1 00:00:02,520 --> 00:00:10,160 Speaker 1: Bloomberg Audio Studios, Podcasts, radio News. I'm Caroline Hepger, and 2 00:00:10,200 --> 00:00:13,400 Speaker 1: this is Here's Why, where we take one big story 3 00:00:13,640 --> 00:00:15,960 Speaker 1: and explain it in just a few minutes with our 4 00:00:16,000 --> 00:00:21,880 Speaker 1: experts here at Bloomberg. You've had this global bond slump 5 00:00:22,200 --> 00:00:24,599 Speaker 1: that really picked up peace at the end of last week. 6 00:00:24,720 --> 00:00:26,759 Speaker 1: People along bind they tend to look at these things 7 00:00:26,760 --> 00:00:30,440 Speaker 1: and both inflation and demands for capital can push up brads. 8 00:00:30,560 --> 00:00:32,360 Speaker 1: It starts to look a lot more interesting with thirty 9 00:00:32,520 --> 00:00:35,080 Speaker 1: real yields levels that we haven't seen since the. 10 00:00:35,080 --> 00:00:38,800 Speaker 2: GFC yields already high, curves are relatively steep, and central 11 00:00:38,800 --> 00:00:41,560 Speaker 2: banks are probably going to be relatively slow to address 12 00:00:41,560 --> 00:00:45,440 Speaker 2: the inflation problem. That's a perfect storm. Bonvigilenties love it. 13 00:00:46,120 --> 00:00:50,760 Speaker 1: Bod markets are sending a warning. Long term boring costs 14 00:00:50,800 --> 00:00:55,160 Speaker 1: have climbed across major economies. The pressure has been fueled 15 00:00:55,240 --> 00:00:59,640 Speaker 1: by inflation fears linked to the Iran War. At the 16 00:00:59,680 --> 00:01:03,880 Speaker 1: same time time, countries are adding to rather than cutting 17 00:01:04,040 --> 00:01:09,679 Speaker 1: their debt. It's a combination that is rattling confidence because 18 00:01:09,680 --> 00:01:14,360 Speaker 1: as borrowing costs rise, governments may need to borrow even more, 19 00:01:14,920 --> 00:01:18,000 Speaker 1: and a vicious cycle could now be on the horizon. 20 00:01:18,840 --> 00:01:23,160 Speaker 1: So here's why a bond market doom loop is brewing. 21 00:01:24,920 --> 00:01:28,680 Speaker 1: Stephanie Flanders is Blueberg's head of Economics and Government and 22 00:01:28,760 --> 00:01:32,319 Speaker 1: host of the Trumpanomics podcast, and she joins me, Now, 23 00:01:32,640 --> 00:01:36,120 Speaker 1: what are bond markets trying to tell governments and central 24 00:01:36,160 --> 00:01:37,080 Speaker 1: banks right now? 25 00:01:37,440 --> 00:01:39,240 Speaker 3: I think there's a mixture of things. I mean, we're 26 00:01:39,280 --> 00:01:43,920 Speaker 3: seeing the implied cost of borrowing if you're a government 27 00:01:44,040 --> 00:01:47,319 Speaker 3: go up quite significantly. That's when you see the value 28 00:01:47,520 --> 00:01:50,600 Speaker 3: of the government debt the bomb rice goes down and 29 00:01:50,680 --> 00:01:52,920 Speaker 3: what they have to offer in terms of their interest 30 00:01:53,080 --> 00:01:55,520 Speaker 3: rate goes up. That's how bond markets work, and there 31 00:01:55,520 --> 00:01:57,840 Speaker 3: has been quite a steep increase, and I think that's 32 00:01:57,880 --> 00:02:02,320 Speaker 3: associated with in the short term, realizing that this crisis 33 00:02:02,360 --> 00:02:05,200 Speaker 3: in Iran and the closure of the straight orfor moves 34 00:02:05,280 --> 00:02:07,440 Speaker 3: is going to have a significant effect on inflation for 35 00:02:07,520 --> 00:02:10,120 Speaker 3: longer than people thought. It's also going to mean that 36 00:02:10,160 --> 00:02:13,480 Speaker 3: central banks maybe have to respond to higher inflation. There's 37 00:02:13,480 --> 00:02:15,600 Speaker 3: that short term thing going on, but I think also 38 00:02:15,720 --> 00:02:19,320 Speaker 3: longer term investors are just looking at these governments that 39 00:02:19,360 --> 00:02:21,240 