1
00:00:02,720 --> 00:00:07,520
Speaker 1: Bloomberg Audio Studios, podcasts, radio news.

2
00:00:08,800 --> 00:00:12,000
Speaker 2: A global sell off in long dated bonds, including thirty

3
00:00:12,080 --> 00:00:16,200
Speaker 2: year guilts and US treasuries and Japanese government bonds has deepened.

4
00:00:17,000 --> 00:00:20,320
Speaker 3: UK thirty year bond heelds rose to hya since nineteen

5
00:00:20,480 --> 00:00:23,600
Speaker 3: ninety eight, and it's out of control, putting extra pressure

6
00:00:23,760 --> 00:00:25,599
Speaker 3: on the PM. Japanese bonds.

7
00:00:25,840 --> 00:00:29,520
Speaker 2: Joining the global bond slide, Yields on long dated bonds

8
00:00:29,520 --> 00:00:33,479
Speaker 2: across the world continue to edge up. Developed economies around

9
00:00:33,520 --> 00:00:37,320
Speaker 2: the world are dealing with concerns about inflation and demographics,

10
00:00:37,479 --> 00:00:42,160
Speaker 2: domestic politics, and geopolitics Bloomberg Economics. As Jamie Rush says,

11
00:00:42,200 --> 00:00:44,840
Speaker 2: what we're seeing this week is part of a larger trend.

12
00:00:45,400 --> 00:00:48,320
Speaker 2: Some investors are losing confidence in their leaders over the

13
00:00:48,400 --> 00:00:51,160
Speaker 2: long term, and it's softening demand to buy into those

14
00:00:51,159 --> 00:00:52,720
Speaker 2: governments long dated bonds.

15
00:00:53,040 --> 00:00:55,760
Speaker 1: What we've seen over the past year has been a

16
00:00:55,800 --> 00:00:59,400
Speaker 1: significant climb in bond yields right and most recently and

17
00:00:59,440 --> 00:01:02,840
Speaker 1: in particular, we've seen an increase in thirty year or

18
00:01:02,960 --> 00:01:05,120
Speaker 1: very long maturity bond yields.

19
00:01:05,680 --> 00:01:08,400
Speaker 2: In the UK, thirty year bond yields hit five point

20
00:01:08,480 --> 00:01:12,000
Speaker 2: seventy five percent, their highest level since nineteen ninety eight.

21
00:01:12,560 --> 00:01:14,920
Speaker 2: On Wednesday morning, the yield on the thirty year US

22
00:01:14,959 --> 00:01:18,160
Speaker 2: Treasury bond almost hit five percent for the first time

23
00:01:18,200 --> 00:01:22,240
Speaker 2: since July, before it's stabilized. Jamie says investors have been

24
00:01:22,240 --> 00:01:25,880
Speaker 2: paying close attention to a series of bond auctions this week,

25
00:01:26,240 --> 00:01:28,360
Speaker 2: and there are a couple more coming up in France

26
00:01:28,440 --> 00:01:28,959
Speaker 2: and Japan.

27
00:01:29,440 --> 00:01:32,080
Speaker 1: People are now focusing very closely on the results of

28
00:01:32,120 --> 00:01:34,880
Speaker 1: bond auctions to see whether the appetite is there.

29
00:01:35,240 --> 00:01:38,480
Speaker 2: Jamie says this appetite for long dated debt gives us

30
00:01:38,520 --> 00:01:42,400
Speaker 2: insight into investor psychology, how confident investors are in an

31
00:01:42,400 --> 00:01:46,360
Speaker 2: economy's long term prospects. And this route has raised a

32
00:01:46,400 --> 00:01:47,520
Speaker 2: lot of questions.

33
00:01:47,760 --> 00:01:49,800
Speaker 1: Why are people so worried about locking up their money

34
00:01:49,800 --> 00:01:52,720
Speaker 1: for thirty years? What does that tell you about the

35
00:01:52,760 --> 00:01:56,160
Speaker 1: border appetite for debt and does it mean that actually,

36
00:01:56,360 --> 00:02:00,240
Speaker 1: as we get closer towards tipping points further out, will

37
00:02:00,240 --> 00:02:02,600
Speaker 1: we see interest rates at Shaws Michu's starts rise.

38
00:02:06,720 --> 00:02:08,520
Speaker 2: I'm David Gerret and this is the big take from

39
00:02:08,560 --> 00:02:11,480
Speaker 2: Bloomberg News today. On the show, What to Sell Off

40
00:02:11,560 --> 00:02:14,720
Speaker 2: in Long dated bonds in developed countries tells us about

41
00:02:14,760 --> 00:02:22,919
Speaker 2: the challenges economies are facing all over the world as

42
00:02:23,000 --> 00:02:25,799
Speaker 2: prices of long term debt have fallen in the US

43
00:02:25,840 --> 00:02:28,800
Speaker 2: and the UK and Japan and elsewhere, and the yields

44
00:02:28,800 --> 00:02:31,480
Speaker 2: on those bonds have soared. I asked Jamie Rush of

45
00:02:31,520 --> 00:02:35,680
Speaker 2: Bloomberg Economics what's responsible. He told me central banks are

46
00:02:35,760 --> 00:02:39,080
Speaker 2: under a lot of pressure to sell bonds right now.

