Speaker 1: Bloomberg Audio Studios, podcasts, radio news. We've been seeing a
Speaker 1: selloff in the bond market. Yields on US government bonds,
Speaker 1: this twenty eight trillion dollar market have been grinding higher,
Speaker 1: although they did come down a little bit after the
Speaker 1: latest inflation data, and that move. Those higher yields, well,
Speaker 1: they're causing some concern on Wall Street.
Speaker 2: It's higher for longer level of yields has certainly been
Speaker 2: spooking the market.
Speaker 1: The yield on the ten year Treasury note, we've seen
Speaker 1: it inch closer and closer to five percent. That's a
Speaker 1: threshold it hasn't crossed since twenty twenty three, and before that,
Speaker 1: since two thousand and seven, ahead of the global financial crisis.
Speaker 1: Treasury ten year rates have already shot up some eighty
Speaker 1: basis points since the markets started factoring in the Trump trade.
Speaker 1: Yields up for a seventh consecutive session.
Speaker 3: You know. PGM has sort of said there was a
Speaker 3: tantrum esque style to these bond markets.
Speaker 1: What all this means in broad strokes is it's getting
Speaker 1: more expensive to borrow money. There's a lot of uncertainty
Speaker 1: about the future of the US economy, and investors are
Speaker 1: demanding more return they want to be paid more for
Speaker 1: taking on the additional risk that comes with longer term debt.
Speaker 1: And it's not just investors buying bonds who are concerned.
Speaker 1: The tenure treasury is a key benchmark.
Speaker 2: Surgeing treasury yields kind of filter through to so many things.
Speaker 1: Liz McCormick covers the bond market for Bloomberg.
Speaker 2: News over fifty trillion and various global securities and assets
Speaker 2: and derivative are priced all for the ten year yield,
Speaker 2: So where it moves kind of affects other markets, which.
Speaker 1: Is making investors kind of nervous, and it's also weighing
Speaker 1: on businesses and consumers who need to borrow money. Treasury
Speaker 1: yields impact the interest we pay on mortgages and car loans.
Speaker 1: Liz says, there's a roiling debate now about what we're
Speaker 1: seeing in the bond market and what it means if
Speaker 1: this is a reset or return to normal, or if
Speaker 1: if it's signaling that there is trouble ahead like we've
Speaker 1: seen in the past. I'm David Gera, and this is
Speaker 1: the big take from Bloomberg News today on the show,
Speaker 1: Why bond yields have been climbing, What the consequences of
Speaker 1: that could be, and what yields that may be higher
Speaker 1: for longer would mean for you, for me, and for
Speaker 1: markets in the economy. The FET Reserve has cut its
Speaker 1: benchmark interest rates one hundred basis points or one percentage
Speaker 1: points since September, and there was this expectation that as
Speaker 1: interest rates fell, so would bond yields. But we've seen
Speaker 1: the opposite happen. The yield on the thirty year Treasury
Speaker 1: bond has risen by about the same amount as the
Speaker 1: Fed cut one whole percentage point, which might not sound
Speaker 1: like a lot. It's not a crazy high rate, but
Speaker 1: it's what the move could signal that's causing concern. A
Speaker 1: quick refresher yield is the interest you get from holding
Speaker 1: a bond. Generally, US tressure are considered some of the
Speaker 1: safest investments around, so their yields are generally lower than
Speaker 1: other riskier investments. Low risk, low reward. When investors start
Speaker 1: demanding higher yields, it can signal they see some economic
Speaker 1: bumps ahead. So I started by asking Bloomberg's Liz McCormick,
Speaker 1: what are the bumps investors are worried about right now?
Speaker 1: Is there a consensus explanation for what's driving bond yields higher.
Speaker 2: Yeah, I think there is a consensus, and it's a
Speaker 2: compilation of things.
Speaker 3: One.
Speaker 2: While the stock market was turning along positively for a
Speaker 2: while last year, the bond market was getting worried because
Speaker 2: we have a new president. President Trump was reelected. People thought, oh,
Speaker 2: he's going to be stimulating the economy. He would keep
Speaker 2: his tax cuts that he did in his first term,
Speaker 2: things like that, and tariffs. We know he's very into tariffs,
Speaker 2: so people were worried. Okay, if he's going to be
Speaker 2: very gross stimulative and tariffs might be inflationary, this might
Speaker 2: be bad for yields because, I mean, we all want
Speaker 2: a better economy, but our macroeconomics tells us stronger economy,
Speaker 2: higher growth rate, higher yields. Then you add inflation, which
Speaker 2: is always like the worst thing for bonds because you're
Speaker 2: getting these fixed payment streams, so inflation just eats away
Speaker 2: at that.
