WTF is Going on in the Bond Market?!

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1:59No credit card or payment needed. Just head over to Pipedrive.com slash MNN to get started. That's Pipedrive.com slash MNN as in Money News Network, and you can be up and running in minutes. I'm going to sound the alarm today and I'll be up front. It's about the least sexy thing in finance possible, the bond market. But stick with me because this one lands in your wallet. Here's the short version. Over the past few weeks, investors have been dumping U.S. government bonds. And when that happens, the cost of borrowing money goes up for everyone, starting with the government and ending with you and me.

2:36As I'm recording this, the 10-year Treasury yield is sitting right at around 4.8%. That's the highest it's been in years. The 30-year recently hit its highest level since 2007. Seven, in plain English, the U.S. government is being charged more to borrow money than it has in a very long time. And when Uncle Sam pays more, so do you. Here's why I care enough to drag you into this. I spent years covering markets on CNBC, Bloomberg, CNN, and here's the thing nobody tells you. The stock market gets all the attention, but the bond market is where the real grownups are. It is bigger, it is quieter, and you know what?

3:13It's usually right. Stocks are the popularity contest. Bonds are the credit check. And right now, the credit check on the United States is coming back with some questions. That's all a rising yield really means. The people lending our government money want to be paid more to keep on doing it. And here's the reason it matters to you, even if you never, ever buy a bond in your life. Mortgage rates follow the tenure like a loyal, loyal puppy dog. Freddie Mac says the average 30-year fixed rate is now 6.71%, marching toward 7%. That's the highest it's been all year. So yes, we are venturing into dense bond territory today, but I'm going to make it very simple, not dumbed down, but very simple.

3:55So what does this actually mean for you? Well, if you've been sitting on the sidelines waiting for interest rates to come down before you buy a house, I have some uncomfortable news for you. They moved in the literal opposite direction. And if you're not out there home buying, don't tune this out because the exact same force is the one that's setting the rate on your next car loan on your credit card. It moves the bond slice of your 401k and it decides whether your company can afford to expand this year or if it quietly stops hiring. So today I'm going to untangle three things. Why this is happening, what the bond market actually is, and whether any of this should change your plans.

4:32Plus a tip at the end that could save you some real money if you are locking in a mortgage right now. Okay, bond school. I promise this is the five-year-old version. Let's say your friend wants to borrow$10 from you to buy a video game. You say, sure, no problem. You want$11 back next month. Congratulations, you just bought a bond. That extra dollar is the interest. And the interest rate is what Wall Street calls the yield. A bond is basically an IOU with a price tag. That's it. Now, swap your friend for the U.S. government. When the government spends more than it collects in taxes, it borrows the difference by selling millions of those IOUs called treasuries.

5:13A 10-year treasury is just the government saying, hey, lend me$1 ,000 and I will pay you interest every year for 10 years and then I'll hand you your$1 ,000 back. The yield is the interest rate you're getting on that loan. Higher yield, the government is paying you more to lend to it. Lower yield, it is paying you less. Hold on to that because it's basically the whole episode. And here's what turns that pile of IOUs into a full-fledged market. You don't have to hold on to that bond for the 10 years. You can sell it to somebody else tomorrow, and whoever buys it collects the rest of those interest checks.

5:48That happens on a scale that is really hard to wrap your head around. About$1.2 trillion of treasuries change hands every single day. Every day. There is$31.5 trillion of it out there in total. Trillion with a T. And because historically the U.S. government has always paid its bills, a treasury is treated as the safest loan on the planet. That makes it the ruler everything else gets measured against. Your mortgage, your car loan, corporate borrowing, all of them. If lenders can get nearly 4.8 % from Uncle Sam, think about it, with basically zero risk, they're not going to lend it to you for less.

6:30They're going to lend it to you for that plus extra for the risk that you, unlike the U.S. government, might not pay them back. Now, the one thing you really need to understand about bonds, long-time listeners know this one very well because it's in the money school and I bring it up basically every chance I can get. Bond prices and interest rates move like a seesaw. When one goes up, the other goes down. Back to your friend for a second. Say a new kid on the block starts offering$12 back on every$10 that he borrows. Suddenly, nobody wants your old$11 IOU unless you sell it to them, let's say, for less than$10.

7:06That's a basic example of new rates going up and old bond prices going down every single time. And that's exactly what happened these past few weeks. Investors dumped bonds, prices, fell, yields rose, and because mortgage rates are priced directly off the 10-year treasury yield, your mortgage rate rose right along with them. A bond sell-off isn't some abstract Wall Street event. It finds its way directly into your mortgage application. Now, I can hear some of you saying, but a higher yield means I earn more, so why is that bad? Totally fair. Go back to your friend. If he's reliable, you'd lend him$10 and be happy with 11 bucks back.