47
00:02:38,840 --> 00:02:43,359
Speaker 1: So quantitive tightening, the acts of winding down balance sheets

48
00:02:43,600 --> 00:02:47,360
Speaker 1: that were bloated during the pandemic and the global financial crisis.

49
00:02:47,560 --> 00:02:50,600
Speaker 1: That was supposed to be like paint drying. I've not

50
00:02:50,639 --> 00:02:52,800
Speaker 1: seen paint dry in this fashion before. It's a bit

51
00:02:52,840 --> 00:02:54,799
Speaker 1: more exciting than it should be. So I think there's

52
00:02:54,800 --> 00:02:57,400
Speaker 1: a big element of central banks stepping out of the

53
00:02:57,440 --> 00:02:59,840
Speaker 1: picture releasing bonds into the market.

54
00:03:00,280 --> 00:03:02,960
Speaker 2: But Jamie says, in the case of the UK and Japan,

55
00:03:03,320 --> 00:03:06,600
Speaker 2: the rise in yields is being driven by some unique factors.

56
00:03:07,120 --> 00:03:10,120
Speaker 2: In Japan, the central bank spent years trying to keep

57
00:03:10,200 --> 00:03:13,640
Speaker 2: borrowing casts down by buying up its longer term bonds,

58
00:03:13,840 --> 00:03:17,640
Speaker 2: so called yield curve control, and now they're dialing that back.

59
00:03:18,320 --> 00:03:21,400
Speaker 1: So Japan, the end of yield curve control. What that

60
00:03:21,440 --> 00:03:23,560
Speaker 1: means you haven't got control of the Yelk curve. It's

61
00:03:23,600 --> 00:03:26,400
Speaker 1: now being exposed to market forces in a way that

62
00:03:26,440 --> 00:03:29,720
Speaker 1: hasn't been the case for quite a number of years. UK.

63
00:03:30,120 --> 00:03:32,959
Speaker 1: The retirees that are now sitting on their yachts whatever

64
00:03:33,000 --> 00:03:36,600
Speaker 1: it is that they're doing and spending down their retirement savings, well,

65
00:03:36,800 --> 00:03:38,840
Speaker 1: they were a huge source of demand for very long

66
00:03:38,920 --> 00:03:41,960
Speaker 1: dated debt, and there's a structural rotation out of long

67
00:03:42,040 --> 00:03:45,000
Speaker 1: dated debt as those pension schemes are now starting to mature,

68
00:03:45,520 --> 00:03:49,760
Speaker 1: So UK, Japan, France as well. The political impasse in France,

69
00:03:49,880 --> 00:03:53,480
Speaker 1: the fractured politics of the country makes it incredibly difficult

70
00:03:53,520 --> 00:03:56,560
Speaker 1: to pass budgets as we are seeing expecting the fall

71
00:03:56,600 --> 00:04:00,040
Speaker 1: of another government relatively soon. And you can add into that,

72
00:04:00,200 --> 00:04:03,280
Speaker 1: of course Germany's decision to spend a lot more also

73
00:04:04,000 --> 00:04:07,280
Speaker 1: creating fiscal gisses, and the ongoing situation in the US

74
00:04:07,320 --> 00:04:09,480
Speaker 1: where we have the same sorts of problems in terms

75
00:04:09,480 --> 00:04:11,960
Speaker 1: of keeping the depths under control. So all of these

76
00:04:11,960 --> 00:04:14,360
Speaker 1: factors are coming together right now, and they're sort of

77
00:04:14,440 --> 00:04:17,680
Speaker 1: in some ways idiosyncratic, so I think you can't discount them.

78
00:04:17,720 --> 00:04:19,640
Speaker 1: They're important and they're happening now.

79
00:04:20,320 --> 00:04:23,000
Speaker 2: The moves we've seen in recent days are startling, but

80
00:04:23,160 --> 00:04:25,680
Speaker 2: Jamie argues they're part of a broader trend.

81
00:04:26,040 --> 00:04:28,440
Speaker 1: I think it's also important to take a step back

82
00:04:28,839 --> 00:04:31,800
Speaker 1: and consider the broader sweep of history. What were the

83
00:04:31,880 --> 00:04:34,680
Speaker 1: reasons why interest rates fell for such a long time.

84
00:04:35,240 --> 00:04:37,440
Speaker 1: When you think about interest rates, what it is that

85
00:04:37,520 --> 00:04:40,440
Speaker 1: determines interest rates globally is it's not really central banks.

