Why the Bond Market is Daddy

"Watch the bond market, it's the backbone of all markets"

Ray Dalio recently said that in a clip, plugging his new book, "How Countries Go Broke: The Big Cycle" (available for pre-order now, if you're into macroeconomic horror stories)

But that got me thinking... why exactly is the bond market—specifically U.S. Treasuries (Dalio didn't specify, but you can easily read between the lines if you watch the clip)—such a pivotal force? Why is it spooking so many of our key economic players?

The answer is so simple it almost hurt... US Treasuries give us the 'Risk Free Rate'. Investors normally use the 10-year Treasury Bill to determine the risk free rate (stay away DCF connoisseurs, I'm keeping this simple)

Why the Market is Freaking Out About Bonds Right Now

Last Wednesday, the Treasury Department conducted a relatively modest $16 billion auction of 20-year bonds, which saw unexpectedly weak demand. This lack of appetite from investors triggered alarm bells, sending bond yields sharply higher. The critical 10-year Treasury yield briefly hit above 5%—a significant psychological and financial threshold. As a direct consequence, the equity markets swiftly reacted, with the S&P 500 plunging approximately 1.5% within just 30 minutes of the yield spike.

But why such panic over bonds?

At its core, the bond market—specifically U.S. Treasuries—functions as the anchor for borrowing costs throughout the economy. Rising yields indicate increased borrowing costs, which negatively impact everything from mortgages and corporate debt to consumer loans. Higher rates put downward pressure on stock valuations and can slow economic growth significantly.

The backdrop intensifying these concerns is the recent passage of a significant spending bill by the House (the Big Beautiful Bill), which aims to permanently extend previous tax cuts but at a substantial cost. The Congressional Budget Office (CBO) estimates that this bill could add $3 to $5 trillion to the national debt over the next decade. Crucially, these projections assume relatively moderate interest rates around 3.6%. Yet, current yields on 30-year Treasuries are already pushing above 5%.

This difference isn’t trivial. Every 1% increase above the CBO's projected rate means roughly an additional $350 billion annually in interest payments. With rates now approximately 1.5% higher than CBO assumptions, the U.S. could face an extra $5 trillion in debt servicing costs over ten years—creating a potentially dangerous cycle of increasing debt and interest obligations.

In short, investors see a growing mismatch between fiscal responsibility and economic reality. The bond market is essentially signaling that ongoing fiscal policies and debt trajectories may be unsustainable. Unless spending patterns shift dramatically, the bond market will likely continue to act as a severe and unforgiving judge of economic policy. The bond market is serving as policymaker's 'economic daddy'.

So, what should we do? I'm not qualified to answer that so I'll tell you what I'm doing... I'm a Buffett-style investor, as most people here are. Buffett treats US Treasuries as his risk-free parking lot. (I currently have ~25% of my portfolio in $SGOV). I'm not anticipating some great change or trying to time anything, but rather, I have dry powder ready to deploy when I find a great company trading at a reasonable price.

We do this because, if we buy a great business with a sustainable moat (with pricing power), we can weather almost any economic storm in the long run-- regardless of US Fiscal policy. A great reference for those interested would be the late 70s/early 80s Berkshire Chairman letters.

What do y'all think of the bond market?

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