September 3, 2025 • 18 mins
A global selloff in long-dated bonds — including 30-year UK gilts, US Treasuries and Japanese government bonds — has deepened.
On today’s Big Take podcast, host David Gura, Bloomberg Economics’ Jamie Rush and FX reporter Mia Glass in Japan discuss what happened this week in UK and Japan bond auctions — and what it all means for the global economy.
Read more: Global Bond Selloff Deepens With Longer Debt Leading Losses
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Speaker 1 (00:02):
Bloomberg Audio Studios, podcasts, radio news.
Speaker 2 (00:08):
A global sell off in long dated bonds, including thirty
year guilts and US treasuries and Japanese government bonds has deepened.
Speaker 3 (00:17):
UK thirty year bond heelds rose to hya since nineteen
ninety eight, and it's out of control, putting extra pressure
on the PM. Japanese bonds.
Speaker 2 (00:25):
Joining the global bond slide, Yields on long dated bonds
across the world continue to edge up. Developed economies around
the world are dealing with concerns about inflation and demographics,
domestic politics, and geopolitics Bloomberg Economics. As Jamie Rush says,
what we're seeing this week is part of a larger trend.
Some investors are losing confidence in their leaders over the
(00:48):
long term, and it's softening demand to buy into those
governments long dated bonds.
Speaker 1 (00:53):
What we've seen over the past year has been a
significant climb in bond yields right and most recently and
in particular, we've seen an increase in thirty year or
very long maturity bond yields.
Speaker 2 (01:05):
In the UK, thirty year bond yields hit five point
seventy five percent, their highest level since nineteen ninety eight.
On Wednesday morning, the yield on the thirty year US
Treasury bond almost hit five percent for the first time
since July, before it's stabilized. Jamie says investors have been
paying close attention to a series of bond auctions this week,
(01:26):
and there are a couple more coming up in France
and Japan.
Speaker 1 (01:29):
People are now focusing very closely on the results of
bond auctions to see whether the appetite is there.
Speaker 2 (01:35):
Jamie says this appetite for long dated debt gives us
insight into investor psychology, how confident investors are in an
economy's long term prospects. And this route has raised a
lot of questions.
Speaker 1 (01:47):
Why are people so worried about locking up their money
for thirty years? What does that tell you about the
border appetite for debt and does it mean that actually,
as we get closer towards tipping points further out, will
we see interest rates at Shaws Michu's starts rise.
Speaker 2 (02:06):
I'm David Gerret and this is the big take from
Bloomberg News today. On the show, What to Sell Off
in Long dated bonds in developed countries tells us about
the challenges economies are facing all over the world as
prices of long term debt have fallen in the US
and the UK and Japan and elsewhere, and the yields
(02:28):
on those bonds have soared. I asked Jamie Rush of
Bloomberg Economics what's responsible. He told me central banks are
under a lot of pressure to sell bonds right now.
Speaker 1 (02:38):
So quantitive tightening, the acts of winding down balance sheets
that were bloated during the pandemic and the global financial crisis.
That was supposed to be like paint drying. I've not
seen paint dry in this fashion before. It's a bit
more exciting than it should be. So I think there's
a big element of central banks stepping out of the
picture releasing bonds into the market.
Speaker 2 (03:00):
But Jamie says, in the case of the UK and Japan,
the rise in yields is being driven by some unique factors.
In Japan, the central bank spent years trying to keep
borrowing casts down by buying up its longer term bonds,
so called yield curve control, and now they're dialing that back.
Speaker 1 (03:18):
So Japan, the end of yield curve control. What that
means you haven't got control of the Yelk curve. It's
now being exposed to market forces in a way that
hasn't been the case for quite a number of years. UK.
The retirees that are now sitting on their yachts whatever
it is that they're doing and spending down their retirement savings, well,
they were a huge source of demand for very long
(03:38):
dated debt, and there's a structural rotation out of long
dated debt as those pension schemes are now starting to mature,
So UK, Japan, France as well. The political impasse in France,
the fractured politics of the country makes it incredibly difficult
to pass budgets as we are seeing expecting the fall
of another government relatively soon. And you can add into that,
(04:00):
of course Germany's decision to spend a lot more also
creating fiscal gisses, and the ongoing situation in the US
where we have the same sorts of problems in terms
of keeping the depths under control. So all of these
factors are coming together right now, and they're sort of
in some ways idiosyncratic, so I think you can't discount them.
