Are U.S. Treasurys Really Risk-Free? Ft. Mary Childs (EP.273)

0:02We all need to make smart decisions with our money. The Long Term Investor podcast shows you how by distilling complex financial matters into easily digestible lessons. And now here's your host, chief investment officer at PlanCorp and the author of Making Money Simple, Peter Lazaroff.

0:21The Long Term Investor Host:Welcome to The Long Term Investor. Today, I am welcoming back Mary Childs, host of the new show, Mary in America, which has quickly become one of my favorite podcasts to listen to. If you know Mary in the past, you may know her from her book, The Bond King, or when she co-hosted NPR's Planet Money. But her new show, Mary in America, is just so fascinating. She has such a wonderful group of guests. And we talk a little bit about that because I kind of wanted to hear, well, how do you find these people in the first place? But then we dive into a problem. Well, maybe not a problem, but a question that I know Mary and I are both passionate about, which is U.S.

1:00The Long Term Investor Host:Treasuries routinely being described as risk-free because no investment is literally risk-free. So we talk a little bit about how government borrowing becomes an economic problem, how it can raise borrowing costs throughout the economy, and who will buy the next wave of treasury issuance. As always, you can find detailed show notes at thelongterminvestor.com. And if you've been listening for the past few weeks, you also know I have a new book myself coming out, The Perfect Portfolio, there is a link at the top of the episode description to learn more about that. And now without further ado, here is my conversation with Mary Childs.

1:40The Long Term Investor Host:Welcome back to The Long-Term Investor. Today, I'm thrilled to be joined by Mary Childs. Mary, thanks so much for joining the show. Thank you for having me. Excited to be here again. Yeah. Welcome back, I should say. Last time you were here, we were talking about The Bond King, which you have beautifully displayed up on your bookshelf. Oh, sorry. I'm blocking it with my mic. It's really pretty, though. We can still see your name of the book. That's what matters. That's right. You are the Bond Queen, as we've previously established. Look at that. There we go. Perfect positioning. Thank you. You are now the host of Mary in America.

2:13The Long Term Investor Host:But for people who aren't familiar with your work, maybe just before we dive in, give people a quick background on yourself. All right. I'm going to do my resume really fast. so I started at Bloomberg News in 2009 as an intern and then I stayed there for six years and loved it and went to a bunch of different desks and got to report on a bunch of different things most notably the bond market obviously and then I went to the FT and Barron's and then from there I went to Planet Money at NPR which is the twice weekly economics podcast at NPR and it's very narrative very storytelling and very like for normal people to listen to which was a really nice balance from the like heavy institutional work that I'd done before.

2:54And now I'm doing my own thing, Married America, available wherever you get your podcasts.

3:00The Long Term Investor Host:Yeah. Tell us about that. I mean, because Married America, I mean, I can hear a lot of your past work when I listen to shows, but it's you have such a unique group of guests. So if you're not, if none of you listen to Mary's show, first of all, you're going to love her after you listen to her for like 30 minutes to an hour now. But the, you know, like, tell me a little bit about the show? Like, why did you start it? Like, what is the goal? What are you going for here? I think it really is just, I always have these questions about how the world got this way, why we are the way we are, why we've got this structure around us.

3:34And honestly, whether it's working, like, I feel like it's very healthy to reevaluate all the deals that we made or the deals that someone before us made and see if they're still working and if it's the way that it should be should being in pretty big quotes. And so the the luxury of the show is that I get to basically follow my interests and answer my very sincerely motivated questions. So the odd mix of guests is, is exactly that is because I both have done a lot of work over the 15 years I've been doing this. I think I need to update that number, but something like that, that I like feel like at this point, I know who's good and who's going to tell me the truth and who's like spinning.

4:14These are like kind of strongly held opinions at this point for a lot of people, especially the names that you would see on the regular outlets. And so it's sort of like, okay, I'm not going to call the person who everyone else calls. Because, you know, sometimes that person is actually not that aware of the mechanics or the, you know, the kind of underlying invisible infrastructure. And so my interest is like, so granular, very often, I'm just like, I want to know literally what is the one thing that's causing this, the mechanical thing that's causing this. And that very often leads you to some, some person that, you know, people haven't called before or that is less well known or, or that I've had on planet money 50 times.

4:53The Long Term Investor Host:Well, I feel like I'm going to use an overused like analogy, but it's like you want someone who knows how the watch work, not just who can tell time. Is that fair? Oh my God. That's so good. Isn't that, that's a saying, isn't it? Oh, I feel like that's a saying. Um, I did not come up with that. So I can't wait to hear you use it on the show. And I'll be 100%. Yes. I don't even need the attribution because definitely not mine. But tell me, so like you, your questions, I think, is what also has made you a great host, great reporter in general. You know, the book that we referenced is sort of like a journalistic piece in many ways.

