Trump vs. the Bond Market

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1:02The US Treasury market is looking a little weird lately. The cost of borrowing is going up. Donald Trump has been more and more erratic. His Treasury sector, Scott Bessent, has been making some more aggressive moves into the market. We have a lot of potential energy that will turn into kinetic energy. What is going on with US Treasuries? Why does the chopperization seem so freaked out?

2:04And what might happen from here? Robin Wigglesworth is the editor of the Financial Times blog, Alphavill. He's co-host of their podcast, A Story of Money, an author of the forthcoming book, A Fabulous Debt, the epic story of how bonds built the modern world. A quick time stamp here because a lot is happening in the bond market lately. We spoke on Monday, August 24th. Robin Wigglesworth, 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 sector, Scott Bessent's recent interventions in the bond market. No, not at all. He's a very capable man. He wanted to do it. He's very good at it. He is a good touch, very good natural touch for the bonds and interest. He did that. He also have come back up to Ben. Have you talked to him about another type of intervention?

3:06Is that something he will be doing? We have many types of intervention. That's one. The ultimate intervention is our military. And we have to use that, we will. So I would say that escalated fairly quickly. Yeah. I've not heard of people trying to use the military against the bond market before. Why don't we start in the more comprehensible part of it before we go there? What has Scott Bessent been doing? 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, a price of the US government borrowing, flows into everything else. And clearly before the midterms, they would like interest rates and bond yields be lower to make affordability better for American households. But in the toolkit that the Treasury Secretary has, it's actually not that much. And Bessent 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

4:08support buyback operations that are being used for longer dated nominal coupons securities. And you know, jacking up the buyback program by a few billion dollars, even 10Xing it is not going to move the needle, which is why people are scratching the heads of a why he would do this and why frankly after the initial reaction, Treasury yields have started climbing again. I think to have this conversation, we need to just set the table on this whole structure that people sometimes see flash by them on CNBC or in the financial pages, but maybe don't have that much familiarity with. So just at the simplest level, what is a US government bond? The US government bond is a tradable loan issued by the US. So bonds are just tradable loans. You can buy them sell them the pay of a fixed interest rate and they're kind of designed to be able to buy the sell it very quickly, unlike a conventional loan. And the US government is the biggest government in the world, this most powerful country.

5:10It is at the apex on the entire global financial system. So that's why Treasury is so important and why everybody loves having them. They're kind of the most easily tradable bond on the planet. And one of the reasons why the US government can fund itself so cheaply is because everybody loves buying them. And they love buying them because they're safe. If you have a share of Tesla stock or of Apple stock 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 bought this bond at 5%, that bond is going to pay you 5%, for 10 years or 20 years or 30 years or whatever it is, and then give you the underlying money on the loan back at the end of that, like clockwork. 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

6:10as any financial instrument on Earth. As crazy as it sounds sometimes to Americans, but yes. I would say that 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 in the next five years, but next 30 years, I'm pretty confident that they will be a US government around in 30 years. You couldn't say that about every country on the planet or even most companies. Companies do go bankrupt as well. 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 abused a lot. But it just means that you can buy and sell something very easily. The Treasury market. I mean, that trades a trillion dollars a day. And that's why whether you're a pension plan in Denmark, a sovereign wealth fund in the Middle East, a central bank in Brazil, for example,

7:12everybody likes treasuries because even if you have hundreds of billions of dollars worth them, you know you're going to be able to sell a lot of them very quickly if you have to. And that's almost like the magic sauce that helps keep the Treasury market loft even though concerns about US indebtedness have been growing for what generations now. So that's the financial plumbing side of it. That's why the Treasury's ended up being so crucial to the financial system. They're the liquidity. They're like what runs through the arteries of the global financial system. But let's say I am not a pension fund. I am not the Brazilian central bank. I don't, my knowledge own any bonds. Why do I care? 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.