Speaker 1: Maybe this is a good moment for us to pause
Speaker 1: for just a sec for another refresher on how bonds work.
Speaker 1: You buy a bond, you get fixed payments called coupons,
Speaker 1: off in every six months, and the amount you get
Speaker 1: typically stays the same for the life of the bond.
Speaker 1: So if you're thinking about buying, say a ten year bond,
Speaker 1: and you're expecting higher inflation over that decade, you're going
Speaker 1: to demand a higher return on your investments, a higher
Speaker 1: yield on that bond, then you might if you weren't
Speaker 1: worried about inflation. So higher inflation expectations, higher yields.
Speaker 2: And then we started getting some sticky readings on inflation
Speaker 2: right even before we have a new administration. So I
Speaker 2: think that's the consensus that people thought, Oh, we might
Speaker 2: have a more gross stimulative inflationary environment under Trump, and then, oh,
Speaker 2: by the way, this progress on inflation seems to have stalled,
Speaker 2: and we're trying to figure out is it stalling or
Speaker 2: could we have a resurgence.
Speaker 3: And that's just the bugaboo for bomb Land.
Speaker 1: Now. Higher yields on US treasuries might be a good
Speaker 1: thing if you're an investor looking for a pretty much
Speaker 1: drama free place to park your money for a while,
Speaker 1: but treasuries are also critical to other assets, to other
Speaker 1: parts of the economy. So broadly speaking, when bond yields
Speaker 1: go up, it affects companies. They'll have to pay more
Speaker 1: to raise money, and borrowing costs for consumers also go up.
Speaker 2: So it just makes everything you want to do that
Speaker 2: you don't have cash on hand to do more expensive,
Speaker 2: and it may make you stop. Although we haven't seen
Speaker 2: the economy slow yet, we may get there. The higher
Speaker 2: rates may slowly drag the economy down a little bit.
Speaker 2: We all have friends, I'm sure who reach out. I
Speaker 2: have cousins that are young and they want to buy
Speaker 2: a house and they keep saying, Liz, I've been waiting
Speaker 2: and waiting, and I thought you told me the Fed
Speaker 2: was cutting rates that would help, and it hasn't. And
Speaker 2: so they're holding off on by house because they said
Speaker 2: the margage rates are still at seven percent. I can't
Speaker 2: afford it. So you see would be home buyers affected.
Speaker 2: You see even your baring rates on cars, and like
Speaker 2: I remember, during the financial crisis, you could get a
Speaker 2: car loan at zero percent, and now it's much above that.
Speaker 2: Even look at a home equity line of credit. If
Speaker 2: you're getting private loans for college, that's more expensive.
Speaker 1: Let me ask you about this moment, about what's happening
Speaker 1: with bonds, about this movement the ten year five percent
Speaker 1: or higher just help me understand the moment that we're
Speaker 1: in and how much I don't know if it's fear
Speaker 1: or anxiety there is just about the state of the
Speaker 1: bond market today.
Speaker 2: Yeah, I think what's interesting is that the stock market
Speaker 2: has really taken notice. Now we have the thirty year
Speaker 2: bond yield around five percent. Let's just say it's psychologically high.
Speaker 2: It's relatively high for where it's been ten years, flirting
Speaker 2: at five percent. So you have to think in equity
Speaker 2: land that people across the border saying, wait a minute,
Speaker 2: if yields are higher, this means it costs companies more. So,
Speaker 2: the thirty year mortgage rate is back to around seven percent.
Speaker 2: That slows the housing market, right, So that's why these
Speaker 2: higher bond yields are like sweeping all the conversations.
Speaker 3: Right.
Speaker 2: And let's add to that, we had a payroll reading
Speaker 2: for the last month of the year which was quite robust, right,
Speaker 2: well above expectations, although close to Bloomberg.
Speaker 3: Economics, I will give them points.