They're important and they're happening now.
Speaker 2 (04:20):
The moves we've seen in recent days are startling, but
Jamie argues they're part of a broader trend.
Speaker 1 (04:26):
I think it's also important to take a step back
and consider the broader sweep of history. What were the
reasons why interest rates fell for such a long time.
When you think about interest rates, what it is that
determines interest rates globally is it's not really central banks.
They have to pick whatever interest rates stabilizes inflation. What
matters over this longer period is the balance between saving
(04:48):
and investment in the global economy. More people wanting to
save pushes interest rates down, more people wanting to invest
PUSH's rates up, and so there are structural forces which
have determined these things over the past fifty years. The
other ones that are really important generally fall under the
geopolitics umbrella. We all thought we lived in a relatively
safe world. Well, Putin's invasion of Ukraine has revealed that
(05:12):
we don't live in a safe world, and so governments
around the world are having to scramble to invest in
military equipment and more investment higher interest rates. We also
think about China and oil producers. For many years, they
were saving their export revenues and they were funneling them
(05:32):
into the US treasury markets more saving, lower interest rates,
and so that was a dominant factor as globalization was occurring.
After China's accession to the WCO, well we know the
globalization is not happening, are quite the same force, and
allied to that, it was actually becoming really cheap for
US to upgrade our technology and infrastructure. So because of
the abundance of production in China, cheap capital goods, cheap computers,
(05:57):
cheap tech, all of that, we didn't have to spend
as much on less investment, low interest rates. Again, that's
now flipping into reverse. The tectonic shifts we've seen in
geopolitics are now swinging into the opposite direction and they
are pushing rates up. So I think that broader sweep
of history is really important and we are something of
an inflection point.
Speaker 2 (06:17):
Jamie. Let's talk about demographics. Some economists have suggested that
as a population ages, like in Japan, like in the US,
where baby boomers are retiring and drawing down their savings,
that is impacting demand for longer term bonds. And I'm
wondering how demographics change or complicate that demand.
Speaker 1 (06:34):
So some people would tell you that the thing that
matters is life expectancy, so people think ahead to how
long they're going to live and make their saving decisions.
And in that world, demographic bulges in the population don't
matter too much because people are planning ahead, you don't
have these movements in savings. Others, and I consider myself
among them, would say that people are pretty hopeless at
(06:55):
predicting their life expectancy and just kind of take it
as it comes. Therefore, you do see some shifts in
flows of spending when these demographic boulders move through the distribution.
And one way to kind of extract yourself from that
debate is to try and estimate the impacts directly. We
found when we estimated it that yes, the dependency ratio
(07:17):
to the number of retirees and children or students to
the prime age working population, that ratio does appear to
matter to interest rates over long horizons, and you have
more dependence, you've got less saving and therefore does have
an upward impact on interest rates.
Speaker 2 (07:34):
Jamie, let's zero in on the UK where we've seen
some of the most dramatic moves in longer term bond yields.
How big have they been.
Speaker 1 (07:41):
Well, we've seen it move up of around about one
hundred and ten basis points over the past year in
the UK, so that's move up to five point seven
percent in thirty year borrowing costs has taken us back
to interest rates that we haven't seen since the late
nineteen nineties. I would not say the UK stands out
as an enormous outlier at this juncture. If you look
(08:04):
at bond yields for France, for the US, for Japan,
for Germany, they've all moved up to varying extents. But
there are a couple of things which matter for the UK,
and so, without trying to get into too much detail,
which most people find boring, but the way that the
UK does it is we produce a forecast for the
economy five years ahead, a forecast for revenues spending, and
(08:27):
the gap between those two things in five years is
the target variable. Now you can guess that a lot
of those things move around all the time. It's the
difference between two very large numbers. They're deficit, and so
whenever those some of those numbers change, there's a knee
jerk reaction to try and correct the course of fiscal policy,
which means that people never have any stability when they're
thinking about what's going to happen to taxes in the future,
(08:49):
what's going to happen to spending. They always feel that
something may be coming and that makes it actually very
harder to invest and make decisions.
Speaker 2 (08:56):
In the UK, Chancellor Rachel Reeves is trying to plug
a massive budget hall From brig Economics estimates it's thirty
five billion pounds, and with higher interest rates doing that
becomes a lot harder. The cost of borrowing goes up.