8:12It really is the bedrock of the entire global financial system. It's where governments fund themselves. It's where banks fund themselves, largely. It sets the cost of money for governments, for companies, for households, through mortgages, car loans, student loans, the whole 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 causes the stock market to wobble as well. And that's why we've seen people like Bessent and Trump. They actually care less about the stock market than people think. Remember Liberation Day? The stock market crapped out quite violently. Because actually when the bond market started to buckle, that Bessent and Trump very quickly said, hang on, the bond market is getting yippy as Trump put it. We need to take a time out. I think it'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. But the bond market buckling, the bond market throwing a bit of a tantrum,

9:14that 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 of the central political issue now. The stock market affects how rich people both feel and are. 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 dead 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 3%, it's 3% plus X plus whatever they think they need to add on top of that. If treasuries are 5%, if they are 7%, then mortgages, autos, everything else are 5%, 7%, 9%, plus something on top of that. And so you're kind of creating the base layer of how much everything that includes debt is going to cost to say nothing of what happens if you actually begin having volatility in that market.

10:23Then things get really scary. We've not really seen that 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. 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 feeds into everything else basically, is going up. Well, treasury secretary Scott Bezahn has a 3, 3, 3 plan as he's done that. He wants to lower the budget deficit to 3% of GDP. He wants to get 3% economic growth. And he wants to increase oil production in the United States by 3 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 risk free rate. It's the safest government bond market, the biggest, the most liquid government bond market in the world.

11:25The US treasury market is $32 trillion. So when treasury yields go from 2% or 3% or 4% or 5% there, I'm paying a spread on that. When I borrow from Norwegian bank, everybody is in some way, or respect, competing with the US government for money. But proving that's why when the US bond market sneezes, the world can catch its cold. And that's just when it sneezes, when it has the flu, it gets really nasty. That's the volatility that you mentioned. 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 bond and sold. Is there a website they all log into? I mean, how quite literally are these bonds bond and sold? They are quite literally bought and sold all the time, albeit not in a big marketplace. So the first bond market is now a food market in Venice and Italy. Now it's all electronic on Bloomberg terminals, for example.

12:26But 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 Tajikistan or a pension plan in Mexico, they'll buy through banks, a club of banks called primary dealers. They're kind of serious big organizations like JP Morgan and Goldman Sachs. In return for promising to make markets, making sure that the markets are steady, that the buyers and sellers and they'll match them, they are allowed to bid at auction from the US government. And so then, I mean, this is a very basic question. But how is the yield we're talking about, whether it's 3%, or where it is now, 4% to 5%. How is it set? It's just, it's supply and demand that morning.

13:26How many people are buying? How many people are selling? Like what is happening that lands us on any given day at 4.2%, or whatever it might be? Well, they look at where they're already trading. But the banks will basically come up with an idea of what they think they should pay, depending on what they're the demanders. Most of the time, these auctions are non-events. They're kind of designed to be boring. You don't want excitement when the US government is issuing debts. But occasionally, there are little cobbles. For example, we saw this recently. There was slightly limped demand for an auction of a 30-year treasury bond. And suddenly, that yield, the US government had to pay a bit of extra on top. And that kind of caused concerns. Well, thanks for getting less boring. So walk me through the store of the bond market over the past. I mean, you can choose a time range here, but you know, five, ten years. How much higher is it than it was? And what is it that is starting to get people nervous about where it's going from here?

14:31Well, 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 to us now, but you know, Ezra, we knew now we're younger. A debate in the United States was what would happen if the US government had no debts? Like in the 90s, people were genuinely worried that the US government might run out of debt. It was, you know, had budget surpluses, and it was paying down debt. So how does the financial system, when operate, when the bedrock just doesn't exist? Now, of course, this is radically different. The big change was the financial crisis. Countries around the world just had to borrow money and, you know, support economic growth three years afterwards. And we've never really recovered from that. Now, financial crisis calls these massive, usually like, seven-year hangovers economically speaking. And governments quite rightly decided we need to spend no way out of this. But then, of course, you know, it's hard habit to kick.

