A bond is a certificate confirming that its owner has lent money to a specified borrower that will be repaid at a fixed date, typically with a fixed rate of interest. Known as fixed-income securities, they appeal to investors who want stable returns.
Corporations issue bonds to borrow money and so do governments – to pay for investments and other expenditures. The UK government’s bonds are called gilts, while US government bonds are known as treasuries, traditionally seen as a safe haven because they are guaranteed by the world’s biggest economy. They are issued with different maturity dates when they must be paid off in full, with two-year, 10-year and 30-year bonds being common.
How are they traded?
Bonds can be bought and sold like shares on a secondary market – an exchange – but, unlike shares, they offer guaranteed annual returns. The bond market is the world’s biggest securities exchange, worth almost $130tn (£99tn), with the US market accounting for about 40% of debt worldwide.
Government bonds are usually sold to financial institutions in auctions, and can then be resold on the secondary market for more or less than their face value.
What is a bond yield?
Bond yields represent the amount of money an investor receives for owning the debt as a percentage of its current price. When the price of a bond falls, yields rise. The yield is commonly referred to as an interest rate, or the cost of borrowing to an issuer.
Rising yields suggest dwindling appetite to own the debt among investors, which can be influenced by a range of factors including an issuer’s ability to repay. For governments, this centres on the prospects for the country’s economy and finances.
Inflation expectations also have a significant impact. This is because inflation undercuts the future value of money received for owning the debt. This means investors could demand a higher yield to compensate for the risk.
And because other financial products, such as mortgages, are priced off the yield, there is a spillover into the broader economy.
What have Trump’s tariffs done to bonds?
At first the US president considered his tariff plan to be working, having anticipated stock markets would react badly to tariffs and the dollar would fall.
Trump was sure the bond market would remain calm because he promised to pay for tax cuts later in the year with revenues from tariffs, meaning the US government could limit the number of bonds it issues, keeping supply and demand in sync and putting a cap on overall government debt levels.
However, the tariff war has prompted fears of a US recession, making it riskier to lend to the US. There are concerns that the US will become locked in a titanic struggle with China, which would damage both economies over a long period and drag down global growth.
In response, investors have sold US bonds in huge quantities, driving down their value and sending the yield higher, making future government debt more expensive to issue.
Where did this leave Trump?
There was a fear in the White House that paying a higher interest rate on national debt would increase the government’s annual spending deficit, adding pressure to an already stretched budget and increasing the overall debt mountain.
Worse, the $29tn market in US treasuries is the bedrock of the global financial system and heavy selling could put pressure on other parts of it, forcing banks or other institutions to default and causing a wider financial crisis.
by Phillip Inman, The Guardian | Read more:
Image: Richard Drew/AP
[ed. If you read this and the following post you'll be smarter than 90 percent of the people in the country. As for what this all means going forward, the essay on Pax Americana (below) should not be missed. See also: What is the National Debt Costing Us? (PPF:]
The Congressional Budget Office (CBO) projects that interest payments will total $952 billion in fiscal year 2025 and rise rapidly throughout the next decade — climbing from $1 trillion in 2026 to $1.8 trillion in 2035. In total, net interest payments will total $13.8 trillion over the next decade. Relative to the size of the economy, interest costs in 2026 would exceed the post-World War II high of 3.2 percent from 1991. Such costs would rise to 4.1 percent of gross domestic product (GDP) in fiscal year 2035, if current law remains the same.
The federal government already spends more on interest than on budget areas such as:
- Defense
- Medicaid
- Federal spending on children
- Income security programs, which include programs targeted to lower-income Americans such as the Supplemental Nutrition Assistance Program; earned income, child, and other tax credits
- Veterans’ benefits
