The Decibel - What the current bond market turmoil says about the economy

Episode Date: September 10, 2026

Scary bond market headlines – warnings of an impending financial crisis – have been in the news for weeks now thanks to a rise in U.S. Treasury yields. This market is the bedrock for much of the global financial system and changes in it can ripple across governments and companies and right into people’s bank accounts.Scott Barlow is a columnist for Globe Investor. He explains the worry about the current rising bond yields, what’s behind the increase and what kind of impact it may have on your life.Questions? Comments? Ideas? Email us at [e-mail] Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

The bond market has been generating some alarming headlines lately. Here's a sample. Bond market unease poses greatest risk for next financial crisis. Global economy on a financial crisis trajectory as bond markets dive. Global bond yields hit 2008 crisis levels as markets flash warning. The bond market is a critical part of the global financial system. And what happens with bonds trickles down to the consumer through things like car loans and mortgages. So how worried should you be? And how does what's going on impact Canada

specifically? We have one of the globe's market experts with us, Globe Investor columnist Scott Barlow. He's a 20-year veteran of Canadian investment banks and writes a newsletter with market insights for globe subscribers twice a week. He'll be our bond market guide today to shepherd us through the complexities of what's happening right now. I'm Cheryl Sutherland and this This is the decibel from the Globe and Mail. Hi, Scott. Welcome to the show finally. Hi, Cheryl.

Thanks for having me. This is your first time as a guest in the show. It is. I've been watching sort of ambiously as other people file in and out of the soundstage here. Yeah, and fun fact for listeners. I mean, you're kind of like my TV friend. Like, you always give me some tips on great TV, but you sit really close to me. So we talk all the time.

So it's really great to have you in the chair, finally. And I'm fresh out of TV recommendations. There's a bit of a desert going on right now until we get the pit back in January. Okay, okay, so TV aside, let's turn our attention away from TV and talk about something just as exciting. The bond market. The bond market seems pretty sleepy on the surface, but actually you pretty quickly get into complexities, and it's actually pretty fascinating how bond trading, both its power to determine what happens in the economy and what happens with the bond market and investing in it. So that sets us up to talk about the bond market.

and I'm going to start with a very basic question to start. And this is just so everyone is on the same page, okay? Ready for it? I'm ready. What is a bond? Bond is basically is a contract that, like, for instance, a government says, I need money to pay my giant bureaucracy. So I am going to give you a piece of paper and you are going to give me $100.

And I will pay you an interest rate like I will give you payments twice a year. year of, let's say, 5%, two payments of two and a half percent on that $100 until the period of the bond is over, which is, you know, five years is common, 10 years is common. So basically, it's an entity borrowing money and agreeing to pay interest to the people who have lent them that money. So basically it's an IOU. Yep. Right. So when it comes to who's issuing the bond, we're talking about governments, for example, big institutions, that kind of thing. And those who buy them, It could be anybody, but at the same time, it's still big institutional investors, pensions, other governments. Yeah.

Is that right? I mean, whoever has the most money, they definitely own, like, a lot of bonds in almost all cases. Right. And then so consumers like me and you, we might have bonds in our portfolio. Balance funds and portfolios share. Great. Who determines how much you make from a bond? So if you just buy a bond when it's issued for, let's say, $100 again, and there is a

a 5% yield on it, which means they pay you $5 per year on the $100. And then they give you the principal back after five years. That's the simplest way of making money from a bond. But let's say the bond is issued in 2023, but in 2024, the price of the bond changes from $100 to $95. How would that happen? If the interest rate environment changed. Okay.

So let's say if interest rates went up, from the 5% we discussed early. They went to 6%. The new bonds will yield 6%. Yours only yields 5, the one you bought. So the value of that bond goes down. It's worth less. So it's not with $100 anymore.

It's worth $97, say. Interesting. But the thing is when that bonds at $97, it actually now yields 6%, the same as the new ones. So making money from bonds is two ways. You just buy it and hold it, and that's the basic way.

or you can buy it at different prices and basically sell it at different prices before it matures. So the key for people to remember is that if the price of a bond goes down, the yield goes up. Okay. So we're going to be focusing on

the wild things going on with U.S. treasury bonds right now, which are U.S. government bonds. And these bonds are considered one of the safest investments and what goes on with them impacts the global economy, including what goes on here in Canada.