5:28The Long Term Investor Host:But like, what do you feel like you're most drawn to investing? Like, what are these things that kind of get you fired up? Well, I think I love understanding structures and I really love talking to the person who built the structure. So those people don't always want to talk because if their structure is like not doing well, they don't really want the call. They're hiding from you. Yeah. Yeah. They're like, please not today. A different day would be maybe better or never. And I understand and respect that, but I will keep emailing them, which is also another talent I was born with. yeah it's a lack of shame really i you know like normal people would be like it would be impolite to send a fourth email and i'm like hey i mean you every author knows that you have to get shameless eventually because you're just asking for favors left and right i imagine because you're publishing and you've been a journalist for so long and you're interviewing people so often that you've gotten where you are without a little bit of the like you learn to lose it pretty quick yeah yeah and the less shame you have as a reporter honestly the better you are so um yeah it's regrettable because you can become a there's a tipping point where you kind of start losing the being a person part but um but yeah kids yeah yeah it's like there's a balance you kind of want to keep an eye on that um but I think I like aberrations I like when things go sideways and things break because I think that's when you actually the lights come on and you can actually see what we have been operating with.

6:54Most of the time, it's kind of like, you know, in the dark, no one's paying attention that closely. It seems to be working fine. You don't got to think about it. And when something goes wrong, it's like, oh, that pipe. Oh, no one remember, like we haven't looked in this corner. I mean, same thing in your house, right? It's like you've never opened this closet. And then you're like, that has been sweating this whole time. Oops.

7:15The Long Term Investor Host:I feel like, you know, what I was really thinking that we would talk most about probably fits the bill exactly of what you're talking about. I mean, really at the intersection of your interests and your reporting in the past is the bond market and the treasury and the risk-free rate. So treasuries described as risk-free, you know, in your opinion, what exactly is supposed to be risk-free? It's such a charming phrase, isn't it? It's so sweet. We all know that that's not real. There's no such thing as risk-free. We know that. We cannot get away from that. And yet, we needed something to base everything else on.

7:55And so is it a fair proposition that the U.S. government will never default, will never miss an obligation and therefore is risk free? It's probably pretty good. That's probably the best we're going to get, right? I don't have a better idea, really. So in part because the dollar is at the center of the global financial system, too, it makes it easy and kind of fluid for everyone to just agree with this premise. and treasuries as a result of, you know, Bretton Woods, but also bank regulation, but also the result, like every single part of the way the dollar touches people's lives. It's become the the treasury market has become the most important market of all and and kind of where everything prices itself, because if you have a rate that's the risk free rate, then you can know that how to price something that's a little bit more risky.

8:45If this is zero, then let's add a little bit more.

8:47The Long Term Investor Host:you gotta have some baseline and i as we're saying the word risk-free or words risk-free out loud and it was a wonder who who came up with that phrase do we right no i don't think we know really someone should get credit for that um i think it was a group project and i think at this moment if you tried to find them they would hide that's that's probably true so you said something interesting though so do you feel like people consider treasury safe and if you're like listening to us rather than watching us. I'm doing a lot of air quotes today, it turns out. You know, are they safe because the financial system has been constructed to make it safe?

9:23The Long Term Investor Host:Or is it because, I mean, the U.S. government, I think from a credit worthy standpoint, historically has been a relatively safe bet. Really safe. You can get into like whether that's changing over time. But do you think like currently the risk free thing sits more on the financial system being built around it being risk free? Oh, great question. I think it's like a, it's not quite a chicken and egg. I think it started that we were like, oh, we've got this, this great thing that's like always working. And then things, I mean, we used to have LIBOR, really, you know? Yeah. So I think it's like LIBOR and its spawn, if you will.

9:58Now, it's the same idea of like, I need, I need to ground myself. Everything is relative. And so I need something to compare everything against. I need a starting point. It's like a blank slate of paper. Otherwise, blank sheet of paper, blank slate, either one, both. Yeah. And I need to write something down. Where do I start? And so because treasuries, you know, it just became it was such a stable place. It's not you're not taking that much risk. So you're not getting compensated that much for it. And if you think about any corporate borrower in the history of everything, it's probably going to be riskier than the U.S.

10:33government for now. You know, right. Maybe that's changing.