86
00:04:40,520 --> 00:04:43,600
Speaker 1: They have to pick whatever interest rates stabilizes inflation. What

87
00:04:43,680 --> 00:04:48,000
Speaker 1: matters over this longer period is the balance between saving

88
00:04:48,440 --> 00:04:51,200
Speaker 1: and investment in the global economy. More people wanting to

89
00:04:51,200 --> 00:04:54,600
Speaker 1: save pushes interest rates down, more people wanting to invest

90
00:04:54,960 --> 00:04:57,840
Speaker 1: PUSH's rates up, and so there are structural forces which

91
00:04:57,920 --> 00:05:00,880
Speaker 1: have determined these things over the past fifty years. The

92
00:05:00,920 --> 00:05:03,680
Speaker 1: other ones that are really important generally fall under the

93
00:05:03,720 --> 00:05:08,039
Speaker 1: geopolitics umbrella. We all thought we lived in a relatively

94
00:05:08,080 --> 00:05:12,240
Speaker 1: safe world. Well, Putin's invasion of Ukraine has revealed that

95
00:05:12,240 --> 00:05:14,920
Speaker 1: we don't live in a safe world, and so governments

96
00:05:14,960 --> 00:05:18,240
Speaker 1: around the world are having to scramble to invest in

97
00:05:18,320 --> 00:05:23,480
Speaker 1: military equipment and more investment higher interest rates. We also

98
00:05:23,520 --> 00:05:29,240
Speaker 1: think about China and oil producers. For many years, they

99
00:05:29,279 --> 00:05:32,960
Speaker 1: were saving their export revenues and they were funneling them

100
00:05:32,960 --> 00:05:37,200
Speaker 1: into the US treasury markets more saving, lower interest rates,

101
00:05:37,360 --> 00:05:40,560
Speaker 1: and so that was a dominant factor as globalization was occurring.

102
00:05:40,920 --> 00:05:43,760
Speaker 1: After China's accession to the WCO, well we know the

103
00:05:43,760 --> 00:05:46,080
Speaker 1: globalization is not happening, are quite the same force, and

104
00:05:46,279 --> 00:05:49,080
Speaker 1: allied to that, it was actually becoming really cheap for

105
00:05:49,160 --> 00:05:52,719
Speaker 1: US to upgrade our technology and infrastructure. So because of

106
00:05:52,760 --> 00:05:56,880
Speaker 1: the abundance of production in China, cheap capital goods, cheap computers,

107
00:05:57,000 --> 00:05:59,279
Speaker 1: cheap tech, all of that, we didn't have to spend

108
00:05:59,320 --> 00:06:03,560
Speaker 1: as much on less investment, low interest rates. Again, that's

109
00:06:03,600 --> 00:06:07,200
Speaker 1: now flipping into reverse. The tectonic shifts we've seen in

110
00:06:07,240 --> 00:06:10,680
Speaker 1: geopolitics are now swinging into the opposite direction and they

111
00:06:10,680 --> 00:06:12,880
Speaker 1: are pushing rates up. So I think that broader sweep

112
00:06:12,920 --> 00:06:15,720
Speaker 1: of history is really important and we are something of

113
00:06:15,760 --> 00:06:16,680
Speaker 1: an inflection point.

114
00:06:17,080 --> 00:06:20,839
Speaker 2: Jamie. Let's talk about demographics. Some economists have suggested that

115
00:06:20,880 --> 00:06:24,080
Speaker 2: as a population ages, like in Japan, like in the US,

116
00:06:24,120 --> 00:06:27,159
Speaker 2: where baby boomers are retiring and drawing down their savings,

117
00:06:27,839 --> 00:06:30,400
Speaker 2: that is impacting demand for longer term bonds. And I'm

118
00:06:30,400 --> 00:06:34,120
Speaker 2: wondering how demographics change or complicate that demand.

119
00:06:34,520 --> 00:06:36,400
Speaker 1: So some people would tell you that the thing that

120
00:06:36,480 --> 00:06:40,160
Speaker 1: matters is life expectancy, so people think ahead to how

121
00:06:40,200 --> 00:06:42,480
Speaker 1: long they're going to live and make their saving decisions.

122
00:06:42,839 --> 00:06:46,400
Speaker 1: And in that world, demographic bulges in the population don't

123
00:06:46,400 --> 00:06:49,240
Speaker 1: matter too much because people are planning ahead, you don't

124
00:06:49,240 --> 00:06:53,200
Speaker 1: have these movements in savings. Others, and I consider myself

125
00:06:53,240 --> 00:06:55,640
Speaker 1: among them, would say that people are pretty hopeless at

126
00:06:55,640 --> 00:06:58,520
Speaker 1: predicting their life expectancy and just kind of take it

127
00:06:58,560 --> 00:07:02,599
Speaker 1: as it comes. Therefore, you do see some shifts in

128
00:07:02,680 --> 00:07:06,120
Speaker 1: flows of spending when these demographic boulders move through the distribution.

