Bond Market Has a Message: Is Anyone Listening?

MIKE TOWNSEND: The first nine months of 2026 have seen a lot of big changes, as investors and voters, have had to sort through the implications of the war in Iran, the Fed's decision to hike interest rates, global trade tensions, the rising price of gas and groceries, and more. But U.S. equity markets rode out a rocky start to the year, with the S&P 500^® up more than 13% for the year through September 21.

The fixed income markets have also offered up opportunities investors haven't seen in years. As we approach the end of the third quarter of what has already been a pretty wild year, it seems like a good time to take a closer look at just what the bond side of the markets has to offer. Can we find good returns as well as stability and balance?

Welcome to WashingtonWise, a podcast for investors from Charles Schwab. I'm your host, Mike Townsend, and on this show, our goal is to cut through the noise and confusion of the nation's capital and help investors figure out what's really worth paying attention to.

Coming up in just a few minutes, Collin Martin, Schwab's head of fixed income research and strategy, joins me for a timely discussion about what's going on in the bond market, what the Fed's rate hike means, and why bonds are looking increasingly attractive as part of a diversified portfolio. But before we get to that conversation, here are three things I'm following in Washington right now.

Let's start with the president's announcement that if Republicans win the midterm elections, he wants to send every adult in America $5,000. The plan appeared to catch most of his Republican colleagues off guard, and the reaction on Capitol Hill has been unenthusiastic at best. This isn't something the president can do unilaterally or with an executive order. Congress would have to pass legislation to fund it. At a cost of more than $1.3 trillion, it would increase the budget deficit and the national debt, which last month topped $40 trillion, and it would likely spike inflation. The COVID-era stimulus payments totaled a maximum of $3,200, and most economists concur that they were a major contributor to the increase in post-COVID inflation. Regardless of what happens in the election, it's hard to imagine this idea getting any real traction on Capitol Hill.

But for now, it's a moot point. Fact is they can't vote on it before the election because the House of Representatives adjourned on September 16th and will not return to Washington until November 9, the week after the election, while the Senate is set to follow by the end of the month.

Elsewhere on Capitol Hill, the crypto industry suffered a huge setback last week when the Senate failed to move forward on the Clarity Act, a bill to create a regulatory framework for digital assets that had been in the works for two years. The legislation would have clarified the regulatory environment for crypto, giving the Commodity Futures Trading Commission, the CFTC, primary responsibility for overseeing digital assets, with a secondary role for the SEC. It would have created some investor protections, which are currently lacking in the crypto space. But it collapsed in the Senate after months of haggling because senators from the two parties could not reach agreement over two issues: ethics provisions that would have limited the president and other elected officials from profiting from crypto, and concerns by community banks that provisions related to crypto companies' ability to pay rewards to stablecoin holders would lead to a sharp reduction in bank deposits.

In the end, not only did the bill fail to attract the support of any Democrats, but three Republican senators voted against even starting the debate. It's a big setback for the crypto industry, which had made the legislation its highest priority.

Finally, the collapse of the Clarity Act in the Senate led to immediate action from the SEC, which less than 48 hours later finalized rules to allow for the expansion of trading of tokenized stocks in the United States.

Both the SEC and the CFTC are planning a series of regulatory moves this fall on crypto and crypto-related issues to try to fill gaps in the rules in the absence of congressional action. The SEC's most recent action should open the door to the expansion of tokenized stock trading, which is currently only allowed overseas.

Tokenization is the trading of traditional assets in digital form on the blockchain. Both the New York Stock Exchange and the NASDAQ are readying systems for the trading of digital assets. But some companies are worried that the crypto industry will create digital versions of their stock without the company's permission, and that trading in tokenized stocks could undermine the market for traditional stocks. The SEC did address some of those concerns in the new rule, but there are still a lot of questions before tokenization goes mainstream in the United States.