15:32And then COVID came and just kind of jacked all those trends up to new levels. I mean, we saw, you know, recently, the US government debt burden has crossed the $40 trillion mark. That's a lot of debt. It's a record shattering amount of debt. I want to give people a bit of a context on this. So that means in interest, we are now paying every year in debt interest more than we are spending on defense. Yes. For the first time in almost a century, in fact, since World War II. And it's huge. And that's because, you know, the US borrowers 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 has a lot of bonds that used to cost it maybe 1 or 2% a year. Well, they're getting refinanced because governments always borrow more money to pay back the old money. That's getting refinanced at a higher and higher rate. 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.

16:33Like it's big, but it's not money we owe to Mars. It's money we owe to ourselves, probably speaking. But now seeing, you know, COVID, you know, it's a decade, half a decade since we emerged from hangover there. And budget deficits are in most countries as large as the've ever been, if not, you know. Certainly not much smaller. And that debt burden just keeps growing bigger and bigger. And Jay Powell, he was asked about this by some students. Shortly before he stepped down as chair, was pushed out as chair. And the students asked 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 this paying its interest bill than it does on defense. That typically only happens to great powers and in times of great emergency, major wars and things like that. And, you know, I think over the next 20, 30 years, if the present conditions continue,

17:39the US debt burden is going to go from uncomfortable behind to monstrously big. That's a worry. If you're not a subscriber of the New York Times, we have some news for you. You can outspore the Times for free without any paywalls at all during your first month in the New York Times app. The New York Times app unlocked? Everyone knows the Times is behind a paywall. Only subscribers have access to all the reporting. But what if you could explore the Times for a month for free without putting in a credit card? Now you can. When you download the New York Times app for the first time, your first month in the app is free. A month to go behind the paywall. To see what time subscribers get every single day.

18:39All the investigations, the reviews, the recipes, the deeply reported fact-based journalism. If you don't already subscribe to the New York Times, download the Times app today and get free access for 30 days. All right. So that's one thing that's happening. You're having the government has to buy more or sell more bonds rather because it has to finance this increasing large debt. What else is going on? There's inflation. We have that massive burst of inflation after COVID. Supply chains went kind of haywire. Russian-vaded Ukraine. There was a lot going on. Lots of people always think inflation is uniquely domestic, but this has been a global problem. Central banks may be bilately jacked up interest rates to dampen down the economy, dampen down prices. 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. The recent war on Iran has not helped.

19:42That has blocked off large parts of energy that used to flow through the straight-off hold moves. That has pushed up energy prices and has made people uncomfortably aware that inflation never got back down to the central banks 2% target. And might very easily drift higher from here. That's not great for bonds. Inflation is the arched nemesis of bonds. Because a bond pays a fixed interest rate. So it pays 5% a year. All the inflation is 5% than essentially just running to sound still. So it becomes less valuable. It's probably 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, they're talking about bonds 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, he's saying that about they could reengage military intervention against Iran.

20:42Now, the reality is that hasn't worked. So again, I'm not sure why that would bring down bond yields. 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 of Iran's closure of the straight-of-horimous. Do you buy 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 after that clip. It's slightly tongue-in-cheek, of course. And to a certain extent, I agree that open the streets of Amos, bring peace to the Middle East, energy prices come down, things will quite now. The underlying issue is the size of the US indebtedness, the size of the budget deficit, which we are now running full wartime levels of deficit at a time when the economy is actually doing pretty well.

21:44And also the fact that Trump has put a new chair of the Federal Reserve in, and he seems unwilling, maybe because from instruction from his boss, to raise interest rates. 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 set they just are unwilling to take for whatever reason. Why does raising interest rates bring down bond yields? Well, inflation should be, you know, there's a sense of there's 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 are 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 30 year treasury yields, they'll come down, I think, pretty quickly if the Fed kind of manned up and decided to raise interest rates.

22:45So 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 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 amount of yield. The government has to pay, do you buy that? On the margin, yes, and the AI build up is staggering, remarkable in scale, it is huge, and that is having an effect on the margins. But we're still talking, I think globally, in AI related bond issuance, half a trillion dollars. Now that's big money even today, half a trillion dollars, it matters, but it's mostly displacing other core predictions, like other companies are finding it a little bit pricier to borrow.

