Is Trump going to bomb the bond market?

Donald Trump recently said that if his treasury secretary can’t get bond yields down, the next move might be the military. It sounds absurd, but the US bond market is the quiet foundation underneath almost every price in the global economy, from your mortgage to a company’s loan. When investors lose faith in a government’s ability to manage its money, as happened under the UK’s Liz Truss in 2022, bond yields spike, and borrowing gets more expensive for everyone, instantly. Trump’s tariffs, his war in Iran and his promised $5,000 dividend cheques have investors nervous all over again, and bond yields are climbing. Unlike Liz Truss, Trump has nobody above him to sack him over it. So who actually pays when the bond market loses faith in Donald Trump? Follow If You're Listening on the ABC Listen app https://radio.abc.net.au/help/apps. Check out our series on YouTube: https://www.youtube.com/playlist?list=PLDTPrMoGHssAfgMMS3L5LpLNFMNp1U_Nq

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Speaker 00

  ABC Listen, podcasts, radio, news, music and more.

• 0:07Speaker 01

  Australia is hurtling into a new political era and the Victorian election will be where the change happens. I'm Raph Epstein and every Friday I'm taking over the Politics Now podcast to explore the forces changing Australian politics. Can one nation turn its popular support into political power? Are voters sick of the Labor Party? And can the Liberal Party finally win in Victoria? Search Politics Now podcast on ABC Listen or wherever you get your podcasts.

• 0:37Matt Bevan?

  This podcast was produced on the lands of the Uabakal and Gadigal people. It's pretty rare these days that Donald Trump says something that makes me do like a double take. He has set the bar pretty high.

• 0:51Speaker 03

  And of course, it's like a graveyard for birds.

• 0:53Speaker 04

  Donald Trump's very, very large a brain. The late, great Hannibal Lecter.

• 1:00Matt Bevan?

  But occasionally he still does manage to clear that bar. And recently he caught my attention while talking about the bond market. He was talking about his Treasury Secretary Scott Besant's ability to handle the US bond market's instability.

• 1:14Speaker 03

  He's very good at it. He is a good touch, very good natural touch for the bonds and interest. And he did that, yeah.

• 1:22Matt Bevan?

  The previous day, Besant had ordered the Treasury to buy back several billion dollars of its own bonds to try and bring down bond yields. But despite this intervention, the yields continued to go up, which is not great. So Trump was asked what he was going to do about it.

• 1:38Speaker 03

  The ultimate intervention is our military. And if we have to use that, we will, yeah.

• 1:43Matt Bevan?

  Yeah. Was there a follow up to that? Something like, what? Or huh? Or are you going to launch airstrikes on the US bond market, Mr. President?

• 1:53Speaker 05

  Your move on beef imports is upsetting some ranchers.

• 1:56Matt Bevan?

  Seems like we're moving on. Okay. So what exactly has set the bond market into hyperdrive?

• 2:02Speaker 06

  Now, part of the reason for rising bond rates is growing concern about US government debt, which hit $40 trillion last week.

• 2:11Matt Bevan?

  So there are $40 trillion in US government bonds out there. And Donald Trump is thinking of whacking a bit more on the tab.

• 2:19Speaker 03

  Here is my promise. If the Republicans win the House of Representatives and the United States Senate, I will issue a dividend to every adult citizen in the United States of America for $5,000.

• 2:37Matt Bevan?

  If you're wondering how many new bonds that will require, well.

• 2:41Speaker 06

  It would add more than a trillion dollars, 1.3 trillion US dollars to the United States deficit.

• 2:48Matt Bevan?

  The thing is, though, the bond market is kind of a mystery to most people. Whenever it comes up in the news, we're usually told it's aggressively boring.

• 2:56Speaker 07

  I know it's boring. I know bond yields are boring. And I want to respect how boring the bond market is for listeners. Probably the most boring word in the entire English language.

• 3:13Matt Bevan?

  So how is it that this aggressively boring thing, the most boring thing in the English language apparently, is actually in control of every financial element of our lives? Is it about time we made it a little less boring? I saw this as kind of a challenge. And it didn't take me long to figure out that actually the bond market is not boring at all. Okay, maybe it's a little bit boring, but it's mostly weird. It's very, very, very weird. Today, the story of how the world economy uses US government debt as the foundation of basically everything it does. And the topsy-turvy inside out logic of why that may be bad news

• 3:58Matt Bevan?

  for you personally. I'm Matt Bevan and this is If You're Listening.

