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The bond market is collapsing and almost no one is talking about it properly. I'm not talking about stocks. Stocks are the scoreboard that everyone watches. The bond market is the engine underneath, and right now that engine is making a noise that I don't like. The interest rate the United States pays on 30-year loans has risen to levels we haven't seen in about two decades.
When this happens, it doesn't stay on Wall Street. This affects your mortgage, car payment, credit card, and eventually your paycheck. I have worked in the markets for a long time and I can say: those who suffer at such moments are not always wrong. These are the ones who weren't paying attention. So be careful for the next half hour .
I will explain in simple language what is happening, why it is important, and how I would think about it if I were you. Before we go any further, do me a favor —sign up. I know, it sounds like every other video you've ever seen. Here is my honest explanation. What I'm going to tell you is the type of analytics that people pay big money for, and you get it for free.
Subscribe now so you don't miss the next video. This story will develop, and I want you to know about it from me in advance, not when it's already costing you money. Let's start with the basics, since most people have used the word " bond" their entire lives without explaining to anyone what it is. A stock is property.
If you buy a share of a company, you become a co-owner . When the company is successful, you are successful too. When things go badly, you also suffer losses, and no one promised you anything. A bond is something completely different. A bond is a loan. You give your money to someone, and they give you a written promise.
They will pay you interest every year and return your original amount on a certain date. That's all. You are not the owner, you are the bank. Here's a simple way to imagine it. Let's say a local bakery wants to open a second store and needs a hundred thousand dollars. You lend them this money , and they agree to pay you 6% per year for 10 years.
If this bakery turns into a large chain, you still only get 6% , and not a penny more . If the bakery has a terrible year, you still get your 6% , because a promise is a promise. And if the bakery goes bankrupt, those who borrowed the money will receive their payments before the owner sees a cent. So, as a lender, you have limited profits, but you are first in line.
As an owner, your potential profit is unlimited, but you are last in line. Now I'll explain why this worries me so much. Companies borrow this way, but so do governments. And the largest borrower on the planet is the United States. When Uncle Sam borrows, the loan is called a Treasury bond. Throughout my career, Treasuries have been considered the safest asset.
People call them risk-free. Not because nothing bad can happen, but because everyone assumes that the government will find a way to repay the debt. This word "suppose" is doing a very difficult job right now, and we will come back to it later. Another idea: if you understand it, you will understand the rest of the video better than many people on television.
Bond prices and interest rates move like a seesaw. When rates rise, the price of existing bonds falls. Imagine you have a bond at 3%, and then the government starts selling new bonds at 5%. Who wants to pay full price for your 3% bond when you can get 5%? No one. To sell yours, you will have to make a discount.
Rates up, prices down. Keep this picture in your head. The last part of the foundation. The interest rate on Treasury bills is the basis for the price of money everywhere. If a bank can lend to the government and earn, say, 4.5% with little to no worry, it will ask you for more because you could lose your job or miss a payment.
So, the government's stake is the floor on which everything else is built. Mortgages, car loans, credit cards, business loans, even the value of stocks is measured relative to it. When this floor rises, everything above it also rises. That's why I say the bond market is the most important market in the world.
The stock market is making headlines. And the bond market sets the rules. So how did we get to this point? The answer is boring, and that's why it's dangerous. The government collects taxes, but spends more than it receives. He's been doing this for years, in good times and bad, under both parties. We recently collected about $5 trillion in taxes and spent about $7 trillion.
Imagine your own household taking in $50,000 and spending $70,000. You would cover the deficit by borrowing, and for a while you might get away with it, but every year the amount increases, and eventually it starts to cost you real money. This is where we are now. The national debt is about $40 trillion.
Trillion is one of those words that loses all meaning. So let me explain it another way. Everything the country produces in a year, the economy is a little over 30 trillion, we owe more than the entire country earns in a year. Economists call this the debt-to- GDP ratio. By the way, that's how most people measure it.
Our figure is about 125%. In 2000, it was about 55%. The economy has grown significantly over the years . The debt grew faster. That's the whole story in one sentence. Think about a house for a moment. If you own a half- million dollar house and owe $400,000 on it, you're safe. You have equity. If you owe 600,000 on the same house, you are in a debt hole.
Of course, a country is not a house , and I don't want to oversimplify the comparison, since a country can collect taxes and grow. But lenders look at these numbers ; When someone is deciding whether to lend you money for 30 years, they want to know your financial situation. And our situation is no longer the same as before.
Here is a point that I think is often ignored. It's not just about how much we owe, it's about how we borrowed it. In 2020 and 2021, interest rates were at rock bottom. This was the moment to lock in long-term loans, as a smart homeowner does by taking out a 30-year fixed- rate mortgage. Instead, a significant portion of the borrowing was done for shorter terms, a few years or less, because short-term money was even cheaper.
