Tuesday, April 15, 2025
What's all this stuff about treasury bonds?
If you were following all the hub-bub about financial disruption last week, you probably noticed a lot of blathering about treasury bonds. They actually are very important-- and what is happening with them now could have a huge impact on our financial future.
The United States government has a lot of outstanding debt, and we finance that debt by selling treasury bonds that are purchased, held, and traded by people all over the world. Because everyone has been pretty confident that the United States will pay its debts, it is seen as a bedrock safe investment. Because of that, treasury bonds don't have to offer much in terms of interest.
That's good for us, because the higher the interest rate on treasury bonds, the more expensive it is to finance our debt. It's like someone who spends 30% of their income on their mortgage, which is an adjustable-rate loan. If that rate goes up suddenly, then the homeowner is suddenly paying much more on the mortgage every month, even though they still have the same old house.
What happened last week is that the United States threw up tariffs all over in a way that didn't seem very well thought-out, and that spooked the bond markets. We didn't seem so reliable. People (well, mostly governments and institutions) started to sell their US treasury bonds, and when that happens the interest rate on new (and old) bonds goes up as the price goes down, because we have to keep selling them to finance the debt and the higher yield will induce people to accept more risk and buy the bonds. So, in a nutshell: Crazy times>America unreliable>People sell US bonds>Price goes down>Yield goes up>suddenly we owe a lot more on our debt because our interest rate increased.
And we are more than $36,000,000,000,000 in debt, so having to pay even a half-point more to service that debt is a huge expense-- billions and billions of dollars. That's money we all will owe that we get nothing from, simply because markets were (or will be) destabilized by our elected government.
To put it another way, a tiny increase in the bond yields will cost far more than anything saved by all of DOGE's cuts, pain and mayhem.
The other thing is this... a lot of what we are doing right now is alienating other countries, banks and foreign institutions-- the people who hold a lot of those treasury bonds. They know that dumping them will hurt the US, and we too often are giving them a reason to do just that.
