Why are you paying more to borrow money?

Vishala Sripappa (0:00)

Scott Bessent takes on the bond market.

Scott Bessent (0:03)

I have asymmetric confirmation. I am the house now.

Mohamed El-Erian (0:08)

The higher government bond yields go, the higher the mortgage rate goes.

Vishala Sripappa (0:13)

It's World Business Report from the BBC World Service.

I'm Vishala Sripappa. On the way, the US Treasury Secretary tries to tame the bond markets, but can Scott Bessent succeed where so many before him have failed? And the luxury sector appears to be losing some of its shine. Why buy a designer bag brand new when a pre-loved one is just as good?

So government bonds are often seen as the boring bit of finance, but that hugely understates their importance. The interest rate a government pays to borrow money via a bond has big consequences. Higher interest payments affect how much governments spend on everything from public services to defence, and it influences the rate you and I pay on mortgages and loans. Now, over the years, governments around the world have learnt that taking on the bond market can be risky business. Investors can quickly punish policies they don't like by demanding higher returns to lend money. And in the UK, many point to the turmoil followed former Prime Minister Liz Truss in her 2022 mini budget as a reminder of just how powerful bond markets can be. At the time, borrowing costs shot up after a statement by her finance minister. And just days after taking office as Prime Minister, she was out of a job.

SPEAKER_4 (1:41)

The biggest tax cuts of any budget for half a century have been announced by the Chancellor Quasi-Quartet.

SPEAKER_5 (1:47)

We need a new approach for a new era. I don't think it's a gamble at all.

SPEAKER_4 (1:53)

The cost of government borrowing shoots up and the pound plunges.

SPEAKER_5 (1:56)

It has been an extraordinary, difficult and tense day on markets.

Liz Truss (2:02)

I cannot deliver the mandate on which I was elected by the Conservative Party. I have therefore spoken to His Majesty the King to notify him that I am resigning.

Vishala Sripappa (2:16)

Well, that all happened in a matter of days, a reminder of how powerful the bond markets can be.

However, Treasury Secretary Scott Bessent appears undeterred by what happened in the UK. In recent weeks, he has taken steps aimed at bringing down his government to borrowing costs and also intervening in currency markets. Well, speaking at an event in Texas last week, he described the recent rise in bond yields as a kind of market fever and suggested a further action could follow if needed. Here's what he had to say.

Scott Bessent (2:47)

Whenever people say, oh, well, Treasury secretary is taking a risk, well, it's my dream. I have asymmetric information.

I am the house now.

Vishala Sripappa (2:59)

So Scott Bessent there. Mohamed El-Erian is a former chief executive of PIMCO, one of the world's biggest investment managers.

Mohamed El-Erian (3:08)

So the stated reason why he thought he would have better luck is that he was intervening at a time of illiquidity. It was the summer time, and he felt that the moves were exaggerated and that he could stabilize a market. He referred to it as a fever, and he wanted to lift the fever. The real reason, I suspect, is political.

The higher government bond yields go, the higher the mortgage rate goes. And the mortgage rate is something that enters into this affordability equation, which has made the Republican Party very vulnerable in the upcoming midterm election.

Vishala Sripappa (3:52)

And when we look at the bond yields in the US, there are lots of factors that are contributing to them being higher.

Mohamed El-Erian (3:59)

And some people feel it's because of oil prices. Some people feel it's because of broader inflation tendencies. Some are pointing to the Federal Reserve with this new chair. But I think the most important reason is a fundamental imbalance between those who want to raise money on the bond market and those who want to lend money to the bond market. So when it comes to borrowing, we of course have the government that comes in regularly and in size, but we also have a new actor. And that is the hyperscalers, whose capital investment has tripled in the last year and who are looking to the bond market to finance. So you have a massive increase in the demand for bond financing. On the other side, you have four countries that used to be very reliable buyers of US securities that are no longer that reliable. China, of course, for geopolitical reason. Then you have Norway that has decided to reduce its holdings. You have Japan that needs to use some of its dollar instruments to intervene in markets. And of course, the countries of the Gulf, who are spending more money domestically than abroad. So it's this fundamental imbalance between more people wanting to borrow and fewer people willing to lend unless interest rates go up. And I think that has been the main driver.