So just a broad take here, Scott, can you explain why that is? I think part of it has to do with the U.S. dollar being the global reserve currency. Like everyone holds U.S. dollars. And so the interest rates go a long way to determine the value of currencies. The other thing is that because the U.S. is so dominant when their interest rates move, either everyone else's interest rates move or the value of their currency falls. Okay.

And so from what I understand, so I might be oversimplifying this, but like just so I think I'm on the same page with you here is that U.S. Treasury bonds are kind of like this bedrock of the financial system, right? Because they affect all other kinds of financial assets. Yeah, they're the benchmark and everything trades up the benchmark. And this is to the point where if you asked a bond trader where Canadian five-year bonds were trading, they would tell you something like five back, which means they wouldn't give you a price. It means five basis points back of treasury bonds. Okay. So they may even not know the price of the bond or the yield. they'll know where it trades in relation to the U.S. bond.

Interesting. Like that's how dominant U.S. bonds are in markets. So they're the reference point then. They are entirely the reference point. Okay, very interesting there. Okay. So lately, bond yields have increased. Yep.

Can you give me a sense of where they're at compared to where they've been? Yields right now are kind of where they were in 2023. Mm-hmm. So, but I think the concern is that they are, you know, on a relatively firm trajectory higher. and people are extrapolating that move to higher bonds. They may be correct. Give me some numbers here. Give me some percentages for the notes that we have right now.

So, I mean, the U.S. tenure is trading somewhere around 5%, which was an important sort of philosophical number for it to go over for U.S. investors. It's sort of like some people panicked when it got over 5%. And that sort of woke everyone up to the fact that we might be in a different environment where Bonos and interest rates are concerned. The Bonneals, the longer term banios, are definitely a source of volatility in equity markets. I mean, one thing we should discuss is the discounted cash flow calculations, which is basically, if someone said I will give you $95 now or $100 18 months from now. There is actual math that tells you which is the smarter way to do it.

So $100 in 18 months from now is worth an amount now. So a big determinant of that, the present value of future money, is the interest rate. So the higher the interest rate, the more you want your money now. And so the reason this is key is because the higher the interest rate or the higher the bond yields, the less future profits on stocks are worth. So if I'm understanding you correctly, what you're saying is that bond yields kind of represent a sense of what investors are thinking. So lower yields for longer-term bonds suggest investors think there will be stronger economic growth in the future?

Well, that depends on the differential between the short-term and long-term bonds. That will give you a sense of where markets believe growth is going. So if you have the most common measure of it's called the steepness of the yield curve is two years versus 10-year yields. And yield curve basically is just the curve of all of the different terms. The yield on the different maturity, right? The two year and the three year. Yeah, exactly. All those, right.

So the difference between the two year and the ten year is the most common way of looking at it. In normal conditions, the ten-year bond yield is considerably higher than the two-year yield. And that indicates optimism to the future that growth will improve. And somebody called the term premium, too, that we don't need to discuss. But that is a sign of health, basically, when the tenure is higher than the two-year. I think what's important here just for listeners, and I think for myself, so I understand, correctly is that bond yields are seen as kind of a representative of investors' feelings about the state of the future economy. Right. Right. And again, yeah. So if future yields are higher, that means

people expect growth. It's a very bad sign for the market when the 10-year bond yield goes below the two-year. That happens very rarely. And it's called an inverted bond yield and then everyone really panics. Interesting. So, yeah, we don't want that. But that's... We're not there. Yeah, yeah, yeah. We're not going to have to worry about that. We'll be right back. We're going to look at the impact of higher bond yields on people in a bit. But first, Scott, can we look at why this is happening, why bond yields are going up right now? What has been driving them?

The big two are oil prices and the tariffs, if we're talking from a North American perspective. So that means that every time people go to the pump to get gas, those prices are higher. The central bank is concerned about contagion from. from there. They're worried that the higher oil prices are going to feed through the economy, right? From the oil price to the trucking companies, to the companies that truck things, you know, and basically the prices on everything start going up by, you know, a reasonable sort of one and a half, two percent, which is what central banks like, to more like three or four percent,

which then you get into problems where people start asking for raises at work because they can't afford things anymore, and then you get what happened in the 70s. which is called a wage price spiral, where things get expensive, people ask for a raise. They buy more things, so things get more expensive. And it's this cycle of that keeps driving interest rates higher and higher. And that's how you get things like my parents getting a mortgage at 19% in the late 1970s. Right. And this is also kind of like what you're talking about here when it comes to the tariffs and also oil prices.