129
00:07:06,680 --> 00:07:09,080
Speaker 1: And one way to kind of extract yourself from that

130
00:07:09,120 --> 00:07:12,200
Speaker 1: debate is to try and estimate the impacts directly. We

131
00:07:12,320 --> 00:07:17,239
Speaker 1: found when we estimated it that yes, the dependency ratio

132
00:07:17,400 --> 00:07:21,640
Speaker 1: to the number of retirees and children or students to

133
00:07:21,720 --> 00:07:25,120
Speaker 1: the prime age working population, that ratio does appear to

134
00:07:25,160 --> 00:07:28,520
Speaker 1: matter to interest rates over long horizons, and you have

135
00:07:28,600 --> 00:07:32,400
Speaker 1: more dependence, you've got less saving and therefore does have

136
00:07:32,440 --> 00:07:34,360
Speaker 1: an upward impact on interest rates.

137
00:07:34,760 --> 00:07:37,480
Speaker 2: Jamie, let's zero in on the UK where we've seen

138
00:07:37,520 --> 00:07:40,400
Speaker 2: some of the most dramatic moves in longer term bond yields.

139
00:07:40,680 --> 00:07:41,560
Speaker 2: How big have they been.

140
00:07:41,880 --> 00:07:44,560
Speaker 1: Well, we've seen it move up of around about one

141
00:07:44,680 --> 00:07:48,200
Speaker 1: hundred and ten basis points over the past year in

142
00:07:48,240 --> 00:07:51,800
Speaker 1: the UK, so that's move up to five point seven

143
00:07:51,880 --> 00:07:55,760
Speaker 1: percent in thirty year borrowing costs has taken us back

144
00:07:55,800 --> 00:07:57,800
Speaker 1: to interest rates that we haven't seen since the late

145
00:07:57,880 --> 00:08:01,400
Speaker 1: nineteen nineties. I would not say the UK stands out

146
00:08:01,440 --> 00:08:04,760
Speaker 1: as an enormous outlier at this juncture. If you look

147
00:08:04,760 --> 00:08:09,120
Speaker 1: at bond yields for France, for the US, for Japan,

148
00:08:09,520 --> 00:08:12,920
Speaker 1: for Germany, they've all moved up to varying extents. But

149
00:08:13,000 --> 00:08:15,600
Speaker 1: there are a couple of things which matter for the UK,

150
00:08:16,280 --> 00:08:18,760
Speaker 1: and so, without trying to get into too much detail,

151
00:08:18,800 --> 00:08:20,760
Speaker 1: which most people find boring, but the way that the

152
00:08:20,840 --> 00:08:23,640
Speaker 1: UK does it is we produce a forecast for the

153
00:08:23,640 --> 00:08:27,840
Speaker 1: economy five years ahead, a forecast for revenues spending, and

154
00:08:27,920 --> 00:08:30,280
Speaker 1: the gap between those two things in five years is

155
00:08:30,320 --> 00:08:32,440
Speaker 1: the target variable. Now you can guess that a lot

156
00:08:32,440 --> 00:08:35,040
Speaker 1: of those things move around all the time. It's the

157
00:08:35,040 --> 00:08:38,880
Speaker 1: difference between two very large numbers. They're deficit, and so

158
00:08:39,000 --> 00:08:41,440
Speaker 1: whenever those some of those numbers change, there's a knee

159
00:08:41,480 --> 00:08:44,120
Speaker 1: jerk reaction to try and correct the course of fiscal policy,

160
00:08:44,400 --> 00:08:46,880
Speaker 1: which means that people never have any stability when they're

161
00:08:46,920 --> 00:08:49,240
Speaker 1: thinking about what's going to happen to taxes in the future,

162
00:08:49,440 --> 00:08:51,960
Speaker 1: what's going to happen to spending. They always feel that

163
00:08:52,000 --> 00:08:54,240
Speaker 1: something may be coming and that makes it actually very

164
00:08:54,280 --> 00:08:55,720
Speaker 1: harder to invest and make decisions.

165
00:08:56,760 --> 00:09:00,000
Speaker 2: In the UK, Chancellor Rachel Reeves is trying to plug

166
00:09:00,160 --> 00:09:04,200
Speaker 2: a massive budget hall From brig Economics estimates it's thirty

167
00:09:04,280 --> 00:09:08,160
Speaker 2: five billion pounds, and with higher interest rates doing that

168
00:09:08,240 --> 00:09:11,520
Speaker 2: becomes a lot harder. The cost of borrowing goes up.

169
00:09:12,080 --> 00:09:14,520
Speaker 2: It's something that's clearly on the mind of President Trump,

170
00:09:14,600 --> 00:09:17,840
Speaker 2: who's pressuring the Federal Reserve to lower interest rates. His

171
00:09:17,960 --> 00:09:20,840
Speaker 2: latest tax and spending bill is projected to add almost

172
00:09:20,920 --> 00:09:23,560
Speaker 2: three and a half trillion dollars to the deficit in

173
00:09:23,559 --> 00:09:24,320
Speaker 2: the coming years.