• 4:12Matt Bevan?

  It's a bit weird to think about now, but 20 years ago, the Australian federal government was able to announce this.

• 4:19Speaker 03

  In net terms, tomorrow, the government will owe nothing.

• 4:24Matt Bevan?

  That is the federal treasurer, Peter Costello, announcing that Australia was making a profit for the first time in 30 years. Not that Costello was planning on turning that profit into anything fun.

• 4:36Speaker 03

  It is not the time to make whoopee.

• 4:38Matt Bevan?

  In hindsight, it probably was the time to make whoopee, but that's not the point. The interesting thing about this moment is that the government actually still had about $55 billion in debt. A few years earlier, they'd realised that they were potentially going to be able to pay off their debt. And they started wondering if that might actually be a bad idea.

• 4:59Speaker 03

  We now have to ask ourselves the question as to whether we should use the money in the future. It's not happening today. It's not happening next year. But in the future, if our program passes the Senate, as to whether we should use the money to eliminate all Commonwealth debt, or whether we should keep these government borrowing instruments on the market and develop an asset position.

• 5:23Matt Bevan?

  I know, it sounds boring, but it was actually a serious quandary.

• 5:27Speaker 03

  This would have to probably be the biggest issue we've ever faced, just the floating of the Australian dollar.

• 5:31Matt Bevan?

  Big Australian investors, like the retirement fund industry, superannuation, were worried.

• 5:37Speaker 03

  The super funds and others like the Commonwealth, they have bonds out there because they like to invest in them, not because they're high return, but because they're no risk.

• 5:47Matt Bevan?

  Okay, we've reached the bit where I explain how all this works. Actually, first, here's our old friend, the star of It's a Wonderful Life, Donna Reed.

• 5:56Speaker 05

  Hi, I'm Donna Reed. I'd like to talk to you about a unique Christmas gift. One guess. You're right, it's money. But not the ordinary kind of money. No, this is growing money. Would you like to see some? US savings bonds.

• 6:14Matt Bevan?

  Donna then goes on to explain the concept of bond yields using an electric train set.

• 6:18Speaker 05

  We'll put one $50 bond, which costs you only $37.50, and take it for a ride through time.

• 6:25Matt Bevan?

  Now, if you listen to last week's episode about El Nino, you'll know that I refuse to use a metaphor to describe it. But this one involves trains. And trains are like my favourite thing. So we're going to do it with a train.

• 6:42Matt Bevan?

  Imagine you've got a hundred bucks cash, but you want it to be.

• 6:45Speaker 05

  Growing money.

• 6:46Matt Bevan?

  Now, this particular train, which we're calling the Treasury Bond Train, operates on a strict schedule. It moves at a constant speed. It's never late. And it guarantees that if you invest your $100 into it, for every kilometre it travels, your money will grow by 1%. So, for example, if the train carries your $100, 50 kilometres, it'll turn it into $150, which is pretty good. The only downside is it's a very, very slow train. And it's going to take 10 years to get to that 50 kilometre mark.

• 7:20Speaker 04

  At more than four hours, the ride struggles to compete with driving or flying.

• 7:25Matt Bevan?

  Now, there are certainly faster vehicles to invest your money in, like stocks or gold, or in the metaphor, like taxis and jet planes. But those vehicles are less reliable. Sometimes they get stuck in traffic, or take a wrong turn, or run out of petrol, or get stuck on the tarmac, which makes them riskier investments. The Treasury Bond Train, on the other hand, is incredibly reliable. It's as close to a sure thing as you can get. Now, if you're investing $100 and you want it to grow quickly and don't mind a bit of risk, you might invest it in the taxi or the jet plane. But what if instead of $100, you're investing a billion dollars of other people's money? Well, risk is a very different

• 8:09Matt Bevan?

  proposition there. Are you willing to gamble a potential loss by investing it in the taxi, the jet, or the train, which is basically 100% guaranteed to get there on time and give you a profit? As train passengers like to say.

