May 28, 2025 • 19 mins
Author of the Money Distilled newsletter John Stepek, is joined by Bloomberg Opinion columnist, Marcus Ashworth. Ashworth, covers European markets and was formerly chief markets strategist for Haitong Securities in London.
The pair discuss Japan's bond market and what recent market activity means for decision making at the Bank of England.
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Speaker 1 (00:02):
Bloomberg Audio Studios, Podcasts, radio news.
Speaker 2 (00:17):
Welcome to the Mertain Talks, Money Markets, roundup debrief on
the biggest stories in markets and economics. As I'm sure
you've already walked to, I'm joined Stebeck, senior report and
author of my distilled newsletter, and that most of the
day's show. While Marrin is out on holiday for a change,
it's not me with me is longtime friend of the
show and usefully our government boinds. Go to a guy,
(00:39):
Marcus Ashworth. Marcus is a Bloomberg opinion columns covering European
markets and is also our go to guy for all
things bond related. Marcus, Nice to see again. How's it going?
Speaker 1 (00:50):
What always a pleasure?
Speaker 2 (00:55):
Yes, I'll buy you lunch one of these days. Up
in these coins? Yeah?
Speaker 1 (01:02):
All the rage or not?
Speaker 2 (01:03):
Actually, what's been going on?
Speaker 1 (01:05):
Sure? Well, it's the second largest bond market in the
world after US treasuries, and it's obviously the proud owner
of the largest sort of government debt GDP ratio as well.
So the Japanese government market has been a backwater in
the sense of foreign investors for many many years.
Speaker 2 (01:24):
That is very.
Speaker 1 (01:25):
Much owned by the Japanese sure as pension funds and
particularly Bank in Japan itself, so it owns a lot
of its own debt, so it's all great, big sort
of money round about. Nonetheless, we start to have noticeable
inflation in Japan after many decades of deflation and certainly
very sort of stagnant growth. But you know, the Japanese
(01:46):
economy fits the starts are doing quite well. In nominal terms,
it's growing at five percent, but you take inflation way,
which is sort of three percent and above and below,
depending how you look at it. It's perhaps a problem
now that inflation is coming through the Bank of Japan
is very reluctant to raise interit traits, but it is
slowly but very carefully. It just wants to see make
(02:09):
sure that deflation has finally finally gone away. But there
are some some nasty signs, which has meant essentially that
demand for long, long dated debt in Japan, which once
was a clam out. All these pretension funds used to say,
I'm forced to buy US treasuriescause of the year, because
I don't get anything in Japan. Please please put you
put yields up. Well, now they've got it. They don't
(02:30):
want it anymore, and that's largely because they've got enough,
and the Bank of Japan is no longer buying all
of jgb's that are sweeping up all the loose bits.
They are trying to passively quantitative titan, which is in essence,
they're not buying everything that matures in the sense of
rebuying investing in back of the market. They're slowly but
(02:51):
very steadily decreasing the matter on their own balance sheet. Well,
no one's really there to buy it now. Ironically, foreigners
have been a little bit more active in the last
few months, seeing yeals going high and they thinking, well,
let's have a little bit of that. Unfortunately, they've had
nothing but bad news since they've been getting involved. But
you know, we really don't have much of a structural
demand for the long end of Japan. And we've had
(03:12):
a couple of rubbish auctions. We had a twenty year
previous week and forty year this week, neither of which
have gone at all.
Speaker 2 (03:19):
Well, however, and just one thing so very quick, so
just to be clear, and the auction is when the
government goes out for the first time and tries to
borrow the money hasn't it all says we're wating a
forty year I owe you appeal for it. It was
like an ip A for equities.
Speaker 1 (03:36):
Yeah, they're just issuing new government debt across different points
on their yell curve from two years out to forty years,
and they have a schedule which comes up and they
do anyway, So they they've they've been. You know, as
all government bonds are sort of well documented when they
will be issuing, the government will be selling more of them.
(03:57):
It just depends how many people turn up to buy it. Now,
normally you'd expect to see at least two to maybe three,
four five or purposing more times cover. These are well
flagged liquidity events where you want to buy something that
you can get to buy a lot of bit at
one time and get a fairly clear and open price.