We'll explore the implications of tokenization for investors in a future episode of WashingtonWise, as the SEC's recent move helps ensure it's coming to America, whether investors and companies are ready or not.

On my deeper dive today, I want to explore what's been going on in the bond market over the past few weeks. There is a lot impacting the market these days: inflation, the Fed, the ongoing war in Iran, the explosion of AI-related spending, the looming election, just to name a few.

And while the first thoughts for many investors may be about the implications for the equities markets, recently it feels like it's the bond market that is driving market conversations. So I want to dig into how the bond market is dealing with all these different pressure points and how investors should be thinking about opportunities in fixed income. To help me with that, there is no one better than Collin Martin, head of fixed income research and strategy here at the Schwab Center for Financial Research. Collin's been with Schwab for more than 14 years, and he's the cohost of our sister podcast On Investing. Collin, thanks so much for joining me today.

COLLIN MARTIN: Great to be here, Mike. Thanks for having me. I'm excited. There's so much to talk about right now.

MIKE: Well, indeed there is, Collin. Just in the last month there have been a lot of headlines that refer to things like "bond market turmoil" and "bond market mayhem." So will you please kick things off by giving us a bit of a level set. From your perspective, what's going on in the bond market right now that has triggered all these headlines? And is the bond market sending a message?

COLLIN: Well, Mike, I think the term "turmoil" or "mayhem" actually sends the wrong message. Treasury yields can rise for good or bad reasons, and I don't necessarily think they're rising for bad reasons. Now the move has been significant. the 10-year Treasury yield recently moved above 5% and it's kind of been hovering there for a little while. The 30-year Treasury yield reached levels we haven't seen in nearly two decades.

But "turmoil" suggests something is not working the way it should, and I don't really think that's the right takeaway. The simplest explanation for me is that the market has repriced the path of short-term interest rates. At the beginning of the year, investors, including myself, expected the Fed to be cutting rates. And now here we are in September, and we just had a rate hike. And the market is now pricing in additional hikes by the end of the year and into next year.

That's a really large shift in a pretty short period of time. And long-term yields are often based on expectations about the future path of monetary policy. So I think long-term yields have really just adjusted accordingly. Now there's other factors that are in the mix. There's a number of things that can influence the direction of long-term Treasury yields, not just the Federal Reserve. Inflation is one. Inflation has been above the Fed's 2% target for a while now.

The economy's doing OK. Nominal growth is strong. Corporate bond issuance has increased. A lot of that's due to AI-related spending. But when you see a pickup in corporate bond issuance, then you have corporations and Treasury looking for buyers of their debt. And maybe that's something that has pulled up Treasury yields as well, or at least contributed. And then finally, global bond yields have risen as well. So it's really not just a U.S. story.

I think the bond market is sending a message, but I think it's saying that the economic backdrop remains relatively firm, inflation is still a concern, and interest rates may need to remain higher than investors previously expected. So given all that, given the fundamentals of our economy, I think a 10-year Treasury yield near 5% actually looks pretty reasonable to me.

MIKE: Well, that's great background, Collin. And that brings me to one of the most important aspects of what you talked about, and that's the rate hike with the Fed voting to raise the Fed funds rate by 25 basis points at its September meeting. The first rate hike in more than three years. And as you noted, a rate hike was just not on the radar screen at the beginning of the year. Now it's clear from comments made by Fed Chair Kevin Warsh that the committee is pretty laser focused on inflation, which as you noted has remained sticky, well above the Fed's 2% target for a long time now. So what are your takeaways from the Fed's decision? And were you surprised if the vote was unanimous? I mean, there were no dissents at all. What does that tell us?

COLLIN: Well, by the time the Fed voted, the hike was not really a surprise. The markets were expecting it. But up until a few weeks before, it was really far from a done deal. I think the key drivers were inflation remaining above target that I mentioned, the stable labor market, the relatively resilient U.S. economy, and then even Fed chair Kevin Warsh had said that financial conditions did not really appear very restrictive. So you put all those pieces together and the case for a hike was pretty straightforward and the market therefore had priced it in. So it really wasn't a surprise at the time of the meeting.

