Treasury Bonds Don't Tap Dance

Bonds don’t tap dance.  There is nothing sexy or flirtatious about bonds.  They are low, slow and share their joy only a little at a time over the long haul.  If you want a relationship that fulfills its promises and serves you well year after year, buy bonds.  Bonds are a good marriage, not a summer fling.  Read on to find out how American Treasury bonds, once the most secure asset in the world, changed from a society matron to a bar floozy.

When you buy a bond, you are loaning the issuer money.  Like all loans, you expect to be repaid the full amount, plus a little extra, called interest.  Interest is the price we pay for money.  With bonds, that interest is called yield.

Treasuries are sold for less than their face value, the difference between the price and par, being the yield, or interest.  For example, if you buy a $10,000 note, due in 10 years, you might pay $9,500 for it.  During those 10 years, the government uses your $9500 to do useful things and, when the bond matures, you get back your $9500 plus the extra $500 as a thank you.  During those ten years, the bond can also be sold to other people with the assumption that the person owning it at maturity will be able to collect the face value.

The bond market is the world's largest security exchange.  It is worth $130 Trillion dollars, and the United States own 40% of the debt being traded. 

When the sale price of the bond falls, the yield rises because it represents the discounted difference between the paid and face value.  The government is getting less for the bond, which means it is having to pay more at maturity.  Who makes up the difference?  You do, through your tax dollars. 

Since the return is guaranteed, what makes some bonds less desirable and therefore cheaper?  Concerns about the health of an economy, fears about ability to repay and inflation are all common causes.  Worries about both a stagnant economy and inflation (stagflation) are poison to bonds.  

When the US raised tariffs on the world, thinking it would pay off Treasury bonds with tariff revenue, the rest of the world knew what was really going to happen and behaved accordingly.  Tariffs are a tax on consumers, not countries.  Counting on tariff revenue means you are counting on your population to continue buying foreign goods at inflated prices.  Higher prices cause decreases in consumption.  That causes a decrease in revenues.  That causes an inability to pay debts.

On April 9^th, the world started selling U. S. Treasuries at record levels.  The yield rate leapt from 3.8% to 4.5%.  That means that in less than 24 hours, our country owed over $300 Billion more just in interest!  That kind of debt threatened not just our ability to repay, but all the banks that owned the debt.  How could they fund private investment or mortgages? How would pulling back on those investments impact the flow of money? The world was teetering on the brink of worldwide financial failure.  This was an unforced error of magnificent proportion.

 The present administration tried to say that the bond auction after the tariff’s 90-day pause was “successful.”  But they didn’t say what price the bonds were sold for.  At any auction, if you can’t sell an item at one price, you keep lowering it until you find a buyer.  American Treasuries were tossed in the “quick sale” bin. Our current bond yields are worse now than they were on the 4^th.  We are getting less cash but owing more in interest. 

This is not how to make things better. 

Forget stocks, watch the bond markets and keep the faith.