• 8:26Speaker 00

  I always feel very comfortable and very safe. I just wanted to have a more relaxing journey and less, yeah, less hassle.

• 8:36Matt Bevan?

  So that's why when it comes to investing very large amounts of money, bonds are by far the best options. They are risk free, essentially, and investors can be assured of a certain return after a certain amount of time. And here lies the problem with the bond market going into hyperdrive. When the train speeds up and investors get more money faster, why would they invest in other things that are more risky? It means that if the train goes faster in order to attract investment, riskier options like the taxi and the jet need to promise even higher returns.

• 9:11Speaker 04

  We have a well tried mechanism for setting a base borrowing rate. And this enables the market to then determine the borrowing costs for everyone else.

• 9:18Matt Bevan?

  And here's why that's bad news for you personally. Banks like to make money. It's literally their job to make as much money as possible for their shareholders. If a bank has the option to invest in a person who needs a mortgage or in Treasury bonds, if they're both offering, say, a return of 5%, they're going to choose the bonds. It means in order to compete, mortgage rates need to always be higher than bond yields, which is why. When bond yields rise, they push up borrowing costs.

• 9:50Speaker 03

  Yields have been moving up for months, pushing up the cost of borrowing to the highest level in four years.

• 9:56Speaker 05

  Climbing Treasury yields also signal that borrowing is getting more expensive.

• 10:01Matt Bevan?

  It's basically a proxy for longer term interest rates. Okay, so you with me so far? Bond yields are kind of the baseline interest rate. But what is a bond? What is the train for, apart from being a free way to make money? Well, bonds are quite literally the government borrowing your money. When you put your money on the train, the government can then use it to pay for stuff if it's not making enough money in taxation, which was the quandary in Peter Costello's days. See, the government was able to pay for everything it needed just through taxation. It was running a profit. It didn't need bonds anymore. It could just pay everybody back all their money and shut down the train.

• 10:41Speaker 03

  But I want to make it clear that if we did have the capacity to retire all Commonwealth debt, that'd be our preference.

• 10:47Speaker 04

  The treasurer says he'll make a decision on the future of Commonwealth bonds by budget time next May.

• 10:52Matt Bevan?

  If the government has no debt, then there's no bond market. But the financial system was worried that if that happened, there'd no longer be a benchmark interest rate. So the government kept the train running purely to give the banks something to go faster than. When Peter Costello announced that the government was debt free, he was including a caveat.

• 11:12Speaker 03

  When you take into account all of the government borrowing and all of its lending, in net terms.

• 11:21Matt Bevan?

  Tomorrow, the government will owe nothing.

• 11:26Matt Bevan?

  The government had more assets and cash on hand than it was borrowing, and so it had reduced its net debt to zero. The train was still going, with about $55 billion of other people's money on board, growing a little bit every year. Other countries do this too. Singapore and Norway both have way more cash than they need to run their countries, but they still borrow money because the very existence of a bond market is important. The trouble is, when you choose to ride the slow and steady bond train, you're in a race against inflation.

• 12:03Speaker 03

  What it means is that the dollar is going to buy, instead of buying £2 of butter, you're only going to be able to buy one and a half.

• 12:10Matt Bevan?

  Imagine putting your money on the Treasury bond train and then getting to the end of the 10-year journey just to find out that prices have risen more than your return on investment. Your money has grown, sure. You've secured a yield as promised, but now it can barely buy you a cup of coffee. The trouble for governments is they control both the train and they tend to be responsible for causing inflation. The federal government's plans to have inflation back under control by the end of the year. Economists say our inflation problem can also be blamed on massive spending by the former government. As we talked about in an episode about central banks a year ago, institutions

• 12:55Matt Bevan?

  like the Federal Reserve and the Reserve Bank of Australia are designed to control inflation. But governments can still cause inflation with wars, tax cuts and big spending. And sometimes it's too much for the central banks to handle. When investors worry about a reckless government causing inflation, they start to demand that the train goes faster so that their money will be worth more at the other end of the line. So the chain is: inflation starts, investors worry, they demand higher bond yields so the money they lend to the government doesn't lose value. And that drives bond yields higher, which then in turn drives up the interest rates on everything.

• 13:37Matt Bevan?

  The chain starts whenever investors think the government might be losing its mind. Let's look at one example of how this economic spiral plays out.

