The Bond Market Is In Big Trouble

The Trump administration was basically forced to intervene after government borrowing costs hit a nearly 20-year high today, 20-year high. So should we be worried? My answer, spoiler alert, yes, we should be worried. But I want to explain why. So let's try to get through this. It's dense. Some people might not be familiar with how bond markets work. I would be one of them. I'm not an expert on this. But through some digging, I think I have a pretty firm grasp on what's going on here. So this all has to do with yields on 30-year Treasury bonds. Okay, to understand how Treasury bonds work, essentially investors invest in our bonds under the understanding that at some point, they will get a return, a percentage on their investment in US bonds, okay? Now, the reason why bonds exist is to finance various things that our government does. Now, if the sentence that I read you earlier, right, that this has to do with yields on 30-year Treasury bonds makes your head spin, it's okay. Think of it this way. We are talking about how expensive it is for the government to borrow long-term. So think of the investor as saying, sure, I'm willing to give you this loan by investing in your bonds. But I'm expecting a higher yield. I want higher interest, essentially, higher return on this investment. So let's continue. The yield or return on a 30-year Treasury topped 5.3% in early morning trading Tuesday. So that's the highest level recorded since 2007. So that already should be a massive red flag. But I'll continue. So Professor Paul Krugman helpfully explained why this phenomenon is happening. What is the cause of all this? And he wrote on his Substack page that interest rates on government debt can rise for two main reasons. First, they can rise because the overall demand for credit in the economy is running ahead of supply, meaning the government is spending more than it's taking in from these investors. Krugman also explains that right now there are two huge entities that need a lot of credit. They need a lot of money. They need a lot of financing. Who am I talking about? First, there's, of course, artificial intelligence, AI. So the AI, so-called hyperscalers, such as Alphabet, Amazon, and Microsoft, well, they are pouring billions and billions of dollars into building infrastructure, namely these data centers. Okay, so that's the first reason. But here's the second reason, our massively high national debt, okay? We are so indebted, the federal government is so indebted, and that has become very costly. So the recent large increase in interest rates is a consequence of soaring demand for credit both to build data centers and to cover federal deficits. We are spending more than we are bringing in, which is why it is crazy, I can't curse, it is crazy that just yesterday it was announced that the federal government signed a deal for Raytheon to produce more Tomahawk missiles. So we can continue on with this dog and pony show in the Middle East on behalf of a tiny irrelevant foreign country that does nothing for us and wants to build its empire, Israel, okay? $22 billion deal to build more Tomahawk missiles. Should we be spending money on that when we're $40 trillion in debt? I don't think so, but who cares? I mean, I'm just an American living in a so-called democracy where my views, which most Americans agree with, don't matter at all. But let me continue with what else is going on here. So why are the interest rates on government debt increasing? So basically, investors expect what's referred to as a risk premium, right? So the idea is they want a higher return on their investment if they're going to buy US bonds. And that's because they don't trust our government. They either don't trust that our government is going to be able to honor its debt obligations. They might also be concerned that the US could either default or stoke inflation in order to manipulate currency, to shrink the real value of the debt. So in other words, the fear is that the government could weaponize inflation to devalue currency. In other words, no one trusts us, and we're having a difficult time in the bond market as a result of that. And inflation, by the way, is already a major concern. As the Washington Post notes, the collapse of the fragile US-Iran ceasefire has reignited fears that an interruption in Persian Gulf oil supplies will keep energy costs and inflation high. On Thursday, remember, this is Thursday of last week, Brent Crude, the global oil benchmark, neared $88 per barrel, up from around $72 during the recent pause in hostilities. Now, when it comes to the cost of Brent Crude, or the cost of oil per barrel, something to keep in mind is that the Trump administration has been able to kind of manipulate the cost by releasing oil from our strategic petroleum reserve. And it is running low. So what happens when we run out? It's gonna be a bit of a disaster, and Trump has announced that there are no diplomatic talks happening with Iran at all as we speak. That's the first time he's confessed that. So we're not in a good place. The Strait of Hormuz remains closed. The Houthis continue attacking Saudi vessels in the Red Sea. Not good, very bad. But there's more. When investors get worried about inflation, they sell bonds. And the US wants to prevent that. Now, Japan recently was in a bit of a pickle, and the US came in and bailed them out. And the reason why isn't because we're looking out for the homies. Let's be very real about that. The reason why the Trump administration intervened to help Japan is because had the Trump administration avoided doing so, Japan would have sold US treasuries. I mean, that's what they would do. They would sell the bonds, and the US doesn't want that. So that's why Besant actually stepped in to partly save Japan. Now, with that in mind, when the investors get worried about inflation and sell bonds, that ends up lowering the price of the bonds while sending yields even higher. Meaning the interest rates that the government would have to pay to the investors, those go higher. So that in turn is a big problem, as we all know. And the Trump administration has decided to take action to do something about this. And it has to do with more manipulation, which in the short term appears to be working. The question is, is this gonna work in the long term when you're not actually addressing the underlying economic issues here? So with that in mind, today, the Trump administration took action with Treasury Secretary Scott Besant, announcing that our federal government will double its repurchases of long-term bonds for a few months. So if you don't know what I'm talking about here, here's an easy way to understand it. Think of this as what corporations do with corporate stock buybacks. In this case, it's the federal government buying its own bonds, okay, to increase the value. Now, to finance this jiu-jitsu move that Besant is carrying out, the Treasury will issue more short-term debt. Remember, what we're talking about right now is the 30-year bond. In this case, we're talking about short-term debt, which is going to be used, more of that is gonna be issued in order to finance this little trick that Scott Besant is engaging in. And look, that could be risky. More short-dated issuance makes government finances even more exposed to any rise in interest rates, which would quickly feed through into higher borrowing costs. But again, for now, it does appear that Scott Besant's calculation has paid off. Apparently, he's a master of manipulation in markets, so in a legal way. He's not doing anything illegal as far as I can tell. So as intended, Treasury yields did go down today. But Besant's maneuver did nothing, as I mentioned earlier, to deal with the underlying economic conditions at play. And he also weakened the dollar in the process. So if you're asking yourself, okay, why is the deal? Well, the Treasury market is the largest bond market in the world. And yields on the government's debt are used across the world as a benchmark for things like business loans and mortgages. Higher Treasury yields typically translate into what? Yeah, into higher interest rates throughout the economy, reducing affordability for households at a time when many are already struggling to make ends meet. That's according to analysis by the New York Times. And our national debt is a massive problem. There's no question about it. And the Trump administration is only exacerbating it by continuing to fund conflicts and wars abroad. So with a national debt of, it's now $40 trillion officially, it hit $40 trillion today. Washington this year is expected to spend more than $1 trillion on interest. That's how much it's costing us just to service our loans, or service our debt, I should say. That's roughly what taxpayers spend on Medicare each year, according to the Congressional Budget Office. If long-term Treasury yields stayed half a percentage point higher than current budget projections assume, the government's annual interest bill could swell by roughly $95 billion by 2028, an April Congressional Budget Office analysis suggests. So that's why it's a big deal. It's a big deal for our country's economy. It's a big deal on a very personal, individual level. Each household is gonna be feeling this. But there is no discussion about changing the foundation of what led us to where we are today. We just keep putting Band-Aids on things. The Fed keeps printing money. The federal government invests in its own bonds to jack up the value artificially. It's what they do. That's where we're at. So this war has had tremendous economic consequences for Americans and the global economy already. And there's no end in sight.