23:48The US treasury, yes, I'm sure it maybe adds a few basis points like a smidgings of a percent on the top, but it is not massively meaningful for the cost of US borrowing. There are so many other larger forces that play here, so it's a factor but not the factor. And then one of the other things people have been talking about is it 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? This is a huge topic and I still think probably under discuss. So if you cost your mind back to the 2000s, there was all this talk of a global savings club. So you had all these central banks and investors around the world were saving a lot of money and they were putting into treasury bonds. And you can see 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 of their liquidity.

24:50They were very easy to buy a cell, not necessarily as a sort of to make great returns. That has stabilized and even shrunk a little bit. This global savings club is looking a little bit less glutty these days. And the treasury market has at the same time grown enormously over the past decade. And into the breach, 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 2% to close to 8%. So officially now hedge funds own more the treasury market than 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. A valuable role I'd even say. But they are also very leveraged.

25:50They borrow money to hold these treasury bonds. So let's say you put down $10 million or certainly $100 million. You can buy a billion dollars worth of treasury. So if suddenly the cost of your leverage, your borrowing that goes up, well then you're just shaken after that trade. And that I think is something that policy makers, I'm Janet Yellen's talked about this before. I'm sure Scott Bessenter is aware of this issue. I think this is one of the reasons why the backtrack quite quickly when the bond market started quivering a bit after liberation day in April 2025. 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 compared to the way pension funds act or the way other Central Banks act, things can happen that require them to move much faster to keep themselves from going under. So you could have correlated selloffs of treasuries happening very, very quickly in a way that would not be typical of the way Central Banks act underprice.

26:53Yeah, normally when there's an economic crisis, treasury yields full because people buy treasury bonds because they're safe and solid and you want to get the hell out of stocks. But because of this dynamic, you can see different phenomena happen. We saw this in March 2020. We saw this in April 2025 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 mean stock traders talk about diamond hands, they're never going to sell a game stop. Well, hedge funds are not 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 the borrowing cost for the US government was just incredibly low. Yeah, I remember back when I was at Wangplug at the Washington Post and we would constantly because we were arguing that we should have a plan. We were arguing that we should actually borrow more at that time and invest in infrastructure.

27:53We had actually put up these 10 year tables showing that at a real rate, the borrowing cost was negative. When you took inflation into account, people are almost paying the US government tomorrow 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 great uncertainty. So one dimension of the US economy in that period was we had incredibly low borrowing costs. And just slowly and then kind of post COVID more rapidly and then post Trump more unpredictably. That's been changing. You're not going to get that 2 or 3% mortgage anymore. And so you're having this sort of like stepping up of the ladder of how much our money costs. And this year has felt to me like the year when people are starting to think, oh, this is going to change the way you think about the US economy going forward or something doesn't happen because people felt the inflation a couple years ago was transitory.

28:57The Fed would bring up rates and bring it back down. So where the Trump administration is spending the lack of predictability in US policy, it seems to me that there is a shift in bond markets in the conversation about how to think about the US. So what is the shift? As multiple dimensions, I agree with everything. And it was remarkable, right? How low bond yields were for a long time. And obviously it was a sign of malaise. It was not a healthy thing. And it showed that we should have been spending more money there in our community. 2022 was kind of the year of the reckoning. That was like the Anna's Herubilus for the bond market. It was one of the worst years for the global bond market in centuries. I mean, in three centuries by some reckoning. And I think people think that after you have a reckoning, well then there's catharsis. You move on and things kind of settle down to a new level and inflation will come down the Fed. Finally, Jack, that interest rates, European Central Bank Jack, that interest rates, governments would start attacking the balance after COVID.

30:00So there was also in the bond market. And we can see this on the prices. The bond market kind of agreed with the Fed that inflation would be treasurty. 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 that maybe a treasury yields it's a three percent, maybe a three four percent. And then I think, look, pre and post Trump also mark, I think 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. And, you know, that money doesn't feel quite as welcome as it used to. We can see China and other countries tip towing a little bit away from the treasury market. So suddenly things that even I maybe foolishly believed firmly a few years ago, I think you wouldn't feel quite as confident out today. And I think that ripples certainly through the financial system as well.

