A reader asks: does the bond market finally matter again?

A reader asks: does the bond market finally matter again?

Archer replies: There was a period in time in which the so-called “bond vigilantes” were tasked with protecting the national fisc. The idea was that a preemptive sell-off in the bond market would make it hard for politicians to trash the country’s balance sheet.

All that seems a bit quaint. Politicians are nothing if not creative, and they have managed to keep spending, the vigilantes notwithstanding. This has been a bipartisan effort, though some have worked harder at than others (see current White House occupant). But the bond market is starting to weigh in. One result is that bond yields for the G-7 countries are now at the highest level since 2004, according to Apollo chief economist, Torsten Slok.

Money is, in a way, like any other asset. We purchase it with labor - $16/hour if you work at McDonald’s; $2,000/hour if you work at Skadden Arps – or through investing. Sometimes we get it for free, an inheritance, for example.

During Covid, the government was giving money away as interest rates actually turned negative for a period of time. Now it’s not. Like everything else, money has become more expensive. The yield on the 10-year treasury, which serves as a benchmark for all kinds of lending, is around 4.5%. Other forms of borrowing price off of that number, with the cost of money rising as a function of perceived risk.

Rates on 30-year, fixed rate mortgages average around 6.5%, for example. Rates on a used car loan can be anywhere from 10-20%, depending on the borrower’s credit history. Longer term loans are typically more costly – who knows if a borrower will still be making payments in the seventh year of a used car loan? Time equates to risk.

As with other assets, demand and supply figures into the cost of money. The demand comes from the government, from corporate borrowers, and from individuals and households. One big source, according to Apollo’s Slok: hyperscalers. Reuters has reported that the so-called “Magnificent Seven” – Amazon, Alphabet, Oracle, Meta, et al – have issued $134 billion in new debt in early 2026 alone.

As of Q4 2025 U.S. nonfinancial corporate debt outstanding was around $14.2 trillion, according to the Federal Reserve. But of course it’s at the margin where change happens, and this unprecedented hyperscaler demand is likely pushing up borrowing costs for corporations broadly.

All this pales compared to what the government is doing. As of this writing, federal debt stood at just under $40 trillion, or 120% of GDP, a level rarely seen outside of a major war. It’s going up by $4-$7 billion/day. That money has to come from somewhere.

For decades, there have been predictions that this borrowing would end in disaster. So far, no dice. But what appears to be happening is more like a slow rolling train wreck. Demand for money is pushing rates up, and the resulting higher interest costs are crowding out other spending. This suggests that the current rise in inflation will be more than “transient,” as the previous Fed chair often stated. It is increasingly baked in.

Economist Milton Friedman argued that “inflation is always and everywhere a monetary phenomenon” – in other words, too much money chasing too few goods results in higher prices. A corollary for our times might be that too many borrowers chasing a too small pool of capital will also drive up costs, at least in the corporate market.

So why not just create more money, per Modern Monetary Theory? Another former Fed Chair, Ben Bernanke, once suggested that the government could print dollars and throw them out of a helicopter as a way to ward off deflation. However, that comes with its own problems, as Friedman noted, and the added possibility of cratering the value of the currency (see Argentina, among many others.) Of course the grifter-in-chief has shown a predilection for tin-pot dictator mores, so maybe that, too, will appeal. Who knows?

But for those who have to live with the aftermath, it’s probably better not to crash the dollar. That will only drive prices — and interest rates — up further, and faster. And that’s not good. Inflation has been everywhere and always destructive. Higher for longer, anyone?

Woof!