7:45But if he's the friend who still owes you from last summer, you would want 13 bucks back or you wouldn't lend it to him at all because he's shysty. That extra money is you charging for the risk that you might never see your 10 bucks back again. That is exactly what's happening to the US government right now. Lenders are charging it more because they're a little less sure that they're gonna be paid back in dollars that are still worth something. So yes, if you buy a bond today, you earn more. But that yield exists because the borrower looks shakier. And here, the borrower is us. The U.S. government's interest bill gets paid out by our tax dollars.

8:25So when Uncle Sam's borrowing costs go up, so does the tab that we are all splitting in taxes. And it's not great if you already own bonds because that seesaw means that the bonds that you're holding now are worth less than they were just a month ago. Same bond, same interest payments, just lower price tag. Now, the biggest myth in all of this, and I hear this constantly, is if the Fed cuts rates, mortgage rates fall. Nope, not directly. Here's the simple version. The Fed sets one rate. What banks charge each other overnight to borrow money. Overnight. Your mortgage is a 30-year loan. Nobody prices a 30-year loan off an overnight rate.

9:13Lenders price it off the 10-year treasury because that's roughly how long the average mortgage actually lasts before people move or they refinance. So here's the basic rule of thumb. Your mortgage rate is basically the 10-year treasury yield plus two percentage points. So the 10-year at 4.8%, mortgages are right around 6.7%. You see it? Now you can never unsee it. It basically means the question is never what the Fed is doing. It's always what the tenure treasury is doing. And that tenure is set by investors. And what they're afraid of right now is inflation and debt. That's why the Fed can cut and cut and your mortgage can still go up.

9:53It happened in the fall of 2024. The Fed cut rates and mortgage rates climbed almost a full percentage point over the next few months. And here's also why the bond market matters way beyond your mortgage. That treasury yield is the floor under every other rate in the U.S. economy, and it is the biggest competitor that stocks have. When a boring, basically risk-free government bond pays close to 5%, a lot of investors look at stocks and they're like, why the heck am I taking this risk? Money moves from stocks into bonds, which is why stocks wobble when yields spike. Companies feel it because borrowing to build, hire, or fund the next data center costs more, so growth slows and profits shrink.

10:39And the government feels it most of all because it has to refinance trillions of dollars of old, cheap debt at today's higher rate. So yeah, a bond sell-off is the one thing that hits your mortgage, your 401k, your employer, and Uncle Sam all at the same time. which leaves the Fed honestly kind of stuck. It really only has two big tools here. Either move short-term rates or create money and use that money to buy bonds, which pushes yields down. Okay, let's try to untangle this because raise rates to fight inflation and then borrowing gets expensive for everyone. Print money to buy bonds and you get lower yields, which makes everything else more expensive.

11:21Expensive to borrow, expensive to buy. So what is actually causing the sell-off? It's definitely not just one thing. It's a whole pileup of a bunch of things. It's the ongoing conflict in Iran that has investors really nervous and oil prices climbing, which keeps inflation pretty stubborn. The government has already spent$1.8 trillion more than it took in this year, and the total national debt has crossed$40 trillion last month for the first time ever. On top of that, the AI buildout has turned big tech into some of the biggest borrowers on the planet. The big AI companies and their data center builders sold about$225 billion in bonds just in the first half of this year.

12:01That's roughly 10 times last year's pace, and it could hit$400 billion by the end of the year. Let me pull on two of those threads because they're the big ones that will still matter after this week's headlines are long gone. Thread number one is inflation. Think about your friend and that 11 bucks again. If prices double before he pays you back, that 11 bucks buys half of what it did when you lent it. And if that happens, you'd want a lot more than a dollar for your trouble. Bond investors think the same way, just with more zeros. The more they worry about inflation eating into their payback, the higher the yield they demand before they'll lend.

12:42That is the simplest reason yields go up. And inflation is still running at around 3.4%, well above the Fed's 2 % target. So the worry is legit. And as I record this, the Cleveland Fed's inflation tracker has the August number landing right around 3.4 % again. The one bright spot is strip out gas and groceries and prices are only rising about 2.4 % a year. That's the number that the Fed watches most closely, and it's actually not that far from their target, which tells you that this fight is mostly about oil and about debt, not about your grocery bill. But here's the twist. The bond market does not actually think inflation is about to explode.

13:25There's a way to measure what investors expect inflation to be over the next 10 years, and right now it's about 2.3%, which is pretty tame. So if investors expect 2 % inflation but are demanding 5 % to lend, the rest of that gap isn't actually about inflation at all. It's about the borrower. They want extra to hold this much U.S. debt. Which brings us to the second thread. Thread two. The debt. Here's the whole loop here. Washington borrows to cover what taxes don't. That borrowing comes with interest. To pay that interest, it borrows more. If that sounds like paying off one credit card with another credit card, that's because it basically is exactly that.

