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Speaker 1: Good morning. It's Wednesday, the fourth of October in London.

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Speaker 1: This is the Bloomberg Daybreak Here podcast. I'm Stephen Carroll.

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Speaker 2: And I'm Credie Gupta. Coming up today.

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Speaker 3: The bond sell off continues as a thirty year US

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Speaker 3: treasury yield hits two thousand and seven levels.

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Speaker 1: US Republican Kevin McCarthy is ousted as House Speaker by

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Speaker 1: those in his own party.

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Speaker 3: Plus looking for lightning in a bottle, Rishi Sunac seeks

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Speaker 3: to put the Tory agenda back on track. As HS

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Speaker 3: two dominates headlines.

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Speaker 1: Let's start with a round up of our top stories.

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Speaker 3: The US treasury thirty year yield touching five percent for

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Speaker 3: the first time since two thousand and seven, the relentless

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Speaker 3: selloff in US government bonds is sparking turmoil across global

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Speaker 3: bond markets. The route accelerated after the latest US data

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Speaker 3: showed job openings increasing by more than expected in August

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Speaker 3: to nine point six million. Our market supporter Valery Titel

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Speaker 3: says the moves are unprecedented in recent times.

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Speaker 4: This route in the treasury market is just absolutely phenomenal. Honestly,

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Speaker 4: I've never seen anything like it myself been in the

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Speaker 4: markets for nearly fifteen years now. This steepening that we're

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Speaker 4: seeing since Drome Powell's testimony two weeks ago. That was

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Speaker 4: ten sessions ago. The relentless selloff mentioned there by.

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Speaker 3: Valerie Titel in US government bonds is also seeing conditions

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Speaker 3: deteriorate in corporate credit. At least two corporate borrow We're

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Speaker 3: standing down plant issuances on Tuesday thanks to the market volatility.

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Speaker 1: The market reaction comes as Atlanta Fed President Rafile Bostic

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Speaker 1: shared his thoughts on the hiking cycle. Speaking at an

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Speaker 1: event in Atlanta, Bostik said the FED should hold rates

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Speaker 1: at elevated levels.

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Speaker 5: I'm grateful to say is that we've seen inflation come down.

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Speaker 5: I feel like we're in restrictive space now and now

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Speaker 5: we just need to let that restriction play out and

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Speaker 5: let it bring inflation, continue to bring inflation down to

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Speaker 5: get back into the range of our target, and if

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Speaker 5: we can do that, that would be a good thing.

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Speaker 1: Bostik's comments come as the US Treasury Secretary Joannet Yellen

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Speaker 1: also weighed in on the debate. She told a conference

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Speaker 1: in Washington. While the strength of the US economy suggests

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Speaker 1: rights will remain higher, for longer. Quote it's by no

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Speaker 1: means a given.

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Speaker 3: Kevin McCarthy has been ousted as the House Speaker after

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Speaker 3: Republican hardliners rebelled over his compromise with Democrats to avert

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Speaker 3: a government shutdown. Goldman Sachs says the raises the risk

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Speaker 3: of a shutdown next month, as his eventual successor will

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Speaker 3: be under quote even more pressure from those on the

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Speaker 3: right of the party. The move ends in tumultuous nine

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Speaker 3: months in the job for McCarthy, who says he won't

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Speaker 3: run for the position again.

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Speaker 6: I don't regret standing up for choosing governan over grievance.

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Speaker 6: It is my responsibility, it is my job. I do

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Speaker 6: not regret negotiating. Our government is designed to find compromise.

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Speaker 6: I don't regret my efforts to build coalitions and find solutions.

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Speaker 6: I was raised to solve problems, not create them.

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Speaker 3: Despite McCarthy's lack of regret, the latest turmoil has fueled

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Speaker 3: concerns about deepening dysfunction in Washington. Last time the House

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Speaker 3: even voted on removing a speaker was over nineteen ten.