I was somewhat surprised that the vote was unanimous, mainly because the committee has displayed a wide range of views over the past few months. At the July meeting, nine committee members voted to hold rates steady. And the unanimous decision meant that all nine of those then shifted their vote, from a hold in July to now a hike in September. So this suggests that the committee as a whole really supported the idea of a hike. And I think that's because the data changed, inflation remained sticky, the risks to inflation staying elevated were high. So the Fed responded accordingly. I think that the unanimity tells us that the hurdle for action had clearly been met by the committee.

And I think even officials who may have preferred maybe a patient approach, they probably concluded that holding rates where they were might have created a greater risk to inflation down the road, or maybe inflation credibility, compared to what a modest hike might mean for growth or employment. With this Fed meeting, I think speed matters. It's not like inflation is necessarily re-accelerating sharply from here, but inflation's been above target for over five years. So I think an adjustment was necessary to just bring it down in a timelier manner.

Now that doesn't mean the Fed is going to begin a long or aggressive hiking cycle. I'd characterize the move as a modest adjustment intended to keep the disinflationary progress on track or maybe even get it back on track. But the key question is what comes next? When the Fed raises rates, it makes it more expensive to borrow money. That may slow down spending trends, which can help pull inflation down over time. I don't think a single 25-basis-point hike will do much to meaningfully restrain the economy by itself. What the Fed will be watching over time, is whether inflation broadens out, whether financial conditions tighten, and if the labor market remains resilient.

MIKE: You know, one of things that fascinates me in watching the Fed right now is Kevin Warsh sort of getting his feet on the ground as the new chair. And he's been very clear that he thinks the Fed overcommunicates. We're already seeing signs that he's trying to reduce that communication. His press conference after this most recent meeting, for example, noticeably shorter than previous press conferences.

We also know he does not like forward guidance. And he's talked about reducing the number of meetings the Fed has each year, from eight to possibly six, which I think he would argue would make the Fed more nimble, more able to assess data and ultimately pivot quickly if needed. Yet it feels like we're in an environment in which the market craves more information, not less. So I think a lot of investors are wondering "How do you pivot quickly if you're meeting less frequently?" Collin, how are you thinking about some of these possible changes at the Fed, which are potentially coming in the next few months?

COLLIN: I do think there's arguments to be made for both sides of this. If we focus first on the shift to six meetings from eight, it could give the Fed more data at each meeting. The September meeting is a really good example. The committee had the August consumer price index data, but it didn't have the August personal consumption expenditures data.

So if they shift to six and space it out more, they might just have a more complete picture of the economy. If they did make that switch, I don't think it would prevent them from pivoting quickly because the committee can always call an emergency meeting if it was necessary, but that could risk sending an unintended signal. If the Fed's calling an emergency meeting, it sounds like it's an emergency, not necessarily a good message that they're sending there.

Now you mentioned Kevin Warsh is not a fan of forward guidance. So in his eyes, forward guidance can create some sort of circular process where markets react to what the Fed says and then the Fed reacts to the market response. So I think he wants to separate that. And he's also brought up the idea that policymakers can become anchored to their own forecast or prior statements, even when the out economic outlook changes.

I'm not so sure that's the case because I do think we see voters and non-voters alike change their views when the data changes, but it's something that Kevin Warsh clearly cares about. I think it's important to remember that many of today's communication practices are actually relatively new. Regular press conferences and the dot plot, which is where Fed officials project where they see the Fed funds rate being over the next few years, they were not always features of Fed meetings and overall monetary policy. And what happened? Markets adapted when they were introduced. And I think that we can continue to adapt if the framework changes.

