Are we headed for 'Bondmageddon'?

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Australia's alliance with the United States has been the linchpin of our country's foreign policy for decades.

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But between the wars and the tariffs and the unpredictability, are we growing apart?

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You know who else didn't help us?

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Australia.

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Inflation, debt, rising interest rates, an AI boom or bubble. The global financial system is straining under pressure, and a lot of smart people are warning that it may break. One of those people is Satyajit Das. He's spent around half a century working in some of the world's biggest banks, as well as in major international corporations. Before the global financial crisis erupted in 2008, he was one of the few people who issued warnings saying that it was coming. That caused Bloomberg to name him as one of the 50 most influential thinkers in finance back in 2014

Now he thinks another crisis is on the way. So, what's going to break first? Welcome to ABC Business Daily.

I'm Michael Janda, the ABC's Business Editor, keeping the chair warm for Carrington Clarke while he's on another overseas adventure. And we've got something special lined up for your Monday. We're going to spend this episode chatting with Satyajit Das, looking at the two biggest pressure points that he sees in the financial system right now. First, bonds, debt, and rising interest rates, and second, the interconnected boom in AI investment. Das, thank you for joining ABC Business Daily.

Satyajit Das (1:59)

It's good to be with you.

Michael Janda (2:00)

I've known you for quite a long time. In fact, since I started working at the ABC in 2008, we were introduced by economics correspondent Stephen Long while we were covering the fallout from the global financial crisis and trying to explain to people why some obscure financial instruments connected to US mortgages had almost blown up the global banking system and the economy with it. Now, you'd seen that disaster coming as early as a couple of years before and warned about it. I'm pretty worried that you're getting pretty worried that we're heading for something similar.

Are we heading for GFC 2.0?

Satyajit Das (2:40)

Well, I think Mark Twain said that history never repeats. It rhymes, but there are some very, very ominous similarities like different complex structures, high levels of debt, and as you will recall, its rises in interest rates, which triggered the problems in 2007, 2008

So the similarities are there.

Michael Janda (3:00)

Yeah. So the underlying issues were sitting there, and it was the rise in interest rates that, as Warren Buffett said, exposed who'd been swimming naked, if you like. And one of these pressure points this time seems to be in the bond market, where countries since that global financial crisis have been used to borrowing very cheaply, but now you and others have warned about the possibility of what's being called by some bond mageddon.

It sounds pretty apocalyptic. How close do you think we might be?

Satyajit Das (3:33)

Well, I think the interesting thing here is that rates have gone up, but they haven't gone up that much. They've gone up about half a percent, give or take. And that's in the US, in Japan, in the UK, Germany, France and in Australia.

I think there are two significant things about that. One is we haven't seen these types of rates for a very long time. In the case of the US, we have to go back to around 2000 or even earlier. And in the case of Australia, we're back to sort of the levels of 2011 So it's a very significant shift from what you were saying, which is a really low rates that we've had. And the second thing that people forget is the amount of debt that we have now is exponentially higher. So even a small rise in interest rate can be significant in terms of your interest cost. And you're quite correct, as you were saying earlier, rising interest rates have a habit of ending booms. They did it in 1987, they did it in 1994, they did it in 2000, they did it in 2008

Michael Janda (4:38)

So as you say Das, it's not that interest rates have surged particularly this year or even that in a broader historical sweep, we're certainly not talking, you know, the interest rates we saw at the end of the 1980s that resulted in stock market crashes and the early 90s recession. But it does seem like both corporations, households, governments, we've all become addicted to ultra low interest rates.