Speaker 3: are sitting on a lot of debt, are sitting on 40 00:02:21,440 --> 00:02:24,840 Speaker 3: rising costs of servicing that debt, and a lot of 41 00:02:25,080 --> 00:02:28,000 Speaker 3: voters and populations who don't seem very keen on doing 42 00:02:28,000 --> 00:02:30,760 Speaker 3: anything to bring that debt down. So I think there's 43 00:02:30,800 --> 00:02:35,160 Speaker 3: also just bigger question marks about government's fiscal sustainability, if 44 00:02:35,160 --> 00:02:35,440 Speaker 3: you like. 45 00:02:35,639 --> 00:02:39,760 Speaker 1: Investors are increasingly worried about a government debt and in 46 00:02:39,800 --> 00:02:43,440 Speaker 1: a lot of different developed economies. But I suppose I 47 00:02:43,520 --> 00:02:47,799 Speaker 1: wonder why they are becoming so much more concerned about 48 00:02:47,800 --> 00:02:50,520 Speaker 1: what has actually been a long running issue with government debt. 49 00:02:50,800 --> 00:02:53,280 Speaker 1: Why the concern particularly now. 50 00:02:53,960 --> 00:02:57,240 Speaker 3: Something very unusual happened after the Global financial crisis, that 51 00:02:57,320 --> 00:03:01,280 Speaker 3: you had a big increase in debt as countries responded 52 00:03:01,320 --> 00:03:04,040 Speaker 3: to the slowed down and the recession in the economies 53 00:03:04,080 --> 00:03:07,840 Speaker 3: at that time, actually doubling of government debt in most 54 00:03:07,880 --> 00:03:11,280 Speaker 3: of the advanced economies, But the cost of servicing that debt, 55 00:03:11,280 --> 00:03:13,680 Speaker 3: because interest rates were falling lower and lower as central 56 00:03:13,680 --> 00:03:16,120 Speaker 3: banks were trying to stimulate their economies, the cost of 57 00:03:16,160 --> 00:03:20,120 Speaker 3: servicing that debt actually fell overall. So that was kind 58 00:03:20,120 --> 00:03:22,360 Speaker 3: of a free lunch for governments. That's gone completely in 59 00:03:22,400 --> 00:03:26,079 Speaker 3: the reverse. In the years since COVID, interest rates have 60 00:03:26,200 --> 00:03:29,680 Speaker 3: been creeping up and the cost of servicing that debt 61 00:03:29,720 --> 00:03:32,600 Speaker 3: for governments have been creeping up. So suddenly, in the UK, 62 00:03:32,720 --> 00:03:36,040 Speaker 3: for example, instead of paying around fifty billion pounds a 63 00:03:36,120 --> 00:03:39,080 Speaker 3: year interest costs on the debt, you're paying closer to 64 00:03:39,120 --> 00:03:42,200 Speaker 3: one hundred billion, maybe higher, which starts to be, you know, 65 00:03:42,240 --> 00:03:45,040 Speaker 3: more than defense, more than many other important bits of 66 00:03:45,080 --> 00:03:47,680 Speaker 3: the economy. And then investors say, well, hang on a minute, 67 00:03:47,920 --> 00:03:50,600 Speaker 3: how are they going to keep paying that bill when 68 00:03:50,680 --> 00:03:54,080 Speaker 3: those bills for education, defense and health are also rising. 69 00:03:54,480 --> 00:03:58,040 Speaker 1: Central banks, also, as you sort of mentioned, spent years 70 00:03:58,320 --> 00:04:01,680 Speaker 1: helping to keep those borrowing costs low. So I suppose 71 00:04:01,880 --> 00:04:04,880 Speaker 1: are we now about to see a new era of 72 00:04:05,480 --> 00:04:08,480 Speaker 1: rising interest rates? You say they've been creeping up. Is 73 00:04:08,520 --> 00:04:11,480 Speaker 1: this a sort of new moment for central banks? 