31:02One thing that has been a little unusual here. So in my political lifetime, typically, presidents and administrations are, they tiptoe 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. Because then everybody would have to listen to him. That's great. And you have in general, 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 going to treat with a lot of respect and a steam. The other thing you'll tend to see presidents do when they are worried about the price of money. And they have a big debt or deficit is beginning to move towards deficit reduction, fiscal contraction. Donald Trump is not really doing either of these things. He was very aggressive in pushing Powell out. He talked a lot about how he wanted to see the Federal Reserve bring down rates.

32:08He brought in Kevin Warsh, who is a relatively well respected guy. But he's coming in under this cloud of what did he have to tell Donald Trump and what is 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. 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. Like as he said, Besson has a touch with the bond market, a touch with industry, it's a former currency trader. But you don't usually use the head of the Treasury Department as a trader. No, he's supposed to implement fiscal policy. So how do you characterize where they're going on this and what that might mean? I'm a journalist as well and I always try to project a almost steel man, the other side's argument. But I do feel some of the policy making around this has been charitable and incoherent.

33:12And some of it is due to some almost very natural misunderstandings. People think of interest rates, but there are obviously lots of different interest rates. The Fed decides interest rates on the short end, essentially what overnight interest rates are and that filters through the banking system. But the Treasury markets interest rates, the bond yields, they are set by markets, they're set by pricing demand, 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 because he wants that affordable mortgage for Americans. That's clearly talked a lot about that. But he also wants the Fed to lower interest rates and they don't really play well together if at all. If you want bond yields lower, 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. But like you say, you want a credible Fed chair. And I think that's why he chose somebody like Warsh who in a fairly horrific long list of candidates was by far probably the most credible one, certainly on the short list.

34:16Because he realized if you put somebody completely unqualified in the Fed chairmanship, then suddenly you'll see quite a viable market reaction. Yeah, Fed chair Peter Navarro would not have been good for a built Pultie was the one that really I mean as a financial journalist, I love you know messy stuff. But that would be pretty much a Pultie would have been pretty bad, I think. But you know him and Besson don't pay well together either. I'm going to bring up a clip of Besson from the other day on CNBC. Yeah, I was going to ask how big this could get if the signal here is that you're not happy with the direction of yields. You know, they've gone back the other way. 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? Well, again, we have a big toolkit. So we'll see. And part of it is signaling here and to show that we believe that the yields don't reflect the underlying fundamentals.

35:19This Iran conflict, we will get on the other side of this. We don't know when and we can talk about the economic measures we're going to be taking against Iran in a minute. And we are in the administration. We are the announcing a probably at the end of this week beginning of next week and increase focus on fiscal consolidation. And it's the coming from President Trump, Russ Boat and myself will be examining both on the revenue side and the cost side of what we can do. I so want to go through a couple pieces of that because one thing here there is something I was mentioning a few minutes ago, which is at least beginning to signal they would like to do a 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 we don't believe the yields reflect the underlying fundamentals? Reminds me a little bit of the John McCain quote that was very famous after when the markets were collapsing. The fundamentals are of our economy are strong.

36:21That quote did not age well at that moment. What do you hear when Besson says that? Truthfully, I hear a little bit of desperation. I don't think bond yields are going to go massively higher. This is not a massive crisis, but they're rolling out and then large buyback program, a technical program, spossus of very nerdy. It's not supposed to be something that has a major effect. So when the US government sells a tenier bond, for example, which is the standard type of bond, the 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, because it's a bit stale, it's kind of locked away in vaults and pension plans and banks. So it doesn't trade that much. So the price usually kind of reflects that. And then you can typically buy them based like Deskab. 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

37:22and paying a fit by issuing those super liquid tenier bonds, 20ier bonds. Besson enlarged that program. He says because of the liquidity he was getting worse in some parts of the Treasury bond market. But it looks like a fairly naked attempt at lowering those bond yields again. But it's completely ignoring the scale we're talking about. We're talking a few billion dollars. There's over a trillion dollars worth of Treasury that trade every day. And this is like putting out a wildfire with a water pistol. And that's why you saw the bond market first reacted to the signal yield sending that we want yields down. And when the Treasury Secretary says that and acts that way, the knee jerk reaction is still we're going to 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 bond market is so tricky for people. Why Carville made that amazing quote about how you can intimidate everybody?

