Financial Times reporter Robin Wigglesworth explains what the bond market is signaling about inflation, government debt and the AI boom

Author and FT correspondent Robin Wigglesworth tells MarketWatch about how bonds build the modern financial system, and what they are currently saying about and inflation, government debt and the financial markets.

The global bond market became bigger than the global banking system sometime in the past decade, the first time that had ever happened. Robin Wigglesworth, global finance correspondent for the Financial Times, found that fact, and it sent him looking for a book tracing how bonds built the modern financial system. He could not find one, so he took it upon himself write one.

Wigglesworth is the author of "Trillions," a history of the index-fund revolution, and his new book, "A Fabulous Debt: The Epic Story of How Bonds Built the Modern World," is out Sept. 29 from Portfolio/Penguin.

In this interview, edited for length and clarity, Wigglesworth shares what the bond market is signaling that stock investors are missing, how the AI boom is being financed with debt rather than equity, and what worries him most about U.S. government debt.

MarketWatch: Why did you decide to write "A Fabulous Debt" now?

Wigglesworth: I was going through Bank for International Settlements data and discovered the global bond market had become bigger than the banking system for the first time ever, sometime in the late 2010s. When I looked for a book tracing its full history, I realized nobody had written one, so I wrote it myself.

I called it "A Fabulous Debt" after a British historian who studied U.K. debt following the Napoleonic Wars, when the debt-to-GDP ratio hit 200% to 300%. He argued bonds act as a financial lubricant, and that in truth, it was a fabulous debt. Sophisticated economies, including the U.S., need a permanent bond market to grow.

'The bond market is the greatest show on Earth, and the stock market is almost like a circus by comparison.'Robin Wigglesworth

MarketWatch: What is the bond market telling us right now that stock investors may be missing?

Wigglesworth: That inflation isn't going back to 2% anytime soon, and central banks may need to keep rates higher for longer. We seem to have broken with the low-yield, low-inflation world of the 2000s and 2010s, and that's actually good. Those low rates were a sign of malaise, a legacy of the financial crisis. The equity market hasn't really factored in that rates may need to stay higher.

MarketWatch: The 10-year Treasury yield recently crossed 5% for the first time since 2023. How significant is that?

Wigglesworth: Not really, in isolation. It's an arbitrary number. What matters is whether the cost of borrowing is outpacing economic growth. The U.S. is now paying around 3.6% of GDP in debt servicing, not principal, just interest. The higher bond yields go, the more that money gets sucked away from defense, education, healthcare and infrastructure. The U.S. now spends more on its debts than on defense. Above 5%, things can start to snowball.

MarketWatch: Is there a way out of this debt trajectory?

Wigglesworth: Probably a mix of things. A little inflation running hot helps, because it shrinks the real value of fixed debt. In 2022 the U.S. saw the biggest debt-to-GDP reduction in the history of the global economy, simply because the economy grew faster in nominal terms than the debt did.

Canada is a good case study. It had a semi debt crisis in the 1990s, when its debt-servicing costs climbed toward 10% of GDP. At that point, the government ran a genuinely crushing austerity program that brought its debt down significantly. It usually takes a real crisis to force the issue. It's always more tempting for politicians to raise spending or cut taxes than to do the opposite.

MarketWatch: Why should someone who owns mostly stocks pay attention to the bond market?

Wigglesworth: Because the bond market is the bedrock of the financial system. Stocks are glamorous, but they don't matter nearly as much. When the dot-com bubble burst, the S&P 500 SPX lost almost 50% peak to trough, but that was a shallow recession. When the bond market breaks, as it did in 2008, that's potentially cataclysmic.

The 10-year Treasury yield BX:TMUBMUSD10Y is the cost of money for the entire global economy. It flows into your mortgage, your car loan, your credit card. Even after writing the book, I'm more convinced than ever the bond market is the greatest show on Earth, and the stock market is almost like a circus by comparison.

'Equity isn't what's inflating the AI boom. It's debt.'Robin Wigglesworth

MarketWatch: Is the artificial-intelligence boom becoming an AI debt boom, and does that worry you?

Wigglesworth: Yes and yes. The capital expenditure in AI is so enormous, these companies can't rely on free cash flow alone so they're turning to the bond market. Last year, the hyperscalers issued a couple hundred billion dollars of bonds. This year it's closer to $500 billion.