14:10And the balance keeps growing. And the interest bill is now enormous. By the Treasury's own count, the government has spent$931 billion on interest so far this fiscal year alone. National Defense, by the way, over the same period,$804 billion. So let's say that again. We are spending now more on interest than we are spending on national defense. And the government's own budget office says the interest bill hits$1 trillion this year and doubles within 10 years. A trillion dollars a year. Not paying anything down, just on the interest. By the way, this is the exact doom loop that Ray Dalio, legendary investor, warned me about when he sat down with me on this show last year.

14:55Here's exactly how he put it. We have the debt issue. We have the internal fight of how the country's run. Think about the budget cuts and how they're taking place. That's a two-edged sword. And think about the conflict internally. And it's coming with conflict externally. So they're being dealt with. But think of it like a patient that is not in good shape. You cannot change some of these things. You can only try to deal with them at their stage in the best possible way. But for so long, we were this patient and we kept giving morphine in the form of ZERP, zero interest rate policy, and people got really addicted to that.

15:35It's so much better. Like, who doesn't like spending? You give credit. It's the paying back that's the problem, right? I mean, I think a lot of new investors who started in 2021 love the ZERP days and want zero interest rates. Of course, it all comes from credit. Give you credit. Are we getting back to those days? We are in an environment that's similar to zero interest rate that can be measured by how much debt is the government getting into? How much credit? We love credit. But we can't have it all the time. We can't have morphine all the time. The important thing to understand is the mechanics.

16:11By that, I mean that it works the same for governments as it works for people with two differences. One difference is the government can print money, but you don't increase wealth by printing money. You just lessen the value of money. So you make it easier to pay back, but you experience it through inflation. And the second difference is the government can take your money so they can tax you. Those are the differences, but it works the same for individuals. So yes, if you keep getting deeper and deeper into debt, you have debt payments problems. Yeah. It's$1 trillion is the interest bill, which is greater than the amount of money we're spending on defense,$1 trillion.

16:57And then because of expiring debt, we have to sell to replace that debt another$9 trillion. And then we have to borrow new money. So it's a lot of money. Now, he said that more than a year ago. He was early, but not wrong. And there are two ways out of this. Spend less than we take in or grow the economy faster than the debt. Bond investors look at those numbers and they charge us extra in case we do neither. That's what a rising yield is. A bill coming due. And Washington is paying attention because a yield spike is the market's way of saying, hey, we're not so sure about you anymore. Nobody likes hearing that from their lender, right?

17:46Last month, the Treasury announced it would double the amount of its own long-term bonds that it buys back from$2 billion to$4 billion per round starting September 9th. Think of it as a company buying its own product off the shelf just to prop up the price. And for exactly one day, it worked. Yields dropped. Then investors did the math. Treasury plans to sell roughly$550 billion of new bonds this quarter alone, and it's buying back$14 billion? That is a garden hose on a wildfire. And by the end of the week, yields were higher than they were before the announcement. And the 30-year Treasury hit 5.33%.

18:23That's the highest it's been since 2007. One top economist summed it up, the Treasury can buy back bonds for a day, it can't buy back the market's confidence. Translation, a band-aid, not a cure. Now, some of you might be wondering, is this an inverted yield curve situation? Quick translation for everyone else, normally the longer you lend money for, the more interest you get because more can go wrong in 10 years than in 10 months. When that flips and the short term pays more than the long term, that's an inverted yield curve and it's shown up before almost every recession over the last 50 years.

19:02So is that what's happening right now? No, it's actually the opposite. Right now, the Fed's overnight rate is about 3.6%. The two-year treasury is around 4.3%. The 10-year treasury is 4.8%. And the 30-year is over 5.2%. The curve is getting steeper with the long-end climbing fastest. That's not a recession alarm. It's an inflation and a debt alarm. Investors aren't worried that the economy is about to stall. They're worried about getting paid back in dollars that buy less than they do today. For your wallet, that is arguably a more annoying problem because a recession eventually drags rates down.

19:44This doesn't. So here is my take, and you know I'm gonna give you one. I don't think the bond market is broken. I think it's actually doing its job, which is telling Washington the truth that nobody else will. A 10-year yield near 5 % is not a crisis. It's a bill, and it's a big one. I don't see it coming down in any meaningful way until either the deficit shrinks or inflation does. And right now, neither one is happening. Either way, if your plan for 2026 was built on rates falling, it's time to rebuild the plan. Okay, one small piece of good news. Remember, the rule of thumb, mortgage rates equals the 10-year plus two points.

