Show Notes
You don’t have to own bonds for the bond market to affect your financial future. It influences the cost of borrowing, the value of stocks, and the financing behind everything from public infrastructure to AI data centers.
In this episode, I’m joined on the floor of the New York Stock Exchange by Robin Wigglesworth, author of A Fabulous Debt: The Epic Story of How Bonds Built the Modern World. We explore how bonds helped build the financial system—and why understanding their history can help us make sense of today’s investment headlines.
Our conversation moves from Alexander Hamilton and the origins of the NYSE to the railroad boom, AI investment, government debt, and the changing role of bond ETFs. Along the way, we discuss why a technology can transform society while disappointing its investors, why higher interest rates aren’t always bad news, and what researching the book changed about Robin’s own views.
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How Bonds Helped Create the New York Stock Exchange (00:34)
Recording from the NYSE gives us a fitting place to begin: the exchange’s history is closely connected to the early American bond market.
Robin explains how Alexander Hamilton consolidated Revolutionary War debts into federal securities, helping establish the new country’s credit. Those bonds became an important part of trading in New York.
He also tells the story of William Duer, whose borrowing and speculation helped trigger the financial panic of 1792. The aftermath contributed to the creation of the Buttonwood Agreement, the arrangement among 24 brokers that became the foundation of the NYSE.
I ask what Hamilton understood about debt that might be missing from today’s debates. Robin emphasizes that government bonds can do more than finance spending. They can serve as collateral, support transactions, and help money move through an economy.
That introduces a tension we return to throughout the episode: government debt can create serious problems, but the securities themselves also perform valuable functions within the financial system.
Why Bonds Matter Even If You Don’t Own Them (05:03)
Robin and I acknowledge that neither of us currently holds bonds in our own portfolios. But that doesn’t make the bond market any less relevant to our financial lives.
Robin draws a distinction between trading existing shares and providing new financing. While much of the activity investors see in the stock market involves shares changing hands, new bond issuance continually supplies money to businesses and governments.
We then discuss the positive case for debt. Borrowing allows households, companies, and governments to bring future resources forward to fund something useful today. Whether that decision makes sense depends on what the money accomplishes and the obligations it creates.
Treasuries have another important role: they serve as widely accepted collateral throughout global finance. Robin explains that this shared foundation helps support transactions far beyond the purchase and sale of government bonds.
The bond market’s importance becomes especially apparent when financing slows or investors become reluctant to lend. The consequences can reach businesses and households quickly.
What the Railroad Boom Can Teach Us About AI Investing (08:36)
I ask Robin how today’s investment in AI infrastructure compares with earlier technological booms.
He points to the railroads, whose expansion depended heavily on bond financing. Investors funded an enormous buildout of physical infrastructure, but the economic importance of that infrastructure did not prevent financial losses or the crash of 1873.
Robin makes a provocative argument: speculative manias can help finance major advances. Canals, railways, and fiber-optic networks sometimes outlasted the companies and investors that paid for them. Society could benefit even when the original investment worked out poorly.
AI may offer a similar lesson, but the comparison has limits. A railway can remain useful for decades, while computing equipment becomes obsolete much faster. The future usefulness of today’s data centers also depends on how AI develops and how much computing capacity it ultimately requires.
We discuss whether excess capacity could be repurposed, while recognizing that neither an eventual bust nor a profitable outcome is inevitable.
For investors, the distinction matters: recognizing a transformative technology is only part of the challenge. The economics of financing it—and who ultimately captures the benefits—can produce a very different result.
Why Relatively Safe Bonds Can Be at the Center of Financial Crises (12:59)
Bonds are often described as the steadier part of a portfolio. Yet disruptions in bond markets can cause severe economic damage. I ask Robin how investors should reconcile those ideas.
His explanation centers on the bond market’s role in financing the economy. An asset can be relatively stable under ordinary conditions while still being part of a system that becomes dangerous when borrowing and lending stop functioning.
Treasury yields also influence the borrowing costs faced by other borrowers. Robin uses his own experience in Norway to illustrate the connection: a lender considering a loan to him can also choose to invest in U.S. government debt.
When financing becomes more expensive or difficult to obtain, companies may reduce investment, cut expenses, or struggle to refinance existing obligations.
That is why Robin sees bond-market stress as particularly consequential. The problem extends beyond falling prices in an investment account to the availability of money businesses need to operate.
Government Debt, Higher Interest Rates, and the Return to the “Old Normal” (14:59)
We turn to government debt and the difficulty of identifying when a manageable burden becomes an unsustainable one.
Robin stresses that there is no universal tipping point. Economic growth, borrowing costs, budget decisions, and political willingness to repay all matter. Higher financing costs become more challenging when debt is already large and deficits continue adding to it.
He also questions the assumption that interest rates should return to the unusually low levels investors became accustomed to after the global financial crisis.
In Robin’s view, that period reflected weak growth and concerns about deflation. Moving beyond it can be a sign of economic improvement, even if governments that borrowed heavily find the adjustment uncomfortable.
Our discussion of Modern Monetary Theory leads to another distinction: a government’s finances cannot be understood entirely through the lens of a household budget. One person’s debt is another person’s asset. But that observation does not remove the constraints imposed by inflation or the cost of financing continued deficits.
