Show Notes
U.S. Treasurys are routinely described as “risk-free.” But no investment is literally free of risk—and that label depends on much more than the federal government’s ability to make its payments.
In this episode, I’m joined by Mary Childs, host of Mary in America and author of The Bond King, for a conversation about the financial infrastructure supporting the Treasury market and the consequences of a growing national debt.
We discuss when government borrowing becomes an economic problem, how it can raise borrowing costs throughout the economy, who will buy the next wave of Treasury issuance, and why hedge funds have become important participants in the market. We also explore the Federal Reserve’s role as a backstop, the moral hazard created by repeated interventions, and why markets often wait until the last possible moment to acknowledge structural risks.
Toward the end, we broaden the conversation to two questions that guide Mary’s reporting: How can you distinguish genuine expertise from confident performance—and are there some things markets should not be allowed to price?
Sign up for my newsletter so you can easily reply to my emails with your thoughts or questions for the podcast:
Why Mary follows questions instead of famous guests (02:00)
Mary begins by tracing her career from Bloomberg News and the Financial Times to Barron’s and NPR’s Planet Money. That path combined deep institutional reporting with the challenge of explaining complicated economic subjects through stories that normal people actually want to hear.
Her new show, Mary in America, gives her the freedom to begin with a question rather than a guest. She wants to know why a system works the way it does, who designed it, what invisible machinery keeps it running, and whether the original arrangement still makes sense.
That often leads her away from the experts who appear most frequently in the media. Instead, she looks for the less-visible person who understands the underlying mechanics—and is willing to explain them honestly.
What financial breakdowns reveal about hidden systems (05:18)
Mary explains that she is naturally drawn to structures and, whenever possible, to the people who built them. Those people are not always eager to talk, especially when the structure is beginning to fail, which makes persistence an essential reporting skill.
She is particularly interested in aberrations: moments when a market or institution stops behaving as expected. When everything is operating smoothly, it is easy to ignore the plumbing. When something breaks, the hidden pipes, incentives, and power relationships suddenly become visible.
That fascination with breakdowns leads us into one of the largest and most important pieces of financial infrastructure in the world: the U.S. Treasury market.
What “risk-free” actually means (07:03)
I ask Mary what is supposed to be risk-free about the risk-free rate.
Her answer begins with an important qualification: nothing is truly free of risk. Investors nevertheless need a baseline against which every other asset can be priced, and U.S. government debt has historically been the best available candidate.
Treasurys occupy that position because of the federal government’s record of meeting its obligations, the dollar’s central role in global finance, financial regulations that favor government debt, and an enormous institutional architecture built around the Treasury market.
The result is a reinforcing relationship. Treasurys became the benchmark because they were considered unusually safe, and the financial system was subsequently designed in ways that help preserve their safety and liquidity.
When rising debt starts affecting households and markets (11:27)
We turn to the federal debt and ask when government borrowing becomes an economic problem rather than merely a large number.
Mary does not point to a single debt level that automatically triggers a crisis. Instead, she focuses on the relationship between economic growth and borrowing costs. If the economy can grow faster than the interest burden, managing the debt is easier. When interest costs consistently outpace growth, the arithmetic becomes more difficult.
We also discuss the possibility that AI-driven productivity growth could provide an economic tailwind at a particularly useful moment, especially as slower population growth creates longer-term workforce challenges.
Mary then explains “crowding out,” one of the most direct ways government debt can affect investors and households. The federal government competes in the same broad market for capital as corporations, homebuyers, and other borrowers. As Treasury issuance grows and the government must offer higher yields, other borrowers may also have to pay more.
That means the consequences of rising debt can appear in mortgage rates, corporate financing costs, investment decisions, and slower economic growth—even without a dramatic default or financial crisis. U.S. Treasury Fiscal Data provides continuously updated information on the national debt.
Why fiscal problems are easy to postpone (20:04)
I ask whether changing the country’s fiscal trajectory requires a crisis.
Mary says a crisis is not logically necessary, but history suggests that people and institutions frequently avoid difficult adjustments until something forces them to act. Investors face a similar incentive: pricing a remote risk too early can be expensive, particularly if everyone else continues operating under the existing assumptions.
A crisis therefore becomes a catalyst. It converts an abstract vulnerability into something the financial system can no longer ignore.
We also discuss how the consequences of excessive debt do not have to arrive through a conventional default. Inflation or financial repression could reduce the debt’s real burden while still imposing meaningful costs on savers, investors, and households. The eventual adjustment may be gradual and widely dispersed rather than one cinematic breaking point.
