The market for U.S. debt, aka the bond market, is a huge and critical part of global finance, but one that usually percolates in the background. Yet lately it’s been in the headlines. What’s behind this disturbance in the force?
You don’t need to be an expert in finance to answer that question, and it’s important that you understand the answer, because it will have a direct impact on your economic life. Perhaps not surprisingly, politics are at the root of these recent developments: the recklessness of both the Trump administration’s economic agenda and congressional Republicans’ deficit-exploding legislation are playing out in real time in ways you need to know about.
Starting at the beginning: As we all know, the U.S. government consistently spends more than it collects in taxes. This difference between government receipts and outlays is the deficit, which in 2024 was $1.8 trillion, or 6.4% of America’s gross domestic product.
Global investors in U.S. debt are learning how many trillions the GOP’s bill is likely to pile onto the already swollen deficit.
Where does the Treasury get this money? It borrows it in the bond market, meaning it sells IOUs to creditors who lend money to U.S. government. They don’t do this because they’re patriots who want to make sure the government can meet its obligations. They do it for a) the yield on the loan, i.e., the interest rate that the bond pays out, and b) the safety of investing in U.S. Treasurys. Such investments have historically been the least risky investments you could make. The U.S. government has always been safely counted on to pay its debts. Default risk has been zero.
OK, so why the anxious headlines, like “The Bond Market Is Waking Up to the Fiscal Mess in Washington” in The Wall Street Journal and “Bond Market Shudders as Tax Bill Deepens Deficit Worries” in The New York Times? Why are economists, myself included, who formerly told debt scolds to stop obsessing over the debt now urging the opposite?
“In a short amount of time,” economist Larry Summers recently told The Atlantic, “the fiscal picture has gone from comfortably in the green-light region to the red-light region.” As the headlines suggest, a key trigger for this angst is the legislation that passed the House this week. Global investors in U.S. debt are learning how many trillions the GOP’s bill is likely to pile on to the already swollen deficit (since it’s a work in progress, we don’t know the number yet, but my analysis suggests something in the $5 trillion range).
The Wall Street Journal’s chief economics commentator Greg Ip noted that the deficit implications of this budget “would be higher than any other sustained stretch in U.S. history, and more than almost any other advanced economy. … Before 2023, [U.S. deficits] accounted for half of advanced economies’ deficits, according to the International Monetary Fund. From 2023 through 2030, it will be two-thirds.”
The result is an increase in the interest rate that the U.S. government has to pay its lenders. Think of it this way. You’ve got $1,000 to lend to one of your friends, both of whom are asking for the loan. Your pal Norm has a good job, a stable family, and wants to invest in a course that will set him up to get that regional VP gig he’s been angling for. Your other pal, Shady, just got fired from another job, but promises that he’s going to take your $1,000 to Vegas and pay you back double. Assuming you’re a rational lender, you’re going to charge Norm a much lower interest rate than Shady.
Bond investors are making a similar call. They’re starting to worry about the sustainability of our debt, which, at $29 trillion, is closing in on 100% of U.S. GDP.
That’s a big number, to be sure, but it’s not automatically worrisome. After all, even with the onslaught of Trumpian chaos, we still have one of the world’s strongest, most productive economies, the dollar is still the world’s dominant currency, and default risk on our sovereign debt remains just about zero.
To make matters worse for all of us, the interest rates on U.S. Treasurys are benchmarks for other key rates throughout the economy.
Understanding why bond investors are right to be worried, then, requires one step deeper into the weeds. Whether we’re talking about your family or the government, there are two key factors that determine debt sustainability: the interest rate and the growth rate. If Norm borrows at 3% and gets that VP promotion, which boosts his earnings by 4%, he’s golden. He can service his debt with the income from his investment. Whereas if Shady borrows at 3% and loses everything in Vegas, he’s up a creek without a paddle — and so, as his lender, are you.
Mapping that onto the U.S. case, investors are worried that the Trump administration and the Republican Congress are engaged in set of actions that will both lower growth and raise interest rates, a toxic combination. The GOP bill doesn’t just add unprecedented trillions to the debt; it takes health coverage and nutritional support from poor people to very partially offset big tax cuts for the wealthy. There’s nothing in there that would lead an objective person to think there’s anything pro-growth about it.
Add the tariffs are expected to slow growth this year, perhaps from around 2% to around 1%, according to forecasts by Goldman Sachs.
This combination of ever-increasing debt (which, to be fair, predated Trump; he’s just making it a lot worse), slower growth and the pervasive sense that neither the administration nor the congressional majority even know or care about these risks, is leading lenders to the U.S. government to insist on a higher return for buying those IOUs known as Treasury bonds.
The rate on a 30-year Treasury has climbed from about 4% last September to about 5% on Friday. That’s just 1 percentage point, but when you’re servicing about $30 trillion in debt, one more point on the interest rate translates into $300 billion more in debt service. Even in Washington, that’s real money.
To make matters worse for all of us, the interest rates on U.S. Treasurys are benchmarks for other key rates throughout the economy, including those on credit cards, auto and mortgage loans. Mortgage rates climbed above 7% last week, and their momentum is solidly in the wrong direction.
To be clear, it’s very hard to predict where interest rates are going, but as long as Trump’s policy continue to put downward pressure on growth and upward pressure on rates, I’m hard-pressed to see rates going anywhere but up. Actions have consequences, and financial markets don’t subscribe to the administration’s alternate reality where everything’s fine and under control. In fact, the bond market is loudly saying everything is far from fine — and the folks under control are out of control.
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