174
00:09:25,000 --> 00:09:28,320
Speaker 1: I suppose there was a belief in the UK up

175
00:09:28,400 --> 00:09:31,800
Speaker 1: until a few years ago, because of the strength of

176
00:09:31,840 --> 00:09:35,640
Speaker 1: institutions and the UK's position in the world economy, that

177
00:09:35,760 --> 00:09:37,640
Speaker 1: you didn't really have to worry about the bond market

178
00:09:37,679 --> 00:09:39,880
Speaker 1: too much. I mean, you have to set sensible policy,

179
00:09:40,400 --> 00:09:42,280
Speaker 1: but that you can take for granted the fact that

180
00:09:42,320 --> 00:09:44,200
Speaker 1: the UK is going to be a big issuer and

181
00:09:44,280 --> 00:09:46,040
Speaker 1: that there's going to be a liquid issuer, and you

182
00:09:46,080 --> 00:09:48,839
Speaker 1: don't have. It's a panic about different deviations and course

183
00:09:48,840 --> 00:09:51,280
Speaker 1: corrections in fiscal policy. Well, we've learned that that's not

184
00:09:51,360 --> 00:09:54,800
Speaker 1: really true, because you can actually do policies which are

185
00:09:54,920 --> 00:09:58,080
Speaker 1: enough to undermine confidence in the bond market, and once

186
00:09:58,120 --> 00:10:01,760
Speaker 1: it's gone, that perception of call credibility, once it's shed,

187
00:10:02,240 --> 00:10:05,439
Speaker 1: is extremely hard to win back. And I suppose that

188
00:10:05,640 --> 00:10:09,200
Speaker 1: is the lesson. It would be unwise to be complacent

189
00:10:09,559 --> 00:10:12,720
Speaker 1: about fiscal policy. It would be unwise to be complacent

190
00:10:13,080 --> 00:10:16,360
Speaker 1: about the US's position at the heart of the global

191
00:10:16,400 --> 00:10:19,199
Speaker 1: financial system and assume that that means that there will

192
00:10:19,200 --> 00:10:21,880
Speaker 1: always be demand for US treasuries and that that is assured.

193
00:10:22,200 --> 00:10:23,319
Speaker 1: I don't think that's the case.

194
00:10:23,760 --> 00:10:26,640
Speaker 2: Looking forward, the FED is scheduled to meet in a

195
00:10:26,679 --> 00:10:29,439
Speaker 2: couple of weeks. The expectation on Wall Street seems to

196
00:10:29,480 --> 00:10:32,560
Speaker 2: be the small rate cut. If that happens, what would

197
00:10:32,600 --> 00:10:34,760
Speaker 2: that mean for the US bond market, for the bond

198
00:10:34,760 --> 00:10:36,000
Speaker 2: market more broadly.

199
00:10:35,960 --> 00:10:38,240
Speaker 1: Well, I think for some of the reasons I set

200
00:10:38,280 --> 00:10:41,760
Speaker 1: out earlier on the structural forces driving interest rates, they're

201
00:10:41,800 --> 00:10:45,120
Speaker 1: particularly effective at the longer horizon. So thinking about about

202
00:10:45,120 --> 00:10:48,240
Speaker 1: ten year treasuries, which means that you can expect that

203
00:10:48,280 --> 00:10:50,640
Speaker 1: even if the FED does cut rates a bit, but

204
00:10:50,679 --> 00:10:52,679
Speaker 1: you wouldn't expect that to translate into one for one

205
00:10:52,920 --> 00:10:55,640
Speaker 1: reductions in that ten year treasury yields. So I think

206
00:10:55,640 --> 00:10:57,760
Speaker 1: you can imagine the situation quite easily where the FED

207
00:10:57,800 --> 00:10:59,960
Speaker 1: cuts and long term borrowing costs don't fall.

208
00:11:01,080 --> 00:11:03,800
Speaker 2: Another factor of driving rates higher is how much countries

209
00:11:03,840 --> 00:11:07,480
Speaker 2: are spending on defense. Jamie has noted previously that a

210
00:11:07,520 --> 00:11:11,280
Speaker 2: more dangerous world is a more expensive world. A few

211
00:11:11,320 --> 00:11:14,600
Speaker 2: months ago, NATO leaders agreed to increase their defense spending

212
00:11:14,600 --> 00:11:17,920
Speaker 2: to five percent of GDP, and Germany has set it

213
00:11:17,960 --> 00:11:20,440
Speaker 2: plans to more than double its military spending.

