Why You Should Care About What’s Happening in the Bond Market

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1:20Learn more at chase.com slash business. Chase for Business. Make more of what's yours. The Chase mobile app is available for select mobile devices. Message and data rates may apply. JPMorgan Chase Bank N.A. Member FDIC. Copyright 2026. JPMorgan Chase and Company. Bloomberg Audio Studios. Podcasts. Radio. News. Global bond jitters have taken center stage. Japanese bond yields remain elevated. Long-dated U.S. Treasury yields are hovering near a three-year high. You see the yellow line just absolutely take off. And it's the highest yield since the bond was introduced all the way back in the late 90s.

2:01This week, the yield on the 30-year treasury was the highest it's been in almost 20 years. And we've also seen yields on long-term debt in the UK and Japan, the highest they've been in decades. Now, remember your fundamentals. When the yield on new bonds climbs higher, old bonds look less attractive and their price tends to decline. When investors find government debt less attractive, they're willing to pay less for it. Bond prices go down and yields go up. Essentially, yields on government bonds are surging. Enda Curran covers the global economy for Bloomberg. And he says this week's turmoil in global government bond markets is a signal that investors are becoming convinced inflation is going to be a more persistent problem.

2:47And there are two reasons for that. The first one we all know about, it's the Iran war. It's the spillover effect on petrol prices, gas prices, fertilizer costs, and various commodities. We know what's going on there. But it's also a feeling that we're just rolling from one shock to another in the 2020s, from the pandemic through Ukraine, through to where we are now. And it's a feeling that, you know, inflation is not going to go back to where it was, say, a decade ago. Things are going to be more expensive. It's going to be more expensive to get a loan out. And then by extension, for a government who wants to go and raise money in the public markets, they're going to have to pay more for it.

3:22And that, Enda says, is something that's going to affect everyone, from Wall Street to Main Street. The impact ultimately will be that it flows through to the real world economy. For example, taking a mortgage out, or for getting a car loan out, or for repaying your interest on your credit card debt. Higher yields, higher borrowing costs for the government does have an impact on everybody else. And it's going to put a particular spotlight on one person on his first day on the job. Our new chairman of the Federal Reserve Board of Governors, Kevin Warsh.

4:03I'm David Gura, and this is The Big Take from Bloomberg News. Today on the show, why investors and economists are so concerned inflation will stay higher for longer. the one great hope that could give the global economy a way out, and what this route in the bond market means for the Fed Reserve, the Fed's new chair, and for you and me.

4:30We talk a lot about the 10-year. That's something that really influences mortgage rates, for instance. It can influence credit card rates and car loans. What is the utility of the 30-year Treasury bond? When we talk about the 30-year, what's it telling us about the state of the economy and investor appetite? It's more of a signaling effect. But the point is, when you have those 30-year yields going where they are, it's a reminder, one, it's a judgment on the U.S. fiscal position right now. And a lot of investors have been warning that the U.S. has been borrowing and spending beyond its means. Now, of course, the administration will push back and they say that the measures they're pushing through, especially in taxation, will promote growth.

5:05And the best way to get out of a debt pile is to grow your economy out of it. But nonetheless, when you see yields go where they are, it's telling you people are worried about the government finances and it's saying people are worried about inflation. And the point I'm making about inflation here is it's not just the Iran story that, of course, is part of it. That's the near term thing. But if you step back, a lot of people are now saying, you know what, it's probably likely the prices are going to be higher for longer. What does the sell off in bonds tell you just about the way that global investors are thinking about U.S.

5:33debt in particular? Well, there are a couple of things going on here. We've had periods of bond sell offs in the past. I mean, during the pandemic, David, for example, bonds sold off during previous moments of volatility, bonds sold off. But now there's a feeling that this sell off is signifying that investors are starting to crystallize on several issues coming together at once. And that is the U.S. government borrowing position. Too much borrowing, too much spending. Investors are saying you're going to have to pay up to keep borrowing from us. That's the fiscal story in the U.S. And it's a reflection not just on the inflation story, but a reflection on this idea that governments have also borrowed too much money over the past few years.

6:08And as a result, now that bill is coming home to roost. And then secondly, there's this kind of penny drop moment where investors are saying, hang on, US interest rates might be higher for longer now because of what's going on in the inflation story. That's the Iran dynamic, but it's also the AI boom that's driving up the cost of goods here. Tariffs have had some impact. You've got the whole changing supply chain story or deglobalization that's making trade more expensive. You've got the demographic story. There's a range of issues there that investors are saying will mean interest rates will need to be higher than they were now for longer.

6:43So there's this kind of feeling that what happened this week? Why now? Well, it's a penny drop moment. Investors seem to be casting judgment on all of these issues at the same time. As you listen to policymakers, as you talk to economists and investors, are people worried about an inflation shock, a kind of seismic event in the global economy? There is some nuance in this, David. Right here, right now, nobody's worried about, say, a 1970s style great inflation outbreak or necessarily what we saw after the pandemic. It's more about this dawning realisation that neither is inflation going back to those benign years that we were all so accustomed to, certainly in the years before the pandemic.