There are risks here, though. I think there's a risk that less communication does not necessarily create more flexibility. It could actually create more uncertainty. Investors, or myself in my role, I don't need a precise forecast from every meeting. I don't need the Fed to tell me what they're going to do. But I want to have an understanding of what the reaction function is. What data matters the most? How does the committee weigh inflation against the labor market? And then most importantly, what indicators would they look at that could cause the Fed to maybe hike, hold, or reverse course from what they were initially projecting?

And without that framework every economic release, especially the more important ones, inflation, labor-market related, could generate more volatility. So I think it's helpful if the Fed explains what it is watching and how the incoming information could change their outlook. Now, we've gotten used to reading between the lines and parsing whatever the chair said after each meeting. I think what we'll see now is investors kind of doing their own interpretations of the Fed actions, but I think that could lead to more short-term volatility while we learn to adjust to this new style.

MIKE: Yeah, I think your point about the frequency of press conferences is particularly interesting. I had to look this up, I didn't realize it, but the practice of having a press conference after every Fed meeting is a Jerome Powell thing. You go back to Janet Yellen, Ben Bernanke, they used to have press conferences after every other meeting. So even this every-meeting frequency is a relatively new thing, and we'll see where Kevin Warsh takes it—perhaps in the opposite direction.

Well, Collin, when we talk about rates, we're usually looking at 10-year Treasuries. And of course, the 10-year has received a lot of headlines recently as yields peaked above 5%. But the two-year Treasury has been above 4.6% for a while. And the two-year is usually more closely aligned with the Fed funds rate. 4.6, of course, is way ahead where the Fed funds rate is now, even after the hike. And that means it would take perhaps three hikes to start getting caught up.

So what's your outlook going forward? Do you see more hikes happening this year? And what about next year?

COLLIN: We do expect one additional hike this year and then another potential hike, which would take it to three total, either this year or sometime in 2027. That seems highly likely as well. The Fed is rarely one-and-done historically, once it begins tightening, it usually makes more than just a single 25-basis-point adjustment because really what's that going do to meaningfully affect economic activity or inflation?

We come up with our view based on a number of things, but we do look to the Fed for guidance, and we get the dot plot that I mentioned before, and the median Fed projection points to one more hike by year end with a hold for next year. But it's important to differentiate between the median versus what are the views of the various committee members. And if we look into next year, into 2027, eight of the 18 dots or projections by participants are projecting an additional hike next year as well. So that's why we lean towards two more in addition to the one we got last week. Now the Fed funds futures market is a little bit more aggressive—investors have been pricing in a path that could include roughly three additional hikes by next year. So we're not there yet, we're closer to the Fed's projections, but incoming inflation data will matter and will likely dictate how much tightening is necessary.

We'll be watching monthly core inflation readings. This is something that New York Fed president John Williams has referenced, where he said he needs to see monthly core inflation prints of 0.2% or less to be confident that inflation is moving towards its goal. We'll also be watching the breadth of inflation. This is something that Kevin Warsh has discussed. In the number of components in the personal consumption expenditures index that are rising by 3% or more on a year-over-year basis. If that continues to broaden out, that might require more hikes. If that narrows in and Warsh thinks that maybe those inflationary pressures are receding, maybe that results in the fewer hikes, one or two more.

Back to your point, Mike, about the two-year. So the two-year Treasury yield is in the 4.6 to 4.7% area right now. It's well above the midpoint of the Fed funds rate range. We've generally held the view that the two-year Treasury yield is a good representation of where the markets expect the Fed funds rate to be in one year's time. I'm not so sure the relationship will continue to hold since Warsh doesn't want the bond market to dictate Fed policy, but we use it as a loose guidepost.

So based on our expectations, I'd say loose expectations, of one and likely two hikes by next year, that's what you need just to catch up to where the two-year Treasury yield is. Actually, you'd need arguably more to catch up there. So I think it's important when you're an investor making portfolio decisions right now, if you're sitting in short-term investments waiting for the Fed to hike, versus looking at what the opportunities are with slightly longer maturities, whether it's two years, three years, five years, why wait for the Fed to hike when any hikes and the number of hikes are uncertain when you can earn what we think are pretty attractive yields right now.