It's something that's clearly on the mind of President Trump,
who's pressuring the Federal Reserve to lower interest rates. His
(09:17):
latest tax and spending bill is projected to add almost
three and a half trillion dollars to the deficit in
the coming years.
Speaker 1 (09:25):
I suppose there was a belief in the UK up
until a few years ago, because of the strength of
institutions and the UK's position in the world economy, that
you didn't really have to worry about the bond market
too much. I mean, you have to set sensible policy,
but that you can take for granted the fact that
the UK is going to be a big issuer and
that there's going to be a liquid issuer, and you
(09:46):
don't have. It's a panic about different deviations and course
corrections in fiscal policy. Well, we've learned that that's not
really true, because you can actually do policies which are
enough to undermine confidence in the bond market, and once
it's gone, that perception of call credibility, once it's shed,
is extremely hard to win back. And I suppose that
is the lesson. It would be unwise to be complacent
(10:09):
about fiscal policy. It would be unwise to be complacent
about the US's position at the heart of the global
financial system and assume that that means that there will
always be demand for US treasuries and that that is assured.
I don't think that's the case.
Speaker 2 (10:23):
Looking forward, the FED is scheduled to meet in a
couple of weeks. The expectation on Wall Street seems to
be the small rate cut. If that happens, what would
that mean for the US bond market, for the bond
market more broadly.
Speaker 1 (10:35):
Well, I think for some of the reasons I set
out earlier on the structural forces driving interest rates, they're
particularly effective at the longer horizon. So thinking about about
ten year treasuries, which means that you can expect that
even if the FED does cut rates a bit, but
you wouldn't expect that to translate into one for one
reductions in that ten year treasury yields. So I think
you can imagine the situation quite easily where the FED
(10:57):
cuts and long term borrowing costs don't fall.
Speaker 2 (11:01):
Another factor of driving rates higher is how much countries
are spending on defense. Jamie has noted previously that a
more dangerous world is a more expensive world. A few
months ago, NATO leaders agreed to increase their defense spending
to five percent of GDP, and Germany has set it
plans to more than double its military spending.
Speaker 1 (11:20):
If you're thinking about where is it that the defense
spending is having the biggest impact, well, it's Europe because
that is where the change in policy on defense has
necessarily had to be the most abrupt. So if we
take Germany as an example, the announcement that they are
going to set aside billions and billions, hundreds of billions
to raise defense spending has had a pretty big impact
(11:43):
in markets, and we've seen that ten year years have
moved higher there as well. How important is that for
the economy the defense spending, well, in terms of the
mitigation of risks Further down the line. It's crucially important
because the cost of a nearer conflict in Europe would
be absolutely colossal, both in human terms and in economic
terms for the economy. Though, I would be quite surprised
(12:05):
if we saw that spending translate into a big boost
to growth. And there a number of reasons for that.
I mean, one is, Germany imports a lot of its
capital equipment. Second, if you look at European defense, it's
extremely fragmented. When you increase spending and when you do
R and D spending in defense in Europe, because it's
so disjointed, you don't get the big supply side benefits.
Speaker 2 (12:26):
There is one more surprising factor I came across. September
is an historically bad month for long dated bonds. Bloomberg
Economics has crunched the numbers and found that globally, maturities
of over ten years posted a median loss of two
percent in September.
Speaker 1 (12:43):
There is the general thought that people are returning to
work after the summer, and there's there's stuff to be done, right,
some price discovery happening over that period. I guess we
will all be sat down and waiting with baited breath
to see what happens to all these auctions over the coming.
Speaker 2 (12:55):
Weeks, those upcoming auctions, and what's at stake for the
global economy. After the break in Japan, yields on long
term debt have hit multi decade highs solid demanded. A
recent sale of ten year Japanese government bonds brought some relief,
(13:19):
but a broader sell off continued, heading into an auction
of longer dated bonds. Blombrig Economics, as Jamie Rush says,
Japan faces some unique challenges.
Speaker 1 (13:28):
Japan has this confluence of facts as which are difficult.
So you have inflation which is sort of suddenly reawakened.