What worries me more is the financial engineering. Companies are structuring chip and electricity purchases as future leases rather than owned assets, so the liabilities don't show up on the balance sheet. There's roughly $1.5 trillion in lease commitments, of which only about $500 billion actually appears on a balance sheet anywhere.

Equity isn't what's inflating the AI boom. It's debt. If this keeps up for a few more years, I'd worry about something like Cisco Systems' stock (CSCO) after 2000, which still took 25 years to get back to its old stock price peak.

MarketWatch: Is there any part of the bond market that looks attractive to investors right now?

Wigglesworth: Broadly speaking, bonds look more attractive than they used to. When people were buying 10-year Treasurys at 1% to 2%, that seemed crazy to me. The bond bear market of 2022 and 2023 was probably the worst in centuries, and hardly anyone talked about it, because it mostly hit pension funds and insurers rather than everyday investors. Now, a 10-year yield near 5%, if inflation comes down, doesn't look bad. That said, it depends on your time horizon. If you're investing for the next 60 years, lean toward equities. If you're retiring in the next five, I wouldn't buy junk bonds or emerging-market debt.

MarketWatch: Are the bond vigilantes back, and do they have real power over the U.S. now?

Wigglesworth: Yes, and that's new. The bond market has always been able to bully small countries that depend on external financing. What's different now is that same amorphous blob of mutual funds, sovereign-wealth funds and pension trustees can bully the U.S., too. We saw President Donald Trump back down in the face of the bond market after "liberation day."

The responsible move for the Federal Reserve is to raise rates and show it's serious about inflation, not cut them. The government doesn't borrow overnight. It sells bonds maturing in five to 30 years, and what those cost depends on how credible the Fed looks on inflation. That's part of why we saw a shift toward more hawkish language from [Fed Chair] Kevin Warsh at Jackson Hole.

(Editor's note: the Fed raised rates a quarter point on Sept. 16, matching what Wigglesworth said was the responsible move.)

MarketWatch: What are the warning signs that bond investors are getting worried?

Wigglesworth: Watch the 10-year Treasury yield. If it starts shooting meaningfully higher than 5% and gaps up rather than drifting, that shows investors losing faith in the U.S. government's ability to control its debt. The junk-bond market is also one of the best early signals of a souring economy, since low-rated borrowers feel stress first. One caveat: So much former junk-bond issuance has migrated to private credit that the signal may now be more muffled.

'It's defensible to run big deficits when the economy is weak or recovering from a shock, but it doesn't feel like every major government on the planet should be running massive deficits right now.'Robin Wigglesworth

MarketWatch: In your book, Alexander Hamilton plays an important role. What did he understand about government debt that we forget today?

Wigglesworth: That one person's debt is another person's asset. Hamilton studied how Britain built a permanent bond market and realized it acted as financial-wonder fuel rather than a weakness, since those bonds could be used as collateral when hard currency was scarce. Jefferson and Madison didn't appreciate this. Madison famously said all public debt is a public curse. Hamilton knew debt is a tool, wanted it permanent, and called it "public credit immortal." He also saw that giving Americans across the states a shared stake in federal bonds helped bind a fractious new country together.

MarketWatch: What surprised you most while researching the book?

Wigglesworth: Two things. One is a bit wonky: the repo market, where people finance bonds and even equities, is the dark matter of finance. You don't see it most of the time, but when it breaks, it's cataclysmic. A repo run helped kill Bear Stearns and Lehman Brothers. [The repo market refers to the repurchase-agreement market, in which collateralized short-term loans are made for liquidity purposes.]

The other is how the bond market encouraged democracy and transparency. Britain made its sovereign debt Parliament's obligation rather than the king's, and began publishing fiscal data. That transparency let it borrow more cheaply, and cheaper borrowing helped it win wars.

MarketWatch: Is there anything happening today that makes you nervous?

Wigglesworth: I try hard not to be a debt scold, and I'm not worried about an imminent crisis. It's defensible to run big deficits when the economy is weak or recovering from a shock, but it doesn't feel like every major government on the planet should be running massive deficits right now.

