How the Bond Market Will Affect Your Wallet

0:00Bond is back. As in, the U.S. bond market is back in the news. This week yields on long-term U.S. Treasuries climbed near a 20-year high and that is once again set off alarm bells across markets. So real quick, bonds 101. The U.S. Treasury borrows money by selling bonds to investors. We're talking about the biggest global investors, huge insurance companies around the world, pension funds, big banks, anyone that needs to put large deposits into a very safe instrument. That safety is what makes bonds attractive to investors, but they can also make a little bit of money. The Treasury pays out interest. How much interest depends on how investors are feeling about the economy. So if demand from investors is weak, those interest rates known as bond yields

1:01go up. Let's say the Treasury Department wants to sell 10 billion dollars of new debt and it sets a 5% interest rate on that for 10 years. If investors think that's fair, they will line up and buy all of that debt. But if there's not enough buyers in the debt sale, they're going to have to increase the rate in order to entice more. Our colleague Jack Pitcher covers markets and he's been keeping a close eye on the upheaval in the bond market. He says there are a lot of reasons why it's happening, but the main one is a very familiar problem. Inflation. Inflation expectations are going back up right now. Oil prices are higher. We have tariffs. All these things are making it hard to get inflation back down to the Fed's 2% target. It's been really sticky around 3%. And suddenly this is top of mind for everyone again. People are concerned this problem is not going to go away on its own.

2:04For listeners who maybe haven't been following the bond market, why should they care about what's going on? With rates in the government bond market go into their highest level in 20 years, it really impacts everything you as a consumer might touch that wise. Welcome to the journal, our show about money, business and power. I'm Jessica Mendoza. It's Friday, September 4th. Coming up on the show, how high inflation is pressuring the bond market. This episode is presented by Intuit Credit Karma. Relaxation doesn't always look like spa days or fluffy pillows. Sometimes it's simpler than that. It's when those pesky tasks you don't have time for, like hunting down your credit card perks are handled for you. Like how card optimizer from Intuit Credit Karma brings your card details

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4:09you heard about Indeed here. Indeed.com slash podcast terms and conditions apply. Hiring now, then this is a job for Indeed Sponsored Jobs. Like most of us, bond investors hate high inflation. That's because high inflation often means that the government raises interest rates and higher interest rates hurt the value of bonds that are already in the market. So let's say you're holding a 10-year treasury bond that has a 5% interest rate. For those 10 years, you're locked in at that rate. But if rates on new bonds go up, let's say the Federal Reserve has to hike interest rates a lot. In a year from now, bonds are paying 7 or 8% and yours only pays 5. The value of your bond goes much lower. People would rather buy the new bond with the higher interest rate. So if you need to sell that before it matures, the values gone down. That's a risk. That's why higher rates hurt bond values.

5:12As inflation numbers have fluctuated in the last few years, bond investors have been watching closely. Things like pandemic relief, tariffs, wars in Europe and the Middle East, they've all reverberated in the bond market. The last couple of weeks, though, two things happened that have pushed bond yields higher. First, renewed hostilities in the war with Iran. Breaking news as I speak, US Central Command says American forces are striking Islamic revolutionary guard-court targets in Iran. The US attacked a small island in the Strait of Formos on Sunday. The Pentagon also targeting Iran's radar systems. Iran firing missiles and drones at US allies. So in general, since the war broke out, oil prices are up a lot. As it is dragged on longer, and people are trying to figure out how long it will drag on, how big the destruction will be. It's moved oil prices a lot in either direction. Today, the average price of diesel hit an all-time high of $5.85 a gallon.

6:18This week, when we went back to the highs on Treasury yields, that came as oil was spiking again, because the US had launched fresh strikes for the first time in at least several weeks. And bond investors care about oil because... Oil is probably the biggest component driving inflation higher right now. That impacts the cost of a lot of things. Americans filling up at the pump, but also the input cost for all sorts of chemical and fertilizer and industrial companies. All of that gets more expensive. Those costs get passed on down the chain. So there's a concern here that if oil is structurally higher for a long period of time, it's going to stoke inflation all over the US economy. Another reason that bond investors are worried about inflation has to do with the Federal Reserve's new chairman, Kevin Warsh. When Warsh was nominated by President Trump to lead the Fed,

7:18the President made it clear he expected Warsh to bring short-term interest rates down. Trump has been extremely vocal for years about how he wants lower interest rates. So a lot of investors, bankers, people on Wall Street, they've been trying to figure out is Warsh going to try to appease the President who nominated him? It's been a bit of a guessing game as to what Warsh is going to do. And his governing style is making it even harder to figure out. Unlike his predecessors, Warsh made it clear that he's moving away from what's called forward guidance. So in the last few Fed regimes, it's become the norm to include forward guidance on policy statements where the central bank governors expect rates to be essentially giving a guide to the market about their current thinking. Warsh has been critical of that for a long time, and he's actually removed those forward-looking forecasts from Fed statements.