But you know, forty years is a very very long
(04:18):
maturity and it's a very specialist market. It's only really
sort of life insurers and pension funds. You might really
want to buy these things. Anyways. The last couple of
longer ended auctions have done poorly in relative terms, which
has brought out a lot of panic, some very sharp
ye'll moves higher. However, one thing I have many many
(04:40):
years of trading Japanese government bond's best part of thirty
five years is not longer. There is always a saying
he's been known as the widow maker trade trying to
short jjb's is it falls out. However, you know this
is because the Japanese authorities are fairly canny when it
comes to looking after their own market. And they've looked
(05:01):
like they pulled another stunt, which is they've sent around
a questionnaire the Ministry of Finance. This is to all
the various different primary dealers, the main main Japanese. They've
done one dealers and said how much would you like
in future? I would you like a lot less? So
everyone's read between the lines, Oh, they're going to cut
all the size of all these sales and essentially the
issue short dated bonds, and that sort of worked a
(05:23):
bit of its magic. Nonetheless, unfortunately another auction went badly,
so we we're back, you know, in the mar again.
But you know, definitely yields are a lot higher than
they were, seismically higher, and that is a very important
international thing to watch.
Speaker 2 (05:39):
That sounds good. Just before we get to that certainly
I understand it is that one of the reasons the
mind for long dated points like everywhere was high is
because investos basically, but an an environment, we have the
thought interest rates and we're going to keep going down
and deflation was going to continue to be in this
(06:00):
you And what is harpened since COVID and infleetion took
off is that that psychology has been destroyed. And also
obviously inflectionent has going up, so you know, you need
to get paid for taking the risk where as you're
dead in before. How much of that is the case
and how much is it something more structural? It's like,
did these pension funds not need twenty immaturities anymore? Why
(06:20):
is that?
Speaker 1 (06:21):
All you said is correct? However, the brutal reality is
is that the Bank of Japan is not buying as
much as it used to buy. Owns fifty six percent
of the entire issuance, and it's trying to reduce that
and there aren't enough buyers to replace it. It's nothing more,
nothing less. Demand you know, is lower than supply at
the moment, there's.
Speaker 2 (06:39):
More salers than buyers.
Speaker 1 (06:41):
Well, yes, there's no buyers. It is not that many sellers,
but there's no bars at all, so you know, you
just get to you and often the Japanese gun mole
market is moribun and it doesn't even trade. It's very
much by appointment and it's held by very well known
people that you know, we don't necessarily want to add
to anything more at the moment, and that's we've got
this situation whereby if the government comes in to try
(07:04):
and sell something and no one turns up, in effect,
or not enough people turn up, the market just doesn't
want to know. Yeal goes high and higher, the price
goes low and lower, until eventually this authorities have to
do something, and that's what they've sort of done by
begging a big signal. They probably might sell some less,
but we shall see.
Speaker 2 (07:21):
Moving over from Japan, how does this affect the rest
of the world right or the US market?
Speaker 1 (07:27):
Has it explained? I mean, Japanese bon yields and interest
rates have traditionally been very very low, so it's been
the main home and source of what's known as the
carry trade, which is a hard thing to understand. Basically,
what people are doing is they're borrowing in yen and
then using that money cheaply to buy higher yielding, more
exciting assets like US text docs for instance, or of
(07:49):
US bonds. But I know, so a lot of the
international flows are dependent on liquidity from borrowing in yen.
If all of a sudden that be comes a lot
more expensive as has been, it unravels a lot of
other types of trades. So it is essentially, you know,
a storm in Japan can can have material effects elsewhere
(08:12):
at the same time, as we're seeing a sell off
in US bond yields, particularly the long end as well,
and indeed in the UK we can come over to
the UK in the moment. But I mean principally, we're
worrying here about the big floats between dollars and Japanese yen,
and that the authorities in Japan are very worried about
one the yen weakening too much or indeed strengthening too much.
(08:33):
That doesn't want to gradual That the yen is very
is very cheap in relative terms of the dollar, but
slowly and steadily they want that maybe it to be
less so, but they want no sharp moves, so that
means no shot moves and interest rates preferably and indeed
in their own bond yields. So let's learne there's stock market.
Speaker 2 (08:47):
So this is what I'm the last August, doesn't it
when we had that brief period of panic when the
yen got a lot stronger, very suddenly, exactly because.
Speaker 1 (08:57):
That was everyone who to a big export county like Japan,
they are planning forward. You know, if you're going to
sell lots of toyotas, you need to know where where
your FX risk is, and so everything has to be done,
you know, preferably in a very calm and careful manner.