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Speaker 3: In that case, the officeholder survive the test.

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Speaker 1: The Prime Minister, Rishi Sunac is today expected to announce

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Speaker 1: that part of Europe's biggest infrastructure project, HS two is

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Speaker 1: being scrapped. It's understood the Prime Minister will use his

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Speaker 1: speech to the Conservative Party conference to soften the blow,

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Speaker 1: announcing that some of the savings will be used to

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Speaker 1: boost other parts of the UK's transport network, but labor

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Speaker 1: is greater. Manchester Mayor Andy Burnham says the plan is

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Speaker 1: a disgrace.

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Speaker 7: Do not pull the plug on the North of England.

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Speaker 7: Do not treat people here as second class citizens when

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Speaker 7: it comes to transport, because if you do do those things,

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Speaker 7: people here will never forget.

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Speaker 1: Burnham's criticism has been echoed by both the former Chancellor

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Speaker 1: George Osbourne and Conservative West Midlands mayor and E Street.

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Speaker 1: Here's what he told Bloomberg Radio.

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Speaker 8: My argument is you do need to have AGES two,

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Speaker 8: so that's not really the question, is it. And of

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Speaker 8: course what's been put to the Prime Minister is a

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Speaker 8: proposal which is supported by private businesses to say let

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Speaker 8: us try to rethink the leg to the North, but

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Speaker 8: it is still needed to win the investment around the world.

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Speaker 1: Those comments from Andy Street and others have helped to

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Speaker 1: cast a long shadow over the annual Tory gathering. HS

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Speaker 1: two was a core plank of the party's previous pledge

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Speaker 1: to level up economic opportunities across the country.

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Speaker 3: Pallentteer, the data analysis firm co founded by tech billionaire

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Speaker 3: Peter Thiel, has emerged as the topic for a major

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Speaker 3: NHS data contract. The five year deal could be worth

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Speaker 3: close to half a billion pounds and focuses on analyzing

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Speaker 3: medical information. Palenteer's relationship with the NHS has been criticized

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Speaker 3: by civil rights and patient advocacy groups who worry about

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Speaker 3: data privacy and the firm's work with intelligence and defense agencies.

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Speaker 1: Billionaire investor Ray Dalio says US China relations are close

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Speaker 1: to breaking down. Speaking to Bloomberg's David Weston at the

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Speaker 1: Bridgewater Associates, founder warned of the risk of conflict between

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Speaker 1: the world's two largest economies.

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Speaker 9: The US China relationship are in a number of areas

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Speaker 9: on the brink of red lines, so, in other words,

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Speaker 9: these irreconcilable differences, they're right on the.

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Speaker 1: Brig Dahalio went on to say that the breaking point

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Speaker 1: would be if the United States comes out in favor

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Speaker 1: of an independent Taiwan, that he said would be quote

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Speaker 1: the equivalent of a declaration of war. Dahlio's long nurtured

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Speaker 1: relations with Chinese officials and has previously expressed admiration for

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Speaker 1: some of Beijing's economic policies. So let's talk more than

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Speaker 1: about the route in global bond markets. We've been talking

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Speaker 1: this morning about the thirty year treasury yield hitting that

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Speaker 1: five percent level for the first time since two thousand

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Speaker 1: and seven, just slightly below that at the moment, back

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Speaker 1: down around four point nine to nine percent. This is

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Speaker 1: a milestone moment for markets at the time that we've

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Speaker 1: seen treasuries essentially bulldoze their way through global markets to

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Speaker 1: the greatest extens that we saw at the start of

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Speaker 1: the pandemic. A market support of Valerie title is with

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Speaker 1: us as well, and Critie this is I know you've

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Speaker 1: been following closely too. I mean where to start in this.

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Speaker 1: First of all, Valari, can we talk about yesterday first?

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Speaker 1: And what happened yesterday.

