The Bond Market Chaos Is Coming for Us All

0:02 US Treasury Market is the most important financial market in the world. Barnun. Nothing is even close. Most of us don't participate in it directly. We don't go in the morning and buy treasury bonds, but treasure bonds do

0:39 define everything from how the stock market ends up performing to the cost of a mortgage. A carlon. A credit card. There is almost nothing financial. They do not touch.

0:51 And the US Treasury Market, it's been Looking a little weird lately. The cost of borrowing for the US government is going up. Probably because our debt recently passed$40 trillion, we now spend more on interest on that debt yearly than we spend on the entire defense budget. Also, Donald Trump has been more and more erratic. There's never been in history.

1:12 The kind of money coming into a country. As we have right now. His treasury secretary Scott Bessent has been making some more aggressive moves into the market. Yeah, think of it as pulling back the slingshot here. We have a lot of potential energy that will turn into kinetic energy. What is going on with US treasuries?

1:29 Why does the Trump administration seem so freaked out? And what might happen from here? Robin Wigglesworth is the editor. the Financial Times blog Alphaville. He's co host of their podcast A Story of Money, and author of the forthcoming book, A fabulous debt.

1:45 The epic story of how bonds built. the modern world. A quick timestamp here because a lot is happening in the bond markets lately. We spoke on Monday, August twenty fourth. Mm.

2:01 Robin Wilkinsworth, welcome to the show. Thanks for having me on. So I wanted to begin. With this clip of Donald Trump being asked last Friday. About Treasury Secretary Scott Besson's recent interventions in the bond market.

2:13 Did you Not at all. No, he's a very capable man. He wanted to do it. He's very good at it. He has a good touch. Very good natural touch for the bonds and interest and

2:28 He did that, yeah. Can you talk to him about another type of intervention? Is that something he will be able to do? We have many types of intervention. That's one The ultimate intervention is our military. And uh if we have to use that we will. Yeah. So I'd say that escalated fairly quickly.

2:46 Uh I've not heard of people trying to use the military against a bond market before. Why don't we start in the more comprehensible What is Scott? Messen been doing.

2:57 Well, it feels a little bit like he's doing a bit of a kitchen sink approach. to bringing bond yields down. The core reason is that bond yields are price of the US Government borrowing flows into everything else and clearly before the midterms, they would like interest rates and bond yields to be lower to make affordability better for for American households. But

3:19 In the toolkit that the Treasury Secretary has There's actually not that much. And Bessant seems to be really trying to kind of Use some wear tools for purposes they weren't really designed for. Breaking market news for you. The Treasury Department is doubling the size of liquidity support buyback operations that are being used for longer dated nominal coupon securities. And you know

3:43 Jacking up the buyback program. buy a few billion dollars, even ten Xing it is not going to move the needle. Which is why people are scratching the heads over why he would do this and why, frankly, after the initial reaction. uh treasure yields have started coming again. I think to have

4:00 this conversation w we need to just Set the table on this whole Structure of it. People sometimes see flash buy them on C N B C or in the financial pages. But maybe don't have that much familiarity with.

4:13 So just at the simplest level. What is a US government bond? US government bond is a tradable loan issued by the US. So bonds are just tradable loans. You can buy them, sell them, they pay a a fixed interest rate.

4:27 And they're kind of designed to be able to buy it and sell it very quickly unlike a conventional loan. And the US government is the biggest government in the world, it's the most powerful country. It is at the apex of the entire global financial system. So that's why treasuries are so important and why everybody loves having them. They're kind of the most easily tradable Uh. Bond.

4:51 on the planet. And one of the reasons why the US government could fund itself so cheaply is because everybody loves buying them. And they love by them because they're safe. If you have a You know, a share of Tesla stock. Or if Apple stock.

5:06 Or of all kinds of things. Even a good bet. for a company over a 10 year time frame is pretty unpredictable. But if the US government says, you know, you've bought this bond at five percent That bond is gonna pay you five percent.

5:20 For ten years or twenty years or thirty years or whatever it is. And then give you The underlying money on the loan back at the end of that. Like

5:28 Clockwork. Yeah. And that's what makes it such an important global financial instrument, that people need something that is perfectly reliable. And the US Treasury Bond is considered as close to perfectly reliable as any financial instrument. On earth. As crazy as it sounds sometimes to Americans, but yes. Uh I would say that you know there are multiple pillars to this. And one of it that it's safe. That if I lend money to the government not just over the next five years, the next thirty years

5:55 I'm pretty confident that there will be a US government around in thirty years. You couldn't say that about every country on the planet, or even most companies. You know, companies do go bankrupt as well. Uh but the US government That feels pretty safe. But I'd say one of the underappreciated pillars of the treasury market is that it's so easy to buy. a ton of them or sell a ton of them. It's liquidity, which is kind of a weird financial jargon word that gets

6:23 Abuse. a lot, but it just means it's you can buy and sell something very easily. The treasury market. I mean that trades a trillion dollars a day. And that's why, you know, whether you're a pension plan in Denmark, a sovereign wealth fund in the Middle East, a central bank in Brazil, for example, everybody likes treasuries because

6:43 Even if you have hundreds of billions of dollars worth of them that you know you're gonna be able to sell a lot of them very quickly if you have to. And that's Almost like the magic source that that that helps keep the treasure market aloft even though

6:59 Concerns about US indebtedness have been growing for what Generations now. So that's the financial plumbing side of it. That's why the treasuries end up being so crucial to the financial system. They're they're the liquidity. They're like what what runs through the arteries of the global financial system. But

7:17 Let's say I am not a pension fund. I am not the Brazilian central bank. I don't, to my knowledge, own any bonds. Why do I Care.

