What's Next for Bonds?

The Trump administration targets the Bar Association's ability to accredit law schools. Plus, the White House considers opening up the fight against foreign criminal groups to private companies. So variations of this have been kicking around Washington for years. But until pretty recently, the mainstream reaction was basically absolutely not. Nobody likes the idea of armies of corporate hackers roaming the Internet and dispensing their own version of justice. And we'll look back at the wild week that was in bond markets. It's Friday, August 21st. I'm Luke Vargas for The Wall Street Journal. And here is the AM edition of What's News, the top headlines and business stories moving your world today. Investors appear to be closing out the trading week on a cautious footing, despite moves by the Treasury Department to curb borrowing costs and arrest a multi-day bond sell-off. And joining me to look back on the bond market is the President of the United States, and the volatility we've seen in bond markets, whether it's run its course and whether everyday investors should care. I'm joined by finance editor Alex Frangos. Alex, I'm going to put my chips on the table here. I'm a millennial. My long-term investments, my retirement accounts are not very exposed to fixed income at this point. But there were points this week where I sort of thought, I really need Alex in here to break this down and explain the so what of all of it. So we're counting on you here. What has been happening the last few days and why is it so consequential? Well, what's been happening is at the heart of financial markets. And even if you don't know, you don't know. You don't own bonds. U.S. government debt is kind of the sun around which all financial markets orbit. And what's been happening is the yields on that debt, what the government has to pay to borrow money, has been going up to multi-decade highs. And that trickles through to the rest of the economy because all other debt is benchmarked against that debt. So what that means is if you borrow money for a house or to buy a car, that is going to go up. And so that's why it really, really matters. It's also the number one alternative for investors. You mentioned you have all your money in stocks. Well, you know, stocks go up and down a lot. They're very volatile, whereas bonds pay a steady coupon. And that coupon is rising, meaning it's making it more attractive to own bonds. So that can have big ripple effects on the stock market. You know, when investors say, well, I'd rather just own that government debt. This is going to pay me five point something percent. And I don't have to think about it. OK. And in terms of the factors that have fueled this bond sell off. And I've seen a lot of stuff put forward. We've seen budget deficit concerns, which the PM show talked about a little bit yesterday. A lack of a solution in the Middle East, shifting demand for U.S. Treasuries among foreign investors, even the AI build out and all the borrowing occurring around that. Perhaps I could go on to you. What are the most credible explanations here? It's a bit of a mystery why yields on the long end are going up. There's a bunch of factors that could be at play. But one of the major ones that people are pointing to is there's just a lot of demand to borrow. The government has this huge. Deficit, the biggest that you'd see, you know, outside of wartime or recession when the government's trying to boost growth. And then you have this massive AI build out. So you have companies that didn't need to issue debt like Google and Facebook's owner, Meta and Oracle, who were borrowing a ton of money. You have some inflationary pressure, you know, oil prices are gone back up because of the stalemate in the Persian Gulf. So there's a mixed vegetable soup of of factors that are causing bond yields to rise. Very tasty. I mean, just quickly on government deficits, we heard Treasury Secretary Scott Besant speaking on CNBC yesterday and saying there's nothing magic about the 40 trillion dollar number. That's what the US debt recently ticked past and that the US can grow its way out of that. Is that still a credible explanation for markets? Well, yeah, I should mention that, like another reason that long term bond yields rise is because investors are expecting growth to be higher. And so that can also be a factor. But you can't deny that. The stock of debt as a percentage of the size of the economy, which is one easy way to kind of measure it, has grown is over 100 percent. You had that 40 trillion dollar number come out this week. That's just a round number. It's more symbolic. The economy has also grown massively over the years. So you have to take that into account. But, you know, people are worried. Is this a loss of confidence in the US's kind of fiscal rectitude and ability to say, look, we're going to raise enough revenue through taxes to pay off our debt? There's some reason. I think that was a little bit overblown, those concerns. But the thing that people are looking for, we're going to hit a breaking point where borrowing costs go up so quickly and so high that it spooks people. When borrowing costs go up, things tend to break. You know, this is what we