Why Are Yields on U.S. Treasury Bonds Rising?

The yield on the 30-year U.S. Treasury bond—effectively, the rate of interest on U.S. government debt—peaked last week at 5.33 percent, its highest level in 19 years. This may be the product of the normal laws of supply and demand. But the fluctuations in the vast market for U.S. debt have effects that are profound for both the U.S. and global economies—and, in this case, for U.S. politics, as Treasury Secretary Scott Bessent has now assumed responsibility for trying to bring that interest rate down. Why exactly are yields rising? How is Bessent’s background as a bond trader informing his actions as treasury secretary? And is the Treasury Department’s intervention in bond markets encroaching on the Federal Reserve’s turf? Those are just a few of the questions that came up in my recent conversation with FP economics columnist Adam Tooze on the podcast we co-host, Ones and Tooze. What follows is an excerpt, edited for length and clarity. For the full conversation, look for Ones and Tooze wherever you get your podcasts. And check out Adam’s Substack newsletter. Cameron Abadi: Why exactly are yields rising? As the prices of bonds go down, their yields go up and there are broad supply-and-demand mechanisms that affect the prices and yields of bonds. But is this right now a matter of too much bond supply—too much U.S. debt—that is reducing the prices, or is there a softening of demand that is driving the reduction of prices? Adam Tooze: This is a truly important news story that’s really developed with real urgency over the summer this year, which is this global move in yields. It’s happening across the board with the vast majority of advanced economies, where a big issue is government debt. And as you say, it’s counterintuitive. So it’s worth repeating the logic: As the relative attractiveness of bonds falls and so therefore their price falls—the effective interest rate, the yield on that bond goes up. Because you end up paying $98, $97, $95 for a hundred dollars’ worth of bond, which then pays you a coupon of $4 a year in interest. And then all of a sudden, you’re looking at a much more attractive interest because you bought it for less than the $100 face value. And so what’s happening in global markets—there’s two figures out there for government debt in the U.S. right now. One is $40 trillion. That’s the total of debt that’s been issued, of which about $8 trillion is held by other government agencies. So this is debt owed by the American government to itself. About $32 trillion is in the hands of the market. And that is almost exactly the same as U.S. GDP. So we’ve crossed two critical thresholds, $40 trillion for overall debt and $32 trillion, 100 percent of GDP, in the hands of the market. And even those numbers by themselves, I mean, they are oceanic, that is huge. A trillion is a thousand thousand million. So it’s a million million Those markets are being moved by just the awesome flow of new debt into the markets and, on the other hand, the growing anxiety around the persistence of inflation, and the availability of other types of assets that are attractive by comparison with debt treasuries. Equities and private debt. And all three of those forces are acting at the same time. So there is a huge issuance of private-sector debt, notably AI-related debt, by very, very highly rated, very high-quality business names, which attracts a bid. There is persistent anxiety about inflation, unsurprisingly, because we’ve had a series of shocks starting with COVID, then Russia’s invasion of Ukraine, then most recently Israel and America’s war against Iran, which have triggered surges in price. The inflation rate is now 3.7 percent. And if you’re holding a bond with a nominal face value, every inch, every percent of inflation eats away at the value of your bonds. So that makes bonds less attractive, reducing the bid. And then there is absolutely gigantic issuance. So $40 trillion is the amount outstanding. But America actually has to replace outstanding debt about somewhere between $8 trillion and $10 trillion a year. Because a lot of the debt is rather short term. It’s running a deficit of 6 percent of GDP, which amounts to $2 trillion in new issuance. And so there is a huge volume of new paper coming onto the market all the time. The daily churn in this market is over $1 trillion. And the whole thing adds up to this shift, which is affecting not just the U.S., but everyone really. French government debt, British government debt, we’ve spoken about that a couple of times on the show. Even German, even Japanese. The only country whose bonds have not seen a substantial increase in yield is basically China, I think, where they operate in a relatively closed financial system and there’s no inflationary pressure. So that gives you an idea really of how capacious this is. CA: Bessent was someone who, as a bond trader in the 1990s, was on the other side of these kinds of mechanisms, identifying situations where a government didn’t have the ability to hold a bond market at a certain price and betting that they couldn’t and then profiting from that. Does that inform how he’s approaching this situation now that he’s a government official? AT: I mean, I think a lot of the Trump people are kind of caught in a dilemma. On the one hand, they have some degree of technical competence, otherwise they wouldn’t be in the jobs they’re in. And on the other hand, you can’t be a Trump underling without being basically a sycophant. So you’ve got to sort of follow the boss’s story. And then they, in various contorted ways, try and twist narratives around that. And foreign-policy people do that in various ways. And what we’re seeing with Bessent is a guy who was not a terribly successful hedge fund guy, he’s no macroeconomic super brain, but he’s somebody who does have a deep understanding of how Treasury markets work, at least at the kind of superficial technical level. And so he oscillates between technical justifications for his various interventions—which have included swap lines for Argentina and, you know, supporting the Japanese currency by selling euro without telling the Europeans first—and now this intervention. Now, modern monetary theory people will say this is all terribly artificial, the Treasury could print dollars, too. It could just create its own purchasing power. Which is true, but it would overturn all existing institutional structures, and it would massively destabilize the financial status quo in the U.S. So that’s not on the cards. So then you ask yourself, “What is Bessent’s endgame here? When people call his bluff, where’s this going to go?” And the answer seems to be, “The