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SPEAKER_1 (0:00)

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Kristin Schwab (1:02)

Today on the show, we'll dig into bonds and Fed policy theory, and we'll look at a less traveled path to home ownership. Would you share a mortgage with your best friend? From American Public Media, this is Marketplace.

In New York, I'm Kristin Schwab, in for Kyra's Doll. It's Wednesday, September 9th, and it's good to be here with you.

$100 a barrel. That was the big mental marker of a number that oil prices passed today after the US attacked several Iranian oil tankers. There's a bit of deja vu happening here. The last time oil prices were this high was back in July. Stocks are, of course, reacting. So are bond yields and not just long-term yields. This morning, the yield on the two-year Treasury note hit its highest level since July of 2024 Marketplace's Justin Ho looks into why short-term yields are spiking and what that says about the economy.

Justin Ho (2:08)

The reason why short-term Treasury yields are rising is all about inflation, because higher oil prices affect the cost of all kinds of things.

SPEAKER_4 (2:16)

Whether it be construction expenditures that go into the housing markets, or whether that be the cost of delivering toys to a big box store, etc.

Justin Ho (2:27)

That's Guy LeBah, Chief Fixed Income Strategist with Janney Montgomery Scott. He says if inflation stays high or goes even higher, thinking is the Federal Reserve is probably going to hike interest rates.

SPEAKER_4 (2:37)

We have a new Fed chair who is at least threatening to be a little bit more aggressive in raising interest rates and fighting inflation.

Justin Ho (2:45)

And that expectation tends to have more of an impact on short-term treasuries than on long-term bonds, says Luke Tilly, Chief Economist at Wilmington Trust.

SPEAKER_4 (2:54)

The shorter end of the curve is definitely going to be influenced by short-term inflation and where market participants and traders think that the Fed is going to go with rates.

Justin Ho (3:02)

In fact, over the last few months, short-term bond yields have been rising at a faster pace than long-term yields. That's also happening because long-term bonds reflect other factors, including how fast investors expect the economy to grow. Winnie Caesar, Global Head of Strategy at Credit Sites, says if the Fed is going to hike interest rates.

SPEAKER_5 (3:20)

That is explicitly because they want to slow something down. Companies are going to be investing less, they're going to be hiring less, and that brings down growth expectations.

Justin Ho (3:32)

It causes long-term rates to rise more slowly.

Caesar says it's not necessarily a bad sign when short-term rates rise at a faster pace. If long-term yields were to rise too quickly, that could be a sign investors think the Fed is letting inflation get out of control.

SPEAKER_5 (3:47)

And so if you have the long end of the yield curve that's just kind of spiraling higher, then that is an indication that some sort of policy mistake has probably been made.

Justin Ho (3:58)

Instead, the fact that short-term yields are rising at a faster pace is more of a sign that investors expect the Fed to succeed, as is Luke Tilly with Wilmington Trust.

SPEAKER_4 (4:06)

The Fed may need to hike rates a little bit in the short term, but over the long term, you'll still have economic growth.

Justin Ho (4:14)

And inflation would be generally under control. I'm Justin Ho for Marketplace.

Kristin Schwab (4:20)

Wall Street Today, well, I think you know where this is going. We'll have the details when we do the numbers.

Justin was just telling us about what the bond market might be saying about the Federal Reserve and interest rates. Well, lately, it's been kind of tricky to figure out what the Federal Reserve is saying about interest rates. Will they raise them? Will they hold? We'll find out at next week's Federal Open Markets Committee meeting. In the meantime, we've called up someone who can help us read the economic tea leaves. Randy Krosner is at the University of Chicago Booth School of Business. He served on the Fed's Board of Governors with Kevin Warsh a couple decades ago.