Now, of course, every investor is different. So you want to focus on what your investing time horizon is and how comfortable you are with the maturities you select. But I think it's a good conversation to have to compare what you can get now versus what you might get down the road based on what the Fed may or may not do.

MIKE: Another thing that has attracted a lot of attention in the bond market in recent weeks is Treasury Secretary Scott Bessent's, I'll use the word intervention in the bond market. Secretary Bessent has leaned into buybacks to keep government debt markets liquid, but many analysts see them as an attempt to tamp down Treasury yields. If that's a goal, not sure it's working. But if they work as planned and lower long-term yields, then that lowers borrowing costs and opens the door for more spending.

On the flip-side, Warsh wants a more hands-off approach where the markets price in inflation risks and fiscal concerns on their own, and prices at the long end go up, helping to restrain inflation. This brings up a bunch of questions. So, first, why is Bessent doing this? And second, are the buybacks working? I mean, Bessent says they are, mostly by saying yields would be even higher without the buybacks. Do you see evidence of that? And finally, what are the dangers of these buybacks?

COLLIN: So first, Secretary Bessent is doing this because he can. He's Treasury Secretary, and that allows him to manage our Treasury issuance in ways he sees fit. Just like you and I can manage our finances or refinance a mortgage if it makes economic sense or kind of just look to see what the various borrowing rates are versus short-, intermediate-, or long term, he can do the same.

Going back to the why, the program that Bessent upsized was a liquidity buyback program where the Treasury purchases older, less traded securities to replace them over time with more liquid benchmark issues. A lot of large institutional investors, they want that liquidity, and when you think about something like a 30-year Treasury bond, as time goes on and it gets further away from the issuance date, it kind of loses its liquidity a little bit because investors prefer the most recently issued one. So this buyback program can improve market functioning, but it really seems like this was less about liquidity and more about attempting to lower yields, given the timing, since the 30-year Treasury yield had hit a fresh 19-year high at the time of the announcement.

And the why that ties in here if the Treasury is buying more in the secondary market, the laws of supply and demand suggest that more demand, in the form of larger Treasury purchases, should pull up prices and could pull yields lower. You asked if it's working, I'd say not really, because long-term yields are pretty much at the same levels or even higher than when Bessent announced these larger operations. The 30-year yield is pretty close to where it was. The 10-year yield is actually noticeably higher than where it was in the middle of August.

I don't think it would have had much of a long-term impact because, as I mentioned before, I don't think the level of yields was a problem that needed to be fixed. I think it was just indicative of economic fundamentals. We have a strong, resilient economy—that's the why. And so I'd say if the intention was to get long-term yields lower, it hasn't really worked so far.

And then finally, you asked about the potential dangers. There's one where you could risk market credibility if investors think the Treasury is trying to meddle too much. Treasury has had a long-standing commitment to steady and predictable issuance. If you're a large Treasury buyer, large banks, they don't want to lose that predictability. And if the risk is rising that they might, they might demand higher yields as an additional risk premium. So if that were to happen in an attempt to lower yields by Treasury, they could actually end up raising them.

To talk about how this works in practice, the Treasury usually funds its long-term buybacks with Treasury bill issuance. So if they buy back long-term Treasury bonds, it's using Treasury bill issuance to fund that. There's also the idea that the Treasury could use its TGA, the Treasury General Account. That's sort of like the Treasury's checking account that it holds at the Fed. But if they were to use that and deplete it, they would just need to issue more Treasury bills to kind of fill it up again because that TGA is meant, not so much for emergencies, but to fill in the gaps when incoming government revenues are kind of choppy and fluctuating, they plug in the gaps there. But if Treasury's doing this, and buying long-term bonds and issuing short-term debt, that shrinks and shortens the average maturity of Treasuries outstanding. And then as short-term rates rise, that's more Treasury bills that need to be issued at potentially higher interest rates as the Fed raises rates. So this could mean even higher annual interest expenses paid by our government.

