LEILA FADEL, HOST:
For more on the U.S. debt and bond markets, I've got Stacey Vanek Smith on the line with me. She's a reporter at Bloomberg Businessweek and co-host of the podcast "Everybody's Business." Good morning, Stacey. Thanks for being back on the program.
STACEY VANEK SMITH: Good morning, Leila.
FADEL: OK. Let's start with a little Econ 101. What does it mean for bond yields to go up or down?
VANEK SMITH: All right. So the world of bonds - I think of it like severance. It is mysterious and important. So I think of it - bonds are like a little loan that we give the government. So if you buy a government bond, you are loaning the government money. And just like a loan, the government has to pay you interest on that bond. It pays you back plus a little interest, and that interest is called the yield. So when yields go up, that is like an interest rate on a loan going up, so it gets more expensive for the government to borrow money. And just like Scott was saying, that means that the government is going deeper and deeper into debt every time it borrows money - harder to pay it back.
FADEL: So Scott also just mentioned that the federal debt is linked to everyone's cost of living. Explain that process a little more - how a higher debt turns into, for example, a more expensive mortgage.
VANEK SMITH: Yeah. It's interesting. It's because all of these things are competing. So mortgages - you might remember from the financial crisis mortgage-backed securities. Banks will package up a bunch of mortgages, chop them up and sell them to investors on the market. Well, those compete against U.S. Treasury bonds. And so they all get priced together. They're all competing against each other. And so when U.S. Treasurys have to start offering higher interest rates to investors, everybody else does. And so that brings up the price of mortgages. When banks are having to pay more for that, it gets passed down to us. They start charging us more to lend us money for our houses.
FADEL: This week, the Treasury Department announced it will buy back more bonds to try to push down interest rates on money it borrows. What were investors' concerns about the bond market?
VANEK SMITH: I think it is just like Scott was saying. Well, it's inflation. I think because - specifically the 30-year bond. People think if they loan the government money for a long time - 30 years, especially - by the time they get their money back, the U.S. dollar isn't going to be worth as much. Like, if I lend you money, $1,000, and 30 years later, when you pay me back, I can only buy a coffee with $1,000, that wasn't a good loan. So essentially, that's what investors are worried about.
FADEL: And how effective is the Treasury's plan?
VANEK SMITH: I mean, so far, it seems to have worked pretty well. It's a strange thing, the way these things work, because the government essentially stepped in and bought its own bonds. It's lending itself money, and that makes it more attractive for us to lend it money. But it did work. It's kind of getting money in the system, money flowing. So - so far, so good.
FADEL: At the White House, President Trump was asked if he is concerned about volatility in the bond market. He said no and then repeated a familiar complaint he's had about the Federal Reserve and the short-term interest rate it controls.
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PRESIDENT DONALD TRUMP: They raise them for no reason. And you can't go out to the market when you have a Fed that's raising - you can't say, oh, I want to pay three points less than what the Fed says you're supposed to be paying. So no. I don't think so at all. I think we have a very powerful country, and we're powering through these ridiculous interest rates.
FADEL: What do you think of the - this - the president's diagnosis here?
VANEK SMITH: It's interesting. I mean, I do think the higher inflation goes, the higher the Fed is going to have to raise interest rates to try to bring that under control. And that is going to affect things like bonds. That's going to make buying - investing in the U.S. government, loaning the US government money seem riskier. So it's going to push up - it's going to potentially force up interest rates, drive up inflation, all of that. So it's not - I would disagree with the president on economic terms here. But, you know, he is right that also raising interest rates is hard on the economy.
FADEL: With all this debt, do investors still see the U.S. as a reliable borrower?
VANEK SMITH: Yes. So relatively speaking, lending money to the U.S. government seems a little bit riskier maybe than it did before. But this is still - lending the U.S. money - U.S. government bonds are still seen as the safest investment in the world. It's sometimes called the riskless investment. I don't know if I agree with that. But, you know, governments - investors - all over the world count on those bonds as just the safest place possible in the world right now to put their money. And hopefully that will continue.
FADEL: That's Bloomberg's Stacey Vanek Smith. Stacey, thank you for helping break this down for us.
VANEK SMITH: Thanks, Leila. Transcript provided by NPR, Copyright NPR.
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