• 13:51Matt Bevan?

  I have three priorities for our economy: growth, growth and growth. In 2022, the new British Prime Minister Liz Truss and her Chancellor Kwasi Kwarteng wanted to prove very quickly that they had the ability to lead the country. And that's why our dynamic new Chancellor, and I will be taking action.

• 14:15Matt Bevan?

  The action they chose to take in an era when inflation was already rising and the government was running a £68 billion deficit was...

• 14:24Speaker 04

  £45 billion worth of unfunded tax cuts, including relief for high-income earners.

• 14:31Speaker 03

  And so what the bond market said is, hang on. And the markets took one look at what the Truss government was proposing to do and decided that they didn't like what they saw.

• 14:41Matt Bevan?

  Investors became terrified that the Truss government was going to trigger even worse inflation and started demanding that the train go much faster, demanding higher bond yields.

• 14:52Speaker 03

  The rate of interest on government debt started creeping up.

• 14:56Matt Bevan?

  The banks hadn't seen this coming and prepared to raise their interest rates in response.

• 15:00Speaker 03

  And that then fed through into banks withdrawing their mortgage offers to people.

• 15:05Matt Bevan?

  So they'd already offered people a mortgage, but then they withdrew those offers because they wanted to raise the interest rate. Remember, banks want to make as much money as possible.

• 15:16Speaker 03

  And it was basically a degree of economic chaos prevailed.

• 15:20Matt Bevan?

  The Bank of England dumped a bunch of money onto the train to try and chill everybody out. The Chancellor was sacked two weeks later, and then a few more days after that. I am resigning as leader of the Conservative Party.

• 15:36Matt Bevan?

  Prime Ministers can survive a drop in the polls or a drop in the stock market. They cannot survive a panicking bond market. Liz Truss lasted less than 50 days as Prime Minister. So I hope you're starting to get why bond markets are so significant. They don't move much by design, but when they do, it's a big deal. And when one particular train starts to look shaky, well, that's when things get really interesting. Around the time when Peter Costello was figuring out whether or not to pay off Australia's debt, the US government was on its way towards being in a similar position.

• 16:17Speaker 06

  Tonight at midnight, America puts an end to three decades of deficits and launches a new era of balanced budgets and surpluses.

• 16:26Matt Bevan?

  US President Bill Clinton did not enjoy the late 90s for lots of reasons, almost all of which were his own fault, but he did enjoy the bit where he got to announce budget surpluses.

• 16:36Speaker 06

  We are now entering the second year of an era of surpluses.

• 16:40Matt Bevan?

  The government had issued billions in bonds, loading other people's money onto the train in order to pay for infrastructure and services. But now Clinton's government was bringing in more tax revenue than it needed, and so it was emptying out the train.

• 16:55Speaker 06

  Our debt is $1.7 trillion less this year than it was projected to be back in 1993. Our children and their children will not inherit the crippling burden of interest payments that we faced.

• 17:10Matt Bevan?

  At that rate, the train would be totally empty in 10 years.

• 17:14Speaker 03

  I've asked Congress for a one-year increase of more than $48 billion for national defence, the largest increase in a generation.

• 17:24Matt Bevan?

  But the war on terror, followed by the global financial crisis, led the government to just keep adding carriages to the back of the train and to keep filling them up with more and more of other people's money. The US government Treasury bond train is now the largest moving object in this metaphor. There is more than $30 trillion on it, with new carriages being added every day. It's worth more than the cumulative value of all of the gold that has ever been mined in human history.

• 17:56Matt Bevan?

  The train is so big now that it's setting the base interest rate for everything else in the global economy. And it's also the default place for people with enormous sums of money on their hands to store their wealth.

• 18:08Speaker 06

  There's one place, that's the safe haven, and that's the US bond market.

• 18:11Speaker 03

  US government debt is still considered to be the world's safest government debt in the world.

• 18:17Matt Bevan?

  If you are a Saudi sovereign wealth fund or a Japanese investment bank with $50 billion to store somewhere, it is perfect. You can put huge amounts of money onto the train and take it back off the train at any time without tanking the price. There's no other vehicle available that can pay out that kind of money. Or to use the proper term, there's no other markets with that much liquidity.