8:19He argues that putting that stuff out there can put the Fed into a bit of a hole where they have less flexibility to change based on the most recent data. With Warsh's approach, rates traders bond investors, they're working with a little less information, a little more uncertainty about what the central bank is thinking. And investors tend to not like uncertainty. Investors generally do not like uncertainty. But then, last week, Warsh made some comments that gave the market a hint that he might be open to raising rates. It happened at the Fed's annual summer meeting in Jackson Hole, Wyoming. It has a very dramatic mountain backdrop. It's a really closely watched speech by people in the market. It tends to be the longest speech that the Fed Chair gives each year. And it's an important chance for them to set the tone for the market on where they expect to go next and what they're

9:20paying attention to. I've been looking forward to this weekend. So what did Warsh say? Warsh took the opportunity at Jackson Hole really for the first time in his short tenure to emphasize that the fight against inflation is not over yet, and the Fed might have to high-grades again and high-grades more in order to get it under control. We must be confident that underlying inflation is moving to our objective. Clearly, and at sufficient speed, otherwise, we have worked to do. That's our job, that's our mandate, and that's our charge to keep. To hear that from the Fed Chair really signaled that people should be on watch for Ray X again, and also that the central bank thinks inflation is a real entrenched problem that is not just going to fix itself. Now, bond investors are starting to wonder. Maybe the Fed will high-grades.

10:22If so, it would be the first time in years. People are very uncertain about what the Fed is actually going to do at its next meeting later this month. Traders, they price this type of thing in, they try and figure out what the central bank is going to do. And right now, it's 50-50 whether the Fed will high-grades or stay steady. That uncertainty is causing volatility in the Treasury market right now. People don't want to buy a bond now if they think rates might be higher a few weeks from now. Do you think we're maybe entering an era where higher rates are the new normal? Lots and lots of people are using the phrase higher for longer, meaning it's looking like rates are going to be structurally higher for quite a while is the view that many people are coming around to right now. And maybe even higher than what was expected a year or two ago. So, what does all that mean for you? For me, for your mortgage. That's next.

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12:42corporation behind Claude. People have hard questions about AI. What happens to jobs, whether their kids end up better off, and Thropic asked over 100,000 people their thoughts on AI and is tracking in public what it does about them and where they might not have the answer just yet. There's hope in hard questions. Ask yours at Claude.ai. Slash the journal. You know the classic Benjamin Franklin saying, US Treasuries carry virtually zero default risk and are therefore the world's safest investment vehicle. Okay, just kidding. He never said that. The Treasury didn't exist for most of his life, but what is true is that US Treasuries are considered the safest investment. That's because the US has never meaningfully defaulted on its debt. So if you lend the US your money, you're as sure as you can be that you'll get it back.

13:45It's just a question of how much interest you make on top of it. Because the Treasury bond is so safe, it's yield or interest is used as a benchmark for other less safe kinds of debt throughout the economy. In any time government borrowing costs go up, it's going to make new borrowing costs on any other kind of debt go up. Right. If bond yields go up, the cost of borrowing other debt goes up as well. Exactly. Any new loan you might try and get right now when government bond yields are at their highs of the last 20 years, your mortgage is going to be more than it was three months ago. Your auto one will be more. The interest rate on a new credit card you open is going to be higher. All of this stuff is impacted by government borrowing costs. Just to clarify, what we're saying here is that the interest rate on consumer debt goes up when bond yields go up. We're not talking about the price of goods exactly like groceries or anything like that. Exactly. This has entirely to do with the cost

