Let’s Talk Bonds. Treasury Bonds.

0:05The bond market. Even people who don't follow business news might have heard that it was pretty chaotic this week. The U.S. bond market is raising alarm bells for the economy. Stocks sliding, oil climbing, and the bond market flashing a warning for Washington, D.C. Bonds are the main way the U.S. government borrows money. And this week, the interest the government has to pay on longer-term treasury bonds, what's called bond yields, climbed to its highest level since 2007. And that's got the Trump administration and markets worried. Breaking economic news now. The Dow closed down more than 700 points today as stocks reacted to the volatile bond market.

0:52The U.S. Treasury, which has stepped in to calm the bond markets and address a relentless rise in borrowing costs. That all comes as the national debt officially passed the$40 trillion mark this week.

1:09There's a lot to unpack here. Why did bond yields spike this week? What does it mean for average Americans like you and me? Is the government doing anything about it? And how concerned should we be? Welcome to The Journal. our show about money, business, and power. I'm Jessica Mendoza. It's Friday, August 21st.

1:38Coming up on the show, let's talk bonds, treasury bonds.

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3:27To wrap my head around the bond market drama, I talked to our colleague Greg Ip, the journal's chief economics commentator. Greg, how would you explain to a five-year-old or, you know, a 37-year-old, what is a bond and why it's an attractive investment? Sure. A bond is just like a loan, essentially. When you buy a bond, you're lending money to the federal government. It'll pay you interest every year for the life of that loan, and then at the end of the loan, you get your money back. The interest rate, or the yield on a U.S. Treasury bond, changes from day to day, depending on what investors are willing to pay.

4:05And Treasury bonds are the most important bonds of all because they're basically risk-free. The Treasury is simply not going to default. You will always get your money back. For that reason, they're used as the benchmark to measure almost every other interest rate in the economy. So when you go shopping for a house and you need to get a mortgage, your mortgage rate is directly affected by the yield on a treasury bond. The same is true for your car loans, your personal loans, pretty much any kind of consumer debt. And so basically U.S. treasury bonds are kind of the ultimate bond, the granddaddy bond, because they are so considered so safe.

4:43Treasuries are super safe. There's also a lot of them. So they're very easy to buy and sell, which we say that they're extremely liquid. And they're very useful. So obviously they help the federal government borrow money. But if you need to simply stick your money somewhere that's safe, treasuries provide that service. And they don't just provide it to you and me. They provide it to foreign governments and central banks and so on all around the world. As bonds are bought and sold, their yields fluctuate. And they will fluctuate in response to various information out there that investors are evaluating that determine exactly what interest rate or what yield they think is a fair yield to get on a bond.

5:23So what factors do bond traders look at? A big one is inflation. When inflation goes up, the purchasing power of the U.S. dollar goes down. That means the money investors park in bonds loses value to inflation over time, and investors want higher yields to compensate for that. And persistent inflation can spur the Federal Reserve to raise short-term interest rates, meaning investors might be able to get a better deal on a shorter time horizon. So your expectations of what the Federal Reserve is going to do with very short-term interest rates are a major, major factor in what investors think treasury bond yields should be as an investor.

6:08One of the things they look at is, well, if I lock my money up for 10 years in this bond, as is what happens when you buy a bond. Will I regret that if, for example, the Federal Reserve raises interest rates tomorrow? And then I'll wish that I had actually not locked up my money for 10 years when I could have waited and got a better interest rate. At the start of this year, there was a widespread belief that inflation would fall. And as inflation fell, the Federal Reserve would lower short-term interest rates. But inflation did not fall. And in fact, after the war with Iran began, oil prices shot up and that raised inflation.

6:43So not only do we no longer expect the Fed to cut interest rates, some people think the Fed will raise interest rates. So investors have looked at that information and said, if I'm going to buy a bond, I want a higher yield today than I did eight months ago. Right. So you're waiting to see if you can get a better deal on your money. Exactly. You're always looking at what's the best return for all the various risks involved on my money. The second factor that investors keep an eye on is the national debt. That's the total amount the government owes after running a yearly budget deficit for the past 25 years.

7:21And this past week, the national debt hit a record$40 trillion. U.S. national debt has hit a record of$40 trillion. The U.S. debt now has exploded to a new record high, now surpassing$40 trillion. The national debt just hit a record high, 40 trillion, yes, with a T, dollars. As you know, the federal government runs a very large deficit. Its taxes don't come anywhere near close to, like, paying for all the spending that it does. And it must borrow the difference, what we call the deficit. And it funds that deficit by basically issuing debt, treasury bills and treasury bonds. And the bigger the deficit, the more treasury bonds they have to issue, the more they have to borrow.