7:27 Does this affect or could this affect Me as a normal person. Unfortunately, yes, it will affect you. I mean stepping really Far back. The bond market, you know, it seems boring. People don't care about it as much as the stock market, but really is the bedrock of the entire global financial system. It's where governments fund themselves, it's where banks fund themselves, actually. sets the costs of money for governments, for companies, for households, through mortgages, car loans, student loans, the whole

7:57 Nine yards, essentially. And it flows into the stock market as well. If bond yields go too high, if borrowing costs are too high for companies, well actually it it Causes the stock market to wobble as well. And that's why we've seen people like Bess and Trump, they actually care less about the stock market. than people think. Remember Liberation Day? The stock market crapped out quite violently. It was actually when the bond market

8:20 Started to buckle. That best sent in Trump very quickly said, Hang on the bond market is getting yippy, as Trump put it. We need to take a time out. And I think that's quite indicative of how they see the relative strength and importance. That the stock market can fall and it's not great. Trump wants it to be higher.

8:38 But the bond market buckling, the bond market throwing a bit of a tantrum, that has a real economic impact very quickly and can get quite scary sometimes. Yeah, I want to hold on this point that the bond market is bedrock of how much everything else costs, because I think it's worth expanding this. So you think about an affordability agenda. The cost of everything is the central political issue now. The stock market affects how rich people both feel and are.

9:03 The bond market affects how much you pay for things right now. So when you are getting an auto loan, when you are getting a credit card or paying credit card debt in the future. All of these things are set on top of the cost of money. In the treasury market. And so if Treasuries are paying out at three percent.

9:22 It's three percent plus X plus whatever they think they need to add on top of that. If treasuries are five percent If there's seven percent. Then mortgages Auto's everything else.

9:33 Are five percent, seven percent, nine percent. Plus something on top of that. And so you you're kind of creating The base layer.

9:43 is going to cost. To say nothing of what happens if you actually begin having volatility in that market, then things get really scary. We've not really seen as much of that yet. But this has been going up now in a kind of persistent way for a couple of years. And if you're Donald Trump, you're the Republicans.

10:01 And you want people to feel things are getting cheaper, it is very, very, very, very, very hard. To get people to feel that life is getting cheaper. If the cost of money Which again Everything else basically is going up.

10:14 Well, Treasury Secretary Scott Bessant has a three three three plan, as he's dubbed it. He wants to lower the budget deficit to three percent of GDP. He wants to get three percent economic growth, and he wants to increase oil production in the United States by three million barrels a day. How are we doing on that? Not well, I think. But this is a global issue because the US is the world's most important economy and its financial system is huge. You know, when I borrow money here in Norway, I'm essentially competing with US Treasury. The US government is the the risk free rate. It's the safest government bond market, the biggest, the most liquid government bond market in the world. The US Treasury market is thirty two

10:56 Trillion dollars. So when treasury yields go from two percent or three percent or four percent or five percent there, I'm paying spread on that. When I borrow from a Norwegian bank, everybody is in some way or respect competing with the US government for money. But broadly, that's why when the US bond market sneezes, the world can catch this cold, and that's just when it sneezes, when it has a a the flu. It gets really nasty. That's the volatility that you mentioned.

11:21 You know, I have thought about treasury bonds more than probably most people have. I've covered this in and out and debt ceiling crises and all the rest of it for many years. But I have never Even to this day, I don't have a conceptualization really. Of how these bonds are bought and sold. Is there a website they all log into? I mean, how quite literally?

11:40 Are you Bonds bought and sold. They are quite literally bought and sold all the time, albeit not in a in a big marketplace. So the first bond market is now a a food market in in Venice in Italy. And now it's all electronic on Bloomberg terminals, for example. But It has evolved over the years, but the US now is a big borrower, so it's got pretty strong processes built up around this. It wants to be predictable, it wants to be steady, it's a responsible actor. You can buy treasury bonds, you can put in bids on websites as the government has set up, you as an individual. But most of the big buyers, the central banks of

12:15 Tajikistan or Pension Plan in in Mexico, they'll buy through banks, a club of banks called primary dealers. And they're kind of serious bigger organizations like JP Morgan and Goldman Sachs in return for promising to make markets, making sure that the markets are steady, there are buyers and sellers and they'll match them. They are are allowed to bid at auction. From the US government. And and so then I mean this is a very basic question, but How is the yield we're talking about, whether it's three percent or where it is now four to five percent.

12:51 How is it set? It just it's supply and demand that morning, how many people are buying, how many people are are selling? Like what what is happening that lands us on any given day at, you know, four point two percent or whatever it might be? Well, I mean they look at where they're already trading, uh but the banks will basically come up with an idea. or what they think they should pay. depending on what the the the demand is. Most of the time these auctions are non-events. They're kinda designed to be boring. You don't want excitement when the US government is issuing debt.

13:22 But occasionally there are little cobals. For example, you know, we saw this recently. There was slightly limp demand for an auction of a thirty year treasury bond. And suddenly that that yield the US government had to pay a bit of extra on top. And that kind of Calls concerns.

13:40 Well things be getting less boring. So walk me through the story of the bond market over the past I mean you can choose the time range here, but you know, five Ten years. How much higher is it than it was?

13:54 And What Is it that is starting to get people nervous about where it's going from here? Well, I guess I mean so much in the world can be divided into the pre-global financial crisis and post global financial crisis. So let's start then. The US, you know, it's crazy at us now, but you know, Ezra, when you and I were younger, a debate in the United States was what would happen if the US government had no debt?

14:16 Like in the nineties, people were genuinely worried that the US government might run out of debt. It was it had budget surpluses and it was paying down debt. So how does the financial system when Operate. Doesn't exist. Now of course it's just radically different. The big change was the financial crisis.

14:34 countries around the world just had to borrow money. And and you know. support economic growth for years afterwards. And we've never really recovered from that. Now financial crises causes these massive, usually like seven year hangovers, economically speaking. And Governments quite rightly.