Speaker 2: They did good, but that made it seem like, Wow,
Speaker 2: the Federal Reserve, which for a while was saying, hey,
Speaker 2: we don't want the labor market to slow anymore, they
Speaker 2: have a dual mandate keep inflation and check and a
Speaker 2: stable labor market. But now they surely don't need to
Speaker 2: do anything to help the labor market. It seems to
Speaker 2: be churning along quite well. Right, So the bond market said,
Speaker 2: oh wow, maybe the Fed's not going to cut much
Speaker 2: at all more this year.
Speaker 3: Right.
Speaker 2: That factors into the base rate, that filters through the
Speaker 2: entire curve of all maturities of treasury. So now you've
Speaker 2: got uncertainty about government policy coming. Will it be inflationary,
Speaker 2: will growth just storm along? And now you have maybe
Speaker 2: a federal reserve that's at least on a pause for
Speaker 2: a while.
Speaker 3: That all is a recipe for higher bond yields, and.
Speaker 1: Liz has that uncertainty. It might start to ease up
Speaker 1: once Donald Trump returns to the White House and we
Speaker 1: get more clarity on the policies he intends to put
Speaker 1: in place, but it's not going to go away anytime soon.
Speaker 2: I don't see for short time being here that we
Speaker 2: have that much more clarity on the Fed policy, at
Speaker 2: least for this year. Are they going to be holding,
Speaker 2: do they cut again, could they hike? You know, as
Speaker 2: far as in Washington, we'll get some clarity, right. I
Speaker 2: think the tariff's top of mind, you know, because President
Speaker 2: Trump elect can do that by himself. I think, you know,
Speaker 2: his tax cuts in his first term, he seems to
Speaker 2: really want to extend.
Speaker 3: That's probably going to happen. We'll get clarity. But we
Speaker 3: have another thing.
Speaker 2: We didn't talk about, the debt ceiling, which they're facing
Speaker 2: now because the Congress has to either lift or resuspend
Speaker 2: the debt ceiling. So that's adding another thing. So I
Speaker 2: don't think there's one magic blo that we're going to
Speaker 2: get clarity. Hey, we should talk in a month and
Speaker 2: we'll know everything. We won't.
Speaker 1: Coming up after the break the return of bond vigilantes,
Speaker 1: tantrums in the bond market and concerns about the national debt.
Speaker 1: In recent weeks, Bloomberg's Liz McCormick has been thinking about
Speaker 1: the return of what are known as bond vigilantes. A
Speaker 1: Wall Street veteran named edi Ard Denny came up with
Speaker 1: the term.
Speaker 2: He coined that term back in the la seventies early
Speaker 2: eighties for like bond investors who really kind of revolt
Speaker 2: and say, hey, government, we don't like what you're doing.
Speaker 2: You know, you're spending too much, it's inflationary. We are
Speaker 2: just going to sell your bonds. We're going to only
Speaker 2: buy them at a lower price, higher yield. So I
Speaker 2: think these bond vigilantes, which someone said to me, who
Speaker 2: is it?
Speaker 3: Is it one person? I can't say, it's firm xyz.
Speaker 2: It's them in force coming out and saying saying, you
Speaker 2: want me to buy a ten year bond a thirty
Speaker 2: year bond. I want to hire a yield because there's
Speaker 2: a lot of risk and this deficit situation isn't going away.
Speaker 2: So I think bond vigilantes is an aggregate force of
Speaker 2: all these big asset managers.
Speaker 1: Do they have a lot of power or have they
Speaker 1: had a lot of power historically? If they're able to
Speaker 1: do that, does it force the government to take a
Speaker 1: different approach or look at that differently?
Speaker 3: Well, it has worked in the past.
Speaker 2: In the Clinton era, he was going to do a
Speaker 2: bunch of spending and bonialds were around five or change,
Speaker 2: and then they went up to eight percent pretty quickly,
Speaker 2: and his advisors kind of said, we need to rethink,
Speaker 2: you know, because they knew like the risks of higher
Speaker 2: yields risks to everything, so they kind of put the
Speaker 2: fiscal house in order a little, they end up with surpluses.
Speaker 2: So it might be that if bon Yalds keep rising
Speaker 2: sharply and the stocks keep falling, that may factor into
Speaker 2: our politicians saying something we're doing we have to change
Speaker 2: because you know, higher bon yalds, we said, affect the
Speaker 2: people's mortgages and things. But also people are seeing the
Speaker 2: value of their stocks. People's four oh one K. They
Speaker 2: don't even have to know much about investing. Just getting
Speaker 2: that statement every quarter is troubling.
