The debt bath

The kiddos are too young to remember James Cargill. The veteran US political operative was a Bill Clinton guy and is now a crusty sometimes-commentator on TV cable news.

But he made history with these four sentences:

“I used to think if there was reincarnation, I wanted to come back as the president or the Pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody.”

The bond market is starting to intimidate everyone. This morning the yield on a 30-year US Treasury (the global standard) hit 5.33%.

So what?

So that’s the biggest yield seen in 24 years. It’s a huge premium on current inflation. It means bonds are being sold off and prices falling. That means investors are demanding more return for holding bonds they see as having greater risk. It’s a vote against the future.

When Trump came to office the yield was 4.9%. Before he bombed Tehran it was 4.6%. Now, six months later, the yield has hit a multi-decade high. The Bond God is hot happy with the orange guy.

A quickie refresher: Bonds are issued by corporations and governments to pay for stuff now by promising repayment in the future, and interest in the meantime. Central banks influence short-term rates (like the prime at the bank) while the bond market guides longer-term interests costs, like on mortgages.

The US government owes $40 trillion as of this month in outstanding bonds. The bulk of that ($32 trillion) is tradable and held by investors, countries and other central banks (Canada holds $460 billion in US government debt).

When investors feel good about the future – low inflation, stable conditions, no surprises – they buy bonds. That demand keeps interest rates stable or decreases them. But when people get nervous, fearing the years ahead will be volatile, unpredictable and likely spiked with rising costs or falling economies – they dump bonds. So bond prices drop, which forces yields higher (it’s an inverse relationship, like me and the comments section).

That’s exactly the scene now. In bond terms, yields have exploded higher since the Iran war started – and a host of other things took root. In fact investors worry broadly we’re entering a time of structural inflation, higher interest rates, political upheaval and runaway debt.

You know the highlights. Trump’s war is a fiasco. It’s resulted in a massive expenditure of American capital, a protracted spike in energy costs, resurgent inflation and an emboldened Iran. None of the president’s objectives have been met, while US dominance in the Middle East has been shattered. The Strait of Hormuz is plugged. Iran still has its uranium. US bases have been destroyed. And there is no way out, with Trump becoming more and more irrational as his approval rating tanks along with support for the conflict.

None of this inspires people to buy his bonds.

Investors are pricing in higher oil for a lot longer, with no return to normal shipping in the Strait for years. Or forever. With oil back near $90 a barrel it looks like US central bankers will have to follow the lead of other global CBs and raise interest rates. Investors know this and demand higher yields to shield themselves from the coming erosion in purchasing power.

At the same time, politicians can’t stop spending money. Operating deficits and sovereign debt are flaming higher in America, Canada and across the world. Governments are ramping up military spending, embarking on major projects and trying to stimulate economies still in a post-pandemic funk. Borrowing costs are escalating globally.

And look at what AI is doing. Almost a trillion will be spent in the US alone by hyperscalers throwing up massive data centres to provide the compute needed for new models. These guys are issuing their own bonds, competing with government issues and also fuelling the yield war.

Oh yeah, and then there’s the stock market. Despite war, inflation, debt and the most powerful man in the world focused on a ballroom and a pool liner, valuations have gone ballistic. Record high after record high. Gains of 20% and 30% in twelve months. And along with the soaring indices is concern that, like Icarus, we’re flying too close to the sun.

After all, when you can hold a virtually risk-free government bond and get a 5% yield, why put your money in dangerously-priced equities?

What should you do?

Nothing, of course. Your B&D portfolio should contain a bond component. The price may be down. The yield up. But all this can (and probably will) change in the months to come. The idea of a balanced approach to investing is to have assets which move in different directions, ensuring the overall portfolio remains stable despite the rolling waves outside.

This mess will pass. Trump will pass. Wars, too.

But the debt will remain. Intimidating as ever. Make sure you own some.

About the picture: “This is Bailey a seven pound, eight year old Morkie,” writes Michael in Toronto. “Am told that she is a cross between a Yorkie and a Maltese. She is your very frantic friend if you have a snack for her but has a short memory and only three teeth.”

To be in touch or send a picture of your beast, email to ‘[email protected]’.

Source: https://www.greaterfool.ca/2026/08/18/the-debt-bath/