14:54 decided we need to spend our way out of this. But then of course, you know, it's it's a hard habit to Kick. And then Covid came and just kind of jacked all those trends up. To new levels. I mean, we saw, you know, recently uh the US government debt burden has crossed the$40 trillion mark. That's a lot of debt. Uh it's a record shattering amount of debt. Uh people I want to give people a bit of uh context on this. So that means in interest, we are now paying every year in debt interest

15:23 More than we are spending on defense. Yes. Uh for the first time in almost a century, in fact, since World War Two. And it's it's huge. And that's because, you know, the US borrows a lot of money, has borrowed a lot of money in the past, but also that debt is becoming more expensive as interest rates have gone up. So the US is essentially has lots of bonds that used to cost it maybe one or two percent a year. Well, they're getting refinanced. Because governments always borrow more money to pay back the old money, that's getting refined at a higher and higher rate. And that's just kind of jacking up the interest rate burden. So I was always like I've never been hugely worried about government debt, the size of it, like it's big, but

16:03 It's not money we owe to Mars, it's money we owe to ourselves, broadly speaking. But now seeing you know Covid, you know Yeah, it's a decade, half a decade since we emerged from from the hangover there. And budget deficits are in most countries as large as they've ever been, if not, you know, certainly not much smaller. And that debt burden just keeps growing bigger and bigger. And and Jay Powell, he was asked about this by some students. uh shortly before he stepped out of his chair, was pushed out out as chair. And the students ask him, you know, should we worry about this? And he said, The level of the debt is not unsustainable, but the path is not sustainable. And I think that's the nuance here. That I think people are too worried about the debt where it is now, but of course, the trajectory just doesn't look good. I mean the US, like you said, is already spending more money on on this paying

16:51 It's interest spill. Than it does on defense. that typically no only happens to great powers in in times of great emergency, major wars and things like that. And um You know, I think over the next twenty, thirty years, if the present conditions continue the US debt burden is gonna go from uncomfortably high to monstrously big.

17:12 That's a worry. If you're not a subscriber to the New York Times, we have some news for you. You can now explore the Times for free without any paywalls at all during your first month in the New York Times app.

17:43 Alright, so that's one thing that's happening. You're having uh uh the government has to buy more or sell more bonds rather because it has to finance this increasingly large debt. What else is going on? There's inflation. We had that massive uh burst of inflation after Covid. Uh supply chains went kind of haywire, uh Russia invaded Ukraine. There was a lot going on. Uh uh

18:04 Lots of people always think inflation is uniquely domestic, but this has been a global problem. And central banks maybe belatedly jacked up interest rates to kind of dampen down the economy, dampen down prices. And it's it's it's it's it has worked, but they haven't maybe gotten that last mile. Down. So inflation is in most countries slightly above target, including in the United States. And you know, the recent war on Iran has not helped. That has blocked off uh large parts of energy that used to flow through the Straits of Hulmuz.

18:35 And that has pushed up energy prices and has kind of made people uncomfortably aware that inflation never got back down to the central bank's two percent target and might very easily drift higher from here. And that's not great for bonds. Inflation is kind of the the arch Nemesis of bonds because a bond pays a fixed interest rate. So that's so it pays five percent a year. Well, if inflation is five percent, then essentially you just running to stand still, so it becomes less valuable. If I had to be maximally generous to that Trump Clip I played at the top. This is what I think he was saying. That if you listen to Scott Besson, if you listen to Trump when they've been talking about bonds,

19:11 They're talking about bonds as Often the primary problem is Iran. I don't think that's true. But I think that when Trump is saying the ultimate intervention. Is military

19:23 He's saying that about they could re-engage military intervention against Iran. Uh now that The reality is that hasn't worked. So again, I'm not sure why that would bring down bond yields.

19:36 But The best in Trump argument seems to be that The treasury markets are looking weird, the bond yields are going up because of the transitory influence. Yeah. Do you

19:51 By that actual argument that this is all a transitory Iran driven phenomena. Well, I agree with your interpretation about what Trump was talking about, even though I got a lot of panicky text messages from bond investors uh after that clip. Uh slightly tongue in cheek, of course. Um And to a certain extent, I agree that, you know, open the streets of a moose. Bring peace to the Middle East. Energy prices come down.

20:17 things will quieten down. But the the underlying issue is this the size of the US indebtedness, the size of the budget deficit, which, you know, we are now running sort of full wartime levels of deficit at a time when the economy is actually doing pretty well. And also the fact that Trump has put a new chair of the Federal Reserve in and he seems unwilling Maybe because from instructions from his boss, to raise interest rates. Th the Fed can actually do a lot to bring bond yields down and inflation down if it just raised interest rates a little bit. And that seems to be the step they just are unwilling to take for whatever reason. Why does raising interest rates bring down Bon yields. Well

20:56 Inflation should be, you know, it's a sense of there's more too much money sloshing around the economy. If you raise interest rates, you raise the cost of money, there's less of it, and it should dampen the economy. But a lot of it's just signaling. It's vibes. And for bond investors, a federal reserve that says we are willing to raise interest rates shows that they're willing to do what it takes to bring inflation down. they will be feel reassured and you'll see those kind of 10 year bond yields, the thirty year treasury yields, they'll come down, I think, pretty quickly if the Fed kind of Maned up and and and and decided to it raise interest rates.

21:32 So one other argument I've been hearing is that the Level of AI build out. The amount of money that the various AI companies are borrowing in order to finance all this infrastructure, the data centers, the energy That that's actually creating a

21:49 the private sector is almost crowding out demand for bonds because they're soaking up so much investment that some of it might normally go to treasuries, and that is reducing the demand for treasuries and pushing up the um amount of yield. the government has to pay. Do you buy that? On the margin, yes. And the AI build up is Staggering.

22:10 remarkable in scale. It is huge. Uh and that is having an effect on the margins. But we're still talking uh. I think globally. Uh in AI related bond issuance. Half a trillion dollars.

