MICHEL MARTIN, HOST:
Stocks surged following Donald Trump's reelection, but the bond market is a different story. They've been selling off in a big way, and that affects everything from interest rates to inflation.
STEVE INSKEEP, HOST:
Yeah, bond investors say they're alarmed about parts of the President-elect's economic agenda, which is important because the bond market matters so much for business and governing. If interest rates are low, your company and your government can borrow lots of money cheap. And if interest rates climb, life gets more expensive fast.
MARTIN: For more on this, we are joined by NPR senior business editor Rafael Nam. Rafael, good morning.
RAFAEL NAM, BYLINE: Hey, Michel.
MARTIN: So just briefly, give us the basics of what - what are bonds? And why do they matter? We've said a little bit about that, but just what are they?
NAM: Good question. A lot of people don't get bonds, but it's actually pretty simple. The way it works is that the government sells bonds to investors. We're talking banks, other countries, individual people. Think of it as a loan. The government needs to borrow money to function and to afford all of its spending. These investors are the bank, and they're lending their money to Uncle Sam. Then Uncle Sam promises to pay back these investors with interest. And when bond investors get spooked, they demand more interest from the government, and that's exactly what's happening now.
MARTIN: So why the sell-off?
NAM: Well, there are two critical things to the economy that could get worse under a new Trump administration - inflation and the government's finances. Now, let's tackle inflation first. Although Trump has promised to lower inflation, many bond investors believe he could actually do the opposite. Take tariffs. Trump is proposing a wide range of tariffs, and the U.S. imports a lot of things - clothes, toys, shoes, tech gadgets, you name it. Tariffs obviously make those things more expensive. Trump also wants to cut taxes. For example, he wants to exempt workers in restaurants and other places from paying taxes on tips. All of that could make the country's finances a lot worse, and they're already pretty bad. The budget deficit in the last fiscal year was $1.8 trillion, the third highest on record.
MARTIN: So you heard Steve earlier say that bonds wield a lot of power. How do bond investors wield their power?
NAM: Because they can essentially tell the government we won't be lending you any more money, and that would put the government in a pinch. Now, if the interest the U.S. pays on its bonds surges, it can also create a lot of pain to the country's finances. And these fears in bond markets can spread to other markets like stocks. Fear is pretty contagious, after all, and it has happened before around the world. About two years ago in the United Kingdom, bond investors revolted. It helped create a financial storm, and it took down the prime minister in a matter of weeks. There's even a term for bond investors that wield their power this way - bond vigilantes. These investors could stop buying bonds. It's effectively telling the government - like I was telling you - we're not going to lend you any more money unless you reconsider some of your policies. Now, the U.S. is obviously much bigger than the U.K., and we also don't know what Trump is actually going to do. But things could get rocky very quickly if he does all the things he's promised.
MARTIN: So very briefly, how would this affect regular people?
NAM: Yes, because the bond - U.S. bond market influences all kinds of interest payments, from credit cards to auto loans to mortgages. So when there's pain in the bond market, it's not just the Trump administration that will feel the impact. It could be people like you and me.
MARTIN: That is NPR's Rafael Nam. Rafael, thank you.
NAM: Thank you. Transcript provided by NPR, Copyright NPR.
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