20:20That extra two points is the lender's cut. And right now, it's sitting at right where it normally does. In other words, lenders aren't really piling on extra fees because they're scared. Your mortgage rate is high for one reason and one reason alone. The tenure is high. That is the whole story. So take the win where you can get it. Now, some perspective, because I think we've collectively developed amnesia about what normal interest rates look like. In The Money School, I talk about how rates were basically set to zero after the 2008 housing crisis and again during the pandemic as emergency measures.

20:53Emergency measures, not the default setting. In the 1990s, mortgage rates hovered between 7 % and 10%. In the early 1980s, they blew past 18%. 18 freaking percent. So when people act shocked that a mortgage rate starts at 6%, I kind of get it emotionally, but historically, that is closer to normal than the 3 % rates we got spoiled with a few years ago. Okay, so what about the bonds that you already own, probably without even knowing it? If you have a 401k or an IRA and a target date fund, you know, the kind that's named after the year you plan to retire, congratulations, you definitely own bonds.

21:30Because inside that fund is a recipe, mostly stocks when you're younger and more bonds as you get closer to that retirement year. That's on purpose. Bonds don't grow your money over time the way stocks do, but they don't swing as wildly. So they're basically the seatbelt. When stocks slam on the brakes, bonds are what keep you from going through the windshield. And a stretch like this one where bonds fall is the price of wearing that seatbelt. It does not mean the strategy is broken. So before you panic, do one thing. Just log in, find that pie chart, see what slice is actually in bonds, and check the year-to-date number, not this week's.

22:08And if you pay somebody to manage your money and they've been buying individual bonds on your behalf, you're allowed to ask two questions. What exactly do I own and why? And if they can't answer both in plain English, that tells you something too. Here's my hot take. Stop outsourcing your home buying decisions to a forecast. At the start of this year, Fannie Mae predicted mortgage rates would hover near 6 % through 2027. The Mortgage Bankers Association predicted 6.1 % by the end of the year. Neither of those predictions accounted for a war in the Middle East and a bond market meltdown because nobody can predict those kinds of things.

22:44Every single housing forecast you read is a guess dressed up in a beautiful chart. If you wait for that forecast to be right, you're probably going to be waiting forever because the forecast is wrong constantly. It's just wrong in a different direction each time. So how do you actually choose when is the right time to buy a home? I mean, maybe ever. As you know, I'm a huge fan of renting and then investing your down payment instead of sinking it all into a home. But if you really do want to buy, I wrote a three-part test in Rich Bitch years ago, and it holds up better than any rate prediction I've ever seen.

23:19You'll need to say hell yes to all three of these things. One, you're going to live in it for a while, ideally five years or more. Number two, you can actually afford the whole shebang, meaning the down payment, the insurance, the taxes, the monthly payment, and a cushion, not just approval on paper. And three, you have a steady job you love, because job uncertainty is the worst possible timing for a financial decision of this magnitude. So if you can't say hell yes to those three things, the mortgage rate is kind of irrelevant. You shouldn't be buying right now regardless of what the 10-year treasury does tomorrow.

23:52But if you do pass that test, here's the practical piece. Waiting for a better rate assumes that rates move in one predictable direction, and this month is proof that they do not. Home prices, meanwhile, are still expected to rise a few percentage points this year in most markets. So a lower rate doesn't necessarily mean a cheaper overall price if the price you're buying has climbed too. The strategy I keep coming back to is simple. Buy the house when it's right for you. Treat the rate you get today as temporary and refinance potentially if rates drop later. As a realtor friend of mine likes to say, you marry the house, you only date the rate.

24:33All right, let me put a bow on this. Here are three things to remember. Number one, a bond is basically a loan and the yield is the interest rate on it. When the government has to pay more to borrow, so do you. Number two, this sell-off is a pileup. It's not a single crash. We've got oil, debt, a wall of new AI borrowing, and a Fed that went from cut to maybe hike in a matter of months. Number three, for your wallet, this means inflation stays sticky, mortgage rates stay higher for longer, and waiting for the Fed to rescue your home purchase is not a plan. Your target date fund is doing exactly what it was designed to do.

25:12So judge it on the year, not the week. None of this is fun. All of this is survivable. For today's tip, you can take straight to the bank. If you're locking in a new mortgage rate right now, ask the lender for a float down on your rate lock. Say those exact words. Here's the deal. When you're closing on a house, you lock in your rate for 30, 45, or 60 days, so it can't jump on you before closing day, which is great. But a lock also means that if rates drop during those weeks, you're stuck with the higher rate. A float down fixes that. It's the add-on that lets you grab the lower rate if rates fall while your loan is still closing without canceling or starting the whole process over.

25:52It usually costs a small fee or slightly higher rate up front. And with the tenure swinging around the way it has been, a little protection in both directions is worth asking about. Not every lender offers it and almost none of them will bring it up on their own. So you have to ask for it by name. But the decision about whether to buy a house was never actually about that headline. It was always about whether you can say hell yes to the life you're buying it for. We have