22:24 Now that's that's big money even today. Half a trillion dollars, you know, it matters. But it's mostly displacing other corporate issues. Like other companies are finding it a little bit pricier to borrow. The US Treasury Yes, I'm sure maybe adds a a few basis points, like a s smidgen of a percent on the top, but it is not massively meaningful for the the cost of US boring. There are so many other larger forces at play here. So it's a factor, but not the factor.

22:53 And then one of the other things people have been talking about is that hedge funds are playing a different role. In the treasury market and they are Introducing volatility that wasn't there before. Can you explain why? Yeah, I mean this is a a huge topic and I still think probably under discuss. So if you cast your mind back to sort of the

23:13 the the two thousands, uh there was all this talk of a global savings club. So you had all these central banks and and investors around the world were saving a lot of money and they were putting into treasury bonds. uh and you could see the the foreign ownership of the treasury market became very big. And it was mainly central banks and sovereign wealth funds. And they were known as price agnostic investors. They were buying treasury bonds because their liquidity they were very easy to buy and sell, not necessarily as a sort of to make great returns. That has stabilized and even shrunk a little bit. This global savings glut is looking a little bit less glutty. Yeah.

23:51 Mm-hmm. And the treasure market has at the same time grown enormously. over the past decade. And Into the breach.

24:01 We've seen hedge funds step it. But it has meant that the treasury market has become increasingly beholden to hedge funds. So I think it's gone from around two percent to close to eight percent. So Officially now hedge funds. own more the treasury market than

24:17 Japan and China and Saudi Arabia combined. And that's a huge change. And normally that doesn't matter that much. Because you know, you want a diverse ecosystem and hedge funds are playing an important role in the treasury market. Ha a valuable role, I'd even say. But they are also very leveraged. They borrow money to hold these treasury bonds. So let's say you put down ten million dollars.

24:44 Well certainly a hundred million dollars. You can buy a billion dollars worth of treasury. So if suddenly the cost of your leverage you're borrowing that goes up, well then you're just shaking out of that trade. Uh uh and that I think is something that policymakers, I'm Janet Yellen's talked about this before. Uh I'm sure Scott Bessant is aware of this issue. I think this is one of the reasons why they backtrack quite quickly when the bond market started quivering a bit after Liberation Day in April twenty twenty five. Uh but it is definitely one of the biggest fault lines running through the financial system right now. And the concern here is that hedge funds when they're leveraged.

25:21 Compared to the way. Pension funds act or the way other central banks act. Things can happen that require them to move much faster. Yeah. So you could have correlated.

25:33 sell offs of treasuries happening very, very quickly. In a way that would not be typical of the way central banks act under pressure. Yeah. Normally when there's no An economic crisis, treasury yields fall because people buy treasury bonds because they're safe and solid and you want to get the hell out of stocks. Uh but

25:52 Because of this dynamic, you can see different uh phenomena. happen. We saw this in March twenty twenty. We saw this in April twenty twenty five, when treasury yields actually started shooting higher. as Treasury bonds were sold off because hedge funds were essentially being shaken out of those trades. They were very heavy leverage. That means that they're not strong hands. You know how you know mean stock traders talk about diamond hands, they're never gonna sell GameStop. Well, hedge funds are not

26:18 Solid hands all the time. And so we've gone in this period in this Post financial crisis period. To now. From a place where

26:28 The borrowing cost for the US government was just incredibly low. Yeah. I remember back when I was at Wonk Blog at the Washington Post and we would constantly because we were we were arguing that we should actually borrow more at that time and invest in infrastructure. We constantly put up these 10 year Uh tables. Showing that Uh

26:46 A real raid. The borrowing cost was negative. That when you took inflation into account, people are almost paying the US government to borrow because they were so desperate. for US government debt because it was safe, because it was liquid, because you could actually work with it at a time of of great uncertainty. So One

27:05 dimension of the US economy in that period was we had incredibly borrowing costs. And just slowly and then kind of post-COVID more rapidly, and then post-Trump more unpredictably. That's been changing. you know, you're not gonna get that two or three percent mortgage anymore. And so you're you're having this sort of like

27:24 stepping up of the ladder of how much our money costs And It this year has felt to me like the year. When people are starting to think Oh, this is gonna change the way you should think about

27:38 The US economy going forward, if something doesn't happen, because people felt the inflation a couple of years ago was transitory. The Fed would bring up rates. And it would bring it back down. But the way the Trump administration is spending the lack of predictability in US policy. It seems to me that there's a shift. in bond markets, in the conversation about how to think about the US. So

28:00 What is the shift? has multiple dimensions. I I agree with everything. And it was r remarkable, right, how low Bond yields were for a long time, and obviously it was a a sign of malaise. It was not a healthy thing, and it showed that we should have been spending more money then, arguably. Twenty twenty two was kind of the year of the reckoning.

28:19 That was like uh the Anus Herubulis for the bond market. It was one of the worst years for the global bond market in centuries. I mean by in three centuries, by some reckoning. And I think People think that after you have a reckoning, well then

28:34 There's catharsis. You move on. And things kind of settle down to a new level and inflation will come down. The Fed finally jacked up interest rates. The European central bank jacked up interest rates. Governments would start tacking the balance after COVID. So the wars also in the bond market. You and we can see this on the prices. The bond market kind of agreed with the Fed that inflation would be transitory and we would return to, you know, it's a massively overused phrase, but a new normal. And that new normal would be inflation back to where it should be, and bond yields it, maybe treasury yields at some three percent, maybe three, four percent. And then I think look pre imp Post Trump.

29:11 Also Mark, I think a a sense of things you thought were unimaginable before. are now certainly not unthinkable anymore. The US, you know, still depends on a lot of money coming in from foreign investors to buy treasuries. Uh and and you know, that money doesn't feel quite as welcome as it used to.

