If There’s a Bustle in Your Bond Fund!

By David Ashby, CFP®, CPA, Mustard Seed Wealth Management

To paraphrase that old Led Zeppelin classic, if there’s a bustle in your bond fund, don’t be alarmed now. It’s just the Treasury interfering in free markets!

Last week Treasury Secretary Scott Bessent announced that the Treasury would buy up to $4 billion in long term Treasury bonds. This raises a couple of questions. First, how would they pay for it? By issuing short term Treasury bills. This is sort of like paying off one credit card by using another credit card.

Second, why would the Treasury step in to buy long bonds? Well, by increasing the demand for such bonds, the price will theoretically go up. And if the price of the bond goes up, the yield (a/k/a the interest rate) on the bond goes down. And if the yield/interest rate on long Treasury bonds goes down, then maybe the interest rate on home mortgages will go down as well, thus stimulating the housing market. The rates for a 30-year mortgage remain stubbornly “high” at around 6.75 percent. If you’re a baby boomer, that rate seems cheap. But if you’re in your thirties, you recall mortgage rates of three percent or less just a few years back.

I realize that’s a lot of moving parts. But the move came after yields on 10-year Treasury bonds hit a 19-year high, which means bond prices were dropping. Coincidentally or not, this all happened after we hit the $40 trillion level in federal debt.

But wait a minute. Isn’t the Federal Reserve the government agency that’s supposed to control interest rates? Yep, it is. But that doesn’t seem to be working fast enough. President Trump recently put his new man in there, Kevin Warsh, as the chair of the Fed. The expectation was that Warsh would go in and begin cutting rates. He replaced Trump’s previous appointee, Jerome Powell, who simply wasn’t cutting rates fast enough to suit Trump. But now, Warsh has chaired two meetings so far and has held interest rates constant. Inflation in June kicked up to 4.2 percent and it’s hard to justify cutting interest rates when inflation is significantly above your targeted rate of two percent. So, if the Fed can’t get rates down, maybe the Treasury can.

The announcement that the Treasury would buy $4 billion in long bonds might sound like a lot of money to the average guy on the street. But when you consider that we now have a federal debt level of $40 trillion, it’s a small drop in a big bucket.

The higher interest rates are not the problem, rather just a symptom of the problem. While a bustle in your bond fund shouldn’t alarm you, the rapid increase in federal debt should concern us all. Consider that in 2008, total federal debt was $10 trillion. It took our country about 230 years to get there. We hit $20 trillion nine years later in 2017. Then $30 trillion in 2022 (5 years later) and now $40 trillion in 2026 (4 years). Looks kind of like a snowball headed downhill, picking up speed and mass.

By the way, did the Treasury intervention in the bond market work? Yields dropped briefly and then went back to previous levels by the next day. The interaction of buyers and sellers in the free market is much like gravity, a powerful force!

About the Author: David Ashby, CFP®, CPA, is with Mustard Seed Wealth Management in Texarkana. Read his previous TXK Today column, “The SpaceX Blastoff!”, and learn more about Mustard Seed Wealth Management’s Texarkana location.