So sharp moves are not appreciated, particularly by Japanese authorities,
but it's because it does upset the attle cart elsewhere
as well. And quite clearly, the Trump administration is in
(09:18):
the middle of are doing trade negotiations with Japan. Japan's
government isn't quite a rocky place at the moment, so
the last thing they want to be seen is manipulating
their currency. And as far as the US authorities are concerned,
but they obviously are going to have to do a
fairly important and probably painful trade deal with the US
because they obviously export an awful lot. Though they're no
(09:41):
longer happened to the world's largest credit to nation. That's
that's not being handled across the journey, according to the
latest Japanese Ministry of Finance details. But I mean point
is that Japan sells a lot into the US. Its
currency rate has been very weak. It's be very advantageous
for its exporters. They don't want that to change true ratically.
Speaker 2 (09:59):
Because honestly, one issue with interest rate is going up
is the borrowing more expensive. So I mean is we'll
take this to the UK now because obviously that's where
most of our listeners are living and where their mortgages
are and things like that. What is the knock on
impact to the UK If there is a knock on
(10:20):
impact because obviously long boinds here are going the yields
are going up to what does all of that mean
for the public finances and for what's likely to happened
with the bank at England rate and mortgages and things
like that is.
Speaker 1 (10:34):
Not good news. But I mean, what we're saying in
Japan is very similar to what we're seeing in the UK.
We had the scare with the sort of lit trust instance,
which was really more down to pension funds and the
bond buying strategies called liability driven investing. I'm going to
the money.
Speaker 2 (10:51):
Thank you, because I've gone into that a number of
times on this podcast, and you're one of the few
people that actually confirms that that is what it was,
so expert here the.
Speaker 1 (11:00):
Bank of Anything confirmed themselves two thirds of it was
down to LDR.
Speaker 2 (11:03):
Yeah, exactly.
Speaker 1 (11:05):
However, the point is is that the scare that which
she had around that time October twenty twenty two, three
years ago, has not really been how should we say, learnt,
And now we're finally seeing the knock on effect in Japan,
much much bigger than the market in the UK. But
it's the same basic problem. There are not enough domestic
long only pension fund slash insurer buyers who naturally want
(11:29):
very long data accets to match against the liabilities. There
aren't enough buyers in the UK either, because we have
our own Manu shy Of as you know, of defined
benefit pensions, and the requirements to that is dropping because
a lot of getting closed. The LDI type of buying
is disappearing at the same time as we just got structurally,
(11:49):
you know the demographics, but people are not living as
long there is less demand for very long dated debt.
The Debt Management Officer of the UK Treasury has done
a lot to try and get ahead of this, but
it's evident that they need to do even more. I
sell less long bonds exactly is what perhaps is happening
(12:10):
in Japan. This is just a very similar thing. It's
a structural domestic demand from the big institutions in both
the UK, Japan and the US is radically reduced. The
US Treasury is sort of getting ahead of it in
two ways. One, they're ishing a lot more tea bills,
which we don't really do in the UK and perhaps
we ought to do more of.
Speaker 2 (12:28):
Just clearly, tea bells are basically just cash.
Speaker 1 (12:30):
Yeah, they're very short money market instruments which don't offer
a coupon, but they are issued below one hundred, say
at ninety nine or ninety eight, and they're mature at
one hundred, so you get your money back by holding
it to maturity, and you get back more than you
put in. So you know, this is short data funding,
which is you know, obviously banks are very very important
in it, but you know, we don't do as much
(12:52):
in the UK as perhaps other countries do. The other
thing that US are doing is that the Federal Reserve
has stopped basically all all their US Treasury quantitative timing passively.
They are buying something like five billion a month, but
you know, they're hardly doing anything. So in that sense,
it's not you know, as prevalent a supply demand issue
(13:14):
maybe in the US by what's going on with the
Trump administration. And indeed, what the Federal Reserve is basically saying,
which is we're not going to cut interest rates very much.
Speaker 2 (13:23):
But basically the fad has stopped sale and poins to
stop pail jungers, they stop.
Speaker 1 (13:29):
Reducing their balanchine quiet they are quite as much as
clearly the Bank of are still doing in this country.
And we've got the highest first year you know yields
of all you know, we're five and a half percent.
And then that's that's you know, costing us, and it
costs our financing and our interest rate bill each each
year is higher and higher, and that's just obviously causing
extreme problems onto Rachel Reeves's fiscal headroom or lack thereof.
(13:53):
And yeah, we are not helping ourselves at the moment.
But you know, basically, lusts like Japan we've got less
demand for very long dated bonds, perhaps we should sell
even less of them for the moment anyway, So does that.