29:31 We can see China and other countries. tiptoing a little bit away from the treasury market. So suddenly things that Even I maybe foolishly believed Firmly. A few years ago.

29:42 I think you wouldn't feel quite as confident out today. And I think that ripples certainly through the financial system as well. One thing that has been A little unusual here. So in my political lifetime

29:56 Typically. presidents and administrations are They kept toe quite gingerly around the bond market. James Carville, when he was a top advisor to President Clinton, had this joke that when he when he was reincarnated, he wanted to come back as the bond market. Cause then everybody would have to listen to him. And you Have in general uh

30:18 Presidents tend to do two things around the bond market. One is if it's going up, you want to put in charge Of the Fed somebody who markets are gonna treat with a lot of respect and esteem. The other thing you'll tend to see presidents do when they are worried about

30:33 Uh the Price of money. And they have a big debt or deficit. Is beginning to move towards Deficit.

30:41 reduction, fiscal contraction. Donald Trump is not really doing either of these things. He was very aggressive in pushing uh Powell out. He talked a lot about how he wanted to see the Federal Reserve bring down rates. Um he brought who is a relatively well respected guy.

31:00 But he's coming in under this cloud of what did he have to tell Donald Trump and what has he promised in order to get that job. Then on the other side, Trump has done huge amounts of spending huge amounts of tax cuts. Nobody thinks they're about to do a big pivot to a grand budget bargain. So you have a very different orientation right now.

31:19 It seems to me. from the US president towards the bond market and towards what you should do. If yields are going up and you don't like it.

31:28 Uh As he said, Besson has a touch with the bond market, a touch with interest rate. He's a former currency trader. But you don't usually use the Head of the Treasury Department as a traitor. No. He's supposed to implement fiscal policy. So how would you characterize

31:44 where they're going on this and what that might mean. You know, I'm a journalist as well, and I always try to sort of project sort of almost steel man the other side's argument. But I do feel some of the policy making around this has been Charitably incoherent. Uh and some of it is due to some almost very natural misunderstandings. Like people think of interest rates, but there are obviously lots of different interest rates. The Fed decides interest rates on the short end, essentially like what overnight's interest rates are, and that filters through the banking system.

32:15 But the treasury. markets, interest rates, the bond yields, they are set by markets. They're set by price and demand, and they're obviously affected by interest rates, but all sorts of things. And You know Donald Trump wants bond yields and the bond market to behave. 'Cause he wants that.

32:29 affordable mortgage for Americans. That's clearly he's talked a lot about that. Uh but he also wants the Fed to lower interest rates and they don't really play well together, if at all. You know, if if you want bond deals Lower. Uh, I mean the quickest way is for the Fed to jack up rates or just engineer some sort of massive recession. Neither are really that much fun, right? But like you say, you want a credible Fed here, and I think that's why he chose somebody with like Walsh who in a fairly horrific long list of candidates was by far probably the most credible one, certainly on the short list. Uh, because he realised if you put somebody

33:07 Completely. Uh I'm qualified. uh in the in the Fed chairmanship, then suddenly you'll s you'll see quite a violent bone marker reaction. Yeah, Fed Chair Peter Navarro would not have been good for Bill Pulty was the one that that really I mean, as a financial journalist I love, you know Messy stuff. But That'd be pretty nice. Pully would have been pretty bad, I think. But uh you know, him and Bessant don't play well together either.

33:31 I'm gonna bring up a clip. of Bess sent from the other day on C N B C. Yeah, I I I I was gonna ask. how how big this could get. If if if the signal here is that you're not happy with the direction of yields, you know they've They've gone back the other way. We've we've erased most of the treasury rally that you got yesterday with that big surprise. So how much more are you willing to do?

33:52 Well I again uh we we have a big toolkit, so we'll we'll see. And part of it is signalling here and to show. that we we believe that the yields don't reflect the underlying fundamentals. Uh uh the Saran conflict we will get on the other side of this. Uh we we don't know when and uh we can talk about the economic measures we're gonna be t taking against Iran in a minute.

34:17 And yeah, we are In the administration, we are The uh announcing uh probably At the end of this week, beginning of next week, an increased focus on fiscal consolidation. And you know it's

34:30 They are coming from President Trump. Oh. Russ Boat and myself will be examining both on the revenue side and the cost side uh what we can do. Alright, so I wanna go through a couple pieces of that because one thing you hear there is something I was mentioning a few minutes ago, which is at least beginning to signal they would like to do fiscal consolidation, but given how little they've done with Congress, I don't think anybody's taken that seriously at all. But what does he mean when he says

34:56 We don't believe the yields reflect the underlying fundamentals. Reminds me a little bit of the John McCain. Uh. Yeah.

35:11 What do you hear when Bessant says that? Truthfully I hear a little bit of desperation. I I I don't think bond yields are gonna go massively higher. Uh i this is not a massive crisis, but the rolling out of a an enlarged buyback program, a a technical program supposed to sort of Yeah, very nerdy. It's not supposed to be something that has a major effect. So when the US government sells a 10 year bond, for example, which is the standard type of bond, kind of the benchmark bond, that's super tradable. It's super easy. You can sell a billion dollars of it without moving the price. But as that kind of becomes a nine year bond, an eight year bond, a seven year bond, it becomes a bit stale, it's kind of locked away in vaults and pension plans at banks. So it doesn't trade that much. So the price usually kind of reflects that.

35:58 And then you can typically buy them. And a slight discount. So what the Treasury has been doing for a while is spending a few billion dollars on buying some of those stale, slightly cheap bonds and paying for it by issuing Those Those super liquid ten year bonds, twenty year bonds.

36:15 Uh Bess and enlarge that program. He says because the liquidity was getting worse in some parts of the Treasury bull market. But it It looks like

36:26 a a fairly naked attempt at lowering those bond yields again. Uh But sort of completely ignoring the scale of what we're talking about. We're talking a few billion dollars. There's over a trillion dollars Worth of treasuries that trade every day. And this is like putting out a you know a wildfire with a water pistol. And that's why you saw the bond market first reacted to the signal he was sending.