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Speaker 4: Was a phenomenal session, one of the worst sessions for

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Speaker 4: the treasury market on the year. And not only did

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Speaker 4: we have the thirty year yield rise fifteen basis points

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Speaker 4: on the session, but all across the curve five year

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Speaker 4: tenure and thirty year breached new cycle highs, and it

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Speaker 4: is phenomenal to see this move extending in the Asia session,

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Speaker 4: in the European session as well as we As you

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Speaker 4: just mentioned that thirty year yield breaching five percent. The

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Speaker 4: weakness in the equity market is continuing. SMP was down

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Speaker 4: some one point four percent today. Futures are falling nearly

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Speaker 4: another six tenths so far this morning, so that's a

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Speaker 4: two percent move in the next in the last two

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Speaker 4: sessions just so far for the S and P five hundred,

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Speaker 4: and the route is notable. Globally, Not only did we

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Speaker 4: see Japan five year yields breaching a new decade highs,

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Speaker 4: we also had Germany ten year yields breaching three percent

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Speaker 4: for the first time since twenty eleven. Honestly, there are

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Speaker 4: too many superlatives out there for how high these yields

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Speaker 4: have gotten in this phenomenal steepening of the treasury curve

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Speaker 4: that we have seen over the summer and continuing into

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Speaker 4: the fall.

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Speaker 3: Well, I think the scariest superlative is these are the

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Speaker 3: highest levels in yields going back to two thousand and seven,

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Speaker 3: which doesn't exactly instill a lot of confidence in terms

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Speaker 3: of what comes next, Valerie, what is the ripple effect here.

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Speaker 2: Yet to be seen? That Critty.

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Speaker 4: We know that what happened last year here in the UK,

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Speaker 4: when we had that such volatility and long end guilt,

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Speaker 4: it caused pension funds and insurers to really fall out

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Speaker 4: of bed. That one really came out of nowhere. Is

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Speaker 4: there some risk lurking in the US at the moment

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Speaker 4: for those holders of this long end debt. I mean,

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Speaker 4: some of these thirty year treasuries are trading below fifty

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Speaker 4: cents on the dollar. Now, that is just an imprecedent

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Speaker 4: amount of losses that we are seeing in the treasury market,

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Speaker 4: which around the world is known as a safe asset,

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Speaker 4: as a safe haven, as something you.

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Speaker 2: Hold because it holds its value.

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Speaker 4: That's clearly not been the case in the last two

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Speaker 4: years in the treasury market. But we're seeings happen elsewhere

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Speaker 4: across emerging markets bit jitterly when it comes to this

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Speaker 4: dollar strength causing those emerging market currencies to weaken. We

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Speaker 4: saw it in the credit markets yesterday. We're seeing credit

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Speaker 4: spreads start to creep wider, and some issuers in the

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Speaker 4: US yesterday pulling their deals just due to this treasury volatility,

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Speaker 4: we're also seeing it in financial conditions. This is something

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Speaker 4: that could possibly be in the Fed's favor in some

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Speaker 4: way financial conditions and now flipped into tightening territory due

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Speaker 4: to the strengthening dollar due to this rise in yields

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Speaker 4: and due to these credit spreads beginning to widen crazy.

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Speaker 1: Can we talk a bit about the kind of political

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Speaker 1: implications here as well, because of course, higher yields immediately

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Speaker 1: means the cost of borrowing for the US government gets

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Speaker 1: even higher. And part of this story is the supply

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Speaker 1: issue around the fact that the US government is borrowing

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Speaker 1: that much more.

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Speaker 2: Yeah, it really is.

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Speaker 3: And I think part of this is as well, and

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Speaker 3: this is something that Valerie could probably weigh in on

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Speaker 3: as well. As you look at the thirty year yield,

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Speaker 3: is the yield that a lot of people are.

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Speaker 2: Taking out mortgages on as well. Just on the surface

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Speaker 2: as well.

