What's Next for Bonds?

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Luke Vargas (0:26)

The Trump administration targets the Bar Association's ability to accredit law schools. Plus, the White House considers opening up the fight against foreign criminal groups to private companies.

James Rundle (0:37)

So variations of this have been kicking around Washington for years, but until pretty recently, the mainstream reaction was basically, absolutely not. Like, nobody likes the idea of armies of corporate hackers roaming the internet and dispensing their own version of justice.

Luke Vargas (0:50)

And we'll look back at the wild week that was in bond markets. It's Friday, August 21st. I'm Luke Vargas for The Wall Street Journal, and here is the AM Edition of What's News, the top headlines and business stories moving your world today.

Investors appear to be closing out the trading week on a cautious footing, despite moves by the Treasury Department to curb borrowing costs and arrest a multi-day bond sell-off. And joining me to look back on the volatility we've seen in bond markets, whether it's run its course and whether everyday investors should care, I'm joined by Finance Editor Alex Frangos.

Alex, I'm going to put my chips on the table here. I'm a millennial. My long-term investments, my retirement accounts are not very exposed to fixed income at this point. But there were points this week where I sort of thought, I really need Alex in here to break this down and explain the so-what of all of it. So we're counting on you here. What has been happening the last few days and why is it so consequential?

Alex Frangos (1:47)

Well, what's been happening is at the heart of financial markets and even if you don't own bonds, US government debt is kind of the sun around which all financial markets orbit.

And what's been happening is the yields on that debt with the government has to pay to borrow money has been going up to multi-decade highs. And that trickles through to the rest of the economy because all other debt is benchmarked against that debt. So what that means is if you borrow money for a house or to buy a car, that is going to go up. And so that's why it really, really matters. It's also the number one alternative for investors. You mentioned you have all your money in stocks. Well, stocks go up and down a lot. They're very volatile, whereas bonds pay a steady coupon. And that coupon is rising, meaning it's making it more attractive to own bonds. So that can have big ripple effects on the stock market when investors say, oh, I'd rather just own that government debt. This is going to pay me 5 something percent. And I don't have to think about it.

Luke Vargas (2:47)

Okay.

And in terms of the factors that have fueled this bond sell off, and I've seen a lot of stuff put forward, we've seen budget deficit concerns, which the PM show talked about a little bit yesterday, a lack of a solution in the Middle East, shifting demand for US treasuries among foreign investors, even the AI buildout and all the borrowing occurring around that perhaps I could go on. To you, what are the most credible explanations here?

Alex Frangos (3:09)

It's a bit of a mystery why yields on the long end are going up. There's a bunch of factors that could be at play, but one of the major ones that people are pointing to is there's just a lot of demand to borrow. The government has this huge deficit, the biggest that you'd see outside of wartime or recession when the government's trying to boost growth.

And then you have this massive AI buildout. So you have companies that didn't need to issue debt, like Google and Facebook's owner Metta and Oracle, who were borrowing a ton of money.

You have some inflationary pressure, oil prices are gone back up because of the stale made in the Persian Gulf. So there's a mixed vegetable soup of factors that are causing bond yields to rise.

Luke Vargas (3:50)

Very tasty. I mean, just quickly on government deficits, we heard Treasury Secretary Scott Besson speaking on CNBC yesterday and saying, there's nothing magic about the $40 trillion number. That's what the US debt recently ticked past and that the US can grow its way out of that. Is that still a credible explanation for markets?

Alex Frangos (4:10)

Well, yeah, I should mention that another reason that long-term bond yields rise is because investors are expecting growth to be higher and so that can also be a factor. But you can't deny that the stock of debt as a percentage of the size of the economy, which is one easy way to measure it, has grown as over 100 percent. You had that $40 trillion number come out this week. That's just a round number. It's more symbolic. The economy has also grown massively over the years, so you have to take that into account. But people are worried. Is this a loss of confidence in the US's fiscal rectitude and ability to say, look, we're going to raise enough revenue through taxes to pay off our debt? There's some reason to think that was a little bit overblown, those concerns. But the thing that people are looking for, are we going to hit a breaking point where borrowing costs go up so quickly and so high that it spooks people?