Government borrowing is getting more expensive. Bond yields — the amount the government pays investors to borrow their money — this week hit their highest rate since the financial crisis of 2007, as investors demonstrated their nervousness about the U.S. economy with a massive bond sell-off. The market turmoil could spread, raising borrowing costs for consumers and businesses.
Bond investors are “mainly concerned about two things,” said NPR. The first is that persistent inflation, driven in part by the war with Iran, is eroding the value of the bonds they hold. The second is the federal government’s longstanding and bipartisan “habit of spending more money than it collects in taxes.” The U.S. federal debt hit a “record-shattering” $40 trillion this week. Most observers do not believe the government will “find itself unable to pay back investors,” but investors are increasingly “worried.” This week’s bond jitters are their way of “sounding alarm bells” about the American economy.
Government bonds are also “under pressure from a wave of new corporate debt,” said CNN. Companies like Alphabet and Meta are borrowing massive amounts of money to fund their buildout of artificial intelligence networks, and those corporate bonds are “competing with government bonds for investors’ attention.” That creates less demand and forces higher yields for the government bonds. Big Tech and big government are “competing for the same pool of buyers at the same moment governments need those buyers most,” deVere Group’s Nigel Green said in a note, per CNN.
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The return to pre-2008 rates for bond yields “isn’t cause for panic,” The Wall Street Journal said in an editorial. It might sound frightening to hear that “rates are higher than they’ve been in nearly 20 years,” but in truth the low rates of that era were “abnormal.” The rising rates will create “new budgetary stresses” for the federal government: Servicing the debt now costs $1 trillion a year, making it the “second- or third-largest line item in the federal budget.” The government can no longer borrow “as if near-zero interest rates would last forever.”
“America is about to get more expensive,” Wharton School’s Mohamed A. El-Erian said at The New York Times. The pain is likely to spread to “sectors that are traditionally sensitive to interest rates” such as the home and auto markets, which will “sideline even more prospective first-time home buyers” and raise the cost of transportation. That in turn will feed an “affordability crisis that already sits atop voter anxieties” ahead of the midterm elections.
What next?
Bond markets calmed briefly on Wednesday after the Treasury Department announced it would “more than double the size of its government debt repurchases,” said CNBC. But that relief will probably be “short-lived,” said the Journal, because the buyback program does not address the fundamental concerns about “high levels of debt and government spending.” As of Thursday morning, yield rates were once again on the rise.