Speaker 2 (14:05):
Mean presumably the idea would be we stop selling as
many long dety points and we start selling more short
detied ones sly two five to ten years. Yes, But
my question then is doesn't increase in supply at that
and then push up interest at that end as well,
(14:25):
or they also be.
Speaker 1 (14:25):
An equal there's a lot more liquidity to much bigger market.
It's much more you know, you have a lot more
foreign interest, particularly foreign central banks don't tend to go
out beyond ten years, and obviously a lot shorter Equally
hedge funds which are very active, but in beyond sort
of the ten to fifteen year that they're gonna be
very much any relative value buying and certing strategies, you know,
(14:46):
doing sort of complex trades, but in the net exposure
they have will be very limited. So it's really a
very domestic market out beyond ten or fifteen years. In
the UK totally dominated it for many many years by
pension funds and insurers, and these guys have got enough
at the moment. So as I said that, don't Manager
(15:07):
Office has done a fantastic job up to now. However,
they perhaps need to be even more or the Treasury
needs to make come up with an even more aggressive
way of changing how we find. We find a lot
of very long dated and very much inflation linked bonds
in the last twenty thirty years, it's been fabulous for us. However,
the situation has changed and this is not where we
(15:29):
perhaps have natural demand which maybe go to some more
traditional and like a lot of more other bond markets,
an issue much more in the two to tenure sector,
like the US Treasury does.
Speaker 2 (15:39):
Final question on this, But given all of this, what
do you think that actually does mean for the interest
rates that marld to you know, people putting us evingsway
and people taking the morgidgees. I mean because you know
where at the start of this year this sort of
Bank England, the were people thinking, oh, you know, we
may have fee and a half percent by the end
of the year. Are but that would be like that
(16:04):
would be the same really has become an inflation rate
pretty much and that strikes me as a bit and
lately note but I don't know what viewing that well.
Speaker 1 (16:13):
We haven't helped ourselves by you know, raising the minimum wage,
raising a lot of public sector wage rises, and obviously
huge tax hikes you know, national insurance contribution to employers
and things like that which have forced a lot of
things higher. We do have you know, a bump at
the moment because of energy prices which will go away,
(16:34):
and there's a number of things which would would lead
to you think that probably over the course of the
next six months a year, that inflation will come back
down again. Nonetheless, you know, really the Bank of England
is of the opinion at the moment that doesn't do
anything until it's absolutely proven that that they have got
on top of inflation, and they are clearly more worried
about it than perhaps a lot of in the market
had thought, because we expect the economy to be pretty
(16:57):
soft now as we know. The first was strong optically
because a lot of inventory build ahead of obviously the tariffs.
That's not necessarily going to last very long. So growth
for the rest of the year in the UK is
probably not going to be that great. If it's any
weaker than the Bank of unexpects, then maybe we'll see
the Bank of It be a little bit more aggressive
on rate cuts. But They really want to see two things.
(17:20):
Evident economic weakness, of which we're not really seeing at
the moment. That there are some worries in the labor markets.
It's obviously the statistics. We got quality of them as parlors,
so we don't really have much visibility on that. And
they're not taking your risk until they feel they've got
controversial evidence that we're in recession or something like that,
and until they're seeing inflation. You know, I actually properly
(17:42):
turned the corner and go back down again towards at least,
you know, evidently back towards the two percent target. Anything
above three three and a half percent, which you're sort
of seeing the moment is you know, no go for them.
They're not going to tighten or raise interest rates, but
they're not going to rush too. So you know, we
might get one in August, but that's looking like a
coin flip, so we may get another one before the
end of the year. But you know, look, I never
(18:05):
would have thought this, but there is a possibility we
may have got nothing until until next year. But as
I said, unless we get some further clarity both on
inflation indeed on how the economy is faring, I don't
think the Bank of England is gonna be our friend here.
Speaker 2 (18:20):
It really is great. Well, thank you very much Marcus.
As always, that was extremely enlightening and much very much
pre city coming on.
Speaker 1 (18:30):
Well job, Thanks very much you for having me. Was
enjoy it.
Speaker 2 (18:38):
Thanks for listening to this week's Melton Talks Money Debrief.
If you like our show, rate review and subscribe. Whatever
you listen to podcasts, please make it five stars. Also
be sure to follow me on exit, join Underscore, Stepic
and Merin Maren s w follow Marcus at Marcus Ashwood.
