In Washington, D.C. Roberto Schmidt/Agence France-Presse — Getty Images
Full Faith and credit
By German Lopez
Investors consider U.S. Treasury bonds one of the safest investments in the world. But lately, they haven’t looked so safe. Their value has gyrated up and down. A previous fluctuation appeared to worry President Trump so much that he called off most of the tariffs he announced on “Liberation Day.”
Bonds are basically I.O.U.s from the federal government. When the government needs more money — say, because it spends more than it collects in tax revenue — it sells bonds with the promise that it will pay buyers back with interest. If you bought a 30-year Treasury bond for $1,000 at today’s rate, you’d get back around $2,500 by 2055.
The market for these bonds is opaque. Descriptions of it can sound as if someone is reading the glossary of an economics textbook. But as Trump’s reaction suggests, the bond market really matters, and it’s worth taking the time to understand it. Here’s what you need to know.
What decides bonds’ worth?
In short, demand. When people don’t want to buy bonds, the government has to entice them with the promise of higher interest rates — a bigger payout. And when people are hungry for bonds, the government can lower interest rates and still find buyers.
Much of this depends on trust. Some people buy bonds expecting them to pay off over 30 years. They have faith that the federal government will be able to make good on the investment in three decades. U.S. bonds have been considered one of the safest assets in the world because the United States always pays its debts (even if it does so by selling more bonds).
Why are bonds volatile now?
Chaos: Investors want certainty when they put money into something; otherwise, they could lose it all. But Trump’s erratic approach to tariffs — he proposed, then delayed, new levies against the European Union over the weekend, for instance — makes U.S. policy feel very uncertain. So investors are losing faith in the government and now see bonds as more of a gamble.
Debt: Another problem is that the United States already owes more than $36 trillion. By 2032, it will have more public debt as a share of the economy than it did after the Great Depression and World War II. At the same time, Republicans in Congress are trying to pass a budget bill that would add trillions more to the debt. Investors are asking: Can the government really repay all of that?
Sources: Congressional Budget Office (historical); Committee for a Responsible Federal Budget (projections) | By The New York Times
The nightmare scenario
That loss of trust could lead to a debt crisis. Bond buyers don’t all agree on a specific level of debt that goes too far and tips the nation into a crisis. But one day, investors may conclude that the government can’t pay its lenders. Then comes a spiral: People stop buying bonds, the government has to raise interest rates to find new buyers and then it owes even more money. Suddenly, the debt becomes truly unsustainable — too expensive to maintain or pay off.
When might investors stop believing in America’s future? Nobody knows; it’s largely about feelings. But the bond market and its gyrations are clear warnings that the United States is on the wrong track.