38:23Because you can't push around trillions of dollars very easily. The only people that could really do it, that are the resources to do it. There's only one place in town that can print unlimited dollars and that's a Federal Reserve. So the Federal Reserve has done this in the past, has beaten down bond yields after the financial crisis and in COVID. But the Treasury just doesn't have the resources. I'm Jonathan Knight and I'm the general manager of New York Times Games. If you play our games, you probably know there's something a bit different about them. Just like there are writers behind the articles you read in the Times, there are creators behind our daily puzzles.

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40:35We're 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. We're even willing to put our money where our mouth is on this. It seems in many cases have the opposite effect of actually scaring people a little bit. If they're willing to do this, what does that actually make you think about where this is all going? But how do you see that dimension of it? Like why does it have this sort of effect on expectations? It is in the opposite direction of the treasuries purchases. This boils down to credibility. I mean, the US has for a very long time across many, many administrations or both from both sides of the aisle, built up a ton of institutional credibility about how it acts, how it behaves, its predictability. When you see the world's most influential economic policy maker acting, I wouldn't say erratically, but acting the way that most bond traders sussed out very quickly that this was not going to work.

41:41It makes you doubt other parts of what else are they thinking about. If they are unpredictable, what else could happen? That makes people skittish. I don't think people are panning about the US or worrying at all. Frankly, it was weird that Bessent would respond so falsely to what looked like an unfortunate but entirely natural increase in treasury bond yields. Because of people think inflation might say a bit higher for a bit longer to compensate you for that risk you're taking. But it wasn't out of whack. This was not like we saw in Liberation Day. This was not March 2020 when the treasury market really crept out on the pressure from Covid. So I'm honest a little bit baffled because as Trump said himself in that opening clip that Bessent, 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.

42:42He's doing things he himself knows to be wrong and won't work. I don't doubt for a second he knows this doesn't. Didn't Bessent criticize Yellen when she was doing a more modest version of the same buybacks? He did. And he also criticized the Biden administration for ishing more bills. So the idea was that this was activist treasury policy and of course they're doing the same thing. I chalk that more up to standard political partisanship. You know you're always going to criticize incumbent government for anything and yes it looks massively hypocritical when you do exactly the same thing. But that feels standard. What doesn't feel standard is this kind of incoherence and doing things that people in the administration 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 was doing it. And then he said, I don't think that's the right thing. 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.

43:47I'm going to take that as something that I don't believe has truth value one way or another. Bessent also came out this week with this FT op-ed about you know just a complete trend to do an economic annihilation of Iran to end that. It 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 Bessent doing things that at another time he seemed to know you shouldn't do. Simply that the president is telling people that he does not like the path of the bond market and he wants it to use or 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. 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'm the same I like my Kate and I like to eat it.

44:50But it does feel like I agree that you know I'm not an administration watcher just watch the bond market but it does feel there hasn't 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 priest. And then you know somebody went out and murdered Thomas a Beckett 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. It's a very short term way of thinking I mean like I said the simple solution here is that the fed raises interest rates. What 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. Ending the war in Iran and restoring free passage through the streets of a moose would certainly help a lot as well but we're really talking you know there's a lot of things going on. We're talking in the week of the Jackson Hole symposium which is the annual big central bank conference.

45:51This will be the first work heaven washes there is Fed share. What are you expecting him to say do in a normally fed shares have not wanted to rock the boat too much at Jackson Hole. Watch does not think that I have some sympathy with his view that maybe some volatility in the market just a little bit. Might actually be a healthy thing in the long run so the central bank view and I have some sympathy with that to is that predictability means that bond market volatility and interest rates volatility is low and that's better for economic growth. That is completely true I believe that whole heartedly but some unpredictability can maybe make the system as a whole safer. So if you think back in 2000s when the fed was actually jacking up interest rates out because the housing bubble was inflating they saw some of this they were raising interest rates in a very predictable steady way.

