This week on Facing the Future, Heather Long, chief economist at Navy Federal Credit Union, explains why the cost of borrowing is going up and the implications of higher interest rates for families, businesses and the federal budget.
“Normally bonds are boring, but not right now,” she said. “They are sending a big message. The 10-year Treasury yield is at the highest since 2023, the 30-year Treasury yield is at the highest since 2007. We are not in a debt crisis yet, but this is a big warning sign. Bond investors are worried”
Long identified three factors driving bond yields higher. One is the $40 trillion national debt. “The fiscal situation is only going to get worse,” Long noted. “What little improvement may have been happening just went out the window with the war in Iran and all the unplanned expenses for that.”
A second factor is inflation. Long explained, “There’s a lot of concern about whether we will ever be able to get back to a more reasonable level of inflation, particularly with the new Fed Chair, Kevin Warsh. Is he really committed to getting inflation down, or is he going to do the bidding of President Trump, and try to keep rates low?” She noted, however, that Warsh “did a good job” during the annual Fed conference in Jackson Hole Wyoming by, “really spelling out what kind of inflation data he’s looking at and reminding people that the goal still remains 2% inflation using the personal consumption expenditures index (PCE), which is now well above 3%. So he sounded very hawkish and very much committed to hiking [rates] if he needs to.”
The third factor, Long said, is rising instability around the world. “We’re clearly in a messy situation where a lot of countries are questioning U.S. leadership, or questioning what the future looks like. U.S. bonds look a lot less sexy and attractive than they did even a year or two ago. So you put all that together, and that’s why we’ve seen this really dramatic spike in the bond market.”
She cautioned that the bond market itself is undergoing some changes that present vulnerabilities. “It used to be that U.S. Treasury bonds were the best bet on the block,” she said. “Now, right or wrong, a lot of investors would rather give money to these AI data center build-outs than the U.S. government. That really tells you how much people are questioning their beliefs in the safe haven status of U.S. bonds, particularly in the 10- or 30-year horizon.”
“Things could get worse quickly,” she warned, because of the declining share of bonds purchased by traditional investors and the rise of hedge fund buyers. She recalled how in the past “when the U.S. needed to borrow more money, the tried and true investors would show up. Those were generally pension funds and a lot of foreign countries. Those countries were largely aligned with wanting to see the U.S. succeed, and wanting to see the U.S. as a very safe-haven nation. But China has really pulled back, as have many other nations. It’s not that they’re selling their treasuries, but they’re not buying as many. So who showed up to make up the difference? A lot of hedge funds based in the Cayman Islands. And why do you think they are based in the Cayman Islands? Because all they care about is making money. If they feel that it’s no longer beneficial, and it won’t enrich them to invest in U.S. government bonds, they’re going to exit, and they’re going to exit fast.”
Long pointed out that in addition to costing the federal government more to finance its debt, rising bond yields are “slamming the brakes on the economy.”
“We have people every day who are checking our website or calling in to Navy Federal Credit Union, asking what’s the latest 30-year mortgage rate,” she said. “They’ve climbed, almost back to 7% and let me tell you, there’s a lot of homes that people are willing to buy when the mortgage rate is 6% that they just can’t afford or aren’t even interested in looking at when the mortgage rate is almost 7%. The same thing plays out with auto loans, and with business loans.”
Long hopes that policymakers will act to bring deficits under control before the “bond vigilantes” take over. “The greatest lobbying force this country has ever seen is going to be the bond vigilantes,” she said. “When the bond market speaks, when those yields really start spiking, we’re seeing a mini version of it now, I don’t care what Congress or the President thinks, they will be forced to act in ways that they don’t want to act and that’s scary. As a nation, we want to determine our own future and not have it directed by bond investors.”
Absent action, Long estimates that a debt-induced crisis could hit around 2030, either because the bond market will act, or because Social Security payments will be automatically reduced when the trust fund is depleted. “The typical recipient will suddenly get $500 to $700 less a month,” she said, “and that’s ‘riot in the street’ territory. Obviously, the sooner we act, the less painful that action will need to be.”
She observed that “some investors truly believe that this is the century of China because they’ve got a huge amount of money they’re sitting on that they can continue to invest, or if they have a crisis, that they can help to fund and get out of that problem. Meanwhile, we’re sitting on a $40 trillion growing debt, and that just limits our ability to get through a crisis, let alone make strategic investments for the future. I still bet on the United States of America. I still think we’re amazing and have a lot of advantages, but it’s something that makes you think when you just look at the balance sheets of China versus the United States, and who has the financial upper hand.”
Hear more on Facing the Future. Concord Coalition Senior Advisor Bob Bixby hosts the program each week on WKXL in Concord N.H., and it is also available via podcast. Join us as The Concord Coalition team discusses issues relating to national fiscal policy with budget experts, industry leaders, and elected officials. Past broadcasts are available here. You can subscribe to the podcast on Spotify, Pandora, iTunes, Google Podcasts, Stitcher, or with an RSS feed. Follow Facing the Future on Facebook, and watch videos from past episodes on The Concord Coalition YouTube channel.
