Bonds are like the “hidden wiring connecting the global economy”

The bond market is, normally, a little boring. But lately, it’s been anything but. Today, yields on the 10-year Treasury note hit a 19-year high, following a report suggesting that inflation isn’t slowing down.

Agita in the bond market matters because the bond market is so important. “It is the bedrock to the entire financial system,” said Robin Wigglesworth, editor of the Financial Times’ blog “Alphaville” and host of the podcast, “The Story of Money.” It's actually where most lending happens. We think of banks as kind of the central engine of capitalism, but really it's the bond market.

Wigglesworth has an upcoming — and timely — book called “A Fabulous Debt: The Epic Story of How Bonds Built the Modern World.” “Marketplace” host Kai Ryssdal spoke to Wigglesworth about the book. The following is a transcript of their conversation.

Kai Ryssdal: Everybody listening to this program, because they've heard me say it a million times, knows what a bond is, right? It is people loaning governments, companies, take your pick, money, and then the expectation is they get paid back. You, though, have spent 350-something pages saying it is oh-so-much more than that. Discuss, would you?

Robin Wigglesworth: Yeah, I mean the bond market is often seen as the boring sibling to the stock market. I think that's completely wrong. It is the bedrock to the entire financial system. It's actually where most lending happens. We think of banks as kind of the central engine of capitalism, but really it's the bond market. There's more lending happening through the bond market than the banking system, and I just think the consequences of that shift are huge.

Ryssdal: Well, keep on going. Why is it such a big deal?

Wigglesworth: Well, if you think of how we've ordered the financial system, how we regulate banks, it's all ordered around the banks being the alpha and omega. Central banks were set up to backstop other normal commercial banks. Regulation, we regulate banks to make sure they're safe, but we don't really have the same guardrails around the bond market, and you know it's fairly transparent. It's incredibly dynamic, but it is just as prone to hissy fits as the banks and the stock markets are.

Ryssdal: Well, to that point, you write here, "the bond market takes money as its raw input, spits out factories, railways, hospitals, casinos, smartphones, and semiconductors, wars, and vaccines" all of which, yes, fine, but every now and then, as you say, it spasms, and then we have to deal with it.

Wigglesworth: Yeah, and when the bond market breaks bad, that's a global problem. Think back to the 2000s and the dot-com bubble. That was a big issue for the stock market. The stock market dropped nearly 50% from the peak to the trough. But economically, it was a bit of a nothing burger. It was like a very short, shallow recession. When the bond market broke in 2008, that was a global cataclysm because the bond market kind of represents the cost of money. Even if you and I don't invest in bonds directly, you know the cost of borrowing in the bond market, it flows into absolutely everything else, and that's why the bond market is steadier than the stock market. It's designed to be steadier. It's supposed to be more boring, but when it is not boring, it's usually very, very bad news for everybody.

Ryssdal: What do you make, then, of what's happening in the bond market now? And I'll preface the rest of this question by saying it is not a crisis. Everything has been orderly so far. But as we sit here, you know, the U.S. 30-years at like 5.3%. The 10-years bumping up against five. It's been over it a couple of times in the last couple of weeks. And with $40 trillion in debt, the U.S. government now is paying a whole lot more for borrowing, and that, of course, trickles down. What do you make of the current situation?

Wigglesworth: Well, I think there are two quite interesting facets to this that might seem contradictory, but they're actually almost complementary. And one thing is, you know, inflation is higher than we'd like, and it's been heading high because of the war in Iran, and clearly that means that central banks have to raise interest rates. And higher interest rates and higher inflation, that's the nemesis of the bond market. So that means that you know, to lend to the U.S. government, certainly for 30 years, people want to get paid a bit more. But I do also think that some of this is just returning to a more normal world. Low bond yields that we had after the financial crisis and after COVID was actually a sign of economic malaise, and I think maybe now we're just heading back to a slightly more normal environment that is actually good for everybody except very indebted governments, and that is, of course, painful for the U.S. government more than anybody else. And given where we see the budget deficit heading, interest rates heading, I think it's not unfair to worry a little bit about the U.S., that trajectory, really, at the moment.