10:36The Long Term Investor Host:I mean, yeah, your likelihood to get paid back. I mean, people will like point to it. Yeah. There are corporations out there where you're like, wow, that that that does seem pretty stable for some amount of time. Not many hundred year bonds out there. I mean, there are a few. But some of these corporations, I don't know that I would personally bet on any given corporation existing in 100 years. right yeah you look at the data like the 26 000 u.s stocks or so that have existed since 1926 and how many have eventually go bust and how much turnover there is at the top 10 and how many of those go bust yeah i'd have a hard time doing that but yeah in general it's a great bet uh that we'll be able to pay our interests we'll be able to make good on it but we're getting to a place and i mean one of the things that i've heard you say and i couldn't agree more like people turn the debt into like a political issue.

11:28The Long Term Investor Host:Like we could, so maybe we could have a quick disclaimer, at least on my end, I pledge not to be getting political here. I just want to talk about like the economics of it. We're getting to a point where the headlines are getting louder about unsustainability. I mean, what do you feel like, what are your opinions on what it's like actually going to mean for a country that is borrowing too much? And we haven't really even talked about that's dollar denominated, but we can get there if you want. I know everything's relative, isn't I mean, I think, OK, the things that you can say now that are scary, we spend more on interest than we do on defense as a country that loves defense.

12:04Yeah, that's crazy. Yeah. We the U.S. total debt just surpassed 40 trillion, which everyone freaked out about. But I'm like, 39 was before that. I don't whatever. I'm really struggling with the math of that. Everyone really maybe it's the over the hill element. I'm not sure. So I think that it does start to become a drag on an economy. There's a lot of research and no real answers as to when you want to have an economy that's growing faster than the rate of interest. And the rate of growth is faster than your interest rate. And that's that if you don't have that, if it flips, you're in trouble.

12:41and it's very we have ai growth right now which is really fantastic and very lucky um i mean you can debate no it's very lucky i fully agree yeah yeah yeah can you imagine if we didn't i mean

12:54The Long Term Investor Host:don't imagine full of lucky stuff but like yeah i mean the u.s economy specifically um but you would argue the world economy to some extent because so many things you obviously wasn't alive and an investor, you know, 50 years ago. But I read about it and it's hard to find. I mean, we just became so interconnected because trade agreements were great. But now it just feels like financial markets are so connected to our success and failure. I have a harder time painting a doomsday scenario in my mind, where if like the US is going down that everybody else doesn't go down with it. I 100 % agree. Yeah.

13:30The Long Term Investor Host:I mean, I hope I'm wrong to some extent, like diversified investor Sure, we'd love to see like not everything fall at the same time in the same degree. But, you know, the AI thing was wildly lucky in general. Yeah, I think I think it's been a few thoughts. I'm like overwhelmed by how many different things. Me too. I actually forgot what I was going to say because I was like, oh, wait, there was something else fun I wanted to say. I have eight things. Yeah. I need to be writing this down. I think AI was super lucky in its timing. And my sincere hope is that, you know how we have a fertility cliff coming?

14:00And in 2080, the global population peaks. And it's like you can say, oh, it's just an immigration problem all you want, but it's not every country is on this trajectory of fewer births. Maybe it will align perfectly with AI reducing the total number of jobs. OK, and it'll it'll just be painless and perfect and no one will suffer. That's my goal.

14:21The Long Term Investor Host:However, economic growth is basically productivity gains and workforce changes in growth. So like, yeah, yeah, I guess you're saying if we're not going to have growth in the workforce, we could just have so much productivity that there's all the growth. The productivity gains typically show up in labor force reduction. Yeah. And that's going to be naturally happening anyway because of fewer kids. We're tracking now. Okay. Yes. We're going to get it. Same page. Yeah, I think the sustainability question, well, the question of if everyone goes down with us is unfortunately pretty good. If everything collapsed tomorrow, yeah, we're so intertwined.

14:58Everyone is so deeply invested in the treasury market. I mean, you saw this with the Japan, the yen intervention in August, where it was necessary or a priority for us to do that because Japan's the biggest holder of treasury. So if they started to sell their treasuries to get themselves out of their own bind, then we would suffer and we simply can't have that. So basically everything relies on the treasury market, like being very strong and stable and all of our institutions are oriented around protecting it, which is really nice. and we might see that get a little tested one day.

15:33The Long Term Investor Host:Yeah, maybe not all at once, but gradually. I'm sure not all at once. It's not, yeah. I think one of the things, so you and I probably have to think about this question from different perspectives. Like I often will have a client come who's just concerned about the debt. And as a result, they are worried about just being an investor, period. And there's, you mentioned some of the statistics you mentioned of like debt relative to growth or like our interest payments being greater than defense spending, like there are different implications for the economy. There are different implications for the stock market.

16:05The Long Term Investor Host:I'm one of those, like the economy and stock market are different things. And then there's like the impact of us humans, uh, you know, like your mortgages look different as a result. Uh, your auto loans look different. The job market could look different. Um, when you think about these things and you think about this pie in the sky sort of breaking down, if you're painting pictures in your head, like what's the one of those angles or is there a different angle that you spend time thinking about? I think that crowding out is real. And I think that it's its own inflation where explain crowding out for all of our people.