This is like feeding into inflation. Well, no, yeah, entirely. I mean, like, technically it is inflation. And so goods that we used to get from the U.S. at cheap prices, now there's a tariff on them. The companies pass on the tariff costs or try to to the consumer. So consumer goods go up in price, and that, again, is inflation and people start getting concerned. So what the central bank will want to do is raise interest rates in an effort to make demand lower, right? to slow the economy to lessen demand for those things so that the prices don't get into control.

Bring it back to the bond yields now, how does that factor in there? Okay. So central banks determine what's called a policy rate, and bond yields basically price off that policy rate. Okay. So if the Bank of Canada raise interest rates 25 basis points, all things being equal, bond yields go up by 25 basis points. Okay. So basically, if Bank of Canada raises the rate,

from 2.5% to 2.75%, then bond yields will also go up. They'll follow. Interesting. And that's the whole point. And that increased borrowing costs, which tries to slow the economy, which eases demand so that prices don't go up as much. Now, in this case, when you really have to worry about inflation is when the economy is running, generally the term is running hot.

So basically, the economy is running so that people have enough money that they're shortages. of goods. And those shortages result in higher prices. And that's when, you know, the government raises rates, the central banks raise rates in order to cool the economy, which was running hot. But in the case we have now where things are basically government policies, so the oil prices are up because of geopolitical decisions and, you know, tariffs are also a geopolitical decision. So it's not necessarily the economy running hot that's pushing inflation up. It's sort of these like individual things that are increasing inflation pressure and in turn bond yields. And am I right to think that higher inflation essentially makes the bond payout that you get

twice a year, as you mentioned, worthless? Or is that more complicated than I think? Yeah, no, it goes back to what we were saying before in that the bond that you bought three years before, which yielded 5%, say, right? The new ones yielded 6.5%. have. So the bond that you bought is now worth less. Now we're $95 instead of $100. Now, the thing about bonds, which bond people in the bond industry will always remind you of,

if you just buy it and hold on to it, you get what it says on the tin. You get your 5% per year and you get your $100 back. But, you know, if you're trading them, then that's different than, you know, the value goes to $95 and then you try and sell it. Yeah, so basically if you have the $100 that you invest in a bond and you're getting paid out 10 years later, you will get the $100 back, but your money might not grow, right? That's kind of the thing that happens. Yeah, or the value of the money you get doesn't have the spending power is a better way to put it,

that it did when you bought the bond initially. Interesting. Okay, yeah. So you might want to take that money out and move it somewhere else. Right. Okay. The U.S. debt is playing a role in what's going on as well, right? And U.S. debt recently rose past the $40 trillion mark, which is quite the number.

Yes. So why does that matter to the bond? market? I think it matters a little bit because, I shouldn't say a little bit, because it's a super important concept. There is now a small premium, what was viewed a treasury bond as something that is 100% risk-free, dependable asset you can buy. So because of the 40 trillion, people are going like, yeah, like there was a 100% chance that I was going to get my money back, but now there's a 99.87 chance, right? Just because, you know, of recent leadership and the sheer scale of the debt.

And that means that the global investors may want a slight premium in terms of yield. They may want just a shade more one basis point, half a basis point. Like, just this shade more in yield because of that risk. I mean, if they really, really get concerned that the U.S. is going to pay back treasury debt, then, you know, like that's canned goods and shotguns saving time, right? Like that, the whole global economy has like a huge giant hiccup. So you're saying if there was a fear that the U.S. cannot pay back this debt, that would be a whole other level.

We're not there. We'd have much bigger problems than what we're going to get for lunch, yeah. Okay, but we're not there. We're not even close to there. But that's what's people never thought about that before, probably. But they are starting to. And just to sort of just, I don't want to scare people, just to put this in perspective. But like, U.S. debt to GDP is between 125 and 130%.

Japan is 200%. And it's been that way for a long time. So Japan's a little bit different. And most of their debt's held domestically and U.S. has held everywhere else. But, you know, the U.S. debt is growing quickly and it's regrettable in some ways. It's not a crisis. It's just a thought in the back of people's minds that, you know, they may just want a little bit more insurance. Okay. Scott, is part of the problem here that people aren't buying bonds as much anymore? Like our investments going somewhere else instead of bonds, as in bonds are facing more competition, right? Like all the money going into the AI sector, for example. Yeah, that's a great question. It's slightly different than that, but what's happening is that bond prices, the reverse of yield, are moving in the same way as equities. So bond prices are going down when equity prices go down and up when equity prices go up.