Speaker 3: You're worried.
Speaker 2: Your consumer confidence goes down when you're like, oh my goodness,
Speaker 2: my retirement funds are just evaporating. Right, So I think
Speaker 2: they have in the past gotten the market's attention.
Speaker 1: Help me with the term, which is the market's having
Speaker 1: a tantrum. What is that? And how do you assess
Speaker 1: whether a tantrum is something that's short lived or is
Speaker 1: going to be something longer lasting.
Speaker 2: Yeah, well, of course that started when Ben Bernanke was
Speaker 2: the FED chair and he in twenty thirteen kind of said, hey,
Speaker 2: we might think of like slowing.
Speaker 3: These asset purchases. Those those like a tantrum.
Speaker 2: Because the FED was really supporting the marketplace, So that's
Speaker 2: how it was double. When rates just shoot up, it
Speaker 2: doesn't kind of make sense. So I think we're tantrum esque.
Speaker 3: So I don't think we're there yet. I don't think.
Speaker 2: James Carville, whoever with the advisor to Clinton back when
Speaker 2: who said, you know, I would like to come back
Speaker 2: as the bond.
Speaker 3: Market because they have more power.
Speaker 2: I think they're the bond markets getting that power, But
Speaker 2: we don't have the full kind of vigilante force at
Speaker 2: the moment.
Speaker 1: So it's the Treasury Department that's issuing this debt issuing
Speaker 1: these bonds. Has there been a problem yet with appetite
Speaker 1: for them with these kinds of yields? Are they having
Speaker 1: difficulty selling bonds as we see that the needs continue
Speaker 1: to rise.
Speaker 2: Well, you know, it's interesting because we have lots of
Speaker 2: auctions because we have so much debt to sell. So
Speaker 2: you know, if you've seen a few sloppy auctions where oh,
Speaker 2: people didn't want to buy, and then we've seen people
Speaker 2: come in and buy because some are saying, oh yeah,
Speaker 2: like we said, almost five percent looks good. But I
Speaker 2: think that's what's you know, what Treasury Department does every
Speaker 2: quarter is called a refunding where they decide, hey, what
Speaker 2: are we going to sell this quarter?
Speaker 3: How will we fund the deficit that we need to do?
Speaker 2: So, you know, those meetings, like FED meetings, become more
Speaker 2: and more interesting. Now, right, what's going to happen? Is
Speaker 2: there more bonds and notes and bills and you know,
Speaker 2: so I think it's top of mind. But so far
Speaker 2: now they're selling it, but they're just paying up at
Speaker 2: different points.
Speaker 1: It looks like that's going to become the purview of
Speaker 1: Scott Besson, who's the president of lexnominee to be the
Speaker 1: next Treasury secretary. What do we know of him and
Speaker 1: his attitude toward the US fiscal house and to debt
Speaker 1: more broadly?
Speaker 2: You know, he has this what he calls a three
Speaker 2: three three plan where he would like to get growth
Speaker 2: to three percent. He wants to get the deficit, which
Speaker 2: like we said, is around six percent of GDP down
Speaker 2: to three percent by about twenty twenty eight. And he
Speaker 2: wants to drill, you know, have more oil, about three
Speaker 2: billion barrels a day of oil. So some of those
Speaker 2: might collide. But he has been dubbed kind of a
Speaker 2: fiscal hawk. So I think he's aware that you know,
Speaker 2: we cannot go on this trajectory he's talked about. You know,
Speaker 2: if they do things right that maybe the FED could
Speaker 2: start cutting again.
Speaker 3: You know, if some of this pressure on.
Speaker 2: Inflation comes off and we have more oil production, maybe
Speaker 2: that will drag down inflation, so it will help the
Speaker 2: FED to be able to cut. I mean, of course,
Speaker 2: he's just the Treasury secretary, and you know, the policies
Speaker 2: are done under Trump and in Congress, even the Republicans
Speaker 2: have control of all houses, but the majorities are small,
Speaker 2: so it depends on how things go in Washington, what
Speaker 2: gets done right.
Speaker 1: Now, there are many investors who are talking about bond
Speaker 1: yields being higher for longer, that maybe the tenure hits
Speaker 1: five percent or goes higher and it stays there.
Speaker 2: I think that's very possible because there are many who
Speaker 2: after eight said the FED holding rates near zero too long,
Speaker 2: like that wasn't the normal life?