46:52In 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 rains 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 washed articulated quite in that way and maybe he does so Jackson Hole but it's going to be fascinating to see because I mean this is a new arrow central banking. At 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'm just certainly going to my popcorn ready. I mean this is a way in which washes differing a little bit from those who came before and it sounds very it's a weird thing to be arguing over but yeah 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 going to do and you can react and everybody can plan. And Worsh has been I was a opposed to all forward guidance but he is announced his forward guidance has been there will be less forward guidance.

48:02Why so I have to should say that I think both the proponents of full 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 mass that if they say they're going to do X they have to do X and it takes away the flexibility to be able to do anything respond to incoming data and that's just below me 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. 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 going to keep interest rates low for super long or until X or Y something that being concrete triggers that that will give people so much safety that we're not going to raise interest rates that they'll go and borrow money

49:06they're going to be similarly on me get all like you know my growth going in that I think also again people don't really listen to that because they also do understand that if inflation Sunnier Rups as it did in 2021 22 then central banks are kind of very hurry back track 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 was the coming of the dreaded bond vigilantes. Who are the bond 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 only it's our it's our last option. Last option is the last of the bond vigilants. Yes exactly what's dealing them. So I mean I mean this you and me it's our pension plans our mutual funds are banking are the money that we have in the banking system. The bond vigilantes is kind of a very amorphous phrase it's a wonderful I've used it many times myself because it's so evocative.

50:08But in reality it's just you know a vast ecosystem of money that is in a mutual fund a pension plan an insurance company a bank a sovereign well fund the private bank in Switzerland. Even you and I we can buy groceries directly from the US government and the idea is that you know the vigilantes would stop lending to countries and this really the only power they can't go around beating people up. Which is they would stop buying these bonds. Yeah or maybe just buy the less of them or want a slightly higher interest rate. 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 a parkie star or Sri Lanka or even Argentina that tends to borrow a lot of in foreign currencies. But it does actually you know it's has a bit of truth in us to it because in a world in a global economy that runs on credit.

51:12The ability to raise the cost of credit or denied altogether is an incredible power and this is not set by you know a bond of vases in the secret WhatsApp group. But it is the individual decision of a million people sometimes acting in concert. But you do sometimes see the bond market just get. Jittery about certain countries certain companies at certain times most famously in the UK in 2022 where they managed to house a prime minister in I think 45 days. But typically more and poorer countries that frankly don't have the resources that a large advanced fellow economy does. So you have more conversations with bond traders and I do. It's not a super high bar to clear but you clear it some of my best friends are bond traders. When you guys are couple of weeks in and they are describing the bad scenarios the stuff they worry about or they think about.

52:13The stuff that maybe best in is worried about in you know the wee hours in the morning. What is this look like over the coming couple of years if this goes wrong I mean what do inform people think bad outcomes here might look like. Also is it one of my favorite topics in the whole world and this does make me very sad human being probably but a sovereign debt crisis and sovereign debt restructuring I just think it's there is this fascinating collision or finance economics politics to politics everything comes together. But they usually affect smaller poorer countries of course but because of my interest I actually had thought probably an unhealthy amount of time about what a US debt crisis would look like. A US debt crisis would not look anything like anything else in the world. First of all the US can't really go bankrupt unless it chooses to I mean 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.

53:19Now that can have other crisis like outcomes like runaway inflation that financial system that you can vault by all this dollar printing but a classic default. It is unlikely or vanishing the unlikely and that's why when I talk to bond investors including in the the early hours of the morning and a few drinks in very few bond of us as I know I 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 managed to co up the entire Federal Reserve as start creating dollars like Trump says I want interest rates lower and we're just going to print as many. Dollars to do so as possible that has ripple effects everywhere. What do you think the what is the charge you read that right now you probably looked at bloomberg this morning and I didn't.

