Lately, the scoop on the bond market is like ice cream roulette
Lately, the scoop on the bond market is like ice cream roulette
It’s 17 degrees in New York and the wind is soul crushing. So the fact I’m dragging economist Allison Schrager to get ice cream is a little … unusual.
“I’m not sure this would be my first choice,” Schrager admitted as we walked up the frozen sidewalk. Luckily, Schrager follows the bond market at the Manhattan Institute, and the particular ice cream shop we’re visiting has a lot in common with the bond market right now. Really.
Surprise Scoop bills itself as “The World’s First Ice Cream Roulette Shop.” At first, it doesn’t look like much. It’s an empty room with white walls and a purple floor. There’s nobody greeting you — just some very loud music and some very big touchscreens on the wall.
“Welcome to Surprise Scoop,” the touchscreen reads. “All flavors are randomly selected. No flavor choosing allowed. No refunds or exchanges.”
Here at Surprise Scoop, you order a dish of ice cream, pay a rather hefty $10 (all via touchscreen), and and a worker you never see picks your flavor. The customer has no say at all.
The flavors customers have gotten are odd: ranging from pandan to pickle.
And if you hate what you get, you are in a pickle, according to the disclaimer you are required to click on before you complete your order: “What if I don’t get the ice cream flavor I want? Sorry, please try again. In all seriousness, we’re all taking a risk here.”
Risk. Here’s where ice cream roulette brings us back around to the bond market. Bonds are just little loans you give the government. You buy a bond for four weeks or two years or ten years, and when that time is up, the government pays you back, plus a set amount of interest.
Buying a bond is a lot like going for ice cream (at a regular ice cream place): You pick your flavor, you pay, and you enjoy a nice, predictable payoff.
“Government debt is by far the safest investment one can make,” explains Mike Cudzil, a portfolio manager at PIMCO, one of the biggest investment firms in the world. Cudzil said that safety is exactly why investors and governments snap up billions in U.S. government bonds every week. “In the world of investing, we think the U.S. government is as risk-free as it gets,” he explained.
But the bond market has been on a slightly rockier road lately, said economist Allison Schrager. Why? “It’s partly because inflation is back,” she said.
Inflation is the Achilles’ heel of the bond market. Say you buy a 2-year government bond for $100. And at the end of that time, the government will pay you back your $100, plus $5 in interest. Now, let’s say during those two years, inflation spikes. By the time you cash out, your $105 can’t buy as much; essentially, you lost money on your bond investment.
Back at Surprise Scoop, our order is up. There’s a little secret opening in the wall. A hand pokes out of it, holding our dish of mystery ice cream. Schrager and I inspect it. It’s white, covered in sprinkles and caramel sauce. We dig in, eager to see what our ice cream roulette has wrought.
Schrager takes the first bite and chews thoughtfully, looking perplexed. “I’m not sure what flavor it is,” she finally said. “It’s something exotic … is it coconut?”
I take a bite. It’s sweet, which a kind of tangy hint. I guess it might be durian. “I have no idea what this flavor is,” Schrager concludes. “I don’t think I like it.”
I take another bite and conclude: “It’s weird.”
Weird. Not the experience one hopes for when going for ice cream or buying a bond. But with inflation worries, there’s a risk that the trusty, plain vanilla return investors count on with bonds will end up being more of a coconut-durian-mystery flavor situation.
So, for the past couple of years, to attract investors, the government has been having to pay a higher interest rate — or yield — on its bonds. And those rates have gotten pretty high says PIMCO’s Mike Cudzil.
“Just looking at the bond market, it’s definitely more exciting than there has been in a very long time,” he said. “Those are very attractive returns with a lot less risk than other markets.”
So where our $100 bond was paying $105 after 2 years, the government has been having to pay out more. Say $110.
Those higher rates are a sweet deal for investors but a bitter pill for the government, which is the one having to pay those higher interest rates, Schrager said
“It’s a very big deal,” she said. “We’re running up a lot of debt, and debt service payments are becoming an increasingly large part of our budget. So if they go up even more, it just eats into the budget, and we have less money for other things.”
Recently, the government has gotten a break — bond market roulette has struck again. Right now, investors are worried that tariffs and other economic forces could slow the U.S. economy. The result: They’ve been flocking to bonds. Higher demand means the government can pay lower interest rates on bonds.
Here’s the thing: In spite of all the worries about inflation, bonds are still seen as the safest investment on earth. In tough times, stocks and crypto can lose a lot of their value overnight, but with U.S. bonds, the only real worry is that by the time you get your money back, it won’t be worth quite as much — which isn’t the worst thing. It’s kind of like getting an ice cream flavor you don’t love.
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