The Bond Market Is Flipping Out. Here’s Why You Should Care.

From The New York Times, I'm Rachel. Abrams, and this is The Daily. For months now, [music]. you might have been following the. headlines about the turbulence in the. bond market. And by following, I mean you might have. found yourself a little confused and. maybe even kind of alarmed by all this. talk of the dangers to our economy. [music]. Well, today, we are going to try to. demystify the headlines for those of you. who might need a little bit of help.

>> [music]. >> Our artillery, Ben Casselman, chief economics. correspondent for The New York Times, he. is going to explain what's been. happening and why it matters. It's Tuesday, September 15th. Okay, Ben, we have invited you on The. Daily today to do the impossible, which. is. we are going to explain to people who. may not understand how bonds work, what. a bond is, and why the bond markets have.

been going haywire. And we are going to. explain that not only so that you, dear. listener, understands, but that you even. enjoy this conversation. >> Rachel, I love a challenge, but I. confess that pretty much all day I was. sitting here waiting for a message from. you or somebody on the team being like, "You know what? >> We can't do it. >> Never mind. >> Too hard. Nope, we're going through with. it. We are taping this episode, and my. first question to you, Ben, is. why should people care about the bond. market? >> Yeah, the bond market we talk about it.

less than the stock market, in part. because it's confusing, and I'm going to. do my best as we talk here to make it. less confusing. >> you'll be great. >> But in many ways, it is more important. than the stock market. >> Mhm. >> It's. arguably the most important market on. Earth. And your financial life is tied to the. bond market whether or not you know it. For one thing, because you've probably. got some bonds somewhere in your.

retirement portfolio. If you've got a. 401K, if you've got an IRA, chances are. there some bonds in there, so it matters. there. >> Even if you don't even realize it. >> Even if you don't even realize it. Even. if you never made a decision to go. invest in bonds, it's probably in your. portfolio somewhere. If you've got a. pension, your pension is probably. invested in bonds. But also because bond. yields, and we'll talk about what that. means in a second, I promise, basically decide how much it costs to. borrow money everywhere else in the. financial system. So, if you are.

planning on buying a house, and you want. to get a mortgage, that interest rate is. going to be determined by the bond. market. If you want to buy a car, borrow. money for student loans, any of these. things, open a new business, all of that. is going to be based on what happens in. this kind of opaque, hard to understand. bond market that we're talking about. >> you are going to make that less opaque. for us. But before we do, I'm sure a lot. of our listeners know what a bond is, but for people that need a refresher,

can you just explain to us, not. necessarily in the style of Schoolhouse. Rock, unless you prefer to sing it, what. is a bond? >> A bond is No, I'm not going to sing. >> [laughter]. >> A bond is just an IOU. When. an entity, a national government, a. state government, or a city, a company, wants to borrow money, they sell bonds to investors. Investors. could mean individuals like you and me, it could mean pension funds, hedge. funds, other governments.

And when you buy a bond, you are giving. some money, call it a thousand dollars, to the seller of that bond. You're. You are lending them that money, and they are promising to give it back. to you in some period of time. In a few. months, a few years, 10 years, 20 years, 30 years. So, I go and I buy a 10-year. bond for $1,000, the seller of that bond. is promising to give me back my $1,000. in 10 years. But, I'm not just going to give them my.

money and walk away, right? And so, they're going to pay me interest. We're going to agree at the time that. the bond is sold to a fixed rate of. interest, and they're going to pay me. interest every year until that bond. matures and they give me back my $1,000. That interest rate, functionally, is. what we call a yield, the yield on a. bond is the sort of technical term that. we use. >> Right. So, I'm lending money, you're.

making it worth my while, you're paying. me interest. It is effectively a loan. for some period of time depending on. what we agree on. >> That's right. And the bond market is. this enormous financial system that. encompasses government borrowing and and. corporate borrowing, but but really, when we talk about the bond market, there is one sort of big kahuna in it. And that is the US federal government. This is a $30. trillion market for US Treasuries. >> That's the US government bonds or IOUs,

as you called them. >> That's right. And about a trillion. dollars worth of those IOUs. change hands, get bought and sold in the. market every single day. >> Mhm. >> So, when we talk about the interest. rates that determine everything else, >> Mhm. >> the yields that matter the most, that is. really what we're we're talking about is. the US Treasury market. >> Okay. So, Treasuries are bonds issued by. the federal government. Continuing with. our very brief Econ 101 lesson, tell us.

