Trump vs. the Bond Market

The Ezra Klein Show

This episode explores the growing instability in the U.S. Treasury market, examining how rising bond yields are affecting mortgages, loans, and the broader economy. It

Key takeaways

• U.S. Treasury bonds are foundational to global financial stability due to their safety and liquidity.
• Rising bond yields signal increasing borrowing costs for governments, companies, and households.

Main topics

• U.S. Treasury bond market dynamics
• Impact of rising bond yields on consumer borrowing costs

Notable quotes

"The U.S. Treasury market is the most important financial market in the world. Bar none, nothing is even close."

"There's never been in history the kind of money coming into a country as we have right now."

Conclusion

The episode underscores how deeply interconnected financial markets are, with Treasury bond yields serving as a critical

Transcript preview

Speaker 5 (0:00) Hi, it's Alexa Y. Bell from New York Times Cooking. We've got tons of easy weeknight recipes, and today I'm making my five-ingredient creamy miso pasta. You just take your starchy pasta water, whisk it together with a little bit of miso and butter until it's creamy. Add your noodles and a little bit of cheese. Mmm. It's like a grown-up box of mac and cheese that feels like a restaurant-quality dish. New York Times Cooking has you covered with easy dishes for busy weeknights. You can find more at NYTCooking.com. Speaker 3 (0:56) The U.S. Treasury market Speaker 4 (0:57) is the most important financial market in the world. Bar none, nothing is even close. Most of us don't participate in it directly. We don't go in the morning and buy Treasury bonds. But Treasury bonds define everything from how the stock market ends up performing to the cost of a mortgage, a car loan, a credit card. There is almost nothing financial they Speaker 3 (1:20) do not touch. And the U.S. Treasury market, it's been... Looking a little weird lately. The cost of borrowing for the U.S. government is going up, probably because our debt recently passed $40 trillion. We now spend more on interest on that debt yearly than we spend on the entire defense budget. But also Donald Trump has been more and more erratic. Speaker 7 (1:40) There's never been in history the kind of money coming into a country as we have right now. Speaker 4 (1:46) His Treasury Secretary Scott Besant has been making some more aggressive moves into the market. Speaker 1 (1:50) Think of it as pulling back the slingshot here. We have a lot of potential energy that will turn into kinetic energy. Speaker 4 (1:56) What is going on with U.S. Treasuries? Why does the Trump administration seem so freaked out? And what might happen from here? Robin Wigglesworth is the editor of the Financial Times blog, Alphaville. He's co-host of their podcast, A Story of Money, and author of the forthcoming book, A Fabulous Debt, the epic story of how bonds built the modern world. A quick timestamp here, because a lot is happening in the bond markets lately. We spoke on Monday, August 24th. Speaker 3 (2:31) Robin Wilkes-Worth, welcome to the show. Thanks for having me on. So I Speaker 4 (2:35) wanted to begin with this clip of Donald Trump being asked last Friday about Treasury Secretary Scott Besson's recent interventions in the bond market. Speaker 1 (2:44) Did you direct? Speaker 1 (2:47) No, not at all. Speaker 7 (2:49) No, he's a very capable man. He wanted to do it. He's very good at it. He has a good touch, very good natural touch for the bonds and interest. And he did that, yeah. Speaker 1 (3:02) We have many Speaker 7 (3:05) types of intervention. That's one. The ultimate intervention is our military. And if we have to use that, we will, yeah. Speaker 4 (3:13) So I'd say that escalated fairly quickly. I've not heard of people trying to use the military against the bond market before. Why don't we start in the more comprehensible part of it before we go there? What has Scott Besson been doing? Speaker 2 (3:27) Well, it feels a little bit like he's doing a bit of a kitchen sink approach to bringing bond yields down. The core reason is that bond yields, the price of the U.S. government borrowing flows into everything else. Clearly, before the midterms, they would like interest rates and bond yields to be lower to make affordability better for American households. But in the toolkit that the Treasury Secretary has, there's actually not that much. And Besant seems to be really trying to kind of use some weird tools for purposes they weren't really designed for. Speaker 8 (4:02) Breaking market news for you. The Treasury Department is doubling the size of liquidity support buyback operations that are being used for longer dated nominal coupon securities. Speaker 2 (4:12) And, you know, jacking up the buyback program by a few billion dollars, even 10x-ing it, is not going to move the needle, which is why people are scratching the heads of why he would do this and why, frankly, after the initial reaction, Treasury yields have started climbing again. I Speaker 4 (4:30) think to have this conversation, we need to just set the table on this whole structure that people sometimes see flash by them on CNBC or in the financial pages, but maybe don't have that much familiarity with. Speaker 3 (4:43) So Speaker 4 (4:44) just at the Speaker 3 (4:44) simplest level, what is a U.S. government bond? Speaker 2 (4:48) A U.S. government bond is a tradable loan issued