The Interest Rate on Chaos

The latest Gallup survey shows that 89 percent of Americans view the US government as corrupt. The bond market appears to agree.

The interest rate on America’s ten-year debt reached roughly 5.03 percent Tuesday, its highest level in nearly two decades. The important question is why.

I wrote recently about watching Bloomberg editors and a bond reporter push and shove in the newsroom over how to explain a day’s trading.

They were fighting because the same rise in interest rates can tell very different stories.

The first is growth. Businesses want money to expand. Investors anticipate higher interest rates if demand threatens to outrun the economy’s capacity. The second is inflation. Lenders expect the dollars they receive later to buy less than the dollars they lend today. They demand compensation.

That inflation can come from prosperity. It can also come from making ordinary life more expensive without making anyone more productive. Disrupted oil supplies. More expensive transportation from the cost of diesel fuel. Tariffs. (Federal Reserve researchers have documented tariffs passing through into consumer prices. ) The third and most relevant at this moment, is uncertainty about the trustworthiness of the borrower (The United States government) and the policies governing it.

How much more debt will it issue? Will its institutions act predictably? Is the government corrupt?

The economy is growing, but most of the strength is connected to AI infrastructure, with investment outside those categories weak. A tech investment boom is not a broadly shared boom. The employment picture makes that distinction sharper. Most of the job’s growth is in healthcare. Over the preceding twelve months, healthcare averaged approximately 32,000 additional jobs a month. The entire economy averaged approximately 31,000 net new jobs, meaning that without healthcare we are losing jobs every month.

Caring for an aging population is critical work. It is also a different economic story from a nationwide expansion of productive opportunity. The Iran conflict compounds matters further disrupting oil production, fertilizer supplies and shipping. That is a cost imposed on the economy, not evidence that Americans have become richer.

Most importantly the latest surveys show that 89 percent of Americans view the US government as corrupt, the bond market agrees.

Which brings us to the president. On August 21, asked about further intervention in the bond market, Donald Trump said: “The ultimate intervention is our military, and if we have to use that, we will.”

He did not explain what he meant.

But military power cannot make a lender believe that a dollar will retain its purchasing power. It cannot substitute for a credible budget or predictable government.

Invoking force in a conversation about borrowing confuses the ability to compel — with the ability to inspire confidence. The consequences extend beyond Washington. Higher Treasury yields push up mortgage and corporate borrowing costs. As government debt matures and is replaced, higher financing costs also work their way into the public interest bill. A country can end up paying more to borrow without producing enough additional prosperity to make that burden comfortable.

That is the danger worth watching. The response should be to reduce the uncertainty we create ourselves: credible public finances, predictable rules, and policies that expand productive capacity rather than merely increase costs. Credible anti-corruption actions are the answer.

The bond market does not need to win an argument with the president.

It only needs to name a price.