The bond market is everywhere right now. The New York Times front page led with it all day on Tuesday, the Treasury Secretary intervened on Wednesday, interest rates fell sharply, then folks thought harder about what that all meant, and by Thursday morning the bond yields rose again. We’re all on the edge of our seats trying to figure out what’s going on.
Unless you’re not an economist, in which case this can all feel pretty abstract, and you’re not sure if you really care. Spoiler: You should care.
The stakes here — your stakes — are important. The bond market determines the interest rate the government pays on trillions of dollars of debt. When the first bill you pay every year is on last year’s credit card, there’s not much left over for anything else, so we get fewer roads, fewer schools, fewer police, fewer of all the good things government is meant to do. That’s basically our federal budget right now.
The interest rates you pay on new mortgages, or car loans, or even your credit card are all closely linked to the bond market. As interest rates rise, so do your monthly payments. The affordability squeeze gets a little tighter.
Figuring this all out is hard. The bond market is big, and complicated. The government’s choices are hard to decipher. The stakes are high, but it’s foggy out. So I sat down to record an emergency podcast with my friend Ben Meiselas. We try to start from the basics — what is a bond? — and go all the way through to the latest developments, exploring whether Bessent’s latest move is just tinkering with the financial plumbing or part of a broader economic strategy, and how things work out when the Treasury Secretary is jumping into the bond market just as the new Fed chair is looking to hop out.
This post is mainly about saying: Watch the video, or listen to the podcast (Apple, Spotify). You can add Platypus Economics to your regular podcast lineup by clicking through here. Please do — I would love to join you on your daily commute. For today’s news, this was the fastest I could react.
But writing for you on Substack also allows me to add a bit more. So let me start with a quick update, as things got funky overnight.
Today’s update
The graph — and the two Wall Street Journal headlines separated by less than 24 hours — is the story.
Treasury Secretary Scott Bessent intervened in the bond market. He succeeded in pushing interest rates down. But no one really knows what he’s doing, or why. (I take some guesses on the podcast, but honestly, it’s all still guesswork.)
This morning, traders woke up and, with the benefit of a night’s sleep, felt pretty unconvinced that there was much to Bessent’s intervention. It is — in bond-market terms — a pretty small bet. So interest rates reversed course, and rose.
The end result: 24 hours of drama, and bond yields are basically unchanged.
One thing to bear in mind: All of the dramatic headlines over the past day have been about whether interest rates rose or fell by 0.1%. The bigger picture is that interest rates have risen over recent years, and that move is closer to 4%.
Point is, when you zoom out, you see a far more important trend.
If you’re an expert, that’s today’s post.
If you’re a bit more of an econ-newb, and you want to know a bit more about what’s driving this longer-term rise in interest rates, read on for some helpful background.
Some useful background
First, what is the bond market? I could give you a long explanation with a lotta detail. But it’s probably more helpful to simplify to this: It’s sort of like the bank where the federal government goes to borrow money. Right now, Washington spends a lot more than it collects, so to make up that difference, the federal government borrows in the form of bonds. And the interest rate that it pays on that loan has gone up sharply.
Why are interest rates rising?
There are probably three big causes.
First, the AI buildout. The private sector is borrowing huge amounts of money to invest in some very expensive AI infrastructure.
Second, geopolitical risk. Ukraine, Gaza, Iran, Oman. Kim Jong Un, Taiwan, Greenland. Tariffs on Canada — Canada! — NATO rearming, Hormuz closing, January 6. Trade wars, hot wars, oil shocks, nuclear threats. Billy Joel could just read the headlines. These are big stories. They rewire the global economy in ways that change how much countries need to borrow, if they can lend, and who we trust to repay their debts.
Third, government deficits and debt. This is the story we’re not spending enough time on. The U.S. budget deficit is at its highest level since World War II, outside of the extraordinary shifts demanded by COVID and the Great Recession.
What’s going on with government finances?
Our deficits are at the sort of level that would only make sense if we were in a moment of extreme economic distress and needed a ton of fiscal help. But we’re not in extreme distress. We’re just borrowing like we are.
Deficits create debt, and the U.S. government is borrowing more and more each year. If digging into the national debt is your jam, lemme recommend a favorite from the archives:
Our approach to taxation (as a nation) is like turning down a high-paying work-from-home job because it will cut into your video-gaming time. We can deal with Social Security and Medicare needs by raising the ceiling on payroll taxes; we can deal with the annual deficit by taxing the people with all of the income and wealth rather than letting them take "their" wealth and buy Treasury Bills and earn interest that we all pay with our taxes. But the wealthy will get upset and...build ballrooms? Move to Russia? Saudi Arabia? China? Actually all of this would be "try it, you'll like it."
~4:30 "Budget deficit is highest in postwar period except for Covid & Great Recession... deficits at the level that would only make sense at a moment of extreme economic distress - but we're NOT in extreme distress" - Exactly... we just spent like it by handing tax cuts to billionaires now & into the future! Kind of like a weird histamine reaction to corporations & millionaires longing for greater wealth. Our body politic seems to have become allergic to that. We panicked and threw money at them in the form of massive tax cuts! And it turns out, like in anaphylaxis, our deficits are now swelling out of control, the rest of us are having trouble breathing, and our whole economic system is suffering. If only we'd been inoculated against caring so much about the wealthiest, LOL (till I cry)