8:05In other words, the higher the debt gets, the more treasury bonds need to be sold. And what's happened is that investors, even though nothing dramatically new happened in terms of the information we know about the deficit, people are becoming more accepting of the fact that we're going to have multi-trillion dollar deficits year in and year out for a very long time. That means the treasury is going to keep asking to borrow our money. And the more you borrow, the more you can expect you have to pay. And if the government needs to keep issuing bonds to fund its growing debt, the investors buying those bonds are going to want increased returns on them, bigger yields.

8:46The third factor that's going on is you've probably heard there's an artificial intelligence boom going on. Right. And to finance this boom, to build all these data centers, a lot of companies like Amazon and companies you've never heard of are issuing bonds of their own. They're basically borrowing money to build these data centers. Now, they think that in the long run, they'll earn enough money on these data centers to pay back all the money they've borrowed and then some. And so they say, this is totally fine with me. Have we seen anything like that before? It's happened, but it's rare. So the amount of corporate debt that's going to be issued this year will be the largest on record.

9:23Oh, wow. For many years, companies have been so profitable, they really didn't have to borrow very much. They could do all their investing just out of their current cash flow. What's unusual this year is that even though companies are still very profitable, their investment demands are so large that that cash flow is not enough to actually finance their investment. So they're going to the markets and saying, hey, please lend us money by buying my bonds so that I can go out and build all these data centers. The fact that this is happening, does this mean investors just have more options? They can shop around for the best return on their investment?

9:59Exactly. Hey, I was going to like, you know, buy that treasury bond that pays me 4%, but now I can buy this AI bond that pays me 7%. So you have a world now essentially where it's no longer just the federal government asking to borrow your money. It's Silicon Valley also asking to borrow your money to build data centers. They are competing for your money and therefore offer higher interest rates. These three factors high inflation record national debt and a flood of corporate bonds from the AI boom have all contributed to higher bond yields and the recent chaos in the market So what's the Trump administration doing about it?

10:40That's next

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11:53When things are chaotic in the markets, the U.S. Treasury usually tries not to add to the chaos. It tries to be stable and predictable. They would go to the investors and say, it's important to us that you be long-term trusting buyers of our debt. That's good for us, and it's good for you. So we're not going to do crazy stuff. We're not going to shock you one day by jumping out there and issuing a bond without any announcement or without any warning whatsoever. That might be what a hedge fund trader does. It's not what we do. We're the Treasury. We're going to be regular and we're going to be predictable.

12:26And that's the way it's been for 50 years. But in this case, that hasn't been the Treasury's approach. At a cabinet meeting at Camp David a few weeks ago, a photographer snapped a picture of Treasury Secretary Scott Bessent's notepad. All it said was, to do, buy Japanese yen, five to ten billion dollars. Besant joked about the to-do list on CNBC. Yeah, you know, I was going to finish the list. You know, the rest of the list was, you know, like, go and have lunch with the Supreme Leader, play tennis with Putin. You know, but I thought I would just leave it at the buy five to 10 billion of Japanese yen.

13:09The yen was falling, and Besant's idea was to help a key ally prop up their currency. I think a stable yen is not only important for the U.S., but very important for the entire region. Because if the yen were to weaken substantially, then the other currencies would follow it. The move could also, ideally, deter Japanese investors from dumping U.S. Treasury bonds. The bond market is global, right? Right. So in some sense, when the Treasury goes out to borrow, it's not just competing against other Americans for our savings. It's competing with every government around the world. And for a long time, Japan was a major lender to the United States.

13:53It bought our Treasury bonds. So Besson's logic was, well, if we can stop the yen from falling, maybe inflation in Japan won't go up so much. And if inflation in Japan doesn't go up so much, they won't have to raise interest rates. And if they don't have to raise interest rates, then they'll still buy our treasury bonds and they won't insist that we pay a higher interest rate on those treasury bonds. So that's why he intervened. And is that in Revention significant? Is it unusual for the U.S. Treasury to do something like that? It's very unusual, yeah. Most treasury secretaries, in fact, most experts believe that just going into the market from time to time and buying and selling yen can't really, in a lasting way, affect the value of a currency.

14:32that value of that currency will be determined by fundamentals like trade and inflation and boring and productivity and all those sorts of things. So that's one reason why Treasury Secretaries in the past, they just didn't do it. Besant has publicly defended the move to buy yen, saying it was done in coordination with the Japanese government. Buying billions of dollars worth of yen wasn't Besant's only move to try to reduce long-term bond yields. The U.S. Treasury regularly buys back its own bonds to try to offset rising yield costs. The planned buyback this quarter was supposed to be about$2 billion worth of bonds.