had in the run up to the financial crisis, even just a couple of years ago when the Fed was raising rates to fight inflation in the opening up from the pandemic. We had the banking implosions on the regional banks you had in the UK, the Liz Trust. Those were all happening in a period where rates were going up very quickly. Right now, we don't have the Fed raising rates, but we have the market basically raising rates on the long end. The silver lining, maybe all this is some people say, well, if rates go up enough, it's going to cause a corrective and cause the administration and Congress to say, hey, look, we're going to cut the deficit. I've been speaking to the Wall Street Journal's Europe business, finance and economics editor, Alex Frangos. Alex, as always, thanks for stopping by. Thank you, Luke. In other markets news, workers at South Korean automaker Hyundai have gone on strike for the first time in a decade, bringing a complete halt to production. The walkout is the latest challenge for the company, which is grappling with sluggish global sales. Inflation in Japan picked up last month with the Iran war energy shock rippling across goods in the country. That is solidifying expectations of a BOJ rate hike when it meets next month. Meanwhile, oil prices are pulling back slightly today, but remain on track for a weekly gain of around $1.5 billion. On reduced hopes for a quick resolution to the conflict in the Middle East. And in a bellwether of U.S. consumer health, off-price clothing retailer Ross Stores has raised its full year outlook after new and existing customers visited its locations more frequently. In an investor call, CEO Jim Conroy said that the company was appealing to customers battling higher gas prices and other forms of inflation and that it's Didi's discount stores that serve even lower income demographics. It would sort of be a foolhardy strategy to take this moment in time to elevate the assortment and bring our price points up in a meaningful way. Didi's is in a great spot. Ross is now planning to open 115 locations this year, up from prior plans for 110 new stores. Coming up, the White House wants to create a private cyber force, letting companies know that they're not alone. And the White House wants to create a private cyber force, letting companies know that they're not alone. In President Trump's latest move to remake higher ed, the Education Department today is taking steps to strip the American Bar Association's authority to accredit law schools. Assistant Secretary of Education David Barker said that accreditation, quote, operates like a cartel, end quote, and he accused accreditors of injecting political preferences into their work. The chair of the ABA's Accreditation Council, Melissa Hart, said it's confident it complies with federal laws. The ABA is the nation's leading law school accreditor, with accreditation necessary for schools to gain access to federal student loans and, in most states, for graduates to take the bar exam. Trump has long railed against higher ed, vowing to remove what he sees as liberal excess within universities and calling accreditation his, quote, secret weapon. The White House wants private cybersecurity companies to help the U.S. take a more aggressive approach to accreditation. And finally, AI has thrown the publishing world into chaos, as book deals worth millions of dollars are being dropped over concerns that some authors are using generative AI to write for them. The Authors Guild has tried to combat the emergence of slop with a human-authored stamp. But critics say that an honor system isn't enough to stop AI. And amongst publishers, nobody can seem to agree who exactly is responsible for solving the problem, as the journal's Anna Silman explains. The big five publishers have, by and large, been reluctant to make sweeping statements about AI use. They want works that are original authorship, meaning that the text is written by a human. But they've stopped short of putting any restrictions on how AI could be used in other elements of the writing process. And I think that's largely because they are waiting to see how the norms around this technology evolve and things are changing so fast. And even though some publishers may be taking that wait-and-see approach, Anna said that the inevitable influx of AI is already forcing the industry to consider its long-term survival. I think the consensus right now is that we don't want to. We don't want to read AI-generated books. There's been a lot of public outcry and backlash when authors have been alleged to have used AI in the writing process. However, that is also changing. And there are some genres like fantasy and sci-fi where readers read a lot of books a year. They can be quite formulaic. And there are some companies and some writers experimenting with using AI to help generate some of those stories. So that is a norm that could evolve as well. And that's it for What's News for this Friday morning. Today's show was produced by Daniel Bach with assistance from Kate Lynch. Our supervising producer was Sandra Kilhoff. And I'm Luke Vargas for The Wall Street Journal. We will be back tonight with a new show. Otherwise, have a great weekend. Thanks for listening.