US President Donald Trump arrives at Palm Beach International Airport in West Palm Beach Florida on … [+]
Much is going on with Donald Trump’s second administration. Many people are delighted with its actions — including the start of tariffs on goods from Mexico and Canada slated to start tomorrow — and many are displeased
But forget about individual opinions for a moment. There is one collective response that will have significant consequences for the country and even the world. Not the stock market, although the S&P 500, Dow Jones Industrials, and Nasdaq all took hits on Friday. Not consumers, who will see higher prices — also known as higher inflation in the form of oil, pharmaceuticals, and computers chips as The Hill reported — as importers of products will likely pass on the threatened 25% duties.
The 8 million pound gorilla is the global bond market, which was valued in 2023 at $140.7 trillion, according to The Motley Fool.
As a number of publications have been quoting Democratic political operative James Carville from the 1990s, “I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.”
The weight of the bond market — and let’s focus on the U.S. government bond market for now — is that it’s more than investments. Governments use bonds to borrow but they don’t control the interest rates. Those are set by the market of investors, whether individuals or enormous corporations or investment funds. The resulting rates control how much government debt ultimately costs.
They also have significant influence on how much things like mortgages and auto loans cost. Lenders typically set their rates in two parts. One is called the risk-free rate, which is how much interest can be gained for investors safely. Typically, such rates are based on the yields, or prevailing interest rates, of the 10-year or 7-year Treasurys, as they’re the closest thing to safe rates. Lenders then add a risk premium based on what they think they additionally need to make lending money worthwhile.
Bond investors have been increasingly concerned about where the economy might be going. Trump’s economic plans about extending tax cuts for corporations and the wealthy as well as tariffs are broadly seen as actions that could increase inflation. That makes bond investors look ahead and consider that rising inflation would mean needing higher returns on their investments to stay ahead.
As yields of longer-term government bonds rise, two things happen. Regular government borrowing gets more expensive. There’s pressure from the bond market and also the government’s need to sell more bonds to raise the money they need. That is a greater supply, which pushes down prices and drives up bond rates, further increasing federal borrowing costs.
As the Wall Street Journal wrote recently, a 0.1 percentage point increase in Treasury borrowing costs adds $300 billion to interest expenses over a decade.
Also, if the rising yields mean higher interest rates, then a lot of business and consumer borrowing for basics will rise, pushing inflation even higher and creating a feedback loop that could make the Federal Reserve also increase rates.
Trump has said that he wants the Federal Reserve to cut interest rates, which given economic conditions is probably a poor strategy. However, given current conditions, it’s hard to see how that would happen without an overhaul of the independent central bank’s leadership.