It saved on interest at the time, and I understand why they did it, but short-term debt needs to be renewed. Now, years later, much of it needs to be repaid and is being refinanced at much higher rates. This is a floating rate mortgage for the entire country, and the adjustment is happening right now.
The result is that the interest bill exploded. By some estimates, we now spend more on interest than on the military, a level we have n't seen in modern times. Interest now occupies one of the main places in government expenditures, and it gives nothing in return. No roads, no soldiers, no social benefits.
This is a payment for the past. And as that bill grows, you have to borrow even more to pay it off, which increases the debt, which in turn increases the interest. You can already see how the loop is forming. I'll come back to that. So the real question is not whether the government can pay. He can.
He has a printing press in the form of the Federal Reserve System. Therefore, default is not a realistic threat. The problem is what this payout looks like. If you repay people's debts with newly created money, each dollar buys a little less than the one that was borrowed. This is called depreciation.
And this is a quiet way to avoid paying in full . Lenders are not stupid. They start saying, "If I'm going to be repaid in weaker dollars, I want a higher interest rate to compensate for that." So, let's talk about buyers. Every time the government borrows, someone has to buy those bonds. Think of it as a giant auction that never ends.
When I look at who is buying, I see problems in almost every item. The first buyer is the Fed, the central bank . The Fed can create money, so theoretically it can buy as much as it wants, but there is a caveat. When you buy bonds with newly created money, you inject more dollars into the system. And more dollars hunting for the same goods means higher prices.
We have all experienced this in recent years. The Fed knows this . She tried to reduce her assets, then slowed down, and now she is a cautious buyer at best. It cannot be a savior because the medication worsens another illness. The second group is foreign governments. For years, China has been one of our largest creditors, and it has gradually reduced its reserves.
Japan is now the largest foreign owner, but it has its own problems, particularly in the bond market, so it is also reducing its share. I want to be careful about this . I'm not saying these countries are enemies. They do what any prudent lender does when they start to worry about a borrower. They ask themselves if they want to keep so much savings in one place.
When your biggest customers back out, you feel it at the next auction. The third group is banks and private investors. Many have forgotten what happened to Silicon Valley Bank in March 2023. That bank was loaded with Treasury bonds, so- called "safe" assets. But remember the seesaw effect? When the Fed raised rates, the price of old bonds fell.
The bank didn't hold the trash. He held perfectly safe bonds that had lost value on paper. Then the depositors got nervous, wanted to withdraw their money, and the bank had to sell everything at a loss. He collapsed. Banks have learned that protection against default is not the same as protection against price fluctuations.
Many private investors are now learning the same lesson, and some of them are looking at gold and other assets instead. Let's be fair: a new buyer has appeared , and a pretty big one. The 2025 law requires companies issuing certain digital dollars, so- called stablecoins, to hold reserves in highly reliable assets, primarily short-term Treasury bonds; This has created new demand, and it is real.
But look at what exactly they are buying. Mostly short-term bills, not 30-year bonds. So, the state has a new buyer for its short-term product, while the main long-term product is no longer being sold as before. Therefore, the government is starting to act creatively. One of the things it does is buy back its own old long-term bonds by issuing new short-term debt.
I want to clearly explain what this means, because it is described quite dramatically on the internet. The government doesn't take money out of thin air. It replaces long-term borrowing with short-term borrowing to appease the long end of the market. But think about what that means. This means that we can't find enough people willing to lend to us for 30 years, so we borrow for a few months at a time, constantly refinancing.
This works until rates go up again, and then you refinance at the worst possible time. It's like paying off one credit card with another. This gives you time. But that doesn't solve the problem. Put these parts together. The Fed is acting cautiously. Foreign buyers are backing away. The banks are already burned.
The new demand from stablecoins is real, but it is insignificant and short-term. And the state continues to spend even more. So more bonds have to be sold every year. Supply increases, demand decreases. Any first-year economist will tell you what will happen to the price. She falls. And when the price of a bond falls, its yield increases.
This is the crack I'm talking about. Now let's get personal, because I don't want this to sound like a lecture about Washington. Let's start with your mortgage. When the 10-year Treasury yield rises, mortgage rates follow. Same with car loans. Same with credit cards. If you've been waiting for rates to drop to finally buy a home, this is why you keep getting disappointed.
It's not because banks are evil. The lower limit for all borrowings has risen significantly. And it's affecting the housing market in ways that people don't quite realize. For years, buying was more profitable than renting for many families. In many places this leads to resale. Monthly payments are so high that buyers are backing out.
And sellers who can't find customers are lowering prices and making concessions. This is not a random real estate story. This is the bond market that is manifesting in your area. Now let's look at business, because it also borrows. And they have the same problem as the state. Many companies borrowed cheaply in 2020 and 2021 under loans that are reviewed in several years.