214
00:11:20,679 --> 00:11:22,880
Speaker 1: If you're thinking about where is it that the defense

215
00:11:22,920 --> 00:11:26,679
Speaker 1: spending is having the biggest impact, well, it's Europe because

216
00:11:26,679 --> 00:11:30,800
Speaker 1: that is where the change in policy on defense has

217
00:11:30,840 --> 00:11:33,400
Speaker 1: necessarily had to be the most abrupt. So if we

218
00:11:33,480 --> 00:11:36,240
Speaker 1: take Germany as an example, the announcement that they are

219
00:11:36,280 --> 00:11:39,520
Speaker 1: going to set aside billions and billions, hundreds of billions

220
00:11:39,880 --> 00:11:43,240
Speaker 1: to raise defense spending has had a pretty big impact

221
00:11:43,240 --> 00:11:45,240
Speaker 1: in markets, and we've seen that ten year years have

222
00:11:45,240 --> 00:11:48,120
Speaker 1: moved higher there as well. How important is that for

223
00:11:48,160 --> 00:11:51,360
Speaker 1: the economy the defense spending, well, in terms of the

224
00:11:51,440 --> 00:11:55,079
Speaker 1: mitigation of risks Further down the line. It's crucially important

225
00:11:55,360 --> 00:11:57,880
Speaker 1: because the cost of a nearer conflict in Europe would

226
00:11:57,880 --> 00:12:01,120
Speaker 1: be absolutely colossal, both in human terms and in economic

227
00:12:01,200 --> 00:12:05,280
Speaker 1: terms for the economy. Though, I would be quite surprised

228
00:12:05,320 --> 00:12:07,800
Speaker 1: if we saw that spending translate into a big boost

229
00:12:07,800 --> 00:12:09,480
Speaker 1: to growth. And there a number of reasons for that.

230
00:12:09,559 --> 00:12:11,800
Speaker 1: I mean, one is, Germany imports a lot of its

231
00:12:11,800 --> 00:12:15,760
Speaker 1: capital equipment. Second, if you look at European defense, it's

232
00:12:15,840 --> 00:12:19,520
Speaker 1: extremely fragmented. When you increase spending and when you do

233
00:12:19,720 --> 00:12:22,520
Speaker 1: R and D spending in defense in Europe, because it's

234
00:12:22,559 --> 00:12:26,079
Speaker 1: so disjointed, you don't get the big supply side benefits.

235
00:12:26,920 --> 00:12:30,880
Speaker 2: There is one more surprising factor I came across. September

236
00:12:31,040 --> 00:12:34,840
Speaker 2: is an historically bad month for long dated bonds. Bloomberg

237
00:12:34,880 --> 00:12:38,119
Speaker 2: Economics has crunched the numbers and found that globally, maturities

238
00:12:38,120 --> 00:12:41,360
Speaker 2: of over ten years posted a median loss of two

239
00:12:41,440 --> 00:12:42,840
Speaker 2: percent in September.

240
00:12:43,080 --> 00:12:45,280
Speaker 1: There is the general thought that people are returning to

241
00:12:45,360 --> 00:12:47,960
Speaker 1: work after the summer, and there's there's stuff to be done, right,

242
00:12:48,080 --> 00:12:51,200
Speaker 1: some price discovery happening over that period. I guess we

243
00:12:51,240 --> 00:12:53,560
Speaker 1: will all be sat down and waiting with baited breath

244
00:12:53,600 --> 00:12:55,679
Speaker 1: to see what happens to all these auctions over the coming.

245
00:12:55,520 --> 00:13:00,120
Speaker 2: Weeks, those upcoming auctions, and what's at stake for the

246
00:13:00,120 --> 00:13:11,839
Speaker 2: global economy. After the break in Japan, yields on long

247
00:13:11,960 --> 00:13:15,480
Speaker 2: term debt have hit multi decade highs solid demanded. A

248
00:13:15,520 --> 00:13:19,040
Speaker 2: recent sale of ten year Japanese government bonds brought some relief,

249
00:13:19,240 --> 00:13:22,120
Speaker 2: but a broader sell off continued, heading into an auction

250
00:13:22,240 --> 00:13:26,040
Speaker 2: of longer dated bonds. Blombrig Economics, as Jamie Rush says,

251
00:13:26,120 --> 00:13:28,240
Speaker 2: Japan faces some unique challenges.

252
00:13:28,760 --> 00:13:32,600
Speaker 1: Japan has this confluence of facts as which are difficult.

253
00:13:32,840 --> 00:13:37,520
Speaker 1: So you have inflation which is sort of suddenly reawakened.

254
00:13:37,960 --> 00:13:41,120
Speaker 1: The expectations for inflation have moved higher, and because of

255
00:13:41,160 --> 00:13:44,240
Speaker 1: the way that the wages negotiated in Japan, that's got

256
00:13:44,280 --> 00:13:47,120
Speaker 1: an inherent degree of stickiness to it. You've got a

257
00:13:47,160 --> 00:13:50,240
Speaker 1: government which is trying to win ellectual support by spending

258
00:13:50,240 --> 00:13:54,120
Speaker 1: more money again that's something you'd suggest with chission interest

259
00:13:54,200 --> 00:13:57,120
Speaker 1: rates higher. And then you've got the Bank of Japan

260
00:13:57,520 --> 00:14:01,120
Speaker 1: liberalizing its kind of control of the yield curve. And

261
00:14:01,200 --> 00:14:03,120
Speaker 1: so clearly if you don't have control of it, that

262
00:14:03,160 --> 00:14:05,680
Speaker 1: means interest rates are going to be more exposed to

263
00:14:05,720 --> 00:14:09,680
Speaker 1: market forces, and global market forces also pushing upwards on

264
00:14:09,720 --> 00:14:11,640
Speaker 1: interest rates. So I think you've got a confidence of

265
00:14:11,679 --> 00:14:13,559
Speaker 1: facts as that have all landed at the real moment

266
00:14:13,640 --> 00:14:16,560
Speaker 1: really for holders Japanese debt. That's why you're seeing yields

267
00:14:16,559 --> 00:14:16,920
Speaker 1: go up.

