Why the Bond Market Has Everyone On Edge

SPEAKER_1 (0:02)

Bloomberg Audio Studios, Podcasts, Radio, News.

Stacey Vanek Smith (0:08)

Only you could bring in the Bible, Schumpeter. I was going to bring up the portrait of Dorian Gray.

The bond market, it has been grabbing headlines and roiling global markets and everyone seems pretty worried. But the bond market is vast and it is very complicated. To talk about the bond market, we need a guide. So to help us suss out this moment, we have friend of the show, John Authers, Opinion columnist at Bloomberg. John, you came on and talked about bonds with us a couple weeks ago and we had to pester you again because the story won't go away.

John Authers (0:46)

No, it won't. It's a fact of life. Bond markets are very powerful in ways that you don't really personally experience immediately in your life, but they really are one of the most powerful influences on the world.

Stacey Vanek Smith (1:01)

Yeah. I mean, you've called the 10-year Treasury note the most important number in the world, I believe.

John Authers (1:09)

In world finance. In world finance, yes.

Stacey Vanek Smith (1:14)

This is The Big Take from Bloomberg News. I'm Stacey Vanek Smith in for David Gurra and Sarah Holder. Today on the show, Bloomberg columnist John Authers weighs in on the latest with the bond market. How we ended up on this roller coaster, why markets across the globe are feeling the consequences, and how worried should we be?

John, how does the bond market show up in our life? How does it affect us?

John Authers (1:45)

Well, the key thing for most of us is that it effectively sets the baseline for interest rates on which all other borrowing, frankly, across the world financial system is based. So the closest approach to a risk-free rate that exists over a long period of time would be a long treasury bond.

The only way you're not going to get paid is if the US goes bust, and as the US can print its own supply of dollars to do that, that's very unlikely.

Stacey Vanek Smith (2:19)

A bond is essentially a loan. A 10-year treasury note is essentially a loan that you would give the government. You'd loan it your money for 10 years. At the end, it would pay you interest on that loan, plus your money back. That's the yield. Lately, the yields have been quite high, relatively speaking. They've been rising and rising, which means the US is paying more interest on its loans, which means borrowing is getting more expensive.

What are some of the main reasons why this is happening?

John Authers (2:51)

Well, the main reasons we could look at are, first of all, there are other people looking to borrow.

When you have competitive people asking for your money, offering you an appealing rate that they're very likely to be able to pay to you, then the need becomes greater to offer a higher rate to your creditors. And that means that the overall bond rate will go up. So in the case of...

Stacey Vanek Smith (3:19)

So competition, essentially.

John Authers (3:20)

Yes. So at the moment, there is immense competition for lenders' money because of the huge buildup for artificial intelligence. Those bonds that are being taken out by the giant companies to build data centers aren't as safe as a 10-year treasury, but they're about as safe as loans are going to get. And they are offering very attractive yields.

Then you have the steady move in inflation.

Stacey Vanek Smith (3:53)

So that's reason number two. We've got competition and reason number two is inflation. Yes. Explain how that gets into the bond market.

John Authers (3:59)

So if you're lending over 10 years, you are being promised $10 per year or whatever. And the US being the US, you're going to get those $10 a year. The risk you're taking is that thanks to inflation, those $10 buy you less and less as the years go by.

Stacey Vanek Smith (4:19)

Oh, yeah. By the time you get your money back, you can't buy anything.

John Authers (4:22)

Precisely. So next, there is the issue of how the central bank will respond. Central banks don't set long-term rates. There are some exceptions to that in recent years when central banks have intervened to try to limit long-term rates. But you can set what the overnight rate is going to be for banks if you are a central bank.

Stacey Vanek Smith (4:44)

This is the federal funds rate.

John Authers (4:45)

Yes.

Stacey Vanek Smith (4:46)

So that's what the Federal Reserve controls. But that does trickle down quite fast.

John Authers (4:50)