The expectations for inflation have moved higher, and because of
the way that the wages negotiated in Japan, that's got
an inherent degree of stickiness to it. You've got a
government which is trying to win ellectual support by spending
(13:50):
more money again that's something you'd suggest with chission interest
rates higher. And then you've got the Bank of Japan
liberalizing its kind of control of the yield curve. And
so clearly if you don't have control of it, that
means interest rates are going to be more exposed to
market forces, and global market forces also pushing upwards on
interest rates. So I think you've got a confidence of
(14:11):
facts as that have all landed at the real moment
really for holders Japanese debt. That's why you're seeing yields
go up.
Speaker 2 (14:17):
Bloomberg FX reporter Mia Glass is based in Tokyo and
she's covering the sell off in jgb's and recent bond auctions.
Speaker 3 (14:25):
It's been a bit of a chaotic week. So Japan's
bond yields actually fell a bit after the ten year
auction on Tuesday, which saw its strongest demands since twenty
twenty three, and the auction did pretty well because of
the high yield level on the ten year bond, as
well as the retreat and the expectations for a Bank
of Japan rate hike.
Speaker 2 (14:42):
Tuesday's bond market surge didn't last that really.
Speaker 3 (14:45):
From the tenure auction kind of proved to be a
bit short lived because of the moves that we saw
globally overnight. So there's a global bond sell of happening,
with US thirty year yields climbing back towards that five
percent level following the slump in European bonds, and then
on Wednesday, the long end of the Japanese yield curve
is also coming under further pressure following the global moves,
(15:06):
but also because of the political landscape in Japan as well,
and so that really has to do with the fact
that the boj is pairing back its massive bond purchases
now after nearly a decade of extreme monetary stimulus. So
Japan's bob market is slowly becoming more of a normal
market like the rest of the world. But that's also
leading to the volatility and the very high yields that
(15:27):
we're seeing today.
Speaker 2 (15:29):
Mea notes the rise in yields on long dated Japanese
bonds is not a good sign ahead of Thursday's thirty
year auction, which global investors worldwide are going to be
watching closely.
Speaker 3 (15:39):
The question that investors are asking all over the world
is are we really out of the woods yet when
it comes to longer term bonds, And I think watching
the auctions and the bond moves this week, it doesn't
really seem like we are. We're still seeing steepening pressures globally,
and we're still seeing the longer and really face a
lot of pressure. It's also important to watch Japan because
(15:59):
it's been spelling over a lot into global markets recently,
so I think for global investors it will be really
important to watch Japan and how the political story unfolds
here as well.
Speaker 2 (16:09):
So is Japan a canary and a coal mine for
other nations. Here's Jamie Rush again.
Speaker 1 (16:14):
It is important in the sense that Japan is a
rather large issuer of debt and everybody is quite jittery
around thirty horizons, specifically in advanced economies, so it will
be very closely watched.
Speaker 2 (16:26):
What is the takeaway likely to be for for other
countries or for other investors as they watched that optioning.
Speaker 1 (16:30):
They're clearly scenarios where this could play out quite badly.
We could see a lot of volatility in global markets.
But again I would just come back to the single point,
which is that not that much debt as a proportion
of the current issuance is issued at that maturity. Most
of it is much much shorter duration. The average maturity
of debt is much much lower, so it doesn't immediately
signal that we have a funding crisis. It's just that
(16:53):
the people who wants to type with a number of
people want to type their money for that long is
smaller than it has been in the past.
Speaker 2 (17:00):
And a final question, we've seen the stock market on
a record setting run and so much of that is
baked into these bets that companies will continue to grow
grow even more. How does this what we're seeing in
the bond market effect the stock market?
Speaker 3 (17:14):
Right?
Speaker 1 (17:14):
I actually think it's perhaps a little bit the other
way around. I mean, if you think of it as
an economist, as not everyone does of course, but these
companies that are doing so well and unveiling these new technologies, well,
they are creating investment opportunities. There's a capital that needs
to be spent to be able to harness the benefits
of these frontier technologies. You've got all these companies which
will now need to retool upgrade their tech to try
(17:37):
and get in on this productivity perhaps revolution. What does
that do? What it means there's going to be more investment,
more demand for capital, and that in the long run,
who is going to push up yields as well. So
it's actually they're going to be moving together if that
story plays out.
Speaker 2 (17:54):
This is the big take from Bloomberg News. I'm David Gera.
