Bond bombshell

Unhedged

The episode examines the recent, sharp increase in US 10-year Treasury yields to levels exceeding 5%. The hosts and guest discuss the variou

Key takeaways

• US 10-year Treasury yields have surged past 5%, a significant move in bond market terms.
• Strong US PMI numbers suggest economic growth is persisting, which may keep interest rates higher for longer.

Main topics

• US Bond Market Volatility
• Global Debt and Interest Rates

Notable quotes

The wheels are coming off in the government bond markets, and it is not pretty.

Conclusion

The rapid escalation of US yields poses a significant threat to global

Transcript preview

Speaker 2 (0:00) Buckle up, folks, because the wheels are coming off in the government bond markets, and it is not pretty. As all good, faithful listeners to this podcast know, bonds have been weakening for some time. And as they also know, this pushes borrowing costs higher and higher for all of us everywhere. Governments, companies, ordinary mortals like us getting loans and mortgages. Proof, once again, that if you think markets and real life are separate things, you are very much... doing it wrong. Anyway, earlier this week, the drip drip of sliding bond prices turned into a bit of a torrent. We had the biggest drop in US government bonds that we've had since Donald Trump's Liberation Day last year when he unleashed trade tariffs on the world. The 10 year yield or borrowing cost for the US government has now vaulted well above 5%. This is bad. Okay. So today on the show. the bond bombshell and why it matters. This is Unhedged, the markets and finance podcast from the Financial Times. I'm Katie Martin, a markets columnist locked in the bunker at FT Towers in London. Joining me in the studio, very unusually, in fact, for the first time ever, is the big fella, Rob Armstrong. Hi, Speaker 1 (1:16) Katie. Who Speaker 2 (1:17) let you in? I don't know. Speaker 1 (1:19) My old card from when I worked here seven years ago still works to get in the door. So snuck in. Slipped in unnoticed. No Speaker 2 (1:28) one will notice, don't worry. But also with me in the studio is Mr Ian Smith, one of the hardest working people at the FT, thrashing out markets news in our London headquarters. Ian, how are your nerves? Speaker 3 (1:41) I'm good and I'm glad you didn't call me the little fella. That's all I'm going to Speaker 2 (1:44) say. Speaker 3 (1:46) I thought you might have been working up to that. So it's OK. Look, Speaker 2 (1:50) I'm five foot two as far as I'm concerned. Speaker 1 (1:52) Everyone's pretty big. Medium. Speaker 3 (1:54) I'm the medium fella. OK, Speaker 1 (1:56) first Speaker 2 (1:56) of all, chaps, let us gaze upon the destruction in bond markets. Speaker 1 (2:02) This Speaker 2 (2:03) has been a week and it's not even over yet. So, so far today, and we're recording on Thursday, the US 10-year yield tickled five... 0.15%. Speaker 1 (2:14) When I got on a plane yesterday morning and yields were one place and I got off the plane and they were in a completely different place. Yields moved Speaker 3 (2:24) inversely to your landing. Exactly. Speaker 1 (2:27) And I mean, it was really, I mean, it was like a 14 basis point move yesterday. And at one point they were 17 base points. And that, you know, those are hundreds of a percent, which doesn't sound like a lot. But in bond terms, that is big. That is really an unusual day. I mean, in stock market terms, that would be like a day where markets moved like 7 % or Speaker 2 (2:49) something like that. So yeah, like for normal people, 0.17 percentage points is like, meh, whatever. Holy moly, I have not seen a move that big in treasuries for a very long time. If Speaker 3 (3:02) your own household interest rate moved that much in a day, you would be quite scared. Yeah, your mortgage would be significantly more expensive at the end of the day than it was at the beginning of the Speaker 1 (3:12) day. No Speaker 2 (3:13) likey. So, look, for a bunch of reasons, and God, you know... All of us here in this little grey studio, we talk to people in the bond market all the time. We ask them what the hell is going on. And everyone you speak to has got a different laundry list of reasons why they think bonds are weakening. So there is no right or wrong answer to this. But it's some sort of combination of fiscal incontinence, right? The US is just spending money it doesn't have. It is borrowing a shed load of money. The more you borrow, the more your interest rate goes up. Mix in a bit of inflation, mix in a bit of growth, mix in the fact that the Federal Reserve is raising rates and you have a very, very bad picture for US government bonds. But it's almost like something sort of snapped at one point this week. Like, Ian, where did it all really go wrong? Speaker 3 (3:59) You had this very strong PMI number, so business output growth in the US rising at its fastest in five years. And that kind of fed into this sense that what you've got here driving this bond market sell-off is a US economy that just won't stop. You've got this war in the Middle East that won't end. And you've got your point. governments and companies that just won't stop spending, right? And the bond market is responding to all of those things. But you saw this big move on this PMI number, implying stronger growth into the future, higher interest rates. And that fed what has been a big repricing of US interest rate expectations that has driven the sell-off. One Speaker 1 (4:34) of the Fed governors went and opened their mouth. Speaker 2 (4:36) Oh, what? Never do that. That added. Speaker 1 (4:38) Never do that. And said, yeah, this might take quite a few interest rate increases to get under control. So that was a little more fuel on the Speaker 3 (4:47) fire. And then at the same time, you had oil prices that were escalating again as some of the hopes that the UN General Assembly would lead to a kind of... brokering of some peace talks that didn't seem to happen. Speaker 2 (4:59) Did people think Speaker 3 (4:59) that was going to happen? Well, there had been a little bit of, you know, a rally before then, as people maybe thought. And then there was also a five-year US government debt sale that didn't go particularly well, that fed into those supply concerns. So all of this happened once, you know, the old toxic cocktail. There's one Speaker 1 (5:13) other, I think the olive in the cocktail, actually, which is going to be a first ballot unanimous entrant into the Bad Idea Hall of Fame. The idea that we should ban exports of diesel from the United States. Oh, Speaker 2 (5:28) I literally love this idea. It's like... Well, Speaker 1 (5:32) I mean, the idea that it's very hard for a lot of people who live in America when diesel is expensive, which it is now. If you are a farmer, Speaker 2 (5:41) if Speaker 1