MW The hidden messages the bond market is sending about the AI boom and the stock market

By Michael Sincere

Financial Times reporter Robin Wigglesworth explains what the bond market is signaling about inflation, government debt and the AI boom

Author and FT correspondent Robin Wigglesworth tells MarketWatch about how bonds build the modern financial system, and what they are currently saying about and inflation, government debt and the financial markets.

The global bond market became bigger than the global banking system sometime in the past decade, the first time that had ever happened. Robin Wigglesworth, global finance correspondent for the Financial Times, found that fact, and it sent him looking for a book tracing how bonds built the modern financial system. He could not find one, so he took it upon himself write one.

Wigglesworth is the author of "Trillions," a history of the index-fund revolution, and his new book, "A Fabulous Debt: The Epic Story of How Bonds Built the Modern World," is out Sept. 29 from Portfolio/Penguin.

In this interview, edited for length and clarity, Wigglesworth shares what the bond market is signaling that stock investors are missing, how the AI boom is being financed with debt rather than equity, and what worries him most about U.S. government debt.

MarketWatch: Why did you decide to write "A Fabulous Debt" now?

Wigglesworth: I was going through Bank for International Settlements data and discovered the global bond market had become bigger than the banking system for the first time ever, sometime in the late 2010s. When I looked for a book tracing its full history, I realized nobody had written one, so I wrote it myself.

I called it "A Fabulous Debt" after a British historian who studied U.K. debt following the Napoleonic Wars, when the debt-to-GDP ratio hit 200% to 300%. He argued bonds act as a financial lubricant, and that in truth, it was a fabulous debt. Sophisticated economies, including the U.S., need a permanent bond market to grow.

'The bond market is the greatest show on Earth, and the stock market is almost like a circus by comparison.'Robin Wigglesworth

MarketWatch: What is the bond market telling us right now that stock investors may be missing?

Wigglesworth: That inflation isn't going back to 2% anytime soon, and central banks may need to keep rates higher for longer. We seem to have broken with the low-yield, low-inflation world of the 2000s and 2010s, and that's actually good. Those low rates were a sign of malaise, a legacy of the financial crisis. The equity market hasn't really factored in that rates may need to stay higher.

MarketWatch: The 10-year Treasury yield recently crossed 5% for the first time since 2023. How significant is that?

Wigglesworth: Not really, in isolation. It's an arbitrary number. What matters is whether the cost of borrowing is outpacing economic growth. The U.S. is now paying around 3.6% of GDP in debt servicing, not principal, just interest. The higher bond yields go, the more that money gets sucked away from defense, education, healthcare and infrastructure. The U.S. now spends more on its debts than on defense. Above 5%, things can start to snowball.

MarketWatch: Is there a way out of this debt trajectory?

Wigglesworth: Probably a mix of things. A little inflation running hot helps, because it shrinks the real value of fixed debt. In 2022 the U.S. saw the biggest debt-to-GDP reduction in the history of the global economy, simply because the economy grew faster in nominal terms than the debt did.

Canada is a good case study. It had a semi debt crisis in the 1990s, when its debt-servicing costs climbed toward 10% of GDP. At that point, the government ran a genuinely crushing austerity program that brought its debt down significantly. It usually takes a real crisis to force the issue. It's always more tempting for politicians to raise spending or cut taxes than to do the opposite.

MarketWatch: Why should someone who owns mostly stocks pay attention to the bond market?

Wigglesworth: Because the bond market is the bedrock of the financial system. Stocks are glamorous, but they don't matter nearly as much. When the dot-com bubble burst, the S&P 500 SPX lost almost 50% peak to trough, but that was a shallow recession. When the bond market breaks, as it did in 2008, that's potentially cataclysmic.

The 10-year Treasury yield BX:TMUBMUSD10Y is the cost of money for the entire global economy. It flows into your mortgage, your car loan, your credit card. Even after writing the book, I'm more convinced than ever the bond market is the greatest show on Earth, and the stock market is almost like a circus by comparison.

'Equity isn't what's inflating the AI boom. It's debt.'Robin Wigglesworth

MarketWatch: Is the artificial-intelligence boom becoming an AI debt boom, and does that worry you?