• 18:41Speaker 03

  They are amongst the most liquid asset classes out there, and liquidity in times of crisis are just as important as safety.

• 18:48Matt Bevan?

  The Asian markets are not as deep in liquidity. Try buying $50 billion worth of Bitcoin all at once and see what happens. I don't know what kind of vehicle Bitcoin is, Lightning McQueen or the General Lee Dodge Charger from the Dukes of Hazzard perhaps, but whatever it is, it's going to explode if you try and cram $50 billion into it. The US Treasury bond train, however, wouldn't even notice. $900 billion is loaded and unloaded from that train every day, and it doesn't stop or even slow down. It has become an important piece of global financial infrastructure, run on interest paid by American taxpayers. That's not to say that American taxpayers don't get anything out of it, of course.

• 19:33Matt Bevan?

  For one thing, a lot of the interest is paid back to Americans who have invested in bonds and put their money on the train. It also means that the US federal government has been able to continue funding the military, social security, healthcare programmes and all the other stuff it funds without ever raising taxes, even through massive economic shocks like the GFC and the Covid pandemic. In fact, in 2019, former IMF Chief Economist Olivia Blanchard said that their debt strategy wasn't as bad as people said. If the interest rate is less than the growth rate, you can do what's known as a debt rollover. You just issue debt and then you never repay. He's basically saying that as long as your economy is growing at a higher rate

• 20:17Matt Bevan?

  than your interest rate, you're fine. Don't worry about it. The debt to GDP ratio will slowly come down without you ever having to raise taxes. If you're getting richer faster than you're having to pay interest on your loans, then you can just keep paying interest forever and you'll still keep getting richer. It's the same theory that allows people who have a mortgage to buy an investment property. And this was basically the theory that the government of every developed country in the world was pursuing through the 2010s. And it works fine as long as your economy keeps growing steadily and people don't demand higher bond yields. Consider that to be some subtle foreshadowing.

• 21:03Speaker 03

  My fellow Americans, this is Liberation Day. Waiting for a long time.

• 21:11Speaker 03

  April 2, 2025 will forever be remembered as the day American industry was reborn, the day America's destiny was reclaimed, and the day that we began to make America wealthy again.

• 21:27Matt Bevan?

  When Donald Trump put heavy tariffs on basically every other country, the rest of the world was pretty unimpressed.

• 21:34Speaker 03

  Today's decision will add to uncertainty in the global economy, and it will push up costs for American households. They are all unjustified, unwarranted, and in our judgment misguided. The effects on the global economy will be monumental.

• 21:50Matt Bevan?

  The share market was also not keen. Nervous traders watching trillions of dollars wiped from US shares. The stock market suffering major losses on the heels of the president's tariffs. Trump made his announcement on a Wednesday. For the rest of the trading week, people were ripping their money out of the stock market and loading it on to the safest place they could think of, the bond market train.

• 22:12Speaker 03

  The US and indeed much of the world may be on a collision course with a recession.

• 22:17Matt Bevan?

  Bond yields went down as people shoved money on to the train. But then everyone spent the weekend thinking about it and decided that the train was being driven by a lunatic.

• 22:28Speaker 06

  Uncertainty has skyrocketed and markets are crashing and Donald Trump doesn't know what he's doing.

• 22:34Matt Bevan?

  On the Monday, people started ripping their money off the train very quickly and looking for somewhere else to put it.

• 22:41Speaker 03

  Yields went higher. In other words, the cost of America borrowing money went up. So a huge lack of faith in US government debt.

• 22:51Matt Bevan?

  It was the same thing that happened in the UK when Liz Truss was in charge. Do you remember that bit of subtle foreshadowing when Olivia Blanchard was saying that the plan was fine as long as bond yields stayed below GDP growth? Well, that was falling apart. Lack of faith in the train driver was causing financial chaos. It was at this point that Trump reacted.

• 23:14Speaker 00

  The general view is the only message that is getting through to the White House is coming from the bond market.

• 23:23Matt Bevan?

  He announced a pause on his tariffs. The bond market chilled out again, satisfied that he had heard their complaints.

• 23:31Speaker 03

  Bond market is very tricky. I was watching it, but if you look at it now, it's beautiful. Yeah, I saw last night where people were getting a little queasy.