To get more from The Big Take and unlimited access
to all of bloomberg dot com, subscribe today at Bloomberg
dot com slash podcast offer. If you'd liked this episode,
make sure to follow and review The Big Take wherever
you listen to podcasts. It helps people find the show.
Thanks for listening. We'll be back tomorrow
Bloomberg Audio Studios, podcasts, radio news.
Speaker 2 (00:08):
A global sell off in long dated bonds, including thirty
year guilts and US treasuries and Japanese government bonds has deepened.
Speaker 3 (00:17):
UK thirty year bond heelds rose to hya since nineteen
ninety eight, and it's out of control, putting extra pressure
on the PM. Japanese bonds.
Speaker 2 (00:25):
Joining the global bond slide, Yields on long dated bonds
across the world continue to edge up. Developed economies around
the world are dealing with concerns about inflation and demographics,
domestic politics, and geopolitics Bloomberg Economics. As Jamie Rush says,
what we're seeing this week is part of a larger trend.
Some investors are losing confidence in their leaders over the
(00:48):
long term, and it's softening demand to buy into those
governments long dated bonds.
Speaker 1 (00:53):
What we've seen over the past year has been a
significant climb in bond yields right and most recently and
in particular, we've seen an increase in thirty year or
very long maturity bond yields.
Speaker 2 (01:05):
In the UK, thirty year bond yields hit five point
seventy five percent, their highest level since nineteen ninety eight.
On Wednesday morning, the yield on the thirty year US
Treasury bond almost hit five percent for the first time
since July, before it's stabilized. Jamie says investors have been
paying close attention to a series of bond auctions this week,
(01:26):
and there are a couple more coming up in France
and Japan.
Speaker 1 (01:29):
People are now focusing very closely on the results of
bond auctions to see whether the appetite is there.
Speaker 2 (01:35):
Jamie says this appetite for long dated debt gives us
insight into investor psychology, how confident investors are in an
economy's long term prospects. And this route has raised a
lot of questions.
Speaker 1 (01:47):
Why are people so worried about locking up their money
for thirty years? What does that tell you about the
border appetite for debt and does it mean that actually,
as we get closer towards tipping points further out, will
we see interest rates at Shaws Michu's starts rise.
Speaker 2 (02:06):
I'm David Gerret and this is the big take from
Bloomberg News today. On the show, What to Sell Off
in Long dated bonds in developed countries tells us about
the challenges economies are facing all over the world as
prices of long term debt have fallen in the US
and the UK and Japan and elsewhere, and the yields
(02:28):
on those bonds have soared. I asked Jamie Rush of
Bloomberg Economics what's responsible. He told me central banks are
under a lot of pressure to sell bonds right now.
Speaker 1 (02:38):
So quantitive tightening, the acts of winding down balance sheets
that were bloated during the pandemic and the global financial crisis.
That was supposed to be like paint drying. I've not
seen paint dry in this fashion before. It's a bit
more exciting than it should be. So I think there's
a big element of central banks stepping out of the
picture releasing bonds into the market.
Speaker 2 (03:00):
But Jamie says, in the case of the UK and Japan,
the rise in yields is being driven by some unique factors.
In Japan, the central bank spent years trying to keep
borrowing casts down by buying up its longer term bonds,
so called yield curve control, and now they're dialing that back.
Speaker 1 (03:18):
So Japan, the end of yield curve control. What that
means you haven't got control of the Yelk curve. It's
now being exposed to market forces in a way that
hasn't been the case for quite a number of years. UK.
The retirees that are now sitting on their yachts whatever
it is that they're doing and spending down their retirement savings, well,
they were a huge source of demand for very long
(03:38):
dated debt, and there's a structural rotation out of long
dated debt as those pension schemes are now starting to mature,
So UK, Japan, France as well. The political impasse in France,
the fractured politics of the country makes it incredibly difficult
to pass budgets as we are seeing expecting the fall
of another government relatively soon. And you can add into that,
(04:00):
of course Germany's decision to spend a lot more also
creating fiscal gisses, and the ongoing situation in the US
where we have the same sorts of problems in terms
of keeping the depths under control. So all of these
factors are coming together right now, and they're sort of
in some ways idiosyncratic, so I think you can't discount them.
They're important and they're happening now.
Speaker 2 (04:20):
The moves we've seen in recent days are startling, but
Jamie argues they're part of a broader trend.