This episode was produced by Moses and Summer Sadi and
(18:58):
tala Amadistions and comments on this show and all our
shows are always welcome. Our show email is merin Money
at bloombard dot net
Bloomberg Audio Studios, Podcasts, radio news.
Speaker 2 (00:17):
Welcome to the Mertain Talks, Money Markets, roundup debrief on
the biggest stories in markets and economics. As I'm sure
you've already walked to, I'm joined Stebeck, senior report and
author of my distilled newsletter, and that most of the
day's show. While Marrin is out on holiday for a change,
it's not me with me is longtime friend of the
show and usefully our government boinds. Go to a guy,
(00:39):
Marcus Ashworth. Marcus is a Bloomberg opinion columns covering European
markets and is also our go to guy for all
things bond related. Marcus, Nice to see again. How's it going?
Speaker 1 (00:50):
What always a pleasure?
Speaker 2 (00:55):
Yes, I'll buy you lunch one of these days. Up
in these coins? Yeah?
Speaker 1 (01:02):
All the rage or not?
Speaker 2 (01:03):
Actually, what's been going on?
Speaker 1 (01:05):
Sure? Well, it's the second largest bond market in the
world after US treasuries, and it's obviously the proud owner
of the largest sort of government debt GDP ratio as well.
So the Japanese government market has been a backwater in
the sense of foreign investors for many many years.
Speaker 2 (01:24):
That is very.
Speaker 1 (01:25):
Much owned by the Japanese sure as pension funds and
particularly Bank in Japan itself, so it owns a lot
of its own debt, so it's all great, big sort
of money round about. Nonetheless, we start to have noticeable
inflation in Japan after many decades of deflation and certainly
very sort of stagnant growth. But you know, the Japanese
(01:46):
economy fits the starts are doing quite well. In nominal terms,
it's growing at five percent, but you take inflation way,
which is sort of three percent and above and below,
depending how you look at it. It's perhaps a problem
now that inflation is coming through the Bank of Japan
is very reluctant to raise interit traits, but it is
slowly but very carefully. It just wants to see make
(02:09):
sure that deflation has finally finally gone away. But there
are some some nasty signs, which has meant essentially that
demand for long, long dated debt in Japan, which once
was a clam out. All these pretension funds used to say,
I'm forced to buy US treasuriescause of the year, because
I don't get anything in Japan. Please please put you
put yields up. Well, now they've got it. They don't
(02:30):
want it anymore, and that's largely because they've got enough,
and the Bank of Japan is no longer buying all
of jgb's that are sweeping up all the loose bits.
They are trying to passively quantitative titan, which is in essence,
they're not buying everything that matures in the sense of
rebuying investing in back of the market. They're slowly but
(02:51):
very steadily decreasing the matter on their own balance sheet. Well,
no one's really there to buy it now. Ironically, foreigners
have been a little bit more active in the last
few months, seeing yeals going high and they thinking, well,
let's have a little bit of that. Unfortunately, they've had
nothing but bad news since they've been getting involved. But
you know, we really don't have much of a structural
demand for the long end of Japan. And we've had
(03:12):
a couple of rubbish auctions. We had a twenty year
previous week and forty year this week, neither of which
have gone at all.
Speaker 2 (03:19):
Well, however, and just one thing so very quick, so
just to be clear, and the auction is when the
government goes out for the first time and tries to
borrow the money hasn't it all says we're wating a
forty year I owe you appeal for it. It was
like an ip A for equities.
Speaker 1 (03:36):
Yeah, they're just issuing new government debt across different points
on their yell curve from two years out to forty years,
and they have a schedule which comes up and they
do anyway, So they they've they've been. You know, as
all government bonds are sort of well documented when they
will be issuing, the government will be selling more of them.
(03:57):
It just depends how many people turn up to buy it. Now,
normally you'd expect to see at least two to maybe three,
four five or purposing more times cover. These are well
flagged liquidity events where you want to buy something that
you can get to buy a lot of bit at
one time and get a fairly clear and open price.