how a Treasury works. >> So, a Treasury is a bond like any other. The federal government literally. auctions off bonds. at a fixed interest rate, and those can be in terms that go. anywhere from a few months to. 10, 20, 30 years. The one that we tend to focus the most. on is the 10-year Treasury note. >> [music]. >> It is just sort of the benchmark for.

everything else in the world. The US. government has to date [music]. been the safest, most reliable borrower. in the world. >> [music]. >> And so, the interest rate that they can. charge ends up being sort of the. foundation on which everything else gets. built. So, if I'm willing to lend the. government money for 2%, then I'm going to lend you. money at a little more than 2% because I. don't think you're quite as good a risk.

as the US government. If I'm the bank. making you a loan, I say, "I'm going to. charge you 3% on top of the 2% that I'm. lending to the government, too." So, your interest rate ends up being 5%. [music]. >> Right, you got to base the interest rate. on something, so you might as well base. it off of your most reliable borrower, and everything else can be orbiting. around that. >> That's right. And the yield on that. 10-year Treasury has been [music] going. up. >> Mhm. >> It's been going up gradually for the. past several years, and it's gone up. pretty sharply over the past few months.

And And on Monday, actually, it [music]. briefly touched 5%, which is the highest. in 3 years. >> And this is what has people concerned. >> This is why it's in the headlines. This. is why we're talking about it now on The. Daily. >> Mhm. >> Is that this increase in yields has both. sort of direct immediate consequences, and then it raises concerns about all.

sorts of long-term issues that we could. face down the road. >> Mhm. So, why are the yields on these. 10-year Treasury bonds going up? >> [laughter]. >> Where are you Why are you laughing? Is. it. Is it because it's it's so easy I should. know the answer? >> If only. I would love to give you the simple. one-sentence Schoolhouse Rock version. This This is going to take more than a. Schoolhouse Rock. >> I'm here for it. >> There are a lot of reasons is the short.

dodge answer. The simplest to understand, I think, is. inflation. >> Okay. >> So, if I'm buying a 10-year government. bond, if I'm lending the government a. thousand dollars, and they're promising. to give me a thousand dollars back in 10. years, we know that that thousand. dollars is going to be worth less in 10. years than it is today. Right? That's. just what inflation means. >> Right. >> So, at the barest minimum, I want to.

make sure that the money that I get back. from the government, all that interest and the thousand. dollars at the end makes me whole with. inflation. >> Right, because my thousand dollars will. not be worth a thousand dollars whenever. I get it back from the US government. >> That's right. So, if I expect 2%. inflation a year, I better at least be. getting 2% interest. >> Right. >> So, step one, at at the barest minimum, >> Mhm. >> I want to break even, and then of course. I'm going to want more.

on top of that. >> Mhm. >> But, when inflation goes up, and when we're worried that inflation is. going to stay up, then I'm going to need more interest to. make me whole. >> Mhm. >> If I think that inflation is going to be. 3% instead of 2%, now I'm going to. demand at least 3% interest from the. government. If I think inflation's going. to be 4%, I'm going to expect at least. 4% interest, right? Just as a as a. baseline. >> Mhm. >> And of course, what have we seen with.

inflation? >> We got some numbers on Friday. >> We got some numbers on Friday that. suggest that inflation has picked up. again. Mostly right because of oil prices. But let's go back just a little bit. here, right? We came through this period. of really elevated inflation. coming out of the pandemic. We started to get a little bit of. control over it, but then it's picked up.

again this year. We had tariffs, and now. we've had the war in Iran that's pushed. oil prices up. Diesel prices just hit $6. a gallon. That's a record. And [snorts] so. investors, lenders. are getting nervous not just that. inflation today is a bit higher, but. hey, maybe this inflation problem is. going to stick around for a little. while. Maybe it's going to take a while. for inflation to come back down. And so, if I'm going to lend you my $1,000 for.

10 years, you better give me a little bit more to. compensate. for that inflation that we're expecting. over that time. >> Got it. Basically, if inflation. continues to rise, bond yields, the. borrowing cost for a bond, are going to. rise. >> All else equal, if inflation goes up, we. would expect bond yields to go up, too. >> Okay. So, you mentioned there are more. complicated reasons why we are seeing. yields rise. What are those complicated. reasons? >> So, I kind of think of this as falling. into two buckets. There's the good news. and there's the bad news.