Speaker 1 (04:26):
I think it's also important to take a step back
and consider the broader sweep of history. What were the
reasons why interest rates fell for such a long time.
When you think about interest rates, what it is that
determines interest rates globally is it's not really central banks.
They have to pick whatever interest rates stabilizes inflation. What
matters over this longer period is the balance between saving
(04:48):
and investment in the global economy. More people wanting to
save pushes interest rates down, more people wanting to invest
PUSH's rates up, and so there are structural forces which
have determined these things over the past fifty years. The
other ones that are really important generally fall under the
geopolitics umbrella. We all thought we lived in a relatively
safe world. Well, Putin's invasion of Ukraine has revealed that
(05:12):
we don't live in a safe world, and so governments
around the world are having to scramble to invest in
military equipment and more investment higher interest rates. We also
think about China and oil producers. For many years, they
were saving their export revenues and they were funneling them
(05:32):
into the US treasury markets more saving, lower interest rates,
and so that was a dominant factor as globalization was occurring.
After China's accession to the WCO, well we know the
globalization is not happening, are quite the same force, and
allied to that, it was actually becoming really cheap for
US to upgrade our technology and infrastructure. So because of
the abundance of production in China, cheap capital goods, cheap computers,
(05:57):
cheap tech, all of that, we didn't have to spend
as much on less investment, low interest rates. Again, that's
now flipping into reverse. The tectonic shifts we've seen in
geopolitics are now swinging into the opposite direction and they
are pushing rates up. So I think that broader sweep
of history is really important and we are something of
an inflection point.
Speaker 2 (06:17):
Jamie. Let's talk about demographics. Some economists have suggested that
as a population ages, like in Japan, like in the US,
where baby boomers are retiring and drawing down their savings,
that is impacting demand for longer term bonds. And I'm
wondering how demographics change or complicate that demand.
Speaker 1 (06:34):
So some people would tell you that the thing that
matters is life expectancy, so people think ahead to how
long they're going to live and make their saving decisions.
And in that world, demographic bulges in the population don't
matter too much because people are planning ahead, you don't
have these movements in savings. Others, and I consider myself
among them, would say that people are pretty hopeless at
(06:55):
predicting their life expectancy and just kind of take it
as it comes. Therefore, you do see some shifts in
flows of spending when these demographic boulders move through the distribution.
And one way to kind of extract yourself from that
debate is to try and estimate the impacts directly. We
found when we estimated it that yes, the dependency ratio
(07:17):
to the number of retirees and children or students to
the prime age working population, that ratio does appear to
matter to interest rates over long horizons, and you have
more dependence, you've got less saving and therefore does have
an upward impact on interest rates.
Speaker 2 (07:34):
Jamie, let's zero in on the UK where we've seen
some of the most dramatic moves in longer term bond yields.
How big have they been.
Speaker 1 (07:41):
Well, we've seen it move up of around about one
hundred and ten basis points over the past year in
the UK, so that's move up to five point seven
percent in thirty year borrowing costs has taken us back
to interest rates that we haven't seen since the late
nineteen nineties. I would not say the UK stands out
as an enormous outlier at this juncture. If you look
(08:04):
at bond yields for France, for the US, for Japan,
for Germany, they've all moved up to varying extents. But
there are a couple of things which matter for the UK,
and so, without trying to get into too much detail,
which most people find boring, but the way that the
UK does it is we produce a forecast for the
economy five years ahead, a forecast for revenues spending, and
(08:27):
the gap between those two things in five years is
the target variable. Now you can guess that a lot
of those things move around all the time. It's the
difference between two very large numbers. They're deficit, and so
whenever those some of those numbers change, there's a knee
jerk reaction to try and correct the course of fiscal policy,
which means that people never have any stability when they're
thinking about what's going to happen to taxes in the future,
(08:49):
what's going to happen to spending. They always feel that
something may be coming and that makes it actually very
harder to invest and make decisions.
Speaker 2 (08:56):
In the UK, Chancellor Rachel Reeves is trying to plug
a massive budget hall From brig Economics estimates it's thirty
five billion pounds, and with higher interest rates doing that
becomes a lot harder. The cost of borrowing goes up.
It's something that's clearly on the mind of President Trump,
who's pressuring the Federal Reserve to lower interest rates. His
(09:17):
latest tax and spending bill is projected to add almost
three and a half trillion dollars to the deficit in
the coming years.
