AI Summary
5 min readThe bond market has been sending the U.S. government a message all week, and Treasury Secretary Scott Bessent tried to talk it down on Thursday. The 30-year Treasury yield hit one of its highest levels in nearly 20 years at auction, and the ten-year yield touched 4.7%. Robin Brooks of the Brookings Institution put the worry level at a six or seven out of ten, pointing to what markets are pricing for long-term rates a decade from now: six percent.
The long bond's warning and the Treasury's response
The problem, as Brooks explained, is fundamentally fiscal. The U.S. is running a deficit of roughly 7% of GDP outside of any crisis period like the pandemic. "If you want yields to come down sustainably, then that is what you need to rein in," he said. Bessent's response, which Brooks called "financial engineering," involves trying to shift the composition of government debt away from long-term bonds and toward short-term Treasury bills.
The logic is straightforward: demand for long-term debt has been shaky, so to attract buyers the government would have to offer higher rates. Short-term T-bills, which mature in one to twelve months, have plenty of demand from investors looking for a safe place to park cash. As Chris Lowe of FHN Financial put it, "If the US issues a ton of long-term debt, long-term interest rates will be higher."
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What you'll learn
- 1 (01:17) **30-Year Bond Auction Signals Rising Debt Costs** - The Wall Street Journal's Greg Ip reports the government's interest rate on newly issued 30-year bonds hit its highest level in nearly 20 years, raising concerns about the cost of servicing the national debt.
- 2 (02:00) **Long-Term Yields Reflect Risk and Dysfunction** - Robin Brooks from the Brookings Institution explains that rising long-term bond yields signal market concerns about inflation, policy uncertainty, and high debt levels in the U.S. and other countries.
- 3 (03:40) **Treasury Secretary Bessent's "Financial Engineering"** - Secretary Bessent attempts to prop up the bond market, but Robin Brooks argues the underlying problem of large fiscal deficits remains unaddressed.
- 4 (05:05) **Treasury's Strategy: Shifting to Short-Term Debt** - Marketplace's Justin Ho explains the Treasury's plan to sell fewer long-term bonds and more short-term Treasury bills to manage demand and interest costs.
- 5 (06:37) **The Risk of "Squeezing the Balloon"** - Shifting to short-term debt to fund a large deficit is compared to "buying a house with a credit card," creating new risks if short-term rates rise.
- 6 (08:04) **Upcoming Changes to the PCE Inflation Calculation** - The Bureau of Economic Analysis is revising how it calculates the Personal Consumption Expenditures (PCE) price index, which could make inflation look slightly lower.
- 7 (11:10) **Criticism and Real-World Impact of the PCE Revision** - The timing of the recalculation raises eyebrows, as a lower inflation reading could support the administration's desire for the Fed to cut rates, though it won't change actual prices.
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Guests on this episode
Show Notes
Treasury Secretary Scott Bessent’s buyback of long-term bonds was a bit of a letdown this week — the interest rates barely budged. The Treasury’s next move in its quest to rein in the national debt will be to issue a ton more short-term securities. But that might not be such a good idea, either. In this episode, we’ll catch you up on the bond market turmoil. Plus: Multifamily construction permits are a housing bright spot, the Fed’s favorite inflation measure is due for a methodology change, and two craft-focused small business owners share the view from their economy.
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