36:49 that we we want yields down and you know when the treasury sectorary Says that and acts that way, the knee-jerk reaction is oh, we're gonna buy bonds, but then people realize, well, actually, no, this is clearly not going to have an effect. And It's one of the reasons why the the bond market is so tricky for people, why Carvel made that amazing quote about how you can intimidate everybody because You can't push around trillions of dollars very easily. The only people that could really do it

37:16 They have the resources to do it. There's only one place in pound that can print unlimited dollars and that's the Federal Reserve. So the Federal Reserve has done this in the past, has beaten down bond yields uh after the financial crisis and in in COVID. Um But the Treasury just doesn't have the

37:35 The resources. Trader's talking about And one reason maybe you saw this rapid movement where Bescent announced a policy where they increased these buybacks.

38:12 And that seemed to bring yields down for a minute and then yields bounce back up. Yeah. Is it You keep saying this is looking a little bit desperate. It's maybe worth expanding on what that actually means, because what he is saying is that I am trying to bring things into alignment with the fundamentals. You know, we're even willing to put our money where our mouth is on this. It seems in many cases have the uh opposite effect of actually scaring people a little bit, that if they're willing to do this what does that actually make you think about where this is all going.

38:41 But how do you see that dimension of it. Like why Why does it have this sort of effect on expectations? It is in the opposite direction. of the treasury's purchases. Well it just boils down to credibility. I mean the US has for a very long time over

38:58 across many, many administrations of both s from both sides of the aisle built up. a ton of institutional credibility about how it acts, how it behaves, uh its predictability. When you see you know, the world's most influential economic policy maker acting

39:19 I wouldn't say erratically, but acting the way that, you know, most bond traders sussed out very quickly that this was not going to work. It makes you doubt other parts. of what what what else are they thinking about. If they're unpredictable, what what else could happen? And that makes people skittish. And I I don't think people are panic about the US or warring at all. And I think, you know, frankly, it was weird that Bessant would respond so forcefully to what looked like a Unfortunate but entirely natural increase in treasury bond yields.

39:53 Because of, you know, people think inflation might say a bit higher for a bit longer to Yeah, compensate you for that that extra risk you're taking. But it wasn't out of whack. This was not like we saw in Liberation Day. This was mar not March 2020 when the treasury market really crapped out on the pressure from COVID. So I'm I'm almost a little bit baffled because as as

40:16 Trump said himself in that opening clip that you know Bessant, I'm not sure he has a deft hand with the bond market, but he is a former bond and Currency trader. He does understand these things. He's doing things he himself knows to be wrong. And won't work. I don't doubt for a second he know this doesn't work.

40:35 criticize Yellen when she was doing a more modest version of these same buybacks. He did, and he also criticised the Biden administration for issuing more bills. So the the idea was that this was, you know, activist treasury policy. And of course they're doing the same thing. I'd chalk that more up to sort of standard Political partisanship.

40:57 Uh, you know, you're always going to criticize income and government for anything. And yes, it looks massively hypocritical when you do exactly the same thing. Uh But that Field standard. What doesn't feel standard is this kind of incoherence and doing things that people in the administration

41:14 No won't work. Well, usually when there's incoherence in the Trump administration, it comes because either Donald Trump wanted something or people thought Donald Trump wanted something. Now when I asked, Donald Trump said, Of course I had nothing to do with My treasury secretary engaging with the bond market and intervening in this way. I'm gonna take that as something that I don't uh believe has truth value one way or another. Uh, Besson also came out this week with this F T op ed about, you know, just a complete

41:42 trying to do an economic annihilation of Iran to end that. So this feels to me like there is a debate happening inside the Trump administration somewhere where they're upset about what is happening in Iran, upset about the bond market. So how much is the answer to why is Bess in doing things that at another time Simply that the president is telling people

42:05 That he does not like the path of the bond market and he wants it to use the word behave earlier. I would say Be lower. Right. He wants yields lower, he wants money cheaper, he wants things more affordable, he wants the economy growing faster.

42:20 And even though that is maybe contrary to a bunch of other things he's done on the policy side, maybe some of the problems here actually of his causing. He wants all the things at once. Yeah, who doesn't want all the good things at the same time, right? I I'm I'm the same, I like my Kate And I like to eat it.

42:35 But it does feel I agree that you know I'm not an administration watcher, I just watch the bond market, but it does feel that has an elements of that I can't remember which Henry it was, one of the English kings who said, Who will rid me of this troublesome priests? And then somebody went out and murdered Thomas Abecket, that you know, he will say that he wants certain things and people will feel the need to go out and somehow. Do it. Even when they know that in practice this is not going to help the king, it's going to probably harm him.

43:05 Uh it's a very sort of short termist way of thinking. I mean, like I said, the the simple solution here is that the Fed raises interest rates. Well, at the very least signals a strong willingness to do so. That I think would restore a lot of calm. It would do way more than these measly buybacks. uh the ending of the war in Iran and and restoring free tr passage through the Straits of Hammuz would certainly help a lot as well, but we're really talking Yeah, there's a lot of things going on. We're we're talking in the week of the Jackson Hole Symposium, which is the annual big central bank conference.

43:38 This would be the first where Kevin Warsh is there as Fed chair. What are you expecting him? To say do In a normally Fed chairs have not wanted to rock the boat too much at Jackson Hall.

43:52 Walsh does not think that. And I have to admit I have some sympathy with his view that maybe some volatility in the bot market, just a little bit. might actually be a healthy thing in the long run. So

44:05 The central bank view. And I have some sympathy with that too, is that Uh predictability. means that bond market volatility and interest rate's volatility is low and that's better for economic growth. That is completely true. I believe that wholeheartedly.