268
00:14:17,080 --> 00:14:20,760
Speaker 2: Bloomberg FX reporter Mia Glass is based in Tokyo and

269
00:14:20,880 --> 00:14:24,640
Speaker 2: she's covering the sell off in jgb's and recent bond auctions.

270
00:14:25,000 --> 00:14:27,480
Speaker 3: It's been a bit of a chaotic week. So Japan's

271
00:14:27,520 --> 00:14:30,040
Speaker 3: bond yields actually fell a bit after the ten year

272
00:14:30,080 --> 00:14:33,400
Speaker 3: auction on Tuesday, which saw its strongest demands since twenty

273
00:14:33,440 --> 00:14:36,040
Speaker 3: twenty three, and the auction did pretty well because of

274
00:14:36,080 --> 00:14:38,320
Speaker 3: the high yield level on the ten year bond, as

275
00:14:38,320 --> 00:14:41,000
Speaker 3: well as the retreat and the expectations for a Bank

276
00:14:41,040 --> 00:14:42,040
Speaker 3: of Japan rate hike.

277
00:14:42,360 --> 00:14:45,480
Speaker 2: Tuesday's bond market surge didn't last that really.

278
00:14:45,520 --> 00:14:47,680
Speaker 3: From the tenure auction kind of proved to be a

279
00:14:47,680 --> 00:14:49,840
Speaker 3: bit short lived because of the moves that we saw

280
00:14:49,880 --> 00:14:53,520
Speaker 3: globally overnight. So there's a global bond sell of happening,

281
00:14:53,600 --> 00:14:56,520
Speaker 3: with US thirty year yields climbing back towards that five

282
00:14:56,560 --> 00:15:00,280
Speaker 3: percent level following the slump in European bonds, and then

283
00:15:00,360 --> 00:15:02,840
Speaker 3: on Wednesday, the long end of the Japanese yield curve

284
00:15:02,920 --> 00:15:06,000
Speaker 3: is also coming under further pressure following the global moves,

285
00:15:06,200 --> 00:15:09,440
Speaker 3: but also because of the political landscape in Japan as well,

286
00:15:09,720 --> 00:15:11,400
Speaker 3: and so that really has to do with the fact

287
00:15:11,400 --> 00:15:14,760
Speaker 3: that the boj is pairing back its massive bond purchases

288
00:15:14,880 --> 00:15:18,760
Speaker 3: now after nearly a decade of extreme monetary stimulus. So

289
00:15:18,920 --> 00:15:21,880
Speaker 3: Japan's bob market is slowly becoming more of a normal

290
00:15:21,920 --> 00:15:24,480
Speaker 3: market like the rest of the world. But that's also

291
00:15:24,720 --> 00:15:27,480
Speaker 3: leading to the volatility and the very high yields that

292
00:15:27,520 --> 00:15:28,360
Speaker 3: we're seeing today.

293
00:15:29,680 --> 00:15:32,440
Speaker 2: Mea notes the rise in yields on long dated Japanese

294
00:15:32,440 --> 00:15:35,120
Speaker 2: bonds is not a good sign ahead of Thursday's thirty

295
00:15:35,160 --> 00:15:38,440
Speaker 2: year auction, which global investors worldwide are going to be

296
00:15:38,480 --> 00:15:39,280
Speaker 2: watching closely.

297
00:15:39,560 --> 00:15:42,360
Speaker 3: The question that investors are asking all over the world

298
00:15:42,440 --> 00:15:44,120
Speaker 3: is are we really out of the woods yet when

299
00:15:44,120 --> 00:15:46,880
Speaker 3: it comes to longer term bonds, And I think watching

300
00:15:46,920 --> 00:15:49,560
Speaker 3: the auctions and the bond moves this week, it doesn't

301
00:15:49,600 --> 00:15:53,479
Speaker 3: really seem like we are. We're still seeing steepening pressures globally,

302
00:15:53,680 --> 00:15:56,440
Speaker 3: and we're still seeing the longer and really face a

303
00:15:56,440 --> 00:15:59,640
Speaker 3: lot of pressure. It's also important to watch Japan because

304
00:15:59,720 --> 00:16:02,880
Speaker 3: it's been spelling over a lot into global markets recently,

305
00:16:03,000 --> 00:16:05,160
Speaker 3: so I think for global investors it will be really

306
00:16:05,200 --> 00:16:08,920
Speaker 3: important to watch Japan and how the political story unfolds

307
00:16:08,960 --> 00:16:09,560
Speaker 3: here as well.