Speaker 3: Yeah, untenable, And people who.
Speaker 2: Kind of maybe started their career or started looking at
Speaker 2: you know, the investment world at that point kind of thought, oh,
Speaker 2: that was the norm. And now obviously, like you let,
Speaker 2: now we've seen higher yields. So I think it's very possible,
Speaker 2: and we did have high rates in the past. So
Speaker 2: if we kind of hover here and this is the
Speaker 2: new normal, Let's just say we sit here around with
Speaker 2: most of the treasure yield curve, like treasuries of all maturities,
Speaker 2: say around five percent FED sticks where they are a
Speaker 2: little over four percent all year. That means you have
Speaker 2: to kind of adjust your calculus. Companies will have to
Speaker 2: say again, luckily some of them locked in for many years,
Speaker 2: so they have some time. But companies will maybe cut
Speaker 2: back on new investment because they say, well, if I
Speaker 2: could sell and issue bonds and get money at three percent,
Speaker 2: I'd go for it. But let's put off this project
Speaker 2: because now I'm paying five percent plus, you know. So
Speaker 2: I think that's where it starts to filter through. Like
Speaker 2: it's like I say, we have to see how the
Speaker 2: system can function and handle let's say five six percent
Speaker 2: treasury yields.
Speaker 3: Maybe it won't implode.
Speaker 2: Like like I said, when the FED start tightening, we
Speaker 2: thought the economy would go in a recession, and it didn't.
Speaker 2: So there was some post pandemic anomalies. But I just
Speaker 2: think it's just a different world. I mean again, I
Speaker 2: think in the housing market, people I guess they're just
Speaker 2: going to have to get used to.
Speaker 3: If you want a new house, you got to support
Speaker 3: a seven percent mortgage.
Speaker 1: It's just a thing. Yeah, to get used to it. Yeah,
Speaker 1: we've talked a lot about bonds fixed and come in
Speaker 1: the context of the United States. It's how emblematic is
Speaker 1: what we're seeing here of what's happening around the world.
Speaker 1: Or is the US and a pretty unique case as
Speaker 1: it navigates these higher yields the challenges cases with its
Speaker 1: fiscal situation. Is it unique compared to other countries.
Speaker 2: I wish it was, but I mean not that we
Speaker 2: want to be the only problem job, but it's not.
Speaker 2: The UK had their bond yields really surged because they're
Speaker 2: concern about what they're doing in their fiscal decisions. France
Speaker 2: had a lot of problems. You know, we're just seeing
Speaker 2: this all over the place that government debt yields and
Speaker 2: other regions are rising because they just don't feel like
Speaker 2: there's being enough done bring deficits down, bring debt down.
Speaker 2: I think the estimate now it's about fifty four trillion
Speaker 2: that the global sovereign debt has risen to right.
Speaker 1: The sovereign debt of most advanced economies.
Speaker 3: I mean it's huge. So it's not just the US.
Speaker 2: I mean we are, you know, the biggest sovereign debt
Speaker 2: issuer in the world because we just started the biggest economy.
Speaker 2: But all these other regions are having troubles too. There
Speaker 2: is this problem in many developed nations of debt and
Speaker 2: deficits are on investors.
Speaker 3: Radar for sure.
Speaker 1: This is the big take from Bloomberg News. I'm David Gura.
Speaker 1: For more on the impact of the bond market selloff,
Speaker 1: check out the first episode of a new podcast from
Speaker 1: Bloomberg called Trumpanomics. Host Stephanie Flanders and guests Anna Wong
Speaker 1: and Laura Davidson look at whether the recent moves in
Speaker 1: the bond market are worrying the incoming Trump administration and
Speaker 1: whether it puts any of Donald Trump's grand plans at risk.
Speaker 1: This episode is produced by Jessica bec and Alex Tie.
Speaker 1: It was edited by Tracy Samuelson and Vivian Rodriguez with
Speaker 1: help from Seleia Mosen. It was fact checked by Adriana Tapia.
Speaker 1: It was mixed by Alex Secura and sound design by Jessica.
Speaker 1: Our senior producer is Naomi Shavin. Our Senior editor is
Speaker 1: Elizabeth Ponso, Our executive producer is Nicole beamsterbor Sage Bauman
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Speaker 1: Thanks for listening. We'll be back on Monday.