investors to buy its bonds, then if the Treasury steps in and provides a huge new source of demand to buy up bonds, then it just doesn't have to compete as hard to entice investors. And that should bring down yields. Bring down the demand. Econ 101, supply and demand. The problem here is the Treasury market is huge. Remember, we said before a trillion dollars a day changing hands. And the Treasury Department as big as it is doesn't have the firepower to really move that market. They can throw in a few billion that's a drop in the bucket. And so investors kind of once they got a chance to digest this, took a step back and said, "You're not big enough to do this. You can't really move the market in the way that you're claiming." They saw through it, basically. They were like the U.S. government cannot buy enough to actually influence these prices in a non-artificial way. You're a paper tiger. You don't have the juice. And maybe the most salient example of this came from Stanley Druckenmiller, who is this big investor, maybe not a household name, but very well known in the world of finance. And among other things, used to be Scott Besen's boss. And he wrote a piece in the Wall Street Journal basically saying, "This isn't going to work." And the core of his argument is basically the U.S. has a real problem here with its debt and its deficits. And that what Besen was doing and kind of anything that the Treasury might try to do is just papering over that problem. And the only way that the U.S. is going to be able to bring down bond yields in the long term is to get its fiscal house in order, which is to say to cut spending or raise taxes or some combination of the two so that it isn't running these big deficits year after year. These strategies are not long term. These strategies are just kind of painting over the crack in the wall rather than dealing with the leak that's actually causing it. You know, just a step out for a second. I'm thinking about what you said about people who suddenly can't buy a house. The rhetoric around the housing market in this country has been in recent months. Interest rates are really high. It's a bad time. It's a bad time. It's been sort of discusses the temporary status, but just listening to you in this conversation, I have this question of like, is this actually temporary, this environment that we're in or are we entering a new perhaps permanent high interest period? So I think that's exactly the right question to be asking. So that the yield on the 10 year Treasury right now is around 5%. That is up a lot over where it was a few years ago. We got down at the depths of the pandemic to half a percent. And it's been running around it at 2% to 1/2% for years. But if you go back to way back to before the global financial crisis and the great recession of 2008, the 10 year Treasury was around 5%. And so in some ways, what it may well be is that interest rates are actually getting back to normal on some level, that really what has been abnormal has been these 20 years of really low interest rates. That is so interesting to think about because this period of low interest rates, I mean, that has been for many people like the environment in which they grew up. But what you are saying is that this low interest period, even though it's gone on the last 20 years, that might be the aberration, not the norm. And if that's the case, then we should not expect interest rates to come back down to those low levels again anytime soon. You talk to anybody now in their 60, 70s, 80s and they talk about the first interest rate that they paid on their first mortgage. You hear these numbers that are eye popping to us now. And I get emails from readers all the time. Every time I talk about high interest rates, I get these emails are like, what do you mean high interest rate? In my day. In advance of talking to you, I was texting with my parents to ask them what they paid in interest for their house that they bought in the mid 80s. And my mother said it was 11% with a variable rate that it was as high as 18%. That's right. But here's the thing. What did your parents pay for that house? Because the chances are they paid a lot less than what a house costs these days. And so on some level, we've sort of built this world around low interest rates. And now we're in this situation where we have the high prices, the unaffordable home and the high interest rate. It feels like you're speaking about the affordability crisis in this country that we have talked about so much on the show and that is so present for people in 2026. That's right. So yeah, in so many ways, I think this all connects back to the same issue of affordability. You know, we're all hoping that oil prices will come down and inflation will get better and maybe it will. But this part of the affordability crisis, how much it costs to borrow money to buy a house or to buy a car to live your life, that part of it doesn't seem like it's going to get better anytime soon. And it's quite possible. It's going to get worse. Ben Castleman, thank you so much. Thanks for having me. Investors are now looking towards the Federal Reserve, which is expected to make a decision on whether to increase short-term interest rates later this week. But no matter what the Fed decides, bond yields are likely to remain high. We'll be right back. Here's what else you need to know today. President Trump called in videos chief executive to complain that recent fears about AI were nothing more than a hoax. The call came while the executive Jensen Huang was speaking at a conference in Los Angeles on Monday. Huang put the president on speaker so the audience could hear the five minute conversation, which was recorded by conference attendees. And the Supreme Court on Monday blocked the Trump administration plan to dramatically change how Americans vote by mail in the lead up to the midterm elections. A major loss for President Trump was long claimed without evidence that fraud is rampant in mail voting. The ruling was resounding when for Democratic-led states and voting rights groups which had argued that the plan was unconstitutional and an existential threat to the democratic process. Today's episode was produced by Shannon Lynn, Michael Simon Johnson, and Eric Krupke, with help from Claire Tennis-Getter. It was edited by Mark George and Lisa Chow, with help from Lizzo Bayland. Contains music by Mary and Luzano, Rowan Niemisto, Pat McCusker, Melissa Moxley, and Alicia Bay-Tube. It was engineered by Chris Wood. Our theme music is by Wonderly. That's it for the Daily. I'm Rachel Abrams. See you tomorrow.