The Bond Market Selloff is Showing up in Earnings Reports

**Tyler Crowe** (0:02)
The bond market is talking a lot louder. Motley Fool Hidden Gems Investing starts now.
Welcome to Motley Fool Hidden Gems Investing. I'm your host, Tyler Crowe. Today, I'm joined by long time full contributors, Lou Whiteman and Matt Frankel. Earning season is still happening. We're winding now. We're going to cover a couple of earnings reports today from Klarna and Home Depot. But before we do, guys, the bond market is moving a lot more than it normally is, and it's moving in a direction that most people aren't a big fan of right now. Bond yields are the dividend yield basically of a bond or how much it's valued is rising, which basically means that people are not as willing to pay as much for bonds. This isn't just happening in the US either. Yields on government debt in many countries are hitting 20-year highs right about 2007 numbers, which when people hear that number 2007, a lot of alarm bells start to go off because we all remember what happened in 2008 through 2009 When we had high bond yields and the mortgage markets started to do things that we didn't want it to do. Of course, we got the Great Recession. Not saying that that is happening now, but we are seeing some of the highest yields we have seen in a long time. Guys, what is going on? Why is this all happening at once?

**Matt Frankel** (1:13)
The last time the 30-year treasury was this high, like you said, Lehman Brothers was still one of the largest Wall Street firms. It's been a little while. If I'm a retiree and I need to shift some of my portfolio to fixed income, I'm loving this, but for most of us, it's not a great thing. This isn't the Fed's doing. The long-dated end of the yield curve, meaning the 20-year, 30-year treasuries, it's primarily market-driven. Remember in 2023 when the Fed rapidly raised interest rates to combat inflation and short-term interest rates spiked over 5 percent?
The 30-year yield was actually lower than it is now. If investors expect rates to stay higher for longer, if there's added uncertainty, let's say a Fed chair who doesn't believe in forward guidance, for one example, or if debt issuance is unusually high, like a combination of a lot of government borrowing and a surge in corporate debt, it can push long-term interest rates higher. So you're right that this is global. This is not just the US issue. Japan's 10-year is at its highest yield since 1996
UK's 30-year bond is approaching a 6 percent yield. I can go on, but investors expect more compensation on top of inflation to hold long-term bonds because there is simply more supply to go around.

**Lou Whiteman** (2:25)
Matt's right, this is not the Fed's doing, but it's also kind of the Fed's doing, which is kind of the problem here. There are two things going on. First, the market is looking around the industrial world and seeing no end to budget deficits. When it's happening in the US, it's happening in Europe. Higher debt means more risk, so investors are asking to be compensated for the added risk. That's how the bond market works. But secondly, and this is where the Fed comes in, there is this lingering worry about political independence of the Fed and the Fed's ability to act if needed to raise rates and combat inflation.
I hope those fears are overstated, but I think they are justified. And until the Fed proves otherwise, it is in the penalty box with investors. The credibility of the Fed is probably its best tool for keeping rates down or to at least tamper rate expectations. So to the extent that it is not credible right now or less credible than it was, that's a big thing driving the 30 year in the US. Around the world, there's country-specific issues going on everywhere, but got to remember, this is a global competition for funds. If the Fed is paying more, it forces competition, it forces everybody else to pay a little more because they all want to attract flows. Couple that with what's going on in corporates, Tyler, which I think we'll get to next. There's just a lot of people battling for bond funds right now, and that is causing rates to go up to try and entice people to choose them.

**Tyler Crowe** (3:53)
For those of you who aren't Motley Fool members, maybe this is just the pitch to becoming a member. The three of us actually did a live Q&A yesterday where we were talking about this too, with the supply and demand of debt in general is way up. With that much extra supply, obviously the people who are buying it could be a little bit more choosy. What do you call it? The buyer's market, if you will.