MIKE: How can the Fed and Treasury get on the same page? Knowing that higher yields can bring down equity valuations, at some point do bonds start sucking money out of the equities market?

COLLIN: To get on the same page, I think that could be tough because their policies do appear to be working against each other. Treasury clearly wants lower interest rates since that can lower our government's annual interest expense.

But the Fed has a dual mandate of maximum employment and price stability. And, unfortunately, or fortunately, depending on how you want to frame it, government finances are out of its purview. So to bring inflation down, higher rates might be needed, regardless of if that means a larger interest expense for our government.

Now, in terms of bonds potentially sucking money out of the equities market, so far stocks and riskier investments like lower-rated corporate bonds have generally held up well. It looks like earnings matter more right now, or have lately, than borrowing costs. And we know that from S&P 500 earnings, they've painted a pretty strong story. Data I look at for a more comprehensive picture for the corporate bond market, I get data from the Bureau of Economic Analysis, and in the second quarter, non-financial corporate profits were up 22% on a year-over-year basis. So despite the rise and expected additional rise in short-term borrowing costs, stocks and corporate bonds are doing relatively OK because corporate fundamentals remain pretty resilient.

It does raise the question about portfolio allocations, though. We've talked about the Fed; we've talked about the 10-year Treasury yield. That is not the whole bond market. When we're looking at investment opportunities or options for investors, the benchmark bond index that we look at here in the U.S. is the Bloomberg U.S. Aggregate Index. It has an average yield-to-worst of roughly 5.3% as of September 22. And I say yield-to-worst because some bonds have call features, which allows the issuer to retire them before maturity. So when we look at a bond's yield measures, the yield-to-worst is the lower of the yield-to-maturity or the yield-to-call, barring default, of course. So back to the portfolio allocations, with yields where they are now, bonds can do a lot more of the heavy lifting in a portfolio when they used to.

If you're an investor and you have some sort of financial plan where you can look at, what sort of expected total returns might help you reach your goals, when bonds offered yields in say 1-to-3% area that they did coming out of the financial crisis, they probably didn't help too much. You probably needed to over-weight riskier assets or stocks to help reach your goals. Well, if you can get high-quality bond yields in the 4 or 5% or more area, maybe that allows you to de-risk your portfolio a little bit, boost your bond allocation, and still reach your goals. I think that's really, really important.

Now, this isn't an indictment on the stock market. We still have a relatively favorable view on stocks. We have a neutral view at Schwab, meaning you should hold them at your strategic weights. But if you have more exposure than you should, based on your risk tolerance and investing time horizon, I think it's a good kind of thought exercise here and have a portfolio conversation about maybe adding bonds because of the attractive yields they're offering and because of the kind of stability they might help provide also. Because even though their prices can fluctuate, they tend to have less volatility than stocks over time.

MIKE: Collin, you talked a moment ago about the relationship between overall debt and the bond market. Last month the federal debt hit a staggering $40 trillion. And of course it's still counting. You and I have talked about how $40 trillion—it just sounds like kind of a nonsense number to the ordinary person—ceases to have relevance to people because it's just impossible to get your minds around it. But it does seem that concern is starting to break through.

So what is the relationship between the national debt and the bond market? Is that one of the messages the bond market is sending?

COLLIN: So, Mike, this might not be what some of your listeners want to hear. And maybe they disagree. And I get this a lot when I meet with our clients at Schwab, but I actually don't think that our fiscal situation has been a key driver of higher yields lately. There's no shortage of things that can influence the level of long-term yields, but I think it's a lot of the other factors that I've mentioned before, higher expected Fed funds rate, primarily, and then inflation expectations, just the overall resilient economy, and fiscal concerns to a degree.