by the U.S. So bonds are just tradable loans. You can buy them, sell them, they pay a fixed interest rate. And they're kind of designed to be able to, you can buy it and sell it very quickly, unlike a conventional loan. And the US government is the biggest government in the world. It's the most powerful country. It is at the apex of the entire global financial system. So that's why treasuries are so important and why everybody loves having them. They're kind of the most easily tradable bond on the planet. And one of the reasons why the US government can... fund itself so cheaply is because everybody loves buying them. And they Speaker 4 (5:30) love buying them because they're safe. If you have a share of Tesla stock or of Apple stock or of all kinds of things, even a good bet for a company over a 10-year timeframe is pretty unpredictable. But if the US government says, you know, you've bought this bond at 5%, that bond is going to pay you 5 % for 10 years or 20 years or 30 years or whatever it is, and then give you... the underlying money on the loan back at the end of that, like clockwork. And that's what makes it such an important global financial instrument, that people need something that is perfectly reliable. And the U.S. Treasury bond is considered as Speaker 3 (6:07) close to perfectly reliable as any financial instrument on earth. It's Speaker 2 (6:12) crazy as it sounds sometimes to Americans, but yes. I would say that, you know, there are multiple pillars to this. And one of it, that it's safe. If I lend money to the government, not just over the next five years, but next 30 years, I'm pretty confident that there will be a U.S. government around in 30 years. You couldn't say that about every country on the planet or even most companies. You know, companies do go bankrupt as well. But the U.S. government, that feels pretty safe. But I'd say one of the underappreciated pillars of the treasury market is that it's so easy to buy a ton of them or sell a ton of them. It's liquidity, which is kind of a weird financial jargon word that gets abused a lot. But it just means that you can buy and sell something very easily. The treasury market, I mean, that trades a trillion dollars a day. And that's why, you know, whether you're a pension plan in Denmark, a sovereign wealth fund in the Middle East, a central bank in Brazil, for example, everybody likes treasuries because even if you have hundreds of billions of dollars worth of them, you know you're going to be able to sell a lot of them very quickly if you have to. And that's almost like the magic sauce that helps keep the treasury market aloft, even though... concerns about U.S. indebtedness have been growing for what, generations now. Speaker 4 (7:33) So that's the financial plumbing side of it. That's why treasuries end up being so crucial to the financial system. They're the liquidity. They're like what runs through the arteries of the global financial system. But let's say I am not a pension fund. I am not the Brazilian central bank. I don't, to my knowledge, own any bonds. Speaker 4 (7:56) Why do I care? Does this affect or could this affect me as a normal person? Speaker 6 (8:02) Unfortunately, yes, it will affect you. I mean, it's stepping really far back. The bond market, you know, it seems boring. People don't care about it as much as the stock market, but it really is the bedrock of the entire global financial system. It's where governments fund themselves. It's where banks fund themselves largely. sets the cost of money for governments, for companies, for households, through mortgages, car loans, student loans, the whole nine yards, essentially. And it flows into the stock market as well. If bond yields go too high, if borrowing costs are too high for companies, well, actually, it causes the stock market to wobble as well. And that's why we've seen people like Besson and Trump, they actually care less about the stock market than people think. Remember Liberation Day? The stock market crapped out quite violently. It was actually when the bond market started to buckle that Besant and Trump very quickly said, hang on, the bond market is getting yippy, as Trump put it. We need to take a timeout. I think that's quite indicative of how they see the relative strength and importance that the stock market can fall and it's not great. Trump wants it to be higher. But the bond market buckling, the bond market throwing a bit of a tantrum, that has a real economic impact very quickly and can get quite scary sometimes. Speaker 4 (9:17) Yeah, I want to hold on this point that the bond market is bedrock of how much everything else costs, because I think it's worth expanding this. So you think about an affordability agenda. The cost of everything is the central political issue now. The stock market affects how rich people both feel and are. The bond market affects Speaker 3 (9:34) how much you pay for things right now. So when you are getting an auto loan, when you are getting a credit card or paying credit card debt in the future, all of these things are set on top of the cost of money in the treasury market. Speaker 4 (9:48) And so if treasuries are paying out at 3%, it's 3 % plus X, plus whatever they Speaker 3 (9:55) think they need to add on top of that. If treasuries are 5%, if they're 7%, then mortgages, autos, everything else. are 5%, 7%, 9%, plus something on top of that. And so you're kind of creating the base layer of how much