In the first two weeks of April 2025, many investors are rapidly selling US Treasury bonds despite the recent decline in the stock market. This large selloff is causing bond prices to fall and yields to rise. Since US Treasury bonds are important to the economy, this major bond selloff is increasing borrowing costs for consumers and raising other concerns.
The bond selloff is driven by economic uncertainty linked to President Donald Trump’s tariff policies. Although he has paused tariffs for 90 days, investors are still worried about a possible recession in the US.
This selloff is unusual. Typically, when the stock market declines, investors turn to bonds for safety, which strengthens bond prices. However, this time, investors are selling bonds instead. Some speculate that this mass selloff is a way for investors to push back against the president’s economic decisions, particularly regarding his new tariff strategies.
In addition to higher yields, the selloff can reduce the value of fixed bond payments. Higher yields also mean that the US government will face increased interest rates, leading to faster accumulation of debt and higher payments to bond investors than before.
What Are Bonds
Bonds are a type of financial tool used to raise money. When you buy a bond, you are essentially lending money to the organization that issued it, which can be a government, municipality, or a corporation.
Here are six important things to know about bonds:
- Face Value: This is the original amount of money the bond is worth.
- Market Value: This is the current price of the bond, which can change based on various factors like interest rates, credit quality, and market conditions.
- Maturity Date: This is the date when the issuer will pay back the face value of the bond.
- Coupon Rate: The fixed annual percentage of the face value paid as interest. Some bonds pay semiannually, not just annually.
- Interest: The actual dollar amount paid to bondholders, calculated using the coupon rate and face value.
- Yield: This is similar to the coupon rate, but it can change depending on the bond’s current market value. You have current yield and yield to maturity (YTM).
You can buy bonds directly from the issuer in the primary market or through online platforms in the secondary market. When you buy a newly issued bond, you pay its face value. Bonds are typically categorized by their maturity dates: short-term (less than three years), intermediate-term (3 to 10 years), and long-term (10 years or more). Most bonds have a fixed coupon rate, which determines the interest you will receive, usually once a year.
Bonds can also be traded between people in the secondary market. If you buy a bond from someone else or through a platform, you will pay the current market value, and your interest earnings will depend on the bond’s yield.
When you sell a bond, you can receive either the face value or the market value you paid for it. You will also get any accrued interest, which is the portion of interest earned since the last payment.
Why Does The Government Issue Bonds
The government issues bonds to raise money for spending, in addition to collecting taxes. You can buy US government bonds directly from the US Treasury through its website, TreasuryDirect.
Local governments also issue bonds for similar reasons. You can purchase these bonds from financial advisors, online platforms, brokerage firms, investment banks, and sometimes directly from the issuing organization.
Why Massive Selloffs Of Government Bonds Are Alarming
When people sell government bonds, they are putting them back on the market. If more people are selling bonds than buying them, there will be too many bonds available. This oversupply causes the market value of the bonds to drop.
As the market value decreases, bond yields (the returns investors earn) increase. While some investors might see this as a chance to buy bonds at a lower price for better returns, it creates issues for the government. The government ends up paying more for new bonds, receives less money from bond sales, and ultimately pays more in interest to bondholders.
For example, consider a government bond with a face value of $1,000 that pays $50 in interest each year (a 5% coupon rate). If the bond’s market value falls to $900 and the bondholder sells it, they will receive $900 plus any interest that has accrued.
Now, with the bond priced at $900, the yield becomes higher than the original coupon rate. To find the new yield, divide the annual interest ($50) by the new market value ($900). This gives a yield of about 5.56%. The buyer pays $900 but still receives the same $50 interest based on the original terms.
To illustrate how this affects the government, if the bond’s market value returns to $1,000 but the yield remains at 5.56%, the government would now pay $55.60 in interest for every $1,000 bond issued. This means the government is effectively paying $5.60 more in interest than before for each bond.
How Does Rising Yields Affect Regular Americans
Rising yields on government bonds can have a significant impact on the economy and, consequently, on regular Americans. Here’s how:
- Increased Loan Interest Rates: When bond yields rise, financial institutions often raise interest rates on loans to maintain their profits. This means that mortgages, car loans, and credit card interest rates can become more expensive for consumers.
- Higher Inflation: As the government takes on more debt due to higher bond yields, it can contribute to rising inflation. Inflation reduces the purchasing power of Americans, meaning that everyday goods and services become more expensive. Additionally, the value of savings can decrease as prices rise.
- Reduced Government Spending: To manage the increased interest payments on government bonds and control national debt, the government may cut spending. This can lead to fewer public services and programs, affecting areas like education, healthcare, and infrastructure, which are essential for many Americans.
It’s important to note that bond yields fluctuate. In the initial weeks or months of rising yields, the effects may not be immediately felt by citizens. However, if yields continue to rise consistently and at a fast rate, these impacts will become more pronounced and may extend beyond the examples mentioned.
Key Points
- Bond Selloff and Rising Yields: In early April 2025, a significant selloff of U.S. Treasury bonds is occurring, leading to a drop in bond prices and an increase in yields. This situation is raising borrowing costs for consumers.
- Impact of Stock Market Instability: The bond selloff is driven by instability in the stock market, influenced by President Trump’s tariff policies. Although tariffs have been paused for 90 days, the selling of bonds continues.
- Effects on Government Debt: Higher bond yields result in increased interest payments for the U.S. government, leading to faster accumulation of national debt and higher costs for bond investors.
- Understanding Bonds: Bonds are financial instruments used to raise money, where investors lend money to issuers (governments or corporations) in exchange for interest payments. Key terms include face value, market value, maturity date, coupon rate, and yield.
- Consequences for Americans: Rising bond yields can lead to higher loan interest rates, increased inflation, and potential cuts in government spending, which can negatively impact public services and the financial well-being of everyday Americans.
Sources
- Photo: Unsplash: Marek Studzinski
- ABC News: A Bond Selloff Is Worrying Wall Street: Here’s Why It Matters For You And The Economy
- Fox Business: Wild Week For Stocks, Bonds And The Dollar As Tariff War Rages
- Reuters: Us Bond Rout Leaves Investors Bruised Despite Trump Pause On Tariffs
- MSNBC: America’s Other Checks And Balances Are Still Working On Trump
- Business Insider: The Bond Market Went Haywire This Week: Here’s Why That’s A Warning For The Us And Trump
- CNN: The Bond Market Is Acting Weird. It Spooked Trump