It's really hard to nail down how fiscal concerns are impacting the bond market, but we try. And we use something called the term premium as a gauge. The term premium is defined as the compensation that investors require for bearing the risk that interest rates may change over the life of a bond. So you buy a bond that has, say, 10 years to maturity. As time goes on, there might be other opportunities that are out there. So there should be a premium to lend to the government or hold a bond for 10 years to bear that risk. Now, unfortunately, the term premium that we look at, and there's a few models that are out there, it's hypothetical, it's not directly observable. And as I mentioned, it's really a model. But it's helpful because we can see how investors are considering what sort of risk premium is necessary to hold our long-term debt.

And if fiscal concerns were truly an issue, we think we'd see the term premium increase a little bit. And that hasn't necessarily been the case lately. It's risen over the past few years, but just in this kind of last few months, when we've seen the 10-year Treasury yield rise to 5%, doesn't look like the term premium is a key driver.

Now, just because it's not a key driver doesn't mean it doesn't matter. This isn't an endorsement of our fiscal situation. Our debt is staggeringly high. Like you said, it's kind of a nonsense number. It's hard to comprehend what $40 trillion means, but as long as we run the deficits that we have, where we spend more than we take in, Treasury issuance needs to rise. That's by definition what drives Treasury issuance. If our government is taking in less than it spends, it issues Treasuries to fill that gap. And the more Treasuries we issue, the more buyers we need to find. And over time that should mean that rates might need to stay elevated to attract those additional buyers.

MIKE: Well, if that's one of the messages that the bond market is sending, not sure that anyone is listening in Washington. Capitol Hill, of course, continues to talk about spending. We had the president recently say that he wants to send everyone a $5,000 dividend at a price tag of well over a trillion dollars. I think the problem in Washington now is that the interest on the debt has become the second largest annual expenditure of the federal government, having recently passed both defense spending and Medicare spending it now trails only social security. It just feels like there's not much serious discussion around addressing the debt in Washington. Maybe it's the bond market that can spur some kind of action.

COLLIN: Maybe it could, Mike. Maybe the so-called bond vigilantes could return. The bond vigilantes, it's a phrase that has been around for, I think, over 40 years, but they're considered to be investors who sell Treasuries to really protest fiscal policies that could be perceived as inflation. So in theory, if you have these so-called bond vigilantes, if it's a large number of investors and they're selling their bonds because bond prices and yields move in opposite directions, that pulls prices lower and yields higher. We've generally been in the camp that that bond vigilantes have not been a big influence on the bond markets lately, over the past 10, 20 years, but that could change just because of all the issues that you just mentioned and we've discussed here, just the sheer staggering number and huge amount of debt that we have outstanding.

Now when we think about the large annual interest expense that has made a lot of headlines, it's important to remember that there are two factors that determine an annual interest expense. It's the debt outstanding and then the rate paid on that debt. And I think our debt trajectory clearly needs to be addressed. We went from nine trillion in public debt outstanding in 2007 to over 40 trillion today. A lower rate can help but it's the amount, it's that size that's the issue. So maybe if yields stay elevated or continue to rise and we see that Treasury expense keeps adding to an already large deficit, maybe that gives Congress the nudge it needs to act to try to address it.

MIKE: Well, unfortunately, I'm not super optimistic that Congress is up to that challenge. I do think there's more conversation going on across both parties about how unsustainable the path is. And I do think this debate will come into focus next year because the new Congress will have to raise the debt ceiling by mid-2027. Raising the debt ceiling, traditionally one of the trickiest fights on Capitol Hill, but next year's debate could be an opportunity for Congress to get at least a little more serious about how to slow the growth of the debt, if nothing else.

Well, Collin, this has been a great discussion. I want to end by getting your thoughts on how fixed income investors should be thinking about all of this. Just as one example of the kinds of questions investors are thinking about, if the Fed is going to keep raising rates, aren't I better off getting 4 or 5% on a high-yield checking account and waiting to see how high the 10-year gets before I lock it in for that long?