44:20 But some unpredictability can maybe l make the system as a whole safer. So if you think back in two thousands when the Fed was actually jacking up interest rates Because the housing bubble was inflating, they saw some of this. They were raising interest rates in a very predictable, steady way. in a way that maybe didn't really blow away the froth. And a bit of uncertainty about what the Fed might do might be on the whole be healthy for the system because it kind of reins in a bit of risk taking. You you feel less confident about doing dumb stuff if you don't really know how the Fed is going to react to certain things. I've never seen Walsh articulate it quite in that way. Uh, and maybe he does so at Jackson Hall, but it's going to be fascinating to see because I mean this is a new era of central banking. Uh at

45:09 The world's most powerful central bank. So it's going to be probably one of the most interesting Jackson holes for a very long time. I I'm just certainly getting my popcorn ready. I mean, this is a way in which Borsh is differing a little bit from those who came before him and it it sounds very It's a weird thing to be arguing over. But yeah, the Fed recent Fed chairs have been very into forward guidance. They Tell you what they're going to do. Well before they do it, so you know what they're gonna do and you can react and everybody can plan.

45:37 And Wars has been Uh I wanna say opposed to all forward guidance, but he has announced his forward guidance has been there will be less forward guidance. Uh Why? So I I have to

45:52 Should say that I think both the proponents of forward guidance, and that's most central bankers around the world, and enemies of it, have almost to a comical degree overstated the case for and against. that, you know, the enemies of forward guidance have indicated that this is central banks binding themselves to the masts. that if they say they're gonna do X, they have to do X, and it takes away the fr the flexibility to be able to do anything and respond to incoming data. And that's just baloney. Central banks have issued forward guidance, and when the data changes, they change their mind. We've seen that happen in every central bank, including the Federal Reserve.

46:29 I think central banks have frankly overstated the advantages of forward guidance as a way of sort of stimulating the economy. They said that well if we say we're gonna keep interest rates low for Super long. Or until X or Y something concrete triggers, um that that will give people so much safety that we're not going to raise interest rates that they'll Go out and borrow money, stimulate the economy, get all that economic growth going. And I think also again, people

46:57 Don't really listen to that because they also do understand that if inflation suddenly erupts as it did in twenty one, twenty two Then central banks are kind of very hurriedly backtrack on this forward guidance. It just doesn't matter that much. So When people used to worry about Bonds and the US government debt, the thing you would hear them talk about.

47:16 was the coming of the dreaded Bon vigilantes. So who are the Bon vigilantes? And Is there any reason to still worry about them? So these are the people that Trump is going to deploy the military against, right?

47:30 Only it's it's our it's our last option. Our last option is jailing all the bond builders. Yes, exactly. Or jailing them. So I mean th I mean you and me. It's our pension plans, our mutual funds, our banking, uh the money that we have in the banking system. Uh the Bon Vigilantes is kind of a very amorphous phrase. It's a wonderful I've used and abused it many times myself because it's so evocative. But in reality, it's just, you know, a vast ecosystem Of money.

48:01 That is in a mutual fund, a pension plan, an insurance company, a bank, a sovereign wealth fund, a private bank in Switzerland. Uh, even you and I we can buy treasuries directly from the US government. Uh and the idea is that, you know, the vigilantes would Yeah. Stop blending. The countries. And they're really the only power. They can't go around beating people up. Which is to say they would stop buying these bonds.

48:24 Yeah, or maybe just buy the less of them or or want a slightly higher interest rate. Um So it's both a overdone phrase. And I think certainly in the place like the United States that can literally create dollars. The US bond market is a very different beast than it is in let's say uh uh a Pakistan or Sri Lanka or even Argentina that tends to borrow a lot in in foreign currencies. Uh but it does actually You know, it's has a bit of truthiness to it.

48:54 Because in a world, in a global economy that runs on credit. The ability to raise the cost of credit or deny it altogether is an incredible power. And this is not set by You know A bond of S in a secret WhatsApp group.

49:10 But it is the Individual decision. Over million people. Sometimes in concert. But you do sometimes see the bull market just get

49:21 G three. About certain countries. Certain companies. At certain times, most famously the in the UK in 2022, where they managed to oust a prime minister in I think 45 days. But typically more in in poorer countries that frankly don't have the resources that a large advanced fellow economy does.

49:40 So you have more conversations with Bond traders than I do. Uh Some of my best friends are born trades. When you guys are a couple drinks in.

49:53 And they're describing the bad scenarios, the stuff they worry about or they think about The stuff that maybe Bessant is worried about in, you know, the wee hours in the morning. What does this look like over the coming couple of years if this goes Wrong. I mean,

50:11 What do informed people think? Bad outcomes here might look like. Also Ezra one of my f favorite topics in the whole world, and this does make me a very sad human being probably, but a sovereign debt.

50:24 crises and sovereign debt restructuring. I just think it's there are just this fascinating collision of finance, economics, politics, geopolitics, everything comes together. But they usually affect uh smaller, poorer countries, of course. Uh but because of my interest, I actually had thought probably an unhealthy amount of time about what a US that crisis would look like. A US debt crisis would not look Anything like Anything else in the world.

50:52 First of all, the US can't really go bankrupt. Unless it chooses to. I mean the the US only borrows in dollars and it can create dollars. It's very hard to go bankrupt. If you can create the current set you're borrowing. Now that can have other

51:07 Um crisis like outcomes like runaway inflation, a financial system that, you know, convulsed by all this of dollar printing. But but Yeah, a classic default. is unlikely. Or or vanishingly.

51:22 Unlikely. And that's why when I've talked two bond investors including in the the the early hours of the morning and a few drinks in. Very few bond investors I know are genuinely worried about a debt crisis in the conventional sense. But you can see lots of unconventional types of of severe debt issues in the United States. Like for example, if they suddenly start if they suddenly are out manage to co op the entire Federal Reserve and start creating dollars. Like Trump says I want

51:50 Interest rate's lower and we're just gonna print as many That has ripple effects. Everywhere.