7:21and it means that inflation is going to settle at a higher base. For example, one economist we spoke to makes a point that 2%, the 2 % target that the Fed and other central banks look at, that's now the floor, not the ceiling. And there's a realization that if inflation is going to be a bit higher, well then interest rates are going to have to be higher. Central banks are going to have to play their part in all of this. And if that's the case, then going out and getting a loan is going to be more expensive. So it's not that people are suddenly decided this week we're on the cusp of a 1970s-style inflation shock or the post-pandemic shock.

7:54But it is a slow burn, dawning realization that things are going to be more expensive and central banks are going to have to respond. U.S. government debt plays such a crucial role in the global economy. But is this a worldwide phenomenon? We've talked a lot about U.S. debt so far, but are we seeing a similar kind of sell-off in other debt around the world? I mean, obviously, it's always idiosyncratic. Every country has their own story. But let's just look at the G7 economies if you want to talk about the biggest industrialized economies. They are all seeing one way or another investor concern around maybe the size of their deficit or maybe around the size of their total debt load or maybe concerns around the interest rate repayments.

8:33And as a result, all of these investors are casting judgment and putting pressure on those bond yields. You've seen it in the UK, you've seen it in Japan, you see it across Europe. The rearmament story, of course, is about the borrowing to buy weapons in Europe. That's another part of the story. And investors are driving up the cost of lending money to them. And that's what's going on. And again, there's a question around why now, as opposed to several, you know, over the past few years when all of this was obvious. And the best explanation we're getting when we speak to people is that it's just this confluence of issues now.

9:02Iran has kind of cemented the idea, you know what, we're just in an era of rolling shocks. These shocks aren't going away. And when Iran quietens down, it'll be something else. And that's why we're seeing this judgment getting cast in bond yields the way that we are. Up next, what the sell-off in long-term debt means for the Fed and for its new chair, Kevin Warsh, who started that job today.

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12:04The Fed Reserve's official target for inflation is 2%. That's where policymakers want it. But inflation hasn't been at that level for several years. I asked Bloomberg's end of current why it's been so challenging for Fed officials to get inflation back down. Well, if you go back to maybe early 2025, the Fed, they were making progress. By all accounts, inflation was heading in the right direction. in after so many years of soaring inflation in the US, it looked like they were on track to hit that 2 % target. But then in 2025, a couple of things happened. President Trump announces Liberation Day tariffs.

12:38Now, of course, you can slice and dice and debate the impact tariffs had on inflation, but the Federal Reserve and other economic observers make the point that ultimately there was an impact on goods price inflation and tariffs. So that was the first thing that had an impact. Then, of course, you have this AI boom. And the AI boom is driving up tradable inflation. So the kind of imported goods, the technology goods, the input components that you need for these data centers and chip-heavy base industries, that's becoming more expensive. And now, again, roll forward to where we are right now. We've had the Iran shock.

13:10And obviously, that's clear as day to all of us, diesel prices, what's happening at the gas pump. And then there will be a second-round effect from that. So when you add all that up, it means the Fed's 2 % target now looks a lot further away than it was back in early 2025. And that's why people think it's going to be very difficult for them to lower interest rates in the near term. And that's what they're saying now as well. Those officials are publicly saying they don't see much room to bring down borrowing costs at the moment. It looks farther away, yet you hear from Fed policymakers a confidence that they can get there.

13:40They're not giving up on that 2 % target. And I'm curious if investors have that same confidence policymakers do that inflation is going to be something they can get under control. I mean, the first role of an economic policymaker is to talk up confidence, number one, right? I mean, if they came out and said, you know what, I don't think we're going to hit our target. I think people will be worried if they're giving up, then what hope is there? So there's that. But the other part of it is, I think that investors ultimately probably are skeptical that inflation will return to target in the near term for all the reasons that we've been talking about.

14:09And that's why we might reach a point where the Fed and others have no option but to raise interest rates. And that's something that seemed very unlikely only a few months ago. I want to talk a bit more about the economic backdrop here and why that's making this so difficult. So you have governments who in recent years have been on a real spending spree, I think back to the pandemic and the money that they had to deploy then, certainly with the war in Iran now, there's talk of how you can make life a bit easier for consumers who are seeing energy prices go up. You can say the same thing about the war in Ukraine, the effect that's had on Europe.

14:44Explain as simply as you can on that, why this is a problem. Well, first of all, they had to borrow and spend during the pandemic. It was a public health emergency and economies needed support. I mean, that had to be done. However, that cost comes with a bill and that's now what's happening. And the bill means that the cost of repaying that debt is going to be more expensive. Interest rates are going up because the government has to keep borrowing. and when it's boring it means it's pushing out other borrowers in the market so if you have the government out there in the public market saying we need to borrow trillions well then that's pushing up costs for everyone else too for like typical companies who go out and borrow in the market even even banks who go and borrow it just means there's a higher premium for everyone and the other the other part of then is david it should drive tough choices on public policy decisions Where can the resources go?

