Support Marketplace

Bond market couldn't care less about shutdown

They’re called Bonds, T Bonds. 

And they are often considered to be the safest investment you can make. 

But, much like another kind of Bond, these government bonds are riding a train, one that's headed for disaster. And, just like James Bond's girlfriends, who will expose themselves to all kinds of mortal dangers to be with him, investors are fighting to get on the train, desperate to get their hands on government bonds. 

The proof? The yield on the 10-year T-note recently reached a two-month low. 

(Confused about yield? The yield is the difference between the price of a bond and the return you get when the bond comes to maturity.  So, if you buy a $100 bond that promises 10 percent interest in a year, you’ll get $110 in a year.  Your yield is 10 percent. 

But say you get bored with that bond and you sell it to a desperate friend who pays you $105, well then your friend sees a yield of less than 5 percent (because remember he gets $110 in a year but paid $105.  

And let’s say all your friends want your bond, so they bid up the price and someone buys it for $109 -- that person’s yield is TINY! Less than 1 percent (because they will get $110 for it, but they paid $109)!

So when you hear Kai Ryssdal talk about the yield moving up or down, think of it as saying “a lot of people wanted to buy bonds” or, if the yield increases, “not as many people want to buy bonds.”)

SO, if the government might default on its debt...why in the heck would investors be buying lots of government debt?

Because “we certainly do not anticipate that the U.S. government is going to default,” says Josh Thimmons, a managing director at global investment firm Pimco. 

He, like many investors, just doesn’t think Washington would be crazy enough to drive that train over the cliff.  

Scott Clemons, a strategist Brown Brothers Harriman (the oldest private bank on Wall Street) says it reminds him “of that old Winston Churchill Quote: ‘you can always count on the Americans to do the right thing. After they have exhausted every other possibility.’”

Now, it is true that short term bonds that might be due in the next month are getting a little scary, their interest rates have jumped a quarter percent. But even if the U.S. did fail to make an interest payment on some of its debt, investors figure they’d still get paid, just a little bit late. After all, it’s not like the U.S. can’t pay investors back, it’s that it may not be so willing to. 

There’s another thing going on here, says Thimmons at PIMCO: “the debt ceiling issue is negative for the entire capital structure of the U.S. economy, and T-bills and Treasuries are still the safer part of the capital structure.”  

In other words, government bonds may not look so hot in the face of a shutdown and default, but you know what looks worse? EVERYTHING ELSE.

Scott Clemons agrees, but says there are more important things to focus on than the ‘shenanigans’ in Washington.

“In the short run,” he says, “Washington will drive prices, but earnings drive the underlying value of financial markets.” October happens to be when a lot of firms will be reporting earnings. “That’s the story that has lasting impact beyond whatever happens. So we’re focusing on that.”

About the author

Sabri Ben-Achour is a reporter for Marketplace, based in the New York City bureau. He covers Wall Street, finance, and anything New York and money related.

Comments

I agree to American Public Media's Terms and Conditions.
With Generous Support From...