15:08But then on Wednesday, Besant did something unusual. He announced that actually, the Treasury would be doubling the amount of bonds it was buying back to$4 billion worth. As he watched interest rates go up, he got a little bit concerned. And so what he did on Wednesday was he said, you know, there's a bunch of bonds out there. I'm going to go and buy them back from the market. So Scott Besson claimed that he was doing it because it was going to help with liquidity in the market. And then on television, he came right out and said, yeah, the whole point here is to try and get yields down to reduce the supply of these bonds and force investors to accept lower yields than before.

15:50And what's been sort of the upshot here? Like, did these interventions work? — When the Treasury Secretary said, I'm going to buy back some bonds, we saw interest rates drop on those bonds in the market. But it appears that the announcement effect is starting to wear off. — Despite this intervention, yields have already pretty much returned to where they were earlier this week. Bessent was asked about that yesterday at a press briefing outside the White House. We are trying to bring the market back into equilibrium in a thinly traded market. I think, you know, I'm confident that bonds will continue declining.

16:31And we're back to the world we were in two days ago, which is a world where people are worried about inflation. They're worried about the deficit and they're worried about all this corporate borrowing. Oh, and they're worried about Japan.

16:46So to take a step back, what does Besson's response to high bond yields say about the Trump administration's approach to market interventions? This was irregular and it was unpredictable. Now, if this is the only time he does it, you know, no big deal. But if this is now his new mode of operation, he's going to repeatedly jump in and try and surprise us. It's going to just cause a lot of confusion and chaos. And investors who normally would buy and sell bonds without a moment's notice, now they have an extra thing to worry about. But the Treasury went ahead with these moves anyway. Exactly. I think they have a very high opinion of their ability to outguess the market.

17:25And I think they have limited patience for the types of fundamental policies which fix things in the long run, like reducing the deficit. And so they would rather take the short-term fix, which is to basically jump in the market and try and pull something really quick. But the problem is, as we've seen, is that the effects of those things eventually wear off. And I'll give you another example. So when the war with Iran began, the price of oil shot up. But it didn't go up as much as some people thought. And the reason why is that every few days, the president was suddenly announced on Truth Social or an interview that they were in negotiations for peace with Iran and the Strait of Hormuz would be reopened.

18:00It never actually happened. We never got that peace. The Strait never reopened. And they're still saying the same thing now. And they keep saying it, right? And eventually it stopped having that effect. And here we're sitting with the price of oil at around 85, 90 bucks, which is kind of where it was at the start of the war. And people simply aren't listening that closely any longer. And the real risk that if the Attorney's Secretary keeps on trying to surprise the markets with an FX intervention here or a bond market buyback there, people will start to essentially ignore it. It starts to be sort of boy who cried wolf.

18:33Yeah.

18:36I don't want to overstate things here. The U.S. Treasury market is so incredibly big and important and stable is that you've got to really mess things up a lot to really hurt faith in the U.S. Treasury market. And so I would predict that, you know, assuming that these things do not become a weekly occurrence, we will not see a lasting effect from these interventions on interest rates. But I do worry that things do add up, right? So you have the president starting and stopping trade wars. I think that erodes trust. Budget deficit is running around$2 trillion a year. Scott Besson had said, oh, we're going to bring it down to like 3 % of GDP.

19:16Well, it's a 6 % of GDP and it seems to be stuck there. So a world in which people used to think they understood the United States and it was a trustworthy, predictable rock, you know, in an ocean of swirling chaos. It's not like that. It seems to be like losing its moorings. and I think that that's costly for the United States and it's costly for the world.

19:49That's all for today, Friday, August 21st. The Journal is a co-production of Spotify and The Wall Street Journal. The show is made by Catherine Brewer, Evelyn Fajardo-Alvarez, Pia Gedkari, Max Green, Sophie Codner, Brian Knudsen, Matt Kwong, Colin McNulty, Laura Morris, Enrique Perez de la Rosa, Sarah Platt, Alan Rodriguez Espinosa, Heather Rogers, Pierce Singhi, Jeeva Kavirma, Catherine Whelan, Tatiana Zamis, and me, Jessica Mendoza. Our engineers are Griffin Tanner, Nathan Singapak, and Peter Leonard. Our theme music is by So Wiley. Additional music this week from Catherine

20:43Thanks for listening. See you on Monday.