Why the bond market moves your mortgage and your 401(k)

Matt: The bond market is not one most of us follow every day, but right now it is flexing its muscle. Bond yields have been climbing, pushing mortgage rates higher and even prompting an unusual move from the U.S. Treasury this week. Behind some of that pressure are questions about how much money Washington is borrowing — you may have seen that $40 trillion number — and how much investors will demand to keep lending it.

So this morning on Matt on the Money: why a market you may never think about can affect your mortgage, your savings, and your 401(k).

Dan Bennett with Lakewater Advisory is here to help us connect the dots. Dan, welcome. Good to see you.

Dan: Good morning.

Matt: Let's start with why we're talking about this today. Yields have been moving higher. When Treasury yields rise, what is the market actually trying to tell us?

Dan: When yields rise, what that really means is that investors are demanding a higher return in exchange for lending their money to the government.

A bond is really just a fancy word for an IOU or a loan.

Matt: That's when we hear “promissory note.”

Dan: Exactly. And the bond market is where corporations, businesses, and governments go to raise money and raise capital. Right now you're seeing a lot of demand for it, which is raising rates.

Matt: Connect that to Washington, Dan. The government is spending more than it collects — we know this. So how does it borrow the money to cover that deficit?

Dan: It's a great question. Think of it like a household that is spending more than they're actually making. Right now the government is doing this on a massive scale, spending more than the tax revenue they're actually collecting.

Earlier this year, the CBO came out and said they thought the annual deficit was going to run us about $1.9 trillion. As of July, through the fiscal year, we're at $1.9 trillion — effectively right there.

Ten years ago, just to put a little context on this, we were at $500 billion in terms of the deficit we were running. Now we're at almost $2.1 trillion — it was just updated to $2.1 trillion in August. So quite the difference.

Matt: If Washington needs to sell more and more debt, why might investors eventually say, “I'll lend you the money, but you're going to have to pay me more”?

Dan: There's a lot going on here, and the main ingredient, in my opinion, is supply and demand.

You have a lot of big corporations and other governments going into the bond market to raise money and raise capital. People have options; there's competition.

Think about it this way: if the U.S. government were the only bond issuer, you'd get 1.5% and you'd be happy with it. But there's a lot of competition. You could buy a bond from Amazon, you could buy a bond from Google. A lot of these other AI hyperscalers that are out there are driving a lot of this competition.

And if there's higher demand, I want 5% on my bond. I don't want 1.7%. You've got to pay the bill somehow.

Matt: That gets to the big question, Dan. Are investors really becoming more concerned about America's debt and the deficits, or would that be overstating what we're seeing right now?

Dan: They're definitely becoming more aware of it. The issue right now is the trajectory of the debt. We're at $40 trillion right now in federal debt.

Secretary Bessent came out a couple of weeks ago, and I agree with him. He said there's no magic in the number $40 trillion. From a market sentiment standpoint, it's no different from $39 trillion or $41 trillion. The issue is the trajectory of this.

Ten years ago we were at $20 trillion. We've doubled the federal debt in 10 years. If we double again in 10 years, it's $80 trillion, then $160 trillion, then $320 trillion.

Everybody in the market knows, and everybody in government knows, that something has to be done, and eventually this bill has to come due to bring balance back.

Matt: Okay, if I really bring this home for us — I've never bought a bond in my entire life. So why can this still change what I pay for, say, a mortgage or a car loan, what I earn on my savings, even what happens in my 401(k)?

Dan: It's a really important question, because this isn't just some esoteric financial market issue. People get bored with this, but you have to pay attention. This impacts all of us, and we can't ignore it.

This impacts mortgage rates and auto loans — specifically the long-term bond market, the 10-year and the 30-year. We saw that recently with mortgage rates at 6.6%, perhaps heading up to 7%. So it impacts everyday Americans who are looking to take out new loans.

Matt: So you don't have to be a bond investor to have money riding on the bond market.

Dan: Absolutely not. No.

Matt: Dan, thank you. Dan's going to be back with us next hour, later this morning. We're going to switch gears and talk about how families can start building a college fund — a totally separate issue from this — even if they feel like they're already behind. Thanks, Dan.