everything that includes debt is going to cost. To say nothing of what happens if you actually begin having volatility in that market, then things get really scary. We've not really seen too much of that yet. But this has been going up now in a kind of persistent way for a couple of years. And if you're Donald Trump, you're the Republicans. and you want people to feel things are getting cheaper, it is very, very, very, very, very hard to get people to feel that life is getting cheaper if the cost of Speaker 4 (10:40) money, which again feeds into everything else basically, is going up. Speaker 2 (10:44) Well, Treasury Secretary Scott Besant has a 3-3-3 plan, as he's dubbed it. He wants to lower the budget deficit to 3 % of GDP. He wants to get 3 % economic growth. And he wants to increase oil production in the United States by 3 million barrels a day. How are we doing on that? Not well, I think. But this is a global Speaker 6 (11:07) issue because the U.S. is the world's most important economy and its financial system is huge. You know, when I borrow money here in Norway, I'm essentially competing with U.S. Treasury. The U.S. government is the risk-free rate. It's the safest government bond market, the biggest, the most liquid government bond market in the world. The US treasury market is $32 trillion. So when treasury yields go from 2 % or 3 % or 4 % or 5 % there, I'm paying a spread on that. When I borrow from a Norwegian bank, everybody is in some way or respect competing with the US government for money. But broadly, that's why when the US bond market sneezes, the world can catch a cold. And that's just when it sneezes. When it has the flu, it gets really nasty. That's the volatility that you mentioned. Speaker 3 (11:51) You know, I have thought about treasury bonds more than probably most people have. I've covered this in and out in debt ceiling crises and all the rest of it for many years. But I have never, even to this day, I don't have a conceptualization really of how these bonds are bought and sold. Is there a website they all log into? I mean, how quite literally are these bonds bought and sold? Speaker 2 (12:13) They are quite literally bought and sold all the time, albeit not in a big marketplace. The first bond market is now a food market in Venice in Italy. And now it's all electronic on Bloomberg terminals, for example. But it has evolved over the years. But the US now is a big borrower. So it's got pretty strong processes built up around this. It wants to be predictable. It wants to be steady. It's a responsible actor. You can buy treasury bonds. You can put in bids on websites that the government has set up, you as an individual. But most of the big buyers, the central banks of Tajikistan or a pension plan in Mexico, they'll buy through banks, a club of banks called primary dealers. And they're kind of serious, big organizations like JP Morgan and Goldman Sachs in return for... promising to make markets, making sure that the markets are steady, that our buyers and sellers, and they'll match them, they are allowed to bid at auction from the U.S. government. And Speaker 3 (13:12) so then, I mean, this is a very basic question, but how is the yield we're talking about, whether it's 3 % or where it is now, 4 % to 5 %? How is it set? It's supply and demand that morning, how many people are buying, how many people are selling? What is happening that lands us on any given day at... you know, 4.2 % or whatever it might be? Speaker 2 (13:34) Well, I mean, they look at where they're already trading, but the banks will basically come up with an idea of what they think they should pay, depending on what the demand is. Most of the time, these auctions are non-events. They're kind of designed to be boring. You don't want excitement when the US government is issuing debts. But occasionally, there are little curveballs. For example, you know, we saw this recently. There was slightly limp demand for an auction of a 30-year treasury bond. And suddenly that yield, the U.S. government had to pay a bit of extra on top. And that kind of caused concerns. Well, Speaker 3 (14:11) things have been getting less boring. So walk me through the story of the bond market over the past, I mean, you can choose the time range here, but, you know, five, 10 years. How much higher is it than it was? And what is it that is starting to get people nervous about where it's going from here? Speaker 6 (14:29) Well, I guess, I mean, so much in the world can be divided into the pre-global financial crisis and post-global financial crisis. Let's start then. The U.S., you know, it's crazy to us now, but, you know, Ezra, when you and I were younger, a debate in the United States was what would happen if the U.S. government had no debt? Like in the 90s, people were genuinely worried that the US government might run out of debt. It had budget surpluses and it was paying down debt. So how does the financial system operate when the bedrock just doesn't exist? Now, of course, this is radically different. The big change was the financial crisis. Countries around the world just had to borrow money and support economic growth for years afterwards. And we've never really recovered from that. Speaker 6 (15:15) Financial crisis caused these massive, usually like seven-year hangovers, economically speaking. And governments quite rightly decided we need to spend our way out of this. But then, of course, you know, it's a hard habit to