But you know, forty years is a very very long
(04:18):
maturity and it's a very specialist market. It's only really
sort of life insurers and pension funds. You might really
want to buy these things. Anyways. The last couple of
longer ended auctions have done poorly in relative terms, which
has brought out a lot of panic, some very sharp
ye'll moves higher. However, one thing I have many many
(04:40):
years of trading Japanese government bond's best part of thirty
five years is not longer. There is always a saying
he's been known as the widow maker trade trying to
short jjb's is it falls out. However, you know this
is because the Japanese authorities are fairly canny when it
comes to looking after their own market. And they've looked
(05:01):
like they pulled another stunt, which is they've sent around
a questionnaire the Ministry of Finance. This is to all
the various different primary dealers, the main main Japanese. They've
done one dealers and said how much would you like
in future? I would you like a lot less? So
everyone's read between the lines, Oh, they're going to cut
all the size of all these sales and essentially the
issue short dated bonds, and that sort of worked a
(05:23):
bit of its magic. Nonetheless, unfortunately another auction went badly,
so we we're back, you know, in the mar again.
But you know, definitely yields are a lot higher than
they were, seismically higher, and that is a very important
international thing to watch.
Speaker 2 (05:39):
That sounds good. Just before we get to that certainly
I understand it is that one of the reasons the
mind for long dated points like everywhere was high is
because investos basically, but an an environment, we have the
thought interest rates and we're going to keep going down
and deflation was going to continue to be in this
(06:00):
you And what is harpened since COVID and infleetion took
off is that that psychology has been destroyed. And also
obviously inflectionent has going up, so you know, you need
to get paid for taking the risk where as you're
dead in before. How much of that is the case
and how much is it something more structural? It's like,
did these pension funds not need twenty immaturities anymore? Why
(06:20):
is that?
Speaker 1 (06:21):
All you said is correct? However, the brutal reality is
is that the Bank of Japan is not buying as
much as it used to buy. Owns fifty six percent
of the entire issuance, and it's trying to reduce that
and there aren't enough buyers to replace it. It's nothing more,
nothing less. Demand you know, is lower than supply at
the moment, there's.
Speaker 2 (06:39):
More salers than buyers.
Speaker 1 (06:41):
Well, yes, there's no buyers. It is not that many sellers,
but there's no bars at all, so you know, you
just get to you and often the Japanese gun mole
market is moribun and it doesn't even trade. It's very
much by appointment and it's held by very well known
people that you know, we don't necessarily want to add
to anything more at the moment, and that's we've got
this situation whereby if the government comes in to try
(07:04):
and sell something and no one turns up, in effect,
or not enough people turn up, the market just doesn't
want to know. Yeal goes high and higher, the price
goes low and lower, until eventually this authorities have to
do something, and that's what they've sort of done by
begging a big signal. They probably might sell some less,
but we shall see.
Speaker 2 (07:21):
Moving over from Japan, how does this affect the rest
of the world right or the US market?
Speaker 1 (07:27):
Has it explained? I mean, Japanese bon yields and interest
rates have traditionally been very very low, so it's been
the main home and source of what's known as the
carry trade, which is a hard thing to understand. Basically,
what people are doing is they're borrowing in yen and
then using that money cheaply to buy higher yielding, more
exciting assets like US text docs for instance, or of
(07:49):
US bonds. But I know, so a lot of the
international flows are dependent on liquidity from borrowing in yen.
If all of a sudden that be comes a lot
more expensive as has been, it unravels a lot of
other types of trades. So it is essentially, you know,
a storm in Japan can can have material effects elsewhere
(08:12):
at the same time, as we're seeing a sell off
in US bond yields, particularly the long end as well,
and indeed in the UK we can come over to
the UK in the moment. But I mean principally, we're
worrying here about the big floats between dollars and Japanese yen,
and that the authorities in Japan are very worried about
one the yen weakening too much or indeed strengthening too much.
(08:33):
That doesn't want to gradual That the yen is very
is very cheap in relative terms of the dollar, but
slowly and steadily they want that maybe it to be
less so, but they want no sharp moves, so that
means no shot moves and interest rates preferably and indeed
in their own bond yields. So let's learne there's stock market.
Speaker 2 (08:47):
So this is what I'm the last August, doesn't it
when we had that brief period of panic when the
yen got a lot stronger, very suddenly, exactly because.
Speaker 1 (08:57):
That was everyone who to a big export county like Japan,
they are planning forward. You know, if you're going to
sell lots of toyotas, you need to know where where
your FX risk is, and so everything has to be done,
you know, preferably in a very calm and careful manner.