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Speaker 3: So when you were talking about a crack in the markets,

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Speaker 3: the fact that the long end affects the housing market,

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Speaker 3: well that's going to affect the broader economy. Can you

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Speaker 3: imagine going into twenty twenty four when people are kind

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Speaker 3: of hitting all of their or say, submitting their ballots

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Speaker 3: and suddenly their household wealth has completely been eliminated or

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Speaker 3: is even more expensive than initially thought, those mortgage payments

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Speaker 3: getting higher.

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Speaker 2: I think James.

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Speaker 3: Carville, the political famous political strategists, had said, it's the economy, stupid,

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Speaker 3: that's how you decide who's president. This isn't I mean,

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Speaker 3: how you punctuate that is quite important. Well, it really is,

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Speaker 3: but I mean that happens to be the sense. And

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Speaker 3: I think that's been the concern around why gasoline prices,

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Speaker 3: for example, are such a political mover, but housing is

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Speaker 3: not far behind.

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Speaker 1: But this is happening at a time when you know,

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Speaker 1: even within the US bascal scene, there's more upheaval because

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Speaker 1: Kevin McCarthy has now gone a speaker, putting essentially Congress

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Speaker 1: into staces until I figure that out.

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Speaker 3: Yeah, I mean, look, it's not the best time in

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Speaker 3: Washington right now. We aren't exactly setting a great precedent,

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Speaker 3: I want to say, in terms of leadership. But I

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Speaker 3: think what you have to keep in mind here is that, look,

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Speaker 3: this shutdown just got a whole lot harder. And I

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Speaker 3: think those are the calls that matter from a political standpoint.

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Speaker 1: Because we brought six weeks away.

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Speaker 3: November seventeenth, Yeah, is when the US government shuts down.

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Speaker 3: And look, I think just for some kind of inside

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Speaker 3: baseball here or inside cricket as I believe it's called

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Speaker 3: on this side of the ocean, is basically that one

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Speaker 3: of the major issues of this spending bill has been

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Speaker 3: you can't touch the fence.

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Speaker 2: Spending.

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Speaker 3: Ukrainian aid has kind of gone out the window essentially,

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Speaker 3: and then a lot of it is coming down as

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Speaker 3: well as how you tackle eventually what will be the

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Speaker 3: debt load as well.

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Speaker 2: And there are calls coming out of Goldman that are saying.

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Speaker 3: Because of the political politicization of this, you are now

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Speaker 3: going to see it become even harder to actually hit

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Speaker 3: a bipartisan deal.

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Speaker 2: It come November seventeenth.

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Speaker 3: The first people that get hit in a shutdown are

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Speaker 3: your servicemen, are your troops. And again coming from the South,

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Speaker 3: that is a real sticking point for a lot of

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Speaker 3: the folks who are very passionate about our army battery.

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Speaker 4: Sorry, go aheadah, And you have to wonder whether the

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Speaker 4: markets are really going to force some political change when

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Speaker 4: it comes to Washington, and just how much money they're

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Speaker 4: spending because I'll give you some shocking stats. Thirty percent

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Speaker 4: of treasuries have to be refinanced in the next sixteen months,

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Speaker 4: and a lot of questions are now being raised as

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Speaker 4: to whether those debt financing costs are going to become

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Speaker 4: too much of a burden to the US government and

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Speaker 4: possibly push the path towards fiscal unsustainability. We had a

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Speaker 4: call out from Goldman yesterday noting that they see interest

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Speaker 4: expense rising to four percent of GDP by twenty thirty.

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Speaker 4: That is a shocking statistic. It has not gone much

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Speaker 4: above two percent. I think the highest it was was

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Speaker 4: back in the nineteen nineties where we reached two percent.

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Speaker 4: But if we're really headed for this higher for longer

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Speaker 4: situation in the bond market, the US government could be

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Speaker 4: the first casualty of them.