Speaker 1 (09:25):
I suppose there was a belief in the UK up
until a few years ago, because of the strength of
institutions and the UK's position in the world economy, that
you didn't really have to worry about the bond market
too much. I mean, you have to set sensible policy,
but that you can take for granted the fact that
the UK is going to be a big issuer and
that there's going to be a liquid issuer, and you
(09:46):
don't have. It's a panic about different deviations and course
corrections in fiscal policy. Well, we've learned that that's not
really true, because you can actually do policies which are
enough to undermine confidence in the bond market, and once
it's gone, that perception of call credibility, once it's shed,
is extremely hard to win back. And I suppose that
is the lesson. It would be unwise to be complacent
(10:09):
about fiscal policy. It would be unwise to be complacent
about the US's position at the heart of the global
financial system and assume that that means that there will
always be demand for US treasuries and that that is assured.
I don't think that's the case.
Speaker 2 (10:23):
Looking forward, the FED is scheduled to meet in a
couple of weeks. The expectation on Wall Street seems to
be the small rate cut. If that happens, what would
that mean for the US bond market, for the bond
market more broadly.
Speaker 1 (10:35):
Well, I think for some of the reasons I set
out earlier on the structural forces driving interest rates, they're
particularly effective at the longer horizon. So thinking about about
ten year treasuries, which means that you can expect that
even if the FED does cut rates a bit, but
you wouldn't expect that to translate into one for one
reductions in that ten year treasury yields. So I think
you can imagine the situation quite easily where the FED
(10:57):
cuts and long term borrowing costs don't fall.
Speaker 2 (11:01):
Another factor of driving rates higher is how much countries
are spending on defense. Jamie has noted previously that a
more dangerous world is a more expensive world. A few
months ago, NATO leaders agreed to increase their defense spending
to five percent of GDP, and Germany has set it
plans to more than double its military spending.
Speaker 1 (11:20):
If you're thinking about where is it that the defense
spending is having the biggest impact, well, it's Europe because
that is where the change in policy on defense has
necessarily had to be the most abrupt. So if we
take Germany as an example, the announcement that they are
going to set aside billions and billions, hundreds of billions
to raise defense spending has had a pretty big impact
(11:43):
in markets, and we've seen that ten year years have
moved higher there as well. How important is that for
the economy the defense spending, well, in terms of the
mitigation of risks Further down the line. It's crucially important
because the cost of a nearer conflict in Europe would
be absolutely colossal, both in human terms and in economic
terms for the economy. Though, I would be quite surprised
(12:05):
if we saw that spending translate into a big boost
to growth. And there a number of reasons for that.
I mean, one is, Germany imports a lot of its
capital equipment. Second, if you look at European defense, it's
extremely fragmented. When you increase spending and when you do
R and D spending in defense in Europe, because it's
so disjointed, you don't get the big supply side benefits.
Speaker 2 (12:26):
There is one more surprising factor I came across. September
is an historically bad month for long dated bonds. Bloomberg
Economics has crunched the numbers and found that globally, maturities
of over ten years posted a median loss of two
percent in September.
Speaker 1 (12:43):
There is the general thought that people are returning to
work after the summer, and there's there's stuff to be done, right,
some price discovery happening over that period. I guess we
will all be sat down and waiting with baited breath
to see what happens to all these auctions over the coming.
Speaker 2 (12:55):
Weeks, those upcoming auctions, and what's at stake for the
global economy. After the break in Japan, yields on long
term debt have hit multi decade highs solid demanded. A
recent sale of ten year Japanese government bonds brought some relief,
(13:19):
but a broader sell off continued, heading into an auction
of longer dated bonds. Blombrig Economics, as Jamie Rush says,
Japan faces some unique challenges.
Speaker 1 (13:28):
Japan has this confluence of facts as which are difficult.
So you have inflation which is sort of suddenly reawakened.
The expectations for inflation have moved higher, and because of
the way that the wages negotiated in Japan, that's got
an inherent degree of stickiness to it. You've got a
government which is trying to win ellectual support by spending
(13:50):
more money again that's something you'd suggest with chission interest
rates higher. And then you've got the Bank of Japan
liberalizing its kind of control of the yield curve. And
so clearly if you don't have control of it, that
means interest rates are going to be more exposed to
market forces, and global market forces also pushing upwards on
interest rates. So I think you've got a confidence of
(14:11):
facts as that have all landed at the real moment
really for holders Japanese debt. That's why you're seeing yields
go up.