We also discuss how policymakers’ memories of responding too cautiously after 2008 may have influenced their much stronger response to the pandemic.
How the Fed and Treasury Influence Bond Yields (20:34)
Robin explains that one of the observations that inspired his book was the growing importance of bond financing relative to bank lending.
That shift has implications for central banks. If a large share of financing takes place in bond markets, Robin argues, stabilizing banks alone may not be sufficient during a crisis.
He sees quantitative easing—the purchase of bonds using newly created central bank reserves—as a permanent part of the policy toolkit. We distinguish between emergency actions to restore market functioning and ongoing purchases intended to support economic activity.
We also discuss other tools, including lending facilities and yield curve control. Rather than announcing a fixed amount of bond purchases, a central bank using yield curve control commits to defending a particular yield. Robin notes that credibility can influence how much buying is actually necessary, although such a policy comes with significant trade-offs.
I then ask how Treasury buybacks differ from the Fed’s actions. Robin explains that Treasury operates within a different constraint: it must fund purchases through its available resources or borrowing. Its buybacks do not create central bank reserves in the way QE does.
Finally, we explore why higher short-term interest rates could sometimes help lower longer-term yields. If tighter policy credibly reduces inflation expectations, investors may demand less compensation for the inflation risk of holding long-term bonds.
Will Foreign Investors Keep Buying U.S. Debt? (28:32)
I ask Robin what investors should watch for when considering the possibility that foreign demand for U.S. debt could weaken.
He acknowledges that foreign investment matters enormously to American markets. But he also emphasizes the practical challenge facing anyone looking for an alternative to Treasuries: few markets offer comparable scale, liquidity, and capacity to absorb large investments.
Moving some money out of Treasuries also does not necessarily mean abandoning the United States. That money may move into U.S. corporate bonds or stocks instead.
We discuss how the dollar’s role in international transactions reinforces demand for places to hold dollar-denominated assets.
Robin then distinguishes credit risk from price risk. Confidence that a bond will repay its promised dollars does not eliminate the possibility of significant changes in its market value.
The size of the Treasury market creates another tension. It reflects a large debt burden, but it also helps make the market useful to institutions that need to buy or sell enormous amounts of securities.
What Rising Bond Yields Mean for Stock Investors (32:43)
For investors whose portfolios are primarily stocks, interpreting bond yields can be frustrating.
Robin explains that yields can rise for very different reasons. Stronger growth may support higher yields, but so can concerns about inflation or government finances. The same market move can become evidence for competing narratives.
There is also no single yield that automatically breaks the economy. Higher borrowing costs affect businesses differently, and their consequences depend on how much debt companies carry, when they need to refinance, and how strong their operations remain.
I connect this to stock valuations. The value investors place on future earnings depends partly on the discount rate applied to those earnings. Robin notes that companies with more of their anticipated profits far in the future can be particularly sensitive to changes in that rate.
But valuation formulas are only part of the story. Growth expectations and investor psychology change, too. We discuss why those shifting relationships make confident interest-rate and market forecasts so difficult.
How Bond ETFs Are Changing Fixed-Income Markets (36:32)
Robin’s first book, Trillions, explored the history of index investing. Bond ETFs bring that story together with the history covered in A Fabulous Debt.
He recalls the longstanding concern that frequently traded ETFs holding less liquid bonds could create problems during market stress. But his research has changed how he thinks about their role.
Robin argues that the significance of bond ETFs goes well beyond the debate over active versus passive management. Their creation and redemption process interacts with electronic trading, systematic strategies, and portfolio trading in ways that are changing how bonds move through the market.
He sees these developments as particularly important for corporate debt, where trading practices have historically evolved slowly.
I emphasize that investors should revisit assumptions formed a decade or more ago. The way an individual bond works may be familiar, but the tools used to hold and trade baskets of bonds continue to change. Understanding those developments can lead to a better assessment of the trade-offs.
Why Researching Bond History Made Robin More Concerned About Government Debt (39:05)
I close by asking Robin which of his views changed while writing the book.
His answer is government debt. Although he remains impressed by the bond market’s resilience and ability to evolve, he became less comfortable with the idea that today’s debt challenges will be easy to resolve.
We discuss the tension between inflation’s effects on borrowers and lenders. Inflation can reduce the real burden of existing fixed-rate debt, even as it erodes purchasing power and hurts people holding those obligations.
Robin points to 2022 as an illustration of how painful bond-market losses can coincide with a reduction in debt relative to nominal economic output.
He is clear that inflation is not a painless solution. Its effects on households can be severe, particularly for people with fewer resources to absorb rising costs. But he worries that the alternatives for addressing large debt burdens may also involve difficult economic and political choices.
We finish by recognizing that debt deserves serious discussion without becoming a partisan weapon. Understanding how the bond market developed helps explain both what it makes possible and why its challenges matter.
Resources
- Robin Wigglesworth’s website and books
- A Fabulous Debt: The Epic Story of How Bonds Built the Modern World
- Robin Wigglesworth’s writing at the Financial Times
Audio production by The Podcast Consultant.
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