The bond market is signaling trouble ahead.
asserted
market → signal → trouble
This is why you should pay attention
If you know one thing about bonds, know this: A sharp sell-off is shaking the bond market, and it has big implications for both the economy and your pocketbook.
asserted
it → pay → economy
To understand why the sell-off matters, it helps to understand how bond markets work — and why they are sounding alarm bells about the U.S. government's record-shattering debt levels and the path for inflation.
asserted
they → understand → inflation
Here's a simple and handy guide to make sense of what's going on.
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what → make → sense
How do bond markets actually work?
Bonds are essentially like loans.
asserted
Bonds → work → loans
The U.S. government — like just about any other government in the world — needs to borrow money to afford all its spending, including spending on federal employee salaries and Pentagon projects.
asserted
government → need → salaries
So to raise money, the U.S. government regularly sells bonds to a wide range of investors, from banks to other countries to individual people.
asserted
government → raise → people
(Companies also sell bonds; those are called corporate bonds.
asserted
those → sell → bonds
And just like banks charge you an interest rate when lending you money to use for a credit card or when offering you a mortgage, investors expect to be paid interest in exchange for lending their money to the U.S. government.
asserted
investors → charge → government
In market talk, that interest rate paid by the government is called the bond yield.
asserted
rate → pay → government
Bonds can fluctuate in value, and that affects the amount of interest the government has to pay on that bond.
asserted
government → fluctuate → bond
It's a simple rule: Bond prices and yields move in opposite directions from each other.
asserted
prices → move → other
The reason is that if bond prices fall — like they are now — investors demand to be paid more in interest as additional compensation.
asserted
investors → fall → compensation
If bond prices are rising, investors are fine getting less in interest since they are holding bonds that are appreciating in value.
asserted
that → rise → value
It's not too different from how a financial firm could decide to charge you a higher interest rate for a loan if it's worried about your ability to pay it back — or to lower your interest rate if it feels you are a good customer who's always on top of their bills.
uncertain
who → decide → bills
Why are bond prices falling?
asserted
prices → fall → ?
In a very simplistic way, bond prices are falling these days because investors are mainly concerned about two things.
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investors → fall → things
First, that rising inflation is making the bonds they are holding worth less.
asserted
they → rise → ?
And second, that the U.S. government, under successive presidents, has had a habit of spending more money than it collects in taxes.
asserted
it → have → taxes
One of President Trump's first major legislative victories in his second term, for example, was signing a megabill that extended tax cuts that were implemented during his first administration — while also raising spending in areas such as border security.
asserted
that → sign → security
As a result of actions by Trump and past presidents, the U.S. debt pile is growing: In fact, on Wednesday the U.S. Treasury Department said federal debt hit a record-shattering $40 trillion for the first time.
asserted
debt → grow → time
That's a major reason bond prices are falling.
asserted
prices → fall → ?
The yield on the 30-year government bond, for example, hit its highest level since 2007 this week.
asserted
yield → hit → 2007
Most people don't actually believe the U.S. is about to go broke and find itself unable to pay back investors, but investors are worried.
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investors → believe → investors
Why should I care?
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I → care → ?
Bonds are critical to the economy because they influence interest rates that people pay on many things.
asserted
people → influence → things
What matters most is the bond yield.
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matters → matter → ?
Effectively, the interest rates paid by the government for its bonds become a useful benchmark for banks and other financial firms when they decide how much to charge for their own loans to customers.
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they → pay → customers
That's why hikes in bond yields can reverberate across the economy.
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hikes → reverberate → economy
Mortgage rates, for example, are influenced by the yields paid by government bonds (though there are other factors as well).
asserted
rates → influence → bonds
And at a time when bond yields are rising, it's not surprising to see mortgage rates also rise.
asserted
rates → rise → time
Last week, the average rate on a 30-year, fixed-rate mortgage hit 6.67%, nearly the highest level in a year, according to Freddie Mac.
uncertain
rate → fix → Mac
Rising bond yields can also push up interest rates on credit cards, car loans — and all kinds of borrowing costs across the economy.
asserted
yields → rise → economy
And, obviously, rising bond yields impact how much the government itself has to pay in interest.
asserted
government → rise → interest
The slumping bond market is sending yields sharply higher, so much so that the U.S. is now paying $3 billion in interest per day.
asserted
U.S. → slump → day
In fact, interest payments are now the government's second-biggest expense, trailing only Social Security.
asserted
payments → trail → Security
That has been a big talking point on Wall Street.
But keep in mind that these are two completely different markets.
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these → keep → mind
Bond investors care, primarily, about whether they'll get paid back.
asserted
they → care → ?
Hence, they demand higher interest rates when they start to get worried.
asserted
they → demand → rates
But stock investors tend to make a more straight-up bet on corporate profits.
asserted
investors → tend → profits
…and 6 more, not listed.
The Aporia