The repayment terms on these loans coincide, and the new rates are much higher. A business that used to pay a couple of percent on debt may now pay seven or eight. This money has to come from somewhere , and it is taken out of profits. When profits decline, hiring plans are the first to disappear, followed by salary increases and sometimes jobs.
So the bond market problem becomes a wage problem . Stocks are feeling it too . And here I want to say what I have learned through bitter experience over many years. People are obsessed with profits, but what really drives markets over time is the value and supply of money. When money is cheap and available, almost everything grows.
When money becomes expensive, everything is revalued. A stock is worth exactly as much as it will earn in the future, but future earnings are less valuable when you can get stable, safe income from government bonds today. So when yields rise rapidly, investors start asking tough questions. Is this promotion still worth what I'm paying for it?
Will this company be able to handle higher interest costs? Is a recession looming? That's when you get the volatility you're seeing. History gives us a certain pattern. Large , rapid jumps in long-term returns have often preceded economic downturns . This does not mean that a recession is guaranteed.
Nothing is guaranteed. But it can be self-perpetuating . Higher rates make it harder to borrow, expand, service old debts, lead to defaults and layoffs, and fears become reality. Now add in wars, inflation, and everything else in the news—there's a lot of pressure on one vulnerable spot . A short word for investors and bond fund owners.
Higher yields are good news if you're buying new bonds or keeping cash in a safe account. But if you have bonds or funds holding old long-term papers , be aware of the seesaw effect. They can lose value on paper when rates rise. Security does not always mean stability. Check what you actually have. I will be frank with you.
This does not mean that the sky will fall to the ground tomorrow. Markets may remain strange for a long time to come. I've been right before, but when you rush, it often looks like you're wrong. But when the foundation of the entire system begins to shake, you can't ignore it just because the house is still standing.
So, what's next? I see two ways . The first one, the one the White House is talking about , is economic growth. If the economy grows faster than the debt, the debt decreases relative to the economy and the problem becomes smaller, even if no one has paid back a single dollar. This has happened before.
After World War II, the country spent years emerging from the burden of enormous debt through growth. If we get a real productivity boom or a surge in investment, it could work. And I'm not going to play against American innovation. I've never done that. The second path is what many call the “ death loop,” and it looks like this.
The economy is slowing down, the government is spending more to support it. That means more borrowing, and more borrowing means higher rates because there are n't enough buyers . Higher rates increase your interest bill. A larger interest bill means even more borrowing and, perhaps, additional money issuance to cover it.
The issuance of money fuels inflation. Inflation is pushing rates up again, and the economy is suffering even more. In a circle, it's like being in a hole where they give you a shovel. What am I leaning towards? Honestly, no one pays me to think out loud. You get paid for guessing the direction and correctly determining the size of your bets.
And the most honest answer I can give is: I don't know which path we will take. Anyone who tells you they know for sure is trying to sell you something. What I know for sure is that the risks have changed, and when the risks change, it's worth changing your behavior, even if the forecast remains the same.
Here's how I think about it. This is not advice because I don't know your situation. These are the principles that have served me. First: protect what you have first. Making money is the fun part, but staying in the game is the most important part. If you lose half of your money, you will have to double the rest just to break even.
Second: don't fall in love with your point of view. The markets don't care what you believe. When the facts change, change your opinion. I was changing positions quickly, and my ego was screaming the whole time, but ego is expensive. Third: When you have true confidence and the evidence supports it, don't be timid.
But you won't get there by guessing. You will arrive at this through observation. Here's what I'm watching: 10-year and 30-year bond yields , and especially whether they continue to rise on bad news. The behavior of the Federal Reserve and whether it is inclined to create new money. Dollar and gold, as this is often the market's way of voting on confidence levels.
And the results of treasury auctions. When the government sells bonds and demand is weak, it's a red flag. When it comes to positioning, think about it both ways. If you believe that the "loop of doom" is a real risk, don't invest everything in cash or long-term bonds. Some hold assets that tend to retain value when money depreciates, and gold is a classic example.
If you believe that growth will win, then owning a good business makes sense. Those companies that have high profits, little debt, and the ability to raise prices. The goal is to not take sides and pray. The goal is to build something that can survive any scenario. And look at your own debts. Do they have a fixed or floating rate?
If floating, a change in the rate can hit you directly, and this is the only place where you have complete control. So , once again: I am not your financial advisor. Use this for reflection, not copying. So let me leave you with a challenge. Do three things this week. First, find the yield on 10-year Treasury bonds.
Write down this number and look at it in a month . Simply observing the movement of this number will teach you more than hundreds of headlines. Second, take a look at your own debts. Find out if the rates are fixed or floating, and what will happen to your budget if they increase. Third, write down which path you think we are on: growth or a "loop of destruction," and why.
Then come back in 6 months and see how right you were . That's how you improve at it . If this was helpful, please subscribe, send this to someone who is confused about the betting situation, and write in the comments where you think we are on the path. I will read. Thanks for watching, see you in the next video.
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