>> Okay, let's start with the good news. >> Love some good news. So, the good news is that there seem. like there are lots of opportunities out. there. So, if if I've got my thousand. bucks that I'm going to invest. somewhere, if the stock market is going. up and there's an AI boom happening and. there are all of these companies that. seem like they're, you know, great. opportunities, why would I lend my money. to the federal government, which is nice. and safe, but it doesn't offer a very. impressive return for my money. Why.

would I put it there instead of putting. it into this stock market boom? >> Right. >> Why would I put it there instead of. lending it to, you know, Anthropic or to. Nvidia or to some company that that's, you know, >> Could turn my thousand into a billion. I. don't know. Look at AI. >> That's the optimistic argument here is, "Hey, there are lots of places I could. put my money right now that are going to. give me a bunch better return." And so, if the government wants to borrow money, they're going to have to offer a better. return too to convince me to give them.

my thousand dollars instead of giving it. to, you know, whatever cool startup is. happening. >> Okay, so the argument here being that. this is good news because if the. government has to stay competitive, that. means there are lots of businesses that. are growing that people believe in. That's good for the US economy. That's a. signal that the economy's doing well. >> That's right. And and this is an. argument that you hear right now from. the White House. It's an argument that. you hear from some economists as well. that we're just in a period of faster. growth and better opportunities. And so,

the rise in yields is at least in part a. recognition that the government's got to. compete for those investor dollars. And. hey, that may be. tough for the government, but this is. good news for the economy. >> Do you buy that argument? Do you think. that that that everything you just said. is in fact reflective of a positive. reality right now? >> So, when I talk to economists and I talk. to investors, many of them do think that is part of. what is happening here.

>> [music]. >> There is real enthusiasm for some of. these growth opportunities out there. But hardly anyone that I talk to thinks. that's the whole story. And that's where. the bad news comes in. >> [music]. >> We'll be right back.

>> [music]. [music]. >> Okay, Ben, before the break, you told us. that there are some bad news reasons why. yields are going up. Let's get into. those. >> So, remember when I said the US.

government is the safest, most reliable. borrower on Earth? >> Yes, gave me great confidence. >> What if it isn't? >> Hmm, that gives me less confidence. >> So, the whole reason that. the US government sells bonds in the. first place, right? Is because every. year. it spends more money than it takes in. It runs a deficit. Right? This year, we're going to spend about 7 and 1/2. trillion dollars on [music] defense and.

social security and building roads and. bridges and all the other stuff that the. federal government does. And we're going to bring in. 5 and 1/2 trillion dollars in tax. revenue. And so, that means we've got 2 trillion. dollars of a gap that we've got to make. up, and we make up for it by selling. bonds. >> Mhm. >> And that's fine. But, we run these deficits year after. year after year after year, and the debt keeps accumulating, >> Mhm. >> and it's growing faster than the economy.

is. >> Right. What did I recently hear that. we're spending a trillion dollars on. just interest payments alone? It's more. than we spend on the military. >> Yeah, that's exactly right. We we have. to pay interest on all of that debt, right? That's what we're talking about. when we talk about yields. And and right. now, we're paying a trillion dollars a year. in interest on the debt. That's more. than we spend on defense. It's more than. we spend on basically anything other. than social security and Medicare. >> Mhm. >> [music]. >> And the more that we.

borrow, the more interest we've got to pay, and. that adds even more to the debt. And you're starting to hear investors. just get a little bit nervous. about how long that can continue. >> Mhm. >> [music]. >> And how does that nervousness sort of. manifest with bonds? >> So, if you, Rachel, come to me and you. want a loan, right? I'm going to. evaluate a few things, right? I'm going.

to evaluate what other opportunities I. have, right? We already talked about. that. I'm going to, you know, evaluate. inflation, but I'm also going to. evaluate like how confident am I that. you're going to pay me back. >> Right. >> And if I look at you and and you're, you. know, coming to work every day and. you're limiting your spending and you're. being financially responsible, right? Then I'm going to give you a lower. interest rate than somebody else who's. out there blowing it all at the bar. every night. >> Right. I see where you're going with. this, but if I have a terrible credit. rating, maybe I can't hold down a job, maybe you're thinking you're a riskier. bet and I'm going to charge you more to.

borrow money from me. >> That's exactly right. And so, the. concern here is that the federal. government is. maybe being a little more like that. person hitting the bar every night and a. little bit less like the diligent, responsible worker who's paying their. debt. >> So, investors are actually looking at. the US government right now and they are. thinking that we are riskier than we. have been. >> That's right. And if you're a riskier. bet, you're going to have to pay a. higher interest rate. >> Mhm. >> And remember Remember the trillion. dollars in interest we talked about. earlier?