54:21Well ten years kind of yeah it's around full full 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 come. You know November of twenty twenty eight we use election day here is a kind of marker that the rate is. 67% I mean what we love about the bond market is that it synthesizes just an insane amount of information economic growth and fashion productivity health of institutions things like that. And I'd say that you know people smarter than me and barris themselves trying to protect the markets all day long so I just don't know but as long as the economy is booming and we want that the Treasury yields should go high that would be a healthy signal and if bond yields go back to let's say one percent if you know talking in in November twenty twenty eight and treasury yields are at one percent again well that's a very terrible economic backdrop.

55:28Which way would go right now I don't know I mean a eyes the big factor right now I mean it's kind of the investments are happening in data centers that maybe on the margins sucking a little bit of investment away from the Treasury market but they're certainly juicing the economy. The US economy would look I think rather different if we were seeing these huge cap ex programs that yeah the biggest sense of railways splurge. And then you know it depends like is this going to get the economy going or is it just going to end in another sort of the infrastructure bus and that would probably decide what things look like in November twenty eight. Right to try that out you can imagine a world where AI proves to be a bubble there's a big pop this investment that is powering so much collapses. And then you probably would get to lower by yields because one there'd be less private demand for debt and so more of the more of those funders could buy treasuries second the Fed would probably have to bring down rates because you be going into a recession very likely going to recession.

56:34So 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. Now we want bond yields to go down for the right reasons and that is that inflation is low and stable and quiescent and not very volatile. And you want you want some interests on your treasury bonds it should be fair to expect that. But whether there are six seven percent you talk about that also is that I think probably a very unhelpful world because that would imply that inflation is not under control. It probably implies the Fed is tacitly probably unstatedly given up and controlling it to logic standard we are heading into what we have seen the process at proper stack flation where both growth and inflation are growth is too low inflation is too high and interest. Rates have kind of lost the power to move things around too much well there's something weird and all this so you are about a national beer economics research survey that I've had genuinely shocking that said among bond investors surveyed they believe there to be a 50% chance of a US debt crisis in the next decade.

57:53But then almost all those investors said they had no change in their portfolio strategy based on this. So I had trouble making heads or like on the one hand if the bond market actually believes we're going to have a 50% chance of a debt crisis I wasn't clear what that actually meant. But then also they believe it's that high nobody's doing anything that's weird what did you make of that so how do you explain what that survey was revealing and what did you make of it. I mean I was saying Augustine who said Lord make me chased but not yet and it's how we humans respond to so many things like climate change you know we we know it's a big deal and it's coming and we maybe might tweak a little bit around the edges of our own lifestyle but in reality we don't. We might say we want politicians to do X or Y practice until it actually starts affecting us on the databases you can see people don't really like that and I think it's it's both shocking but also 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.

59:03I think that is good place to end so then I was a final question what if you books you recommend to the audience. I have to admit I've been dreading this because you know he asked me tomorrow they'll probably be different books but I I'm going to choose three books that show that finance economics and business can actually be really fun and interesting and riveting even. I think the obvious first place the first book is barbarians at the gates I genuinely think it's kind of the gold standard of narrative business journalism today but really it's kind of like a history of American business over the past century told through the prism of this private equity on all the crazy characters involved it is astonishing. My second book Daniel Jürgens the prize history of the oil market it's kind of the model for a lot of similar books came first but Jürgens kind of the OG it's I love those histories that kind of tell history of the world this is almost a history of the 20th century but through a completely different angle so it tells it through the oil market is tremendous has crazy characters of course and just I learned so much.

1:00:19Just as a journalist but also just as a person. My third one I can almost feel some of the books behind me screaming at me hoping to be picked I mean yeah the glaring at me I think I feel it I think I'm going to go with the market armors laws of finance it's just a fabulous book about this kind of tumultuous interwar period in the run up to the Great Depression. And it tells you know what is an incredibly complex multi faceted financial economic story through these that the heads of the major central banks at the time and you know my day job at the F.T. I spend lots of time trying to kind of. Pass these things and making digestible to a general audience make them sort of riveting and fun and you know it's I don't think I've seen such a complex story told with such a verb as well as in the markets book so I think that'll have to be my third pick and I'll just have to accept the books some of the books behind me staring at me angrily.

1:01:26Robin Bugglesworth thank you very much thanks for having me on. you