Bond bombshell

Katie Martin (0:00)

Buckle up, folks, because the wheels are coming off in the government bond markets, and it is not pretty. As all good, faithful listeners to this podcast know, bonds have been weakening for some time. And as they also know, this pushes borrowing costs higher and higher for all of us everywhere. Governments, companies, ordinary mortals like us getting loans and mortgages. Proof once again, that if you think markets and real life are separate things, you are very much doing it wrong. Anyway, earlier this week, the drip-drip of sliding bond prices turned into a bit of a torrent. We had the biggest drop in US government bonds that we've had since Donald Trump's Liberation Day last year when he unleashed trade tariffs on the world. The 10-year yield or borrowing cost for the US government has now vaulted well above 5%. This is bad, OK?

So today on the show, the bond bombshell and why it matters.

This is Unhedged, the markets and finance podcast from the Financial Times. I'm Katie Martin, a markets columnist locked in the bunker at FT Towers in London. Joining me in the studio, very unusually, in fact, for the first time ever, is the big fella Rob Armstrong.

Rob Armstrong (1:16)

Hi, Katie.

Katie Martin (1:17)

Who let you in?

Rob Armstrong (1:18)

I don't know. My old card from when I worked here seven years ago still works to get in the door.

So, I slipped in unnoticed.

Katie Martin (1:28)

No one will notice, don't worry. But also with me in the studio is Mr Ian Smith, one of the hardest working people at the FT, thrashing out markets news in our London headquarters. Ian, how are your nerves?

Ian Smith (1:41)

I'm good. And I'm glad you didn't call me the little fella. That's not what I meant.

I thought you might have been working up to that. So, it's okay.

Katie Martin (1:50)

Look, I'm 5'2, as far as I know.

Rob Armstrong (1:52)

Everyone's pretty big.

Ian Smith (1:54)

I'm the medium fella.

Katie Martin (1:55)

All right. Okay. First of all, chaps, let us gaze upon the destruction in bond markets.

This has been a week and it's not even over yet. So, so far today, and we're recording on Thursday, the US 10-year yield tickled 5.15%.

Rob Armstrong (2:15)

Ooh. I got on a plane yesterday morning, and yields were one place, and I got off the plane, and they were in a completely different place.

Ian Smith (2:23)

But the yields moved inversely to your landing. Exactly.

Rob Armstrong (2:28)

And I mean, it was really, I mean, it was like a 14 basis point move yesterday, and at one point, they were 17 basis points. Those are hundreds of a percent, which doesn't sound like a lot. But in bond terms, that is big.

That is really an unusual day. I mean, in stock market terms, that would be like a day where markets moved like 7 percent. Yeah. Something like that.

Katie Martin (2:50)

So yeah, like for normal people, 0.17 percentage points is like, whatever. But holy moly, I have not seen a move that big in treasuries for a very long time.

Ian Smith (3:02)

If your own household interest rate moved that much in a day, you would be quite scared.

Rob Armstrong (3:06)

Yeah. Your mortgage would be significantly more expensive at the end of the day than it was at the beginning of the day.

Katie Martin (3:13)

No likey. So look, for a bunch of reasons, and God, you know, all of us here in this little gray studio, we talk to people in the bond market all the time. We ask them, what the hell is going on? And everyone you speak to has got a different laundry list of reasons why they think bonds are weakening. So there is no right or wrong answer to this, but it's some sort of combination of fiscal incontinence, right? The US is just spending money it doesn't have. It is borrowing a shedload of money.

The more you borrow, the more your interest rate goes up. Mix in a bit of inflation, mix in a bit of growth, mix in the fact that the Federal Reserve is raising rates and you have a very, very bad picture for US government bonds. But it's almost like something sort of snapped at one point this week. Like Ian, where did it all really go wrong?

Ian Smith (3:59)

You had this very strong PMI number, so business output growth in the US rising at its fastest in five years. And that kind of fed into this sense that what you've got here driving this bond market sell off is a US economy that just won't stop. You've got this war in the Middle East that won't end. And you've got, to your point, governments and companies that just won't stop spending, right? And the bond market is responding to all of those things. But you saw this big move on this PMI number, implying stronger growth into the future, higher interest rates, and that fed what has been a big repricing of US interest rate expectations that has driven the sell off.