16:38The Long Term Investor Host:That's OK. Crowding out is the idea that the U.S. government is a borrower like any other in a way it has to come to market. It's reliant on the interest rates that it's charged in the market from bond investors. And that's life. And so when they come to market, when the government comes to market to borrow, those bond investors are looking at the government, but also every other potential borrower sitting there. So there's Meta who wants to fund a new data center and there's Microsoft and there's, I don't know, this Campbell's Soup, whatever. And you're like, well, why would I lend to the U.S.

17:06government at four point whatever when I could lend to all of these beautiful, so great companies that I love so much and so dearly who have great proposals for their growth for a little bit more? And so basically, the U.S. government's always competing. and in that same way if the U.S. government is paying higher interest rates if you and I are coming to market same market and we're like I want to borrow a mortgage I need to buy a house I need a 30-year fixed rate mortgage you're also in line next to the U.S. government if they're paying more that means that in order to compete and to get that borrowing you also have are going to have to pay more in interest that's crowding out so basically it becomes like there's just like not a finite supply of money in the world, but there's only so much demand for debt.

17:52I mean, it changes, but there's only so much. And so in a, especially like in the near term. And so there's this sense that like, if the US government is spending more and more in interest, getting charged more and more in interest, it crowds out other types of borrowings, and it makes you pay more for your mortgage, as you mentioned, and it makes it just, it's a drag on the economy. So I think that that is, to me, that feels pretty real. And that gets kind of diffused throughout the economy in an inflation-like way?

18:20The Long Term Investor Host:I think that is probably the angle that most people don't think about. And I think it's probably one of my favorite angles I've heard from you in the past. Yeah, no, no. I mean, look, I know what questions I'm asking. I know. You're like, Mary, say the one that I like. Yeah, right. Give me the correct answer, Mary. I know you believe it. It's good that I'm cooperating, though. Yes, you're, you know, all of your years of hosting other people make you an excellent guest because you know that you have a job to do here. And I sincerely just think these things like this is actually. For sure. No, no, no.

18:51The Long Term Investor Host:Look, I followed your work for a long time. I think this is what this is a topic I think that you've always shown a lot of interest in. Hence, we're talking about it. Let me ask you this. Do you feel like there needs to be a crisis of some sort? Like, does there have to be a crisis to change the trajectory? No, absolutely not. I mean, we don't tend to change our trajectory before a crisis because it's less fun. We're like having fun doing it the expensive way, you know? So until there's like a, I always say rubber meets road. If you have a better, like, I don't know why that's like the one that makes perfect sense to me.

19:21But, you know, in the mortgage crisis of 2007 through nine, it was people failing to make their interest payments, right? Or sorry, their mortgage payments. They just bought a house that was too, the mortgage was too big. The mortgage payments ballooned because we loved to do that back then. And people owned too many houses. People couldn't make those payments. And so there was this like actual trip wire. And once that happens, that's when you start to see, well, shit hit the fan. I got it. I got a different metaphor. That's when you start to see the actual the actual change. And you have to confront reality because I feel like there's this weird thing about the investor base.

19:55I don't know if this lands with you, but like very often I feel like you investors really don't want to have to consider. We always talk about the market pricing things in and like predicting things and incorporating that into an efficient market, like all the information is already accounted for. Sure. But at the same time, if something's like maybe not going to happen, we really don't want to have to deal with it. We do not. Like, it's too hard to consider that the Treasury market might be risky. We're not going to do that unless we absolutely have to. And it would be expensive to do that if you don't have to.

20:25So, of course, like put that off until the moment that it's necessary. but there is a weird, not denial, but like a willful, like, I'm going to just, I'm going to wait until the last possible second to price this in. I don't feel like it. So crises help us, or they're catalysts. They let us actually reevaluate our structures. That being said, I'm so hopeful that if we like holler enough about these things and we prioritize and we understand to some degree the gravity of what would happen, it's impossible to understand because it's like too large. But if we can appreciate that we don't want to make treasuries be risky, then we need to do something.

21:03And that maybe we can do it.

21:05The Long Term Investor Host:So like inflation or financial repression, I mean, those are ways where perhaps we're not defaulting in the technical sense, but people start to feel it. And then it becomes a political issue that politicians can address without losing their office. Because the answers are actually pretty straightforward. word. Raise taxes, cut spending. I'm so sorry. In my opinion, until there's like a presidential election where people are really running on the platform and that's what the whole election's about. Yeah. I would assume that everyone just keeps their head in the sand because even a bond vigilante in a world where treasuries blow up.