So sharp moves are not appreciated, particularly by Japanese authorities,
but it's because it does upset the attle cart elsewhere
as well. And quite clearly, the Trump administration is in
(09:18):
the middle of are doing trade negotiations with Japan. Japan's
government isn't quite a rocky place at the moment, so
the last thing they want to be seen is manipulating
their currency. And as far as the US authorities are concerned,
but they obviously are going to have to do a
fairly important and probably painful trade deal with the US
because they obviously export an awful lot. Though they're no
(09:41):
longer happened to the world's largest credit to nation. That's
that's not being handled across the journey, according to the
latest Japanese Ministry of Finance details. But I mean point
is that Japan sells a lot into the US. Its
currency rate has been very weak. It's be very advantageous
for its exporters. They don't want that to change true ratically.
Speaker 2 (09:59):
Because honestly, one issue with interest rate is going up
is the borrowing more expensive. So I mean is we'll
take this to the UK now because obviously that's where
most of our listeners are living and where their mortgages
are and things like that. What is the knock on
impact to the UK If there is a knock on
(10:20):
impact because obviously long boinds here are going the yields
are going up to what does all of that mean
for the public finances and for what's likely to happened
with the bank at England rate and mortgages and things
like that is.
Speaker 1 (10:34):
Not good news. But I mean, what we're saying in
Japan is very similar to what we're seeing in the UK.
We had the scare with the sort of lit trust instance,
which was really more down to pension funds and the
bond buying strategies called liability driven investing. I'm going to
the money.
Speaker 2 (10:51):
Thank you, because I've gone into that a number of
times on this podcast, and you're one of the few
people that actually confirms that that is what it was,
so expert here the.
Speaker 1 (11:00):
Bank of Anything confirmed themselves two thirds of it was
down to LDR.
Speaker 2 (11:03):
Yeah, exactly.
Speaker 1 (11:05):
However, the point is is that the scare that which
she had around that time October twenty twenty two, three
years ago, has not really been how should we say, learnt,
And now we're finally seeing the knock on effect in Japan,
much much bigger than the market in the UK. But
it's the same basic problem. There are not enough domestic
long only pension fund slash insurer buyers who naturally want
(11:29):
very long data accets to match against the liabilities. There
aren't enough buyers in the UK either, because we have
our own Manu shy Of as you know, of defined
benefit pensions, and the requirements to that is dropping because
a lot of getting closed. The LDI type of buying
is disappearing at the same time as we just got structurally,
(11:49):
you know the demographics, but people are not living as
long there is less demand for very long dated debt.
The Debt Management Officer of the UK Treasury has done
a lot to try and get ahead of this, but
it's evident that they need to do even more. I
sell less long bonds exactly is what perhaps is happening
(12:10):
in Japan. This is just a very similar thing. It's
a structural domestic demand from the big institutions in both
the UK, Japan and the US is radically reduced. The
US Treasury is sort of getting ahead of it in
two ways. One, they're ishing a lot more tea bills,
which we don't really do in the UK and perhaps
we ought to do more of.
Speaker 2 (12:28):
Just clearly, tea bells are basically just cash.
Speaker 1 (12:30):
Yeah, they're very short money market instruments which don't offer
a coupon, but they are issued below one hundred, say
at ninety nine or ninety eight, and they're mature at
one hundred, so you get your money back by holding
it to maturity, and you get back more than you
put in. So you know, this is short data funding,
which is you know, obviously banks are very very important
in it, but you know, we don't do as much
(12:52):
in the UK as perhaps other countries do. The other
thing that US are doing is that the Federal Reserve
has stopped basically all all their US Treasury quantitative timing passively.
They are buying something like five billion a month, but
you know, they're hardly doing anything. So in that sense,
it's not you know, as prevalent a supply demand issue
(13:14):
maybe in the US by what's going on with the
Trump administration. And indeed, what the Federal Reserve is basically saying,
which is we're not going to cut interest rates very much.
Speaker 2 (13:23):
But basically the fad has stopped sale and poins to
stop pail jungers, they stop.
Speaker 1 (13:29):
Reducing their balanchine quiet they are quite as much as
clearly the Bank of are still doing in this country.
And we've got the highest first year you know yields
of all you know, we're five and a half percent.
And then that's that's you know, costing us, and it
costs our financing and our interest rate bill each each
year is higher and higher, and that's just obviously causing
extreme problems onto Rachel Reeves's fiscal headroom or lack thereof.
(13:53):
And yeah, we are not helping ourselves at the moment.
But you know, basically, lusts like Japan we've got less
demand for very long dated bonds, perhaps we should sell
even less of them for the moment anyway, So does that.
Speaker 2 (14:05):
Mean presumably the idea would be we stop selling as
many long dety points and we start selling more short
detied ones sly two five to ten years. Yes, But
my question then is doesn't increase in supply at that
and then push up interest at that end as well,
(14:25):
or they also be.