Ryssdal: Do you wish American fiscal policymakers would worry a little more? Perhaps?

Wigglesworth: I don't know. I always return to Saint Augustine's prayer: "Lord, make me chaste, but not yet." I mean, I think about that when I'm dieting as well. You know, the best time to start a diet is always tomorrow, right? Not today. And I think for politicians, it's very naturally the same way. I'm not as worried about the U.S. debt situation as many people are, just because I think the U.S. does not tax that much. It could actually relatively easily make its situation look a lot better. I mean, don't forget, back in the late '90s, people were genuinely worried about the U.S. paying down all its debts. Now, obviously, the worry is completely different. But servicing its debts costs the U.S. around 3.5% of GDP, and that's not great. But it's not apocalyptic.

Ryssdal: But it is a trillion dollars a year, man.

Wigglesworth: Well, the U.S. economy is, you know, what, $35 trillion a year? So by taxing that a little bit more or spending a little bit less, things would look quite different. But I do think that it's worrisome that there seems to be zero inclination on either side of the political aisle to do anything whatsoever about this, and so I'm not worried about where the U.S. might be today or next year or even in five years. But given the current trend lines, in 10 years' time, suddenly the U.S. is going to be spending around 5% of its gross annual economic output on just servicing its government debt. The trend lines are bad unambiguously. I'm not going to sugarcoat that.

Ryssdal: The Secretary of the Treasury, Scott Bessent, is doing what he can to try to, one might say, control. He would probably say, in fact, he has said, you know, bring it back to neutral or whatever it was. Equilibrium. And yet the bond market seems to be ignoring him.

Wigglesworth: Yes, well, the bond market is not great at taking direction from finance ministers, and it's quite a change seeing Scott Bessent the Treasury Secretary doing things that Scott Bessent the hedge fund manager would find, I dare say, laughable. Increasing the buybacks, intervening in the Japanese yen, it's like trying to put out a raging inferno with a little water pistol. The buybacks you could you could double it, quintuple, you could 10x the buybacks, and it wouldn't really matter to a treasury market where over a trillion dollars worth of securities trades every single day, and Bessent is really only fiddling around at the edges. And by doing so, he actually draws attention to these issues, and I think actually makes them worse, not better.

Ryssdal: As we wrap this up, I want to take you to the end of the book and the story of, I think you call it, and it is, the oldest performing bond in the world. Tell us that story, would you, and more importantly, why it matters and why you decided to end this book with it.

Wigglesworth: Well, I mean, I'm going to sound incredibly sad, but I actually attended the 400th birthday party of the world's oldest bond. It's written on goat skin. It used to be issued by Dutch Waterworks to repair some dikes 400 years ago. The dike is still there in the bend of a river in in the Netherlands, and the bond still pays interest, around 13 euros a year. So, you know, it's not much. It was gifted to the New York Stock Exchange as a symbol of friendship between Amsterdam and New York, because New York and New Amsterdam, they were founded in 1624 when this bond was born. Look, I know this is going to make me sound super geeky, but I thought it was exhilarating.

Ryssdal: I think it's a great story. Don't sell yourself short. I think it's a cool story. Go ahead.

Wigglesworth: Yeah, no, exactly. And look, for me, museum archivists talk about this word, 'reify.' something that makes very old history seem relevant and real in a tangible sense. And this bond, for me, sums up how these bond instruments have shaped the world that we live in today in a million different ways throughout history, in ways that we don't always see. It's like the hidden wiring that connects the global economy then and now. For me, that was just very exciting being part of that birthday party. Although I have to admit, it wasn't nearly as well attended as I would have liked it to be. And my wife thought I was a little bit weird for going there.