LEILA FADEL, HOST:
It was another sell-off in financial markets.
SACHA PFEIFFER, HOST:
The Trump administration had tried to calm market jitters and keep the government's borrowing costs in check, but investors dumped both stocks and bonds on Thursday.
FADEL: NPR's Scott Horsley joins us to discuss. Hi, Scott.
SCOTT HORSLEY, BYLINE: Good morning, Leila.
FADEL: Good morning. So we don't often talk about the bond market, but it does appear to be flashing a warning sign. What's going on?
HORSLEY: Yeah. Earlier this week, the yield on government debt jumped to its highest level in almost two decades. That's the payoff that investors demand in return for lending money to the government. Carl Tannenbaum, who's chief economist at the asset management company Northern Trust, says there are three reasons bond yields have been going up.
CARL TANNENBAUM: One, we have a very large and growing national debt. Two, inflation continues to be a little higher than we would like to see it. And three, the demand for borrowing, especially long-term borrowing, has been added to by the immense AI buildout.
HORSLEY: Big tech companies are borrowing a lot of money to build their AI data centers, and the government has to compete with that to find lenders of its own. The government's interest costs have jumped about 15% this year to more than $1 trillion a year.
FADEL: How's the Treasury Department responding?
HORSLEY: On Wednesday, the Treasury Department announced it would buy back more of its government bonds, effectively refinancing some of the government's long-term debt with somewhat cheaper short-term debt. And that move was intended to kind of reassure investors and tamp down those sky-high yields. Treasury Secretary Scott Bessent told CNBC he thinks the bond market is overreacting and there's no reason for yields to be this high.
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SCOTT BESSENT: The underlying economy, I think, is very strong. And the only inflationary impulses that we're seeing are coming from the energy, which is temporary.
HORSLEY: Of course, we're almost six months into the Iran war now, and gasoline prices are still high. The Treasury Department's action did provide a little relief in the bond market, but it did not last. Yields came down on Wednesday. But yesterday, they bounced back up again. They're not as high as they were earlier in the week, but the financial markets are still jittery.
FADEL: What does that say about the Treasury secretary's credibility?
HORSLEY: You know, Bessent is a former hedge fund manager. And he essentially said on CNBC, I know better than the market does. But the market's reaction suggests investors aren't willing to take that on faith. Carl Tannenbaum says the buyback program that was announced this week is pretty small in the scheme of things. And, you know, it only runs until just after the midterm election.
TANNENBAUM: Typically, when governments attempt an intervention of this kind, they need to commit to doing it in a very large size and for a very long time. And investors are questioning whether Treasury has that commitment.
HORSLEY: Bessent also told CNBC the government can grow its way out of that $40 trillion in debt. Certainly, economic growth would help. But, you know, right now the economy's growing at an annual rate of about 2%, and we're piling up debt at a rate of nearly 6%. So that's not a roadmap to fiscal success.
FADEL: What does all of this mean for people who are not active investors in the bond market?
HORSLEY: Well, the bond market plays a big role in setting interest rates. So when the government has to pay more to borrow money, so does anyone getting a mortgage or a car loan or trying to bankroll a business. Mortgage rates, for example, have climbed close to 6.7%, and those high borrowing costs are keeping a lot of would-be homebuyers on the sidelines.
FADEL: NPR's Scott Horsley. Thank you, Scott.
HORSLEY: You're welcome. Transcript provided by NPR, Copyright NPR.
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