And that's not usually what happens. No, because of that, they're not offering much in the way of diversification. Okay. Under normal circumstances, if you hold an equity portfolio, you'll add an allocation. bonds and that will reduce the volatility of your overall portfolio. But that's not the case now. So given that, you know, your return potential is higher in equities and you're not getting any diversification benefit from bonds, then, you know, you're buying more equities. You're paid to buy more equities. And that's not just the AI story. That's also, you know, that's throughout the economy. Let's talk about the impact of high yields on the consumer. So high bond yields make

debt more expensive. Can you explain that? You know, if you got a mortgage or you're making a car payment, you know that the lower the rate you finance, the lower your payments. So, I mean, and that's the crux of it is the lower the interest rates are, the lower your monthly payments are for things that you fund it. So those finance rates are driven off of bond yields, you know, and that's how higher rates slow the economy. We've been talking about economies more broadly. Is there anything specific to the Canadian economy? Like what is going on with U.S. Treasury bonds? Does this mean anything for Canada specifically?

Canada's an interesting spot because growth has been really sluggish. And so this inflation pressure is not conventional in the sense that it is happening because of rapid growth. So Canadians are kind of faced with inflation pressure at a time of sluggish growth. And so it's kind of a double whammy. You know, I think it's really important for some of the tariff issues to be resolved so that the economy can start to grow and sort of compensate for the downward pressure on growth that's caused by higher rates are basically imported by U.S. government policy in oil and through tariffs. So just before we end here, Scott, we've been here before, right? Bonne yields have been high. And this is not the highest they've ever been, right?

that was kind of in the 1980s. Yeah. What was it in 1980s? 1982 was a peak. Yeah. And that was awful for the economy. I mean, they called it stagflation and ultra slow growth with prices going up like every month. So people were really suffering. Yeah. And so let's put that into context to today. Like on a scale of one to 10, where would you put the worry with the bond market today? Okay. So I think there's two ways of looking at this. And like, I think in the short term, I think the concerns are, I think, a little bit overdone. As I said, things are relatively orderly, even if, you know, if they keep going, it's bad. But I think from a longer term point of view, I think all investors listening to this are used to an environment

where interest rates always go lower because that's been happening since 1982 when rates peaked. So during the pandemic and the financial crisis, we started getting used to it. And during the pandemic, it happened again where we had ultra-lower, basically zero interest rates. They can't go any lower than that. So we have entered a new era where we cannot rely on ultra-low interest rates. And the trend may over time be higher as sort of the pendulum swings, you know, from the 1982 to the present period to, you know, 40 years in the future, which, you know, we don't know what that holds, but it could be a 40-year period of sort of steadily higher rates, which no one wants. I'm not predicting that.

Hopefully they level off and stay at a stable rate because, you know, central bankers are more educated as far as what happened in the 70s, in early 80s. So, yeah, I think a longer term I'm going to have to start thinking about getting used to maybe supposing that, you know, we're in a different environment, both for consumers in terms of housing, you know, mortgages and large purchases and also for investors who are, you know, valuing. stocks in maybe a different way than they did in the past 25 to 40 years. So on that scale, would you put the worry at five right now? Five just seems like two-rounded number, right? Okay, let's put it at four and a third. Okay. Yeah.

That's very a best of you to do that. Yeah. Although, you know, if they get to six, I would have that jump to six and three-quarters quickly. So, like, this is what I mean. I mean, we're kind of at this point where if rates go that much and yield, to go that much higher, then it's going to be a big problem. But they're not there yet. Okay, Scott, we'll leave it there.

Thank you so much for coming on the show. I really appreciate it. Thanks, sir. That was Scott Barlow, a columnist for Globe Investor. That's it for today. I'm Cheryl Sutherland. This episode was mixed by Rachel Levy McLaughlin. Our producers are Madeline White, Rachel Levy,

McLaughlin and Mikhail Stein. Our editor is David Crosby. Adrian Chung is our senior producer, and Angela Pichenza is our executive editor. Thanks so much for listening.