Who buys Treasurys—and where hedge funds enter the picture (23:07)
With the government issuing more debt, I ask who will purchase the next trillion dollars of Treasurys.
Mary walks through the traditional buyer base: foreign central banks, pension funds, endowments, insurance companies, bond funds, individual investors, and other financial institutions. In recent years, hedge funds have also become increasingly important through the Treasury basis trade.
Institutional investors often obtain Treasury exposure through futures rather than purchasing bonds directly. Hedge funds step between the cash and futures markets, buying Treasurys while taking an offsetting futures position and attempting to capture the small difference between the two prices.
Mary compares their role to that of a janitor mopping up an imbalance. The trade can add demand and liquidity to the Treasury market, effectively creating more room for the government to borrow. But because hedge funds often use significant leverage, their growing role can also create a source of fragility.
Mary explored these mechanics in greater depth in the Planet Money episode “How the Government Got Hedge Funded.”
Market plumbing, Fed intervention, and moral hazard (27:26)
We discuss how difficult it is to distinguish a genuine fiscal warning from an ordinary move in interest rates.
Treasury yields can rise because investors expect more inflation, stronger economic growth, heavier government borrowing, weaker institutional credibility, or some combination of those factors. Market prices do not arrive with labels explaining which concern each investor is expressing, making it easy to construct a narrative after the fact.
That ambiguity also allows the national debt to become politically weaponized. The same movement in rates can be used to support several different stories, even when the underlying cause is uncertain.
We then turn to the Federal Reserve. Its ability to stabilize markets is part of what makes the financial system resilient, but repeated intervention can also create moral hazard. If market participants believe they will be rescued from sufficiently large losses, they may take risks they would otherwise avoid.
Mary argues that a functioning capital market must allow losses. A system that eliminates every crisis may have become so protected that participants are no longer bearing the full consequences of their decisions.
We also distinguish Treasury buybacks intended to improve liquidity in older securities from quantitative easing conducted by the Federal Reserve. Both involve government bonds, but they have different purposes and should not automatically be interpreted as the same policy.
How to tell expertise from confidence (35:05)
After years of interviewing investors, economists, academics, and policymakers, Mary has developed a practical test for expertise: granularity.
Someone who genuinely understands a subject can usually follow a question into its underlying mechanics. Someone relying on prepared talking points may answer a slightly different question, remain at the 30,000-foot level, or struggle when asked to explain a causal step in greater detail.
Mary notes that this does not necessarily mean the person is unintelligent. The public face of a large investment organization may have a different job from the people analyzing individual securities inside the portfolio.
She also becomes skeptical when someone repeatedly forecasts the same crisis regardless of changing conditions. If every situation produces the same prediction, the prediction may reveal more about the forecaster than the market.
What markets can—and cannot—price (37:39)
We close by discussing an idea Mary has explored on Mary in America: whether market logic can be applied too broadly.
Nobel Prize–winning economist Alvin Roth made a powerful practical case for compensating organ donors. If payments increased the supply of kidneys, more people who need transplants might survive.
Stanford philosopher Debra Satz challenged Mary to consider what may be lost when something becomes a market transaction. Mary describes the well-known daycare experiment in which charging parents for late pickups produced more lateness rather than less. The fee changed the parents’ interpretation of the situation: instead of violating a social obligation, they believed they were purchasing additional childcare.
The lesson is that markets do more than allocate goods. In some settings, introducing a price can change the meaning of an interaction, the norms surrounding it, and even the people participating in it.
It is a fitting conclusion to a conversation about the “risk-free” rate. Financial labels and market structures may appear objective, but they ultimately rest on human institutions, judgments, incentives, and agreements that deserve to be examined.
Resources
- Mary Childs
- Mary in America
- Mary in America on YouTube
- Introducing Mary in America
- “Debt Reckoning” by Mary Childs
- “How the Government Got Hedge Funded” from Planet Money
- “How to Price the Priceless” with Alvin Roth
- “What Should Not Be for Sale?” with Debra Satz
- The Bond King by Mary Childs
- FRED Economic Data
- “Even God Would Get Fired as an Active Investor”
The Long Term Investor audio is edited by the team at The Podcast Consultant.
Support the Show
Thank you for being a listener to The Long Term Investor Podcast. If you’d like to help spread the word and help other listeners find the show, please click here to leave a review.
I read every single one and appreciate you taking the time to let me know what you think.