Wigglesworth: Yes and yes. The capital expenditure in AI is so enormous, these companies can't rely on free cash flow alone so they're turning to the bond market. Last year, the hyperscalers issued a couple hundred billion dollars of bonds. This year it's closer to $500 billion.

What worries me more is the financial engineering. Companies are structuring chip and electricity purchases as future leases rather than owned assets, so the liabilities don't show up on the balance sheet. There's roughly $1.5 trillion in lease commitments, of which only about $500 billion actually appears on a balance sheet anywhere.

Equity isn't what's inflating the AI boom. It's debt. If this keeps up for a few more years, I'd worry about something like Cisco Systems' stock (CSCO) after 2000, which still took 25 years to get back to its old stock price peak.

MarketWatch: Is there any part of the bond market that looks attractive to investors right now?

Wigglesworth: Broadly speaking, bonds look more attractive than they used to. When people were buying 10-year Treasurys at 1% to 2%, that seemed crazy to me. The bond bear market of 2022 and 2023 was probably the worst in centuries, and hardly anyone talked about it, because it mostly hit pension funds and insurers rather than everyday investors. Now, a 10-year yield near 5%, if inflation comes down, doesn't look bad. That said, it depends on your time horizon. If you're investing for the next 60 years, lean toward equities. If you're retiring in the next five, I wouldn't buy junk bonds or emerging-market debt.

MarketWatch: Are the bond vigilantes back, and do they have real power over the U.S. now?

Wigglesworth: Yes, and that's new. The bond market has always been able to bully small countries that depend on external financing. What's different now is that same amorphous blob of mutual funds, sovereign-wealth funds and pension trustees can bully the U.S., too. We saw President Donald Trump back down in the face of the bond market after "liberation day."

The responsible move for the Federal Reserve is to raise rates and show it's serious about inflation, not cut them. The government doesn't borrow overnight. It sells bonds maturing in five to 30 years, and what those cost depends on how credible the Fed looks on inflation. That's part of why we saw a shift toward more hawkish language from [Fed Chair] Kevin Warsh at Jackson Hole.

(Editor's note: the Fed raised rates a quarter point on Sept. 16, matching what Wigglesworth said was the responsible move.)

MarketWatch: What are the warning signs that bond investors are getting worried?

Wigglesworth: Watch the 10-year Treasury yield. If it starts shooting meaningfully higher than 5% and gaps up rather than drifting, that shows investors losing faith in the U.S. government's ability to control its debt. The junk-bond market is also one of the best early signals of a souring economy, since low-rated borrowers feel stress first. One caveat: So much former junk-bond issuance has migrated to private credit that the signal may now be more muffled.

'It's defensible to run big deficits when the economy is weak or recovering from a shock, but it doesn't feel like every major government on the planet should be running massive deficits right now.'Robin Wigglesworth

MarketWatch: In your book, Alexander Hamilton plays an important role. What did he understand about government debt that we forget today?

Wigglesworth: That one person's debt is another person's asset. Hamilton studied how Britain built a permanent bond market and realized it acted as financial-wonder fuel rather than a weakness, since those bonds could be used as collateral when hard currency was scarce. Jefferson and Madison didn't appreciate this. Madison famously said all public debt is a public curse. Hamilton knew debt is a tool, wanted it permanent, and called it "public credit immortal." He also saw that giving Americans across the states a shared stake in federal bonds helped bind a fractious new country together.

MarketWatch: What surprised you most while researching the book?

Wigglesworth: Two things. One is a bit wonky: the repo market, where people finance bonds and even equities, is the dark matter of finance. You don't see it most of the time, but when it breaks, it's cataclysmic. A repo run helped kill Bear Stearns and Lehman Brothers. [The repo market refers to the repurchase-agreement market, in which collateralized short-term loans are made for liquidity purposes.]

The other is how the bond market encouraged democracy and transparency. Britain made its sovereign debt Parliament's obligation rather than the king's, and began publishing fiscal data. That transparency let it borrow more cheaply, and cheaper borrowing helped it win wars.

MarketWatch: Is there anything happening today that makes you nervous?

Wigglesworth: I try hard not to be a debt scold, and I'm not worried about an imminent crisis. It's defensible to run big deficits when the economy is weak or recovering from a shock, but it doesn't feel like every major government on the planet should be running massive deficits right now.