Dem
52
Ties
2
GOP
46
Actually, it is worse than that. The bond market is in turmoil, and that has political implications for November. Here is a quick primer. The federal government is spending far more money than it takes in via taxes, so it has to finance billions of dollars of spending by selling treasury bills, notes, and bonds, the difference between those being the time to maturity. Treasury bills are for a year or less and don't pay interest, so they are sold at a discount and pay face value at maturity. Notes (< 20 years) and bonds (≥ 20 years) pay a fixed (coupon) interest twice a year and are auctioned off. The interest rate is fixed for the entire term. Normally, they go for roughly face value. In all cases, the government effectively tries to set the interest rate, although if it is set too low, there may not be enough buyers and the auction fails.
Once these instruments are initially sold, investors can buy and sell them on the secondary market. There, investors set the effective interest rate. If investors try to sell old bonds that pay 2%, nobody will buy them at face value, so they have to be sold at a discount. If a $1,000 bond that matures in a year sells for $980, the buyer will make $200 in principal increase and $200 in coupon interest for an effective 4% yield. Thus the bond market, not the Fed or the Treasury, sets the effective interest rate on the secondary market. Nevertheless, the Fed keeps a close eye on the bond market before making its decisions.
Right now, the bond market is in bad shape, with bond prices dropping rapidly and thus effective interest rates (yields) rising. Those higher yields affect the public by driving the interest rates on credit cards, mortgages, car loans, and other loans up. Think of it this way: Why should a bank loan a home buyer money to buy a house at 4% if the bank can make 6% just buying government or corporate bonds with little risk? At the moment, the bond market is nervous due to wars in Iran and Ukraine, inflation fears, Donald Trump's nuttiness, and other factors, and the result is going to be that people will be paying higher interest rates soon. Right now, a 10-year treasury bond, which affects mortgage rates, has a yield of 4.80%, with virtually no risk if you hold it to maturity. A 5-year bond, which affects car loans, is at 4.55%. Needless to say, higher costs for borrowing money at a time when affordability is going to drive the midterms is not good news for the in-party, the Republicans.
The problem is also feeding on itself. With food, gas, and other prices high, people temporarily "manage" by borrowing the money to pay the rent and put food on the table. "Borrowing the money" can be using credit cards, taking a second mortgage, or some other construction, but all of them are seeing higher interest rates due to the bond market. So just when money is tight for many people, the cost of filling the gap with a loan is also going up. Most people don't understand the how the bond market works, but they do know they are being squeezed and it is getting worse. Unhappy people often express this at the ballot box by blaming the president and voting for the other party.
Treasury Secretary Scott Bessent is trying to drive bond prices back up (and yields down) by having the Treasury buy back some bonds. Fewer available bonds means the remaining ones are scarcer and their value goes up. But Bessent can't buy enough bonds to fight the bond market. The total value of outstanding federal bonds is $40 trillion. He can buy a few billion, no more. Unfortunately, there is not much else Bessent can do before the midterms (or after). Bond guru Ed Yardeni said of the bond market: "It's certainly a political problem. And Bessent's holding the hot potato." Trump can't solve the problem by firing Bessent. He is one of the few Cabinet officers who is actually qualified for his job. A replacement wouldn't do any better, though it might be interesting to see Secretary of Everything Marco Rubio try. (V)