74 00:04:11,880 --> 00:04:14,880 Speaker 3: Yeah, in a way, we're going back to a normal time. Remember, Carolin, 75 00:04:14,920 --> 00:04:16,760 Speaker 3: we had a lot of time where people were worried 76 00:04:16,839 --> 00:04:19,000 Speaker 3: that central banks are sort of run out of ammunition 77 00:04:19,080 --> 00:04:21,760 Speaker 3: because interest rates were at rock bottom and they had 78 00:04:21,800 --> 00:04:24,080 Speaker 3: nowhere to go. Well, I guess the good news about 79 00:04:24,080 --> 00:04:27,080 Speaker 3: the current situation is that with higher interest rates, they've 80 00:04:27,080 --> 00:04:29,200 Speaker 3: got a lot more room for maneuver. We're both on 81 00:04:29,240 --> 00:04:31,800 Speaker 3: the upside and on the downside. But of course the 82 00:04:32,200 --> 00:04:34,400 Speaker 3: bad news is that means we're in a sort of 83 00:04:34,400 --> 00:04:39,560 Speaker 3: slightly higher inflation, higher interest rate environment, and that I 84 00:04:39,560 --> 00:04:42,160 Speaker 3: think we certainly the research that we've done about the 85 00:04:42,200 --> 00:04:45,680 Speaker 3: sort of long term drivers of the cost of money 86 00:04:45,720 --> 00:04:48,560 Speaker 3: of that long term interest rate, we think it is 87 00:04:48,680 --> 00:04:51,120 Speaker 3: going up for a whole bunch of reasons, but in 88 00:04:51,200 --> 00:04:54,200 Speaker 3: part because this is just becoming a more expensive world 89 00:04:54,279 --> 00:04:56,960 Speaker 3: with all these shocks that we're seeing coming down the 90 00:04:57,000 --> 00:05:01,160 Speaker 3: track and rising commodity prices and and things like that. 91 00:05:01,560 --> 00:05:05,120 Speaker 1: So then we've used this term doom loop. Can you 92 00:05:05,200 --> 00:05:08,679 Speaker 1: explain how a doom loop between debt and borrowing costs 93 00:05:08,720 --> 00:05:11,680 Speaker 1: would actually work? I mean, one of the concerns has 94 00:05:11,720 --> 00:05:14,760 Speaker 1: been also about a kind of disorderly bond market. 95 00:05:15,080 --> 00:05:19,640 Speaker 3: The more that investors worry about government's ability to repay 96 00:05:19,680 --> 00:05:22,400 Speaker 3: that debt, the more they demand a higher interest rate, 97 00:05:22,480 --> 00:05:25,240 Speaker 3: maybe a higher risk premium on that debt. Then the 98 00:05:25,279 --> 00:05:27,159 Speaker 3: bill goes up further, so they look at it again 99 00:05:27,200 --> 00:05:28,960 Speaker 3: and say, wow, that really is going to be hard 100 00:05:28,960 --> 00:05:31,240 Speaker 3: to cover. So you can see how that is a 101 00:05:31,279 --> 00:05:35,640 Speaker 3: sort of negative spiral that is quite hard to break 102 00:05:35,800 --> 00:05:40,440 Speaker 3: if governments haven't persuaded investors that they really do have 103 00:05:40,520 --> 00:05:43,160 Speaker 3: a handle on that long term path or debt and 104 00:05:43,200 --> 00:05:45,240 Speaker 3: I think that's why a lot of people, certainly a 105 00:05:45,279 --> 00:05:49,040 Speaker 3: lot of investors and the sort of ratings agencies they 106 00:05:49,120 --> 00:05:51,320 Speaker 3: look at whether a government has it doesn't matter. It 107 00:05:51,320 --> 00:05:54,279 Speaker 3: doesn't matter so much if the borrowing is going up now, 108 00:05:54,440 --> 00:05:56,960 Speaker 3: debt's going up now, But do they have a credible 109 00:05:57,040 --> 00:05:59,680 Speaker 3: plan for putting it on a stable path and potentially 110 00:05:59,720 --> 00:06:03,880 Speaker 3: even having debt fall relative to the size of the economy. 111 00:06:03,920 --> 00:06:06,280 Speaker 3: And I think in quite a few countries, certainly in 112 00:06:06,320 --> 00:06:09,120 Speaker 3: the US and potentially in the UK, that's just not 113 00:06:09,200 --> 00:06:09,920 Speaker 3: the case now. 114 00:06:10,440 --> 00:06:13,480 Speaker 1: If we are in this kind of new normal or maybe, 115 00:06:13,520 --> 00:06:16,080 Speaker 1: as you say, you know, back to a more normal 116 00:06:16,160 --> 00:06:18,880 Speaker 1: situation in terms of the cost of borrowing, what does 117 00:06:18,920 --> 00:06:19,360 Speaker 1: that mean. 118 00:06:20,120 --> 00:06:22,720 Speaker 3: There's many things to like about a world in which 119 00:06:22,760 --> 00:06:25,080 Speaker 3: interest rates are a bit higher. Remember when we had 120 00:06:25,240 --> 00:06:27,440 Speaker 3: very low interest rates, there was a lot of concerns 121 00:06:27,520 --> 00:06:30,880 Speaker 3: about pensioners and others living off their savings couldn't get 122 00:06:30,960 --> 00:06:33,479 Speaker 3: high interest rates. You know, some people like high interest rates. 