boss said we should do something, I did something, that’s all that really matters here.” And the bond market isn’t like that. I mean, it’s not a historically wise thing. But this is going to come at a price, this intervention, I think. Especially because it also puts the Federal Reserve in a really, really tight spot. CA: Normally, if there was going to be an intervention to correct the vast global market for U.S. debt, it would be the Fed, and the new Fed chair, Kevin Warsh, that would have responsibility for intervening. Is Bessent encroaching on Warsh’s territory here? AT: Yeah, this is really one of the dramatic aspects of what’s been going on. And so in this moment, where Kevin Warsh is having to establish himself as Fed chair, it’s not been going terribly well so far. His second press conference in particular was widely rated to have been a disaster, because Warsh is trying to move the Fed to a regime of much more tight-lipped, much less garrulous, much more explicit navigation of the relationship with the bond market. And here comes Bessent making these cack-handed interventions which are widely being interpreted as a sign of panic and mounting insecurity on the part of the Treasury. Which is the last thing the Fed needs. And so the question now is what is Warsh going to say? And in some ways, he could, if he was ultimately going to play the political card, he could align or he could avoid making any comments on Bessent’s intervention. Or on the other hand, if he actually wants to establish his bona fides with the market, he is now in a position where he almost needs to say something about Bessent’s intervention, which will put him explicitly at odds with the executive branch. Which is not where the Fed is going to want to be. People have long forecast that it would come like this. I think most people imagined it would be in the manner of [U.S. President Donald] Trump bullying, that we’ve seen plenty of, after all and the legal war on the Fed is still continuing. But I don’t think we anticipated the Treasury stepping in as an activist player in its own right and so egregiously and openly seeking to manipulate the price of the U.S. Treasury. And doing so with such patently inadequate tools. So it’s either doomed to fail or begging for somebody else to come and sort it out. CA: What is at stake in terms of which government body has this authority to intervene in bond markets? AT: This is a really fundamental question that goes to the heart, I think, of the democratic legitimacy of these procedures. And it’s at first sort of rub a puzzling question. Isn’t this so technical? Does this really belong within the purview of democratic oversight? Would we want Congress to be having a voice in this? Would we want the executive branch to be doing this? I think the general feeling was exactly as you were suggesting, that this is so technical, it’s such a fast-moving operation when you want to do it effectively, and you need really unlimited financial power that the only actor that really sensibly could exercise that role is the Fed. Because that’s its designated place in the modern Constitution. It may not have been spelled out as such, but the Supreme Court with its recent judgments has come pretty close to conferring on the Fed—though this has no standing in American constitutional jurisprudence—a special position. In other words, the key figures in the Fed are protected from presidential intervention in the way that other federal agencies are not, according to the Supreme Court. Which reflects, I think, the Supreme Court’s understanding that the Fed sits in a fundamentally different relationship to major social forces, notably the financial markets and any other body of the American government. So I think that’s where this conventional sense comes from, that Bessent has overstepped a line that it is the Fed that properly deals with this stuff. But the problem, of course, is that that judgment itself is highly conventional, not to say contentious. Because ultimately what we’re talking about here are nothing more nor less than huge distributional questions, right? The whole debt issue is fundamentally a distributional question. The vast majority of American debt is held domestically. So it’s owed by Americans to Americans in the name of the American government to be paid by American taxpayers. So this is an internal American-on-American issue. And there isn’t a real limit to how much debt you compile up, other than the fact that as you raise the volume of debt as interest rates go up, you have to churn larger and larger amounts of money through the tax system, through the fiscal apparatus, and pay that out again as interest payments. And almost by definition, the people who hold large quantities of financial assets, including Treasuries, tend to be wealthier. So what you’re doing is taking from a relatively broad tax base and distributing to people who receive interest on government debt. And this is obviously politically delicate. And right now, we’re already churning more through on interest payments than we are on the Pentagon’s budget, which is already hugely inflated. So this is a very delicate balancing act. So if you view it that way, manipulating the interest rate at which those bondholders are compensated is a huge political intervention. It’s a form of tax. So in the most contentious interventions we’ve seen in the last week, Citadel securities, [Stanley] Druckenmiller, people like that have essentially openly accused Bessent of what they call financial repression. Which is really a technical term for a way of managing the financial system—managing the relationship between interest rates and inflation—but, not improbably in this context, is actually taking on a highly political connotation. In other words, what you’re doing is shifting the balance of interest here through artificial interventions to the benefit of taxpayers and to the detriment of those who are investing in financial assets. That’s what you are doing. You’re artificially squeezing the price up and squeezing the yield down. So existing holders benefit, future lenders will get lower yields. It’s a huge operation on the American distribution of income and wealth that you’re engaged in. And what they’re saying is you shouldn’t be doing this, it should just be the market that does this. Which of course is its own kind of value judgment, right? So I personally think financial repression, we’ve spoken about it on the show, is probably the best way out of America’s fiscal dilemmas. But if you’re going to do it, you’re going to have to do it with more purpose and more coherence and with bigger instruments than the ones that Bessent is mobilizing.