15:37Where can the spending go? The UK, for example, is very interesting. They're talking about how can they manage their public finances in a way that others are not. But in the US right here, right now, I think that probably the biggest complaint is there isn't enough focus on how to rein in spending. So to underline why this is a tricky dynamic, you've got governments who want lower rates because of all the debt that they've taken on. And then you've got central banks who may need to raise rates because of inflation. That therein is the tension. Yeah, and it is tension because central banks, again, if you talk about developed economies, central banks, either by convention or by the law, are allowed to go and set interest rates in the best interest of the economy and of the public.

16:18Now, if you have a finance ministry saying, I have to go out and borrow in the public market next week, and it's going to cost a lot of money, it would really be rather helpful if you weren't raising interest rates. I mean, there's obviously going to be tension there. And that's part of the story that we're seeing play out here in the US. President Trump has spoken publicly about the cost of borrowing, the cost of interest rate repayments, and he blames the Fed for having interest rates too high. Now, in the jargon that's known as fiscal dominance, this idea that central banks have to play a supporting role to the government to, you know, make sure that they're able to fund themselves and keep the public service ticking over.

16:54And that's not what a central bank wants to be doing. They want to be out there setting their policy, which is narrow, it's technocratic, it's interest rates, but it has an impact. They want to do that in the best interest of the public and the economy. And that's why they're getting sucked into this political world. So let's focus again on the US. We know that Kevin Warsh is facing a lot of political pressure to cut rates when he gets to the Fed. But it sounds like that's not the way that the winds are blowing right now. Well, OK, right here, right now, objectively speaking, the Federal Reserve is not in a position to cut interest rates.

17:25their officials are making that point publicly. And that's because they're worried about inflation staying too high. Now, if Mr. Warsh does plan to say we need to cut interest rates in the near term, that's obviously going to be a very tough case to sell in terms of convincing his fellow policymakers and in terms of convincing markets. That's the tonic that's needed right now. More likely is that the Fed will have to stay in hold for some time and at least see through the brunt of this Iran impact and maybe in the second half of the year, see where things stand. But right here, right now, David, the warnings are more that the Fed may have to hike later in the year.

18:01So the markets, the financial markets are already betting that the Fed may have to raise interest rates. And some officials in the Fed are publicly saying, you know what, the next move might have to be up as well. Now, so if we get into that scenario, one would imagine there will be significant political pressure on the Fed, criticism of the Fed, and that's going to be a very tricky balancing act for Mr. Warsh. I want to ask you what the solution to all of this is. I assume it would be helpful if governments spent less and therefore borrowed less. Is that really the only way out of this as economists and investors see it?

18:32Well, so there's one great hope and the great hope is AI. So there is a theory out there that AI is going to drive this massive supply side boom, drive productivity, make us all more efficient in our output and at the same time boost growth, economic growth, which of course is the ultimate cure for debt without triggering inflation. and we're meant to be in this age of AI and there are plenty of people who argue this point and Mr. Warsh by the way is also a believer in this idea that AI will drive this productivity boom and by extension bring down or keep inflation low like in the 1990s during that technology boom that's a great hope but that's you know as of yet somewhat untested productivity is going up but it's not necessarily going up because of AI we don't also know what the diffusion impact will be from AI in terms of people's jobs I mean okay if AI isn't boosting productivity and keeping inflation low, what happens if that's at the cost of, you know, mass unemployment?

19:28These are questions that we don't know yet. But that's the great hope. If it's not that, David, well, then it's going to have to be tough decisions on spending, on public spending. And in the US, for example, there doesn't seem to be much political appetite for that on either side of the aisle. And there doesn't seem to be much public appetite for that either. And that's probably true of many democracies, by the way, given the entitlements that are embedded in the system, they're very hard to unwind in reverse. So the great hope for the situation we're in is that we can grow our way out of it, partly, if not mostly, powered by this AI boom.

20:02And if it's not that, then it's going to be fairly painful.

20:10This is The Big Take from Bloomberg News. I'm David Gurra. The show is hosted by me, Sarah Holder, and Juan Ha. The show is made by Aaron Edwards, David Fox, Jeff Grocott, Patti Hirsch, Rachel Lewis-Kriskie, Laura Newcomb, Naomi Ng, Julia Press, Tracy Samuelson, Naomi Shaven, Alex Segura, Julia Weaver, Yang Yang, and Taka Yasuzawa. Our executive producer is Nicole Beamster-Boer. If you'd like more from Bloomberg on the bond market, my colleague Stephanie Flanders, our senior executive editor for economics, has an episode this week on the bond market on her show Trumponomics. We've linked to it on our show notes.

20:42To get more from The Big Take and unlimited access to all of Bloomberg.com, subscribe today at Bloomberg.com slash podcast offer. Thanks for listening. We're off on Monday for Memorial Day here in the U.S. We'll be back on Tuesday.

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