123 00:06:33,839 --> 00:06:35,919 Speaker 3: They want to be able to earn a high return 124 00:06:36,080 --> 00:06:39,479 Speaker 3: from a safe asset like a government bond. That's a 125 00:06:39,480 --> 00:06:42,680 Speaker 3: world that's happier for them. You also, in a sense 126 00:06:42,800 --> 00:06:46,560 Speaker 3: have higher opportunity cost to money so maybe people take 127 00:06:46,600 --> 00:06:49,919 Speaker 3: more care investors take more care about where they're putting 128 00:06:49,920 --> 00:06:53,080 Speaker 3: their money because there's no easy returns to be had. 129 00:06:53,120 --> 00:06:54,960 Speaker 3: You have to really think about, Okay, if I need 130 00:06:55,000 --> 00:06:57,279 Speaker 3: to make a five percent to six percent return on this, 131 00:06:57,400 --> 00:06:59,640 Speaker 3: am I investing it in the right place. I think 132 00:06:59,680 --> 00:07:02,480 Speaker 3: that's quite healthy. And as I said before, there's also 133 00:07:02,520 --> 00:07:05,360 Speaker 3: the kind of central banks having more room for maneuver, 134 00:07:05,440 --> 00:07:07,440 Speaker 3: not being stuck at the bottom where we were when 135 00:07:07,480 --> 00:07:10,200 Speaker 3: interest rates were sort of nine percent one percent. That's 136 00:07:10,360 --> 00:07:13,080 Speaker 3: fine once you get there potentially, and everyone's got used 137 00:07:13,120 --> 00:07:16,120 Speaker 3: to that different world. I think the challenge always is 138 00:07:16,160 --> 00:07:19,520 Speaker 3: how do you make that adjustment and what gets broken 139 00:07:19,600 --> 00:07:21,559 Speaker 3: on the way there. So there'll be lots of people 140 00:07:21,600 --> 00:07:24,400 Speaker 3: currently and we see this in mortgage markets over the 141 00:07:24,480 --> 00:07:26,800 Speaker 3: last few years. People have borrowed at very low rates 142 00:07:26,800 --> 00:07:28,720 Speaker 3: and then they get real sticker shock when they go 143 00:07:28,840 --> 00:07:31,760 Speaker 3: to refinance their mortgages, particularly in places like the UK 144 00:07:31,840 --> 00:07:34,560 Speaker 3: where people are doing that on a regular basis. So 145 00:07:34,800 --> 00:07:36,960 Speaker 3: I think what we worry about most of the economists 146 00:07:37,000 --> 00:07:39,520 Speaker 3: is not necessarily that sort of steady state where we've 147 00:07:39,520 --> 00:07:43,040 Speaker 3: gone back to normal, if you like, kind of historically 148 00:07:43,080 --> 00:07:46,240 Speaker 3: normal interest rates. But what's going to happen on the 149 00:07:46,320 --> 00:07:49,160 Speaker 3: way there and who's going to get burnt in the process. 150 00:07:49,600 --> 00:07:52,560 Speaker 1: Always about the speed of change, isn't it bo's head 151 00:07:52,560 --> 00:07:56,000 Speaker 1: of Economics and Governments, definitely Flanders. Thank you. For more 152 00:07:56,040 --> 00:07:59,520 Speaker 1: explanations like this from our team of three thousand journalists 153 00:07:59,560 --> 00:08:02,120 Speaker 1: and analysts around the world, go to Bloomberg dot com 154 00:08:02,160 --> 00:08:07,920 Speaker 1: slash explainers. I'm Callain Hepka. This is here's why. We'll 155 00:08:07,960 --> 00:08:10,680 Speaker 1: be back with more next week. Thanks for listening.