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Speaker 1: Yeah, Votari, Can we talk a bit about the international

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Speaker 1: impact of this as well, because I mean, we've seen

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Speaker 1: the German YO curve has uninversed in the past few minutes,

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Speaker 1: because we've seen the thirty year yields move above where

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Speaker 1: the two year yield is the ten year German bundshield

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Speaker 1: and over three percent for the first time since twenty eleven.

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Speaker 1: This is a story that is rippling through markets across

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Speaker 1: the world.

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Speaker 4: It's rippling through and let's be clear, the Central Bank

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Speaker 4: in Europe and the Central Bank here in the UK

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Speaker 4: have really no control over what's going on.

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Speaker 2: This will tighten financial conditions.

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Speaker 4: Globally as we see yields rise, and that is not

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Speaker 4: something the ECB or the Bank of England can necessarily fight.

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Speaker 4: This is being led by the US, and let's be honest,

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Speaker 4: even in the US, the FED really does have no

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Speaker 4: control over long end yields unless they intend on embarking

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Speaker 4: again on quantitative easing, which is something I don't think

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Speaker 4: they have necessarily on their radar. So this is going

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Speaker 4: to be a very very hard thing for not just

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Speaker 4: politicians but for central banks to fight.

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Speaker 1: The other aspect of this, of course, to think about,

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Speaker 1: is where we see the other asset classes. Essentially, as

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Speaker 1: I look across the sea of Red on my Bloomberg

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Speaker 1: terminal this morning, well, I mean, when we're thinking about

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Speaker 1: what happens next in this story, Valerie, where do we

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Speaker 1: need to watch for what might either accelerate this further

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Speaker 1: or potentially bring some calm to market.

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Speaker 2: Well, my mind goes straight to the big data.

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Speaker 7: We have.

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Speaker 4: On Friday, we get the monthly payroll report out of

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Speaker 4: the US, which if it does reflect a hotter than

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Speaker 4: expected labor market. Yet again, we could see a bit

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Speaker 4: more panic when it comes to the treasury market and

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Speaker 4: that hit equities and strengthen the dollar as well. That

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Speaker 4: could be the next kicker. But I mean it could

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Speaker 4: also be the kicker that could end the selloff. Right

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Speaker 4: if we get a week payroll print, let's say, way

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Speaker 4: weaker than expected, we could all calm down now thinking

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Speaker 4: that the US economy is going to slow down. Maybe

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Speaker 4: this higher for longer mantra is a bit of a lie,

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Speaker 4: kind of like transitory, and that's on the horizon. So

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Speaker 4: I think Friday's data is going to be pivotal for

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Speaker 4: what happens forward.

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Speaker 3: Spoken like a true macro thinker, I'll do the micro

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Speaker 3: here because I'll take the other side of it, which

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Speaker 3: is when you look at the ripple effects in terms

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Speaker 3: of this in terms of this market, take a look

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Speaker 3: at what the stock market has not priced in the

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Speaker 3: stock market around the world, I might add, has not

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Speaker 3: priced in this higher bar wing cost. We know that

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Speaker 3: the FED has been hiking, We know that a lot

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Speaker 3: of these has been priced in for twenty twenty two.

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Speaker 3: It has not been priced in for the varshocks, which

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Speaker 3: essentially means that all the selling momentum that you're seeing

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Speaker 3: at a lot of these trading desks that hasn't been

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Speaker 3: priced into the stock market. Another place we're going to

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Speaker 3: see a disconnect is when oil starts trading in line

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Speaker 3: with the global sentiment at a time, by the way,

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Speaker 3: when over and over again we see these physical supply shortages,

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Speaker 3: and yet the market is trading in line with the

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Speaker 3: stock market, or the bond market, or even the stronger

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Speaker 3: dollar is responding to that as opposed to the fundamental

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Speaker 3: kind of tailwinds for that price. And I think that's

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Speaker 3: where you're going to start to see the dislocations really

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Speaker 3: show up.