51:59 What do you think the'cause we're What is the Treasury rate at right now. You probably looked at Bloomberg this morning and I didn't. Well, ten to yeah, it's around four four between it's been between four and five percent for a while, which is why you know I don't get why they were freaking out so much. What's the chance in your view that Cum

52:19 You know November of twenty twenty eight. We'll use election day here as a a a kind of marker. That The rate is Six to seven percent.

52:31 I mean One thing that I love about the bond market. Is that it synthesizes just an insane amount of information. uh economic growth, inflation, productivity, health of institutions, things like that. Uh

52:46 And I'd say that you know I people smarter than me embarrass themselves trying to protect the markets all day long. So I I just don't know. But as long as the economy's booming and we want that, then treasury yields should go high. That would And if bond yields go back to let's say one percent, if you and I are talking in in in November twenty twenty eight, and

53:09 treasury yields are at one percent again. Well That's a very terrible economic backdrop. Uh Which way it would go right now, I don't know. I mean AI is the big factor right now. I mean, it's kind of the investments are happening in data centers that may be on the margins, sucking a little bit of investment away from the treasury market, but they're certainly juicing the economy.

53:31 Uh the US economy would look I think rather different if we weren't seeing these huge capex programs that yeah, the biggest is the railway spurge. Uh and then you know it depends like, is this gonna get the economy going or is it just gonna and end in another sort of the infrastructure bust? And that will probably decide what things look like in in November twenty to try that out, you can imagine a world where AI proves to be a bubble.

53:58 There's a big pop. This Investment that is powering so much. Collapses. And then you probably would get to lower bond yields because one, there'd be less private demand for debt. And so more of the more of those

54:13 funders could buy treasuries. Second, the Fed would probably have to bring down rates because you'd be going into a recession or very likely going into recession. So that'd be a world where, yeah, maybe Bond yields are down to three percent, but it's not a good world. They're down there because the economy has Gone into crisis. Mm. No, we want bond yields to go down for the right reasons, and that is that inflation is low and stable and quiescent and not

54:40 Uh very volatile. And But you won't You want some interests on your treasury bonds. It should be fair to expect that. Um but whether they're up the the six, seven percent you talk about, that also is uh I think probably a very unhelpful will because that would imply that inflation is not under control. It probably implies the Fed is

55:01 Tacitly. probably unstatedly given up on controlling it to a large extent, that we are heading into What we have seen in the past is w a a proper stagflation where both growth and inflation are you know, growth is too low, inflation is too high, and interest rates have kind of lost the power to move things around too much.

55:22 Well, there's something weird in all this. So you wrote about a National Bureau of Economics research survey that I found genuinely shocking. that said among bond investors surveyed. They believe there to be a fifty percent chance. of a US debt crisis in the next decade. But then

55:41 Almost all those investors said they had no change in their portfolio strategy based on this. So I had trouble making heads or tail like On the one hand, if the bond market actually believes we're gonna have a fifty percent chance of a debt crisis I wasn't clear what that actually meant. But then also they believe it's that high and nobody's doing anything. Um that's weird.

56:00 What did you make of that s how would you explain what that survey was revealing and what did you make of it? I mean What was that? Is it Saint Augustine who said, Lord, make me chaste, but not yet? Uh and it's how we humans respond to so many things, like climate change.

56:15 Yeah, we we we know it's a it's a big deal and it's coming. And we maybe might tweak it a little bit around the edges of our own lifestyle, but in reality we don't. And we might say we want politicians to do X or Y, but in practice until it actually starts affecting us on a daily basis. You can see people Don't really like that. And I think it it's It's both shocking, but also

56:36 incredibly unsurprising because it just sums up human nature, right? Even when you can see something big and nasty potentially coming, you know Down the tunnel towards you. You still think that light might be Something. Favorable.

56:50 I'm glad is a good place to end. So then always our final question. What are three books you recommend to the audience? I have to admit I I've been dreading this because you know, you ask me tomorrow, there'll probably be different books. Uh but I I'll again I'm going to choose three books that

57:06 Show that finance, economics, and business can actually be really fun and interesting and riveting even. Um I think the obvious first place, the first book is is Barbarians at the Gate. I I genuinely think it's kind of the gold standard of of narrative business journalism today. But really it's kind of like um A history of American business. over the past century tall through the prism of this private equity deal and all the crazy characters involved. It it is astonishing.

57:35 Um My second book, uh Daniel Jurgen's The Prize. Say history of the oil market. It's kind of the model for a lot of Similar books that came first, but Uyghurs kind of the OG.

57:49 Uh it's I I love those histories that kind of tell a history of the world. This is almost a history of the twentieth century, but through a a completely different angle. So it tells it through the oil market. It's tremendous, has crazy characters, of course, and just I I learned so much just as a journalist, but also just as a a person. Um I f my third one, God, I I can almost feel some of the books behind me. Uh screen. Hoping to be picked. Hoping to be picked. I mean, yeah, they're glowering at me, I if you can feel it. Uh I think I'm gonna go with Liakat Ahmad's Lords of Finance.

58:25 Uh, it's just a fabulous book about this. Kind of. Tumultous into war. period uh and the run up to the Great Depression. Uh and it tells you know what is an incredibly complex multifaceted financial economic story uh through these the the heads of the the the major central banks at the time. And you know, I in my day job at the FT, I spend a lot of time trying to kind of

58:50 pass these things and make them digestible to a general audience and make them sort of uh riveting and fun and and you know, it's I I don't think I've seen such a complex story told with such verve as well as as in Learchett's books. I I think Town. Have to be my third pick and I'll just have to accept the books, some of the books behind me staring that at me angrily. Robin Wigglesworth, thank you very much. Thanks for having me on.

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