14:48of debt. As an example, take mortgage rates. If you're looking to buy or refinance a home, right now you're looking at some pretty high interest rates. On the monthly payment side of things, the monthly payment right now on a mortgage for a $500,000 house is much, much higher than it was back in say 2021. If you're thinking of buying or selling a home, it's going to cost you more to borrow the latest data shows the classic 30 year fixed rate loan approaching 7%. That's the highest level of the year. The big reason for this jump is the global sell-off in the bond market. One thing that's actually happening here is inventory is even lower than it otherwise would be because of this rate dynamic where there's a lot of people out there who have very low interest rates on their mortgage from the period when benchmark rates were super low five, 10 years ago. And they're hanging on to those rates. They don't want to move. Exactly. There's many Americans who,

15:51if they moved and bought a house even of the same value, their monthly payment would be so much higher on a new mortgage at current rates that they're not even considering it. And that's leading to much lower inventory of homes available. And it's really just making the housing market extremely expensive. Higher borrowing costs don't just hurt home buyers, other parts of the housing market, home builders, contractors, even the rents someone pays on their apartment. All of that gets impacted by more expensive debt. So real estate, the big real estate developers, that's a sector in the S&P 500. And it's by far the most sensitive to interest rates. It tends to perform poorly when government borrowing costs are going up. And that's because it's so important for that industry for developing big projects, big apartments. All of that is funded by debt. And when the cost of debt goes up, developers are less likely to take on new projects. It's less profitable for them. So

16:56all of that slows down. And there's a trickle down effect to the suppliers of materials, really anything involved in construction. Contractors, lumber, whoever's providing building materials, that sort of thing. Exactly. Is it possible that as borrowing gets more expensive, thanks to higher bond yields, that people will buy less? And then that could cool the economy more broadly? Certainly. I mean, people are less likely to take out a loan to start a new business. They're maybe less likely to spend a lot of their money if a higher share of it is going to debt service payments. This also applies maybe more importantly to the corporate worlds, which does less if the cost of capital is more expensive. These are all mechanisms that can slow the economy. Jack, what is the takeaway here? Is life about to start getting just more expensive across the board for everyday Americans? So borrowing costs are at the highs of what really

18:00anyone has experienced over the last 20 years. We were in a really low rate era for a long time. Everyone knows that's changed over these last four or five years, but we're now even at the high end of that. So something I think people are worried about is if this continues on this path, if bond investors get more concerned with the US's fiscal position and really start selling this debt, that could have a very large impact. If yields remain elevated, the federal government will have to pay more to borrow money. And that starts to raise the question, will the US be able to get out of this cycle? Already the national debt is over 40 trillion dollars. Concern for a potential debt spiral could erode trust in the US's ability to pay back what it owes. And that old saying that treasuries are the safest bet starts to seem less true. Lots of people in the US have been

19:00talking about the problem of the national debts for years and years, but it's not something that's really had any consequences with it as the US's run larger deficits, bond investors, still-bought bonds, borrowing costs remained in a normal range. If that starts to change and there starts to be real concern over the ability for the US to pay back its bondholders and people don't want to buy these anymore, rates could go much higher than they are right now and there could be severe consequences. Today, a new jobs report outperformed expectations, adding to investor speculation that the Fed might feel comfortable raising rates at his next meeting later this month without risking higher unemployment. That expectation of a rate hike sent bond yields up again.

20:00That's all for today, Friday, September 4th. Additional reporting in this episode from Shradda Dinesh and Ryan DeSembre. The journal is a co-production of Spotify and the Wall Street Journal. The shows made by Katherine Brewer, Evelyn Fajardo Alvarez, Pia Gaggari, Max Green, Sophie Codner, Ryan Caneutsen, Matt Kwong, Colin McNulty, Laura Morris, Enrique Perez de LaRosa, Sarah Platt, Alan Rodriguez Espinoza, Heather Rogers, Pierre Singey, Jiva Cavirma, Katherine Whalen, Tatiana Zemese and me, Jessica Mendoza. Our engineers are Griffin Tanner, Nathan Shingapok, and Peter Leonard. Our theme music is by So Wiley. Additional music this week from Katherine Anderson, Marcus Bagala, Peter Leonard, Billy Libby, Bobby Lorde, Emma Munger, Nathan Shingapok, Griffin Tanner, So Wiley, Perry Music Library, and Blue Dot Sessions. In fact, checking this week by Nicole Pasolka. Our next episode of My Monday Morning will be in the feed on Sunday.

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