• 23:40Matt Bevan?

  That was then, and this is now. The beginning of the Iran war in February this year caused a very similar freak out on the bond market. And this time it hasn't really stopped. As the closed Strait of Hormuz affects oil prices, which then drives up global inflation, people have been consistently trying to get their money off the bond train and put it somewhere else. Another place they've been putting it is...

• 24:08Speaker 06

  Artificial intelligence. It's the greatest investment boom in history, bigger than canals, railroads, electricity, highways and telecommunications. By next year, the global investment is expected to reach a trillion US dollars or one and a half trillion Aussie.

• 24:25Matt Bevan?

  The AI data centre build out is now competing for cash with the US bond market. So the US is having to offer higher bond yields to get people to keep their money on the train. And of course, higher bond yields means...

• 24:39Speaker 00

  When bond yields rise, they push up borrowing costs.

• 24:42Matt Bevan?

  Short of ending the war, which Trump has been promising to do for months now, there's not all that much he can do to stop this, even if he does say...

• 24:50Speaker 03

  We have many types of intervention. That's one. The ultimate intervention is our military. And if we have to use that, we will, yeah.

• 24:59Matt Bevan?

  Bombing the Iranians isn't getting the strait open, and he can't actually bomb the train, nor would he want to. His Treasury Secretary Scott Besant tried loading some of the government's own money on to the train to try and make it look like it was still a good place to invest.

• 25:15Speaker 03

  He's very good at it. He has a good touch, very good natural touch for the bonds and interest. And he did that, yeah.

• 25:22Matt Bevan?

  That didn't work, though. He injected a few billion dollars into a market that trades $900 billion a day. The market barely noticed. Yields kept going up. Do you remember earlier when I said that banks aren't what I thought they were? Well, we were all brought up on advertising like this.

• 25:46Speaker 06

  One bank is helping more Australians get the right home loan. So wherever you are in life, you can get ahead. Whatever your goals, ANZ will help you get there.

• 25:59Matt Bevan?

  I always assumed that the thing that a bank wanted to know when you apply for a home loan is whether you're able to pay the money back. But actually, what the bank is really asking is whether I can offer a better deal than the bond train. The US train sets the global benchmark for the price of borrowing money. The Australian government pays a little bit more than that. Australian banks pay a little bit more than that, and you pay a little bit more than the banks. Lucky you. But sometimes, through absolutely no fault of yours, the benchmark moves. Donald Trump does something that convinces people that US bonds aren't as safe as expected, like threatening to bomb the train. That drives up US bond yields and...

• 26:44Speaker 00

  When bond yields rise, they push up borrowing costs.

• 26:47Matt Bevan?

  For everyone, everywhere in the world. But only Americans get to decide who's driving the train. And they're voting on whether they like the job that he's doing in the US midterm elections in a couple of weeks. He's promising that if his party wins, he will run up another trillion dollars in debt as a little gift to the American people.

• 27:08Speaker 03

  I will issue a dividend to every adult citizen in the United States of America for $5,000.

• 27:22Matt Bevan?

  How this all shakes out matters to all of us. He's the one driving this train.

• 27:35Matt Bevan?

  If You're Listening is written by me, Matt Bevan. Supervising producer is Cara Jensen McKinnon. It's produced by Jess O'Callaghan and Adair Shepherd. We are going to record a question and answer episode, which we will be publishing this weekend. If you've got any questions about the show or the stuff we cover that you'd like us to answer, send them through now to ifyou'[email protected]. Voice notes are the best way to send them to us and make sure that we answer them. Also, excitingly, we have just been given our own If You're Listening YouTube channel, which will just have our show on it. Some people on YouTube are commenting, saying that they think this means that we

• 28:16Matt Bevan?

  have left the ABC. It does not. We are still at the ABC, but we've just got our own YouTube channel, separate from the rest of ABC News. One of the great things about this is it means that we will be able to do live events where you can ask me questions live via comments. We're going to do our first one of these while the votes are coming in for the midterm elections in the US. So if you're into that, subscribe to our YouTube channel now and you'll be the first to know when we are going live. But yes, question and answer episode coming up on the weekend, so get your questions in now via email, preferably via a voice note. I'll catch you then.