So what's your outlook on the fixed income markets through the end of the year and into 2027? Where are the opportunities?

COLLIN: There are opportunities. And that's what I want to focus on here, Mike. I want to focus on the positives because if we go back to the first part of our discussion about turmoil, I think a lot of investors get spooked by what's been going on in the markets. I'd rather talk about the opportunities that the recent increase in yields can present to investors. So despite the 10-year Treasury yield now near 5%, we don't suggest investors shift to long-term bonds just yet, at least from a tactical standpoint. That doesn't mean you can hold any, if it's going to help you reach your goals. But from a short-term tactical standpoint, we prefer short- and intermediate-term maturities for now. When we talk about short- and intermediate-term maturities, somewhere in that two to maybe five-to-six-year range, we'd likely need to see long-term yields keep rising a bit more before we get a little bit more interested in long-term bonds.

When we think about where we are with the Fed right now, the 10-year Treasury yield tends to peak closer to the last Fed rate hike rather than the first. So there just seems to be more factors that can pull yields up. And the longer the maturity, the more sensitive the more sensitive its price is to interest rates. We don't want to get in front of that just yet. For now we're focusing on short- and intermediate-term maturities. If yields continue to rise, there will probably be a level where we think yes, yields are high enough where we suggest investors now consider long-term bonds. We just don't think we're there just yet. And we're also going to look at our economic growth outlook. If growth was expected to slow, which is not our base case, we'd probably be more comfortable taking on duration or long-maturity investments there as well. Now when I talk about short- and intermediate-term maturities, that doesn't mean hiding out in cash.

I mentioned that two-year Treasury yield before, but I can kind of spread that around to other short- to intermediate-term maturities, whether it's a two-year, a three-year, or a five-year. Why wait for the Fed to catch up to the yields that they're currently offering when you can earn that right now? Again, when I offer that broad outlook, every investor is different. So think about what your timeframe is. But it's something to consider if you've been waiting for high yielding or higher yielding opportunities.

Thinking outside of Treasuries, we do see potential opportunities where you can take a little bit more risk. We have a more favorable view on investment grade corporates, high-yield corporates, and preferred securities. I've talked about the resilient economy. I mentioned strong corporate earnings. That supports the case to take a little risk, depending on your risk tolerance, of course. Because even if the Fed raises interest rates or we see a little slowdown, companies are in pretty good shape to kind of manage that situation. We do acknowledge that the relative yields that most corporate bonds offer, it's called the spread, they're pretty low, but we're still comfortable considering again investment-grade corporates, high-yield corporates and preferreds because their corporate fundamentals remain pretty strong even as their spreads are pretty low.

MIKE: Well, Collin, it says a lot about the state of the bond market today that I could probably ask you another 30 minutes worth of questions, but I think that's a great place to wrap it up. Thanks so much for taking the time to walk through what's been a bit of a crazy period for the usually pretty quiet bond market.

COLLIN: Thanks for having me, Mike. This was a lot of fun.

MIKE: That's Collin Martin, head of fixed income research and strategy at the Schwab Center for Financial Research. You can read his latest commentary on Schwab.com slash learn. And don't forget to check out his podcast On Investing, which he co-hosts with Schwab's chief investment strategist, Liz Ann Sonders.

Well, that's all for this week's episode of WashingtonWise. We'll be back with a new episode in two weeks. Take a moment now to follow the show in your listening app so you get an alert when that episode drops and you don't miss any future episodes. And don't forget to leave us a rating or a review. Those really help new listeners discover the show.

For important disclosures, see the show notes or schwab.com/WashingtonWise, where you can also find a transcript.

I'm Mike Townsend and this has been WashingtonWise, a podcast for investors. Wherever you are, stay safe, stay healthy, and keep investing wisely.