Speaker 1 (14:25):
An equal there's a lot more liquidity to much bigger market.
It's much more you know, you have a lot more
foreign interest, particularly foreign central banks don't tend to go
out beyond ten years, and obviously a lot shorter Equally
hedge funds which are very active, but in beyond sort
of the ten to fifteen year that they're gonna be
very much any relative value buying and certing strategies, you know,
(14:46):
doing sort of complex trades, but in the net exposure
they have will be very limited. So it's really a
very domestic market out beyond ten or fifteen years. In
the UK totally dominated it for many many years by
pension funds and insurers, and these guys have got enough
at the moment. So as I said that, don't Manager
(15:07):
Office has done a fantastic job up to now. However,
they perhaps need to be even more or the Treasury
needs to make come up with an even more aggressive
way of changing how we find. We find a lot
of very long dated and very much inflation linked bonds
in the last twenty thirty years, it's been fabulous for us. However,
the situation has changed and this is not where we
(15:29):
perhaps have natural demand which maybe go to some more
traditional and like a lot of more other bond markets,
an issue much more in the two to tenure sector,
like the US Treasury does.
Speaker 2 (15:39):
Final question on this, But given all of this, what
do you think that actually does mean for the interest
rates that marld to you know, people putting us evingsway
and people taking the morgidgees. I mean because you know
where at the start of this year this sort of
Bank England, the were people thinking, oh, you know, we
may have fee and a half percent by the end
of the year. Are but that would be like that
(16:04):
would be the same really has become an inflation rate
pretty much and that strikes me as a bit and
lately note but I don't know what viewing that well.
Speaker 1 (16:13):
We haven't helped ourselves by you know, raising the minimum wage,
raising a lot of public sector wage rises, and obviously
huge tax hikes you know, national insurance contribution to employers
and things like that which have forced a lot of
things higher. We do have you know, a bump at
the moment because of energy prices which will go away,
(16:34):
and there's a number of things which would would lead
to you think that probably over the course of the
next six months a year, that inflation will come back
down again. Nonetheless, you know, really the Bank of England
is of the opinion at the moment that doesn't do
anything until it's absolutely proven that that they have got
on top of inflation, and they are clearly more worried
about it than perhaps a lot of in the market
had thought, because we expect the economy to be pretty
(16:57):
soft now as we know. The first was strong optically
because a lot of inventory build ahead of obviously the tariffs.
That's not necessarily going to last very long. So growth
for the rest of the year in the UK is
probably not going to be that great. If it's any
weaker than the Bank of unexpects, then maybe we'll see
the Bank of It be a little bit more aggressive
on rate cuts. But They really want to see two things.
(17:20):
Evident economic weakness, of which we're not really seeing at
the moment. That there are some worries in the labor markets.
It's obviously the statistics. We got quality of them as parlors,
so we don't really have much visibility on that. And
they're not taking your risk until they feel they've got
controversial evidence that we're in recession or something like that,
and until they're seeing inflation. You know, I actually properly
(17:42):
turned the corner and go back down again towards at least,
you know, evidently back towards the two percent target. Anything
above three three and a half percent, which you're sort
of seeing the moment is you know, no go for them.
They're not going to tighten or raise interest rates, but
they're not going to rush too. So you know, we
might get one in August, but that's looking like a
coin flip, so we may get another one before the
end of the year. But you know, look, I never
(18:05):
would have thought this, but there is a possibility we
may have got nothing until until next year. But as
I said, unless we get some further clarity both on
inflation indeed on how the economy is faring, I don't
think the Bank of England is gonna be our friend here.
Speaker 2 (18:20):
It really is great. Well, thank you very much Marcus.
As always, that was extremely enlightening and much very much
pre city coming on.
Speaker 1 (18:30):
Well job, Thanks very much you for having me. Was
enjoy it.
Speaker 2 (18:38):
Thanks for listening to this week's Melton Talks Money Debrief.
If you like our show, rate review and subscribe. Whatever
you listen to podcasts, please make it five stars. Also
be sure to follow me on exit, join Underscore, Stepic
and Merin Maren s w follow Marcus at Marcus Ashwood.
This episode was produced by Moses and Summer Sadi and
(18:58):
tala Amadistions and comments on this show and all our
shows are always welcome. Our show email is merin Money
at bloombard dot net
Host
Merryn Somerset Webb
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