>> Sure. >> Well, the higher the interest rate goes, the more interest we've got to pay, which adds even more to the debt, which makes investors even more nervous. about our willingness to pay it. So, they charge an even higher interest. rate. And the risk becomes that you get this. ratchet effect, where all of a sudden interest rates go. up and up and up, and interest payments. go up and up and up, and they're pushing. each other higher. >> This bad news explanation that you're. giving for why interest rates are going.

up, this feels like it is directly in. conflict with the explanation you gave. us earlier about how. it shows that the US is doing well. because there are all these like great. investments that the government has to. be competitive with. So, how do we weigh. these explanations against each other? Like, do we know sort of how much of the. rising yields is because of the good. reason, how much is because of the bad. reason? Like, what can you tell us about. what's driving this predominantly? >> So, what I can tell you is that this is. what economists and bond investors are. spending a ton of their time right now.

arguing and fighting with each other. about. Is trying to figure out exactly. the question that you're asking. The reality is it's probably some. combination of all of these things. People are worried about inflation, they're optimistic about some of the. opportunities that exist in the US. economy, but they're nervous about the. fiscal sustainability of the US. government specifically. But, exactly how you tease out those. different pieces, which of them is most. important, how you weigh them against.

each other, that is a subject of a lot. of debate that is not easy to answer. clearly. >> Okay. So, basically there's a lot of. uncertainty, which I'm sure isn't good. for anything. >> Investors never love uncertainty. >> So, if you have been paying attention to. any of this, you are probably aware that. the US Treasury has been intervening in. the bond market. Explain what they have. been doing and why. >> Yeah, so look, this increase in bond. yields, it's a problem for the White. House, right? It's a problem first just. because it's driving up the cost of.

borrowing for the federal government, and it means paying more interest, but. it's also increasing the costs for. everyday Americans. For you as you think. about going out and buying a house and. needing to get a mortgage, for example. >> It's a political problem because I've. been saving up maybe my whole life for a. house and now suddenly I can't afford it. and I'm like, what the heck, Mr. President? >> That that's exactly right. And and so, a. few weeks ago when bond yields were. really sort of spiking at the end of. August, Scott Bessent, the Treasury. Secretary,

came out with this plan that was meant. to at least sort of calm down markets. And what that was was to have the. Treasury buy up billions of dollars. worth of long-term government bonds from. investors, to buy them back. And. what that was meant to do was to sort of. ease the market and bring down yields. >> That was the theory. >> That was the theory. And and it worked. for like a few hours. And then pretty quickly Treasury.

investors said, this isn't going to. work, and yields began to rise again. And and so we're now at this point where. yields are up significantly, and it's. not clear that there's much that the. Treasury can do to to bring them down. >> And just in the simplest way possible, Ben, explain to us. why that intervention by Bessent did not. work. >> So remember, if part of the reason that. yields are rising here is that the. government is trying to entice investors.

to buy its bonds, then if the Treasury steps in and. provides a huge new source of demand to. buy up bonds, then it just doesn't have. to compete as hard to to entice. investors. And that should bring down. yields. Bring down yields. >> Econ 101, supply and demand. The problem. here is the Treasury market is huge. Remember we we said before, a trillion. dollars a day changing hands. And the Treasury Department, as big as. it is,

doesn't have the firepower to really. move that market. They can throw in a. few billion, that's a drop in the. bucket. >> Mhm. >> And so, investors kind of once they got. a chance to digest this, took a step. back and said, "You're not big enough to do this. You. can't really move the market in the way. that you're claiming.". >> They saw through it, basically. They. were like, "The US government cannot buy. enough to actually influence these. prices in a non-artificial way.". >> You're a paper tiger. You don't have the.

juice. >> Mhm. >> And maybe the the most salient example. of this came from Stanley Druckenmiller, who is this big investor, maybe not a. household name, but very well known in. the world of finance. And among other. things, used to be Scott Bessent's boss. >> Mhm. >> And he wrote a piece in the Wall Street. Journal, basically saying, "This isn't. going to work.". And the core of his argument is. basically, "The US has a a real problem.

here. with its debt and its deficits. And that what Bessent was doing, and. kind of anything that the Treasury might. try to do, is just papering over that. problem.". >> Mhm. >> And the only way that the US is going to. be able to bring down bond yields in the. long term is to get its fiscal house in. order. Which is to say, to cut spending. or raise taxes or some combination of. the two, so that it isn't running these.

