What’s up with the bond market? : NPR

NPR’s Scott Detrow talks with economist Justin Wolfers of the University of Michigan about what’s going on with the bond market — and why it matters to everyday people.

Transcript

SCOTT DETROW, HOST:

Government bond yields are rising to levels we have not seen in decades as investors around the world sell off bonds. So why are investors so anxious right now, and what does this bond sell-off mean for the U.S. economy and everyday people? We’re going to put those questions to Justin Wolfers, professor of public policy and economics at the University of Michigan and the founder of digital platform Platypus Economics. Thanks for joining us.

JUSTIN WOLFERS: A pleasure, Scott.

DETROW: I was going to say I love the name Platypus Economics.

WOLFERS: Oh, I kind of liked it, too, but I also just love talking bond yields. How exciting is that?

DETROW: Let’s do it. Before we get to what is happening in the markets right now, let’s start with the basic because the bond is generally the safe investment move, right? It’s boring. It’s predictable. Remind us why they are so stable in normal times.

WOLFERS: Yeah. Let’s go back all the way. When you and I want to borrow money, we turn up to the bank, and you might say, I’m buying a car, can I borrow $10,000? When the federal government wants to borrow money, it’s talking in hundreds of billions, maybe even trillions. And if you turn up at the bank and ask for a trillion dollars, they turn you away. So therefore, what the federal government does is it basically yells out to the world, I’ll borrow money from anyone who’ll lend it to me. That place where it yells is called the bond market.

And people historically have been very comfortable lending money to the U.S. government because they’re pretty sure they’ll get paid back. They’ll get paid back ’cause the federal government is in this incredible line of business. It prints numbers on pieces of paper, and then people call that money.

DETROW: Yeah. It’s a good place to be.

WOLFERS: If I was in that line of business, I’d be living a very different life, but you would also be really comfortable lending me money.

DETROW: So given all that, why are investors so rattled right now? I know there’s a lot of different factors going on, but what would you start with?

WOLFERS: So what’s going on right now, in plain English, is interest rates are higher, simple as that. And I want you to recognize the U.S. government is competing in the market for loans with you trying to borrow money for your mortgage and me trying to borrow money for my car. So what’s going on right now is there’s a lot more people who want loans. Let me give you two big factors that make all the difference.

The big one is the AI build-out. We’ve got these companies borrowing billions of dollars to build data centers as quick as they can. That may turn out to be economically transformative but, at a minimum, what it means is today, they’re borrowing a lot of money.

The second big borrower is the federal government. Every year that our taxes are smaller than our spending, then the government needs to borrow money. And right now, it’s borrowing at a rate that is basically unprecedented outside of wars or recessions.

DETROW: Though that’s where I got a little confused because, you know, long-term government debt is a serious problem, but it’s a serious problem we have been talking about and worrying about for a very long time. What, particularly in this moment, is making the markets more concerned about it?

WOLFERS: Yeah. I think there’s two things. One, when you first started worrying about this, Scott, when you first started reporting on this, you would report and use numbers like billions with a B. Today, we use numbers like trillions with a T. When you first started reporting on it, it was probably a decade ago or maybe longer. I didn’t know how long you’ve been at this game.

DETROW: Wow.

WOLFERS: But the government debt was – you know, before the financial crisis in ’08 was about 30% of GDP. Now it’s triple that. And more than that, there’s no seriousness about addressing it. If there were a moment to bring down the deficit after COVID, it would be after the bug went away. And it hasn’t happened, and we don’t see any discipline coming out of Congress and absolutely none coming out of the White House. And so folks are also losing faith that the American political system can ever deliver fiscal responsibility.

DETROW: Justin, you are exuding an energy where I feel comfortable asking you a possibly dumb question. Maybe that’ll be a mistake on my end, but I’m going to go for it. If you’re effectively – you’re lending the government money in a bond, interest rates are higher, why isn’t that a good thing? If I’m lending you money, and you’re paying me back at a higher interest rate, that seems like a good thing for me.

WOLFERS: Yeah. Absolutely. It is. Now I want you to remember there’s two sides to that transaction. If you’re someone who has wealth, and you put it away in investments like bonds, you’re going to be getting a higher rate of return. But if you’re someone who’s borrowing money, and I don’t know your financial situation, but right now, you might owe money for college. You might owe money on your car. You might be repaying a mortgage. Those interest rates also go up. And so for folks who don’t have stacks of money stashed away and, in fact, are in debt – and that’s most homeowners – that means that your monthly pay, your monthly bill on the mortgage goes up.

There’s also a set of issues that the federal government is going to spend more of its – more of its spend each year is going to have to go to paying off the credit card bill than providing the sort of services you might hope for. And that’s even if the deficit doesn’t change, right? Given our current debt, if we pay higher interest rates, there’s less money for roads, schools, police, the military and the other things you might value.

DETROW: Looking ahead, what are a few factors that you think could reverse this trend in rising bond yields and bring them back down?

WOLFERS: Well, we might magically wake up tomorrow and start to get our fiscal house in order.

DETROW: I’m going to say based on a long time covering that, that seems unlikely, but that is a possibility.

WOLFERS: But every night I go to bed and I wake up hoping tomorrow is another day.

DETROW: You’re an optimist.

WOLFERS: And I want you to keep that hope, Scott. The AI boom could fizzle out or we could have just built enough data centers. Or remember, this is the balance of people who need to borrow and people who are saving. So if something led people to save a whole lot more, that’s like a supply of loans going up. When the supply of something goes up, usually the price goes down.

DETROW: That’s economist Justin Wolfers, professor at the University of Michigan and founder of Platypus Economics. Thanks so much for talking us through all this.

WOLFERS: Thanks, Scott.

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