308
00:16:09,880 --> 00:16:12,040
Speaker 2: So is Japan a canary and a coal mine for

309
00:16:12,120 --> 00:16:14,360
Speaker 2: other nations. Here's Jamie Rush again.

310
00:16:14,640 --> 00:16:16,800
Speaker 1: It is important in the sense that Japan is a

311
00:16:16,880 --> 00:16:21,080
Speaker 1: rather large issuer of debt and everybody is quite jittery

312
00:16:21,160 --> 00:16:24,760
Speaker 1: around thirty horizons, specifically in advanced economies, so it will

313
00:16:24,800 --> 00:16:26,040
Speaker 1: be very closely watched.

314
00:16:26,280 --> 00:16:28,000
Speaker 2: What is the takeaway likely to be for for other

315
00:16:28,040 --> 00:16:30,320
Speaker 2: countries or for other investors as they watched that optioning.

316
00:16:30,520 --> 00:16:33,320
Speaker 1: They're clearly scenarios where this could play out quite badly.

317
00:16:33,360 --> 00:16:35,560
Speaker 1: We could see a lot of volatility in global markets.

318
00:16:35,880 --> 00:16:38,280
Speaker 1: But again I would just come back to the single point,

319
00:16:38,280 --> 00:16:41,040
Speaker 1: which is that not that much debt as a proportion

320
00:16:41,160 --> 00:16:44,600
Speaker 1: of the current issuance is issued at that maturity. Most

321
00:16:44,600 --> 00:16:47,520
Speaker 1: of it is much much shorter duration. The average maturity

322
00:16:47,560 --> 00:16:50,440
Speaker 1: of debt is much much lower, so it doesn't immediately

323
00:16:50,480 --> 00:16:53,040
Speaker 1: signal that we have a funding crisis. It's just that

324
00:16:53,480 --> 00:16:55,120
Speaker 1: the people who wants to type with a number of

325
00:16:55,120 --> 00:16:57,320
Speaker 1: people want to type their money for that long is

326
00:16:57,360 --> 00:16:59,560
Speaker 1: smaller than it has been in the past.

327
00:17:00,040 --> 00:17:03,480
Speaker 2: And a final question, we've seen the stock market on

328
00:17:03,800 --> 00:17:05,800
Speaker 2: a record setting run and so much of that is

329
00:17:06,320 --> 00:17:09,920
Speaker 2: baked into these bets that companies will continue to grow

330
00:17:10,240 --> 00:17:12,720
Speaker 2: grow even more. How does this what we're seeing in

331
00:17:12,720 --> 00:17:14,159
Speaker 2: the bond market effect the stock market?

332
00:17:14,640 --> 00:17:14,800
Speaker 3: Right?

333
00:17:14,840 --> 00:17:17,000
Speaker 1: I actually think it's perhaps a little bit the other

334
00:17:17,000 --> 00:17:18,280
Speaker 1: way around. I mean, if you think of it as

335
00:17:18,320 --> 00:17:20,960
Speaker 1: an economist, as not everyone does of course, but these

336
00:17:21,000 --> 00:17:25,040
Speaker 1: companies that are doing so well and unveiling these new technologies, well,

337
00:17:25,040 --> 00:17:28,720
Speaker 1: they are creating investment opportunities. There's a capital that needs

338
00:17:28,720 --> 00:17:31,480
Speaker 1: to be spent to be able to harness the benefits

339
00:17:31,520 --> 00:17:34,840
Speaker 1: of these frontier technologies. You've got all these companies which

340
00:17:34,840 --> 00:17:37,280
Speaker 1: will now need to retool upgrade their tech to try

341
00:17:37,320 --> 00:17:40,600
Speaker 1: and get in on this productivity perhaps revolution. What does

342
00:17:40,640 --> 00:17:42,520
Speaker 1: that do? What it means there's going to be more investment,

343
00:17:42,640 --> 00:17:44,840
Speaker 1: more demand for capital, and that in the long run,

344
00:17:44,880 --> 00:17:46,679
Speaker 1: who is going to push up yields as well. So

345
00:17:46,720 --> 00:17:48,560
Speaker 1: it's actually they're going to be moving together if that

346
00:17:48,640 --> 00:17:49,920
Speaker 1: story plays out.

347
00:17:54,400 --> 00:17:56,840
Speaker 2: This is the big take from Bloomberg News. I'm David Gera.

348
00:17:57,200 --> 00:17:59,600
Speaker 2: To get more from The Big Take and unlimited access

349
00:17:59,680 --> 00:18:03,000
Speaker 2: to all of bloomberg dot com, subscribe today at Bloomberg

350
00:18:03,040 --> 00:18:06,560
Speaker 2: dot com slash podcast offer. If you'd liked this episode,

351
00:18:06,640 --> 00:18:08,640
Speaker 2: make sure to follow and review The Big Take wherever

352
00:18:08,720 --> 00:18:11,080
Speaker 2: you listen to podcasts. It helps people find the show.

353
00:18:11,520 --> 00:18:13,440
Speaker 2: Thanks for listening. We'll be back tomorrow