big deficits year after year. >> These strategies are not long-term. >> These strategies are just kind of, you. know, painting over the crack in the. wall rather than dealing with the leak. that's actually causing it. >> You know, just to step out for a second, I'm thinking about what you said about. people who suddenly can't buy a house. The rhetoric around the housing market. in this country has been, in recent. months, "Interest rates are really high. It's a bad time. It's a bad time." It's. been sort of discussed as a temporary. status. But just listening to you in.

this conversation, I have this question of like, is this actually temporary, this. environment that we're in, or are we. entering a new, perhaps permanent, high. interest period? >> So, I I think that's exactly the right. question to be asking. So, that the yield on the 10-year. Treasury right now is around 5%. That is up a lot over where it was a few. years ago. It got down at the depths of.

the pandemic to half a percent. >> Mhm. >> And it's been running around it at, you. know, 2%, 2 and 1/2% for for years. But, if you go back to. way back to before the global financial. crisis and the Great Recession of of. 2008, >> Mhm. >> the 10-year Treasury was around 5%. And so, in some ways, what it may well. be is that interest rates are actually. getting back to normal on some level.

That really what has been abnormal has. been these 20 years of really low. interest rates. >> That is so interesting to think about. because this period of low interest. rates, I mean, that has been for many. people like the environment in which. they grew up. But, what you are saying. is that this low interest period, even. though it's gone on the last 20 years, that might be the aberration, not the. norm. >> That's exactly right. And and if that's. the case, then then we should not expect. interest rates to come back down to. those low levels again anytime soon.

>> Mhm. >> You talk to anybody now in their, you. know, 60s, 70s, 80s, right? And they. talk about sort of the first interest. rate that they paid on their first. mortgage, right? And you hear these. like, you know, numbers that are. eye-popping to us now. And I get emails. from readers all the time. Every time I. talk about high interest rates, I get. these emails. They're like, "What do you. mean high interest rate? In my day, >> You know, in advance of talking to you, I I was texting with my parents to ask. them what they paid in interest for.

their house that they bought in the mid. '80s, and my mother said it was 11% with. a variable rate that was as high as 18%. >> That's right. But, here's the thing. What did your parents pay for that. house? >> Mhm. >> Cuz the chances are they paid a lot less. than what a house costs these days. >> Mhm. >> And so, on some level, we've sort of. built this world around low interest. rates. And now, we're in this situation. where we have the high prices, the. unaffordable home, and.

the high interest rate. >> It feels like you're speaking about the. affordability crisis in this country. that we have talked about so much on the. show, and that is so present for people. in 2026. >> That's right. So, yeah, in in so many. ways, I think this all connects back to. the same issue of affordability. You know, we're all hoping that oil. prices will come down, and inflation. will get better, and and maybe it will.

But, this part of the affordability. crisis, how much it costs to borrow. money to to buy a house, or to buy a. car, to live your life, that part of it doesn't seem like it's. going to get better anytime soon. And. it's [music] quite possible it's going. to get worse. >> [music]. >> Ben Castleman, thank you so much. >> [music]. >> Thanks for having me.

>> Investors are now looking towards the. Federal Reserve, which is expected to. make a decision on whether to increase. short-term interest rates later this. week. But, no matter what the Fed decides, bond yields are likely to remain high. We'll be right back. Here's what else you need to know today. >> [music]. >> President Trump called Nvidia's chief. executive to complain that recent fears. about AI were nothing more than [music].

a hoax. The call came while the. executive, Jensen Huang, was speaking at. a conference in Los Angeles on Monday. [music]. Huang put the president on speaker so. the audience could hear the 5-minute. [music] conversation, which was recorded. by conference attendees. And the Supreme Court on [music] Monday. blocked the Trump administration plan to. dramatically change how Americans vote. by mail in the lead-up to the midterm. elections. A major loss for President. Trump, [music].

who has long claimed, without evidence, that fraud is rampant in mail voting. [music]. The ruling was a resounding win for. Democratic-led states and voting rights. groups, which had argued that the plan. was unconstitutional and an existential. threat to the Democratic [music]. process. Today's episode was produced by Shannon. Lynn, Michael Simon [music] Johnson, and. Eric Krupke with help from Claire Tanis. Getter. It was edited by Mark George and. Lisa Chow with help from [music] Liso. Bayliff. Contains music by Marion.

Lozano, Rowan Nemirow, Pat McCusker, Alyssa Moxley, [music] and Alicia. Eatoop. It was engineered by Chris Wood. Our theme music [music] is by Wonderly. >> [music]. >> That's it for The Daily. I'm Richelle. Abrams. [music]. See you tomorrow.