Speaker 2 (14:17):
Bloomberg FX reporter Mia Glass is based in Tokyo and
she's covering the sell off in jgb's and recent bond auctions.
Speaker 3 (14:25):
It's been a bit of a chaotic week. So Japan's
bond yields actually fell a bit after the ten year
auction on Tuesday, which saw its strongest demands since twenty
twenty three, and the auction did pretty well because of
the high yield level on the ten year bond, as
well as the retreat and the expectations for a Bank
of Japan rate hike.
Speaker 2 (14:42):
Tuesday's bond market surge didn't last that really.
Speaker 3 (14:45):
From the tenure auction kind of proved to be a
bit short lived because of the moves that we saw
globally overnight. So there's a global bond sell of happening,
with US thirty year yields climbing back towards that five
percent level following the slump in European bonds, and then
on Wednesday, the long end of the Japanese yield curve
is also coming under further pressure following the global moves,
(15:06):
but also because of the political landscape in Japan as well,
and so that really has to do with the fact
that the boj is pairing back its massive bond purchases
now after nearly a decade of extreme monetary stimulus. So
Japan's bob market is slowly becoming more of a normal
market like the rest of the world. But that's also
leading to the volatility and the very high yields that
(15:27):
we're seeing today.
Speaker 2 (15:29):
Mea notes the rise in yields on long dated Japanese
bonds is not a good sign ahead of Thursday's thirty
year auction, which global investors worldwide are going to be
watching closely.
Speaker 3 (15:39):
The question that investors are asking all over the world
is are we really out of the woods yet when
it comes to longer term bonds, And I think watching
the auctions and the bond moves this week, it doesn't
really seem like we are. We're still seeing steepening pressures globally,
and we're still seeing the longer and really face a
lot of pressure. It's also important to watch Japan because
(15:59):
it's been spelling over a lot into global markets recently,
so I think for global investors it will be really
important to watch Japan and how the political story unfolds
here as well.
Speaker 2 (16:09):
So is Japan a canary and a coal mine for
other nations. Here's Jamie Rush again.
Speaker 1 (16:14):
It is important in the sense that Japan is a
rather large issuer of debt and everybody is quite jittery
around thirty horizons, specifically in advanced economies, so it will
be very closely watched.
Speaker 2 (16:26):
What is the takeaway likely to be for for other
countries or for other investors as they watched that optioning.
Speaker 1 (16:30):
They're clearly scenarios where this could play out quite badly.
We could see a lot of volatility in global markets.
But again I would just come back to the single point,
which is that not that much debt as a proportion
of the current issuance is issued at that maturity. Most
of it is much much shorter duration. The average maturity
of debt is much much lower, so it doesn't immediately
signal that we have a funding crisis. It's just that
(16:53):
the people who wants to type with a number of
people want to type their money for that long is
smaller than it has been in the past.
Speaker 2 (17:00):
And a final question, we've seen the stock market on
a record setting run and so much of that is
baked into these bets that companies will continue to grow
grow even more. How does this what we're seeing in
the bond market effect the stock market?
Speaker 3 (17:14):
Right?
Speaker 1 (17:14):
I actually think it's perhaps a little bit the other
way around. I mean, if you think of it as
an economist, as not everyone does of course, but these
companies that are doing so well and unveiling these new technologies, well,
they are creating investment opportunities. There's a capital that needs
to be spent to be able to harness the benefits
of these frontier technologies. You've got all these companies which
will now need to retool upgrade their tech to try
(17:37):
and get in on this productivity perhaps revolution. What does
that do? What it means there's going to be more investment,
more demand for capital, and that in the long run,
who is going to push up yields as well. So
it's actually they're going to be moving together if that
story plays out.
Speaker 2 (17:54):
This is the big take from Bloomberg News. I'm David Gera.
To get more from The Big Take and unlimited access
to all of bloomberg dot com, subscribe today at Bloomberg
dot com slash podcast offer. If you'd liked this episode,
make sure to follow and review The Big Take wherever
you listen to podcasts. It helps people find the show.
Thanks for listening. We'll be back tomorrow
Hosts And Creators
Sarah Holder
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