Could High US Bond Yields Spark a Crisis in Europe?

SPEAKER_1 (0:02)

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John Authers (0:08)

The 10-year has just broken through another level.

Sarah Holder (0:11)

Bloomberg Opinion's John Authers came into the studio Monday morning just as the 10-year bond yield hit 5.3%.

John Authers (0:19)

So it's now at a 24-year high. So it's gone higher than it ever did in the spike that precipitated the financial crisis.

Sarah Holder (0:29)

Wow. Are we at a crisis moment when it comes to bond yields?

John Authers (0:32)

In the US, no. In the case of France, you have very imminent signs of a potential crisis in Japan and also in the UK.

Sarah Holder (0:45)

I'm Sarah Holder and this is the Big Take from Bloomberg News. Today on the show, I sit down with John and Heather Long, the chief economist at the Navy Federal Credit Union, to talk about where bond yields are rising, how central banks around the world could respond, and how consumers in the US are feeling the pressure.

So we've been talking a lot on the show about the sharp rise in bond yields in the US. In the past week, yields on 30-year bonds have hit 5.66 percent. There's that new record for the 10-year, it's at its highest yield since 2002 Heather, what does this all tell you about where we're at in the US right now?

Heather Long (1:33)

To me, the most interesting question right now is this debate around, are these yields rising in the US at least due to a stronger economy? We have gotten a lot of interesting data in the last month that points to a healthier consumer than maybe many expected, a healthier job market than maybe many expected. So I think that debate, we have had some fresh data on, and is one of the most interesting right now. That's a more positive story, and obviously the White House has fully embraced that story, but you hear a lot of smart voices making that case versus, I lean more on the side. What this is really telling us is a belief in the market that taming inflation is going to be a much harder task. It's going to take longer than we thought, and that's both in the short-term context of what Fed Chair Kevin Warsh can do, and in the longer-term context of the demographics and the fiscal situation of the US and many other countries. So I lean more on that more negative spin, but I think it's a really interesting debate.

Sarah Holder (2:43)

And when it comes to these global markets, again, we're seeing France, UK, Japan, seeing high yields as well. How much of that is it caused by the US set off by what's going on in the US bond market? And how much of it is related to sort of domestic factors in these countries?

John Authers (2:59)

Both, naturally. The way to look at this is like a spark to light a flame. So you don't create a crisis from nothing if a country has its house completely in order.

But similarly, if the markets are complacent and allow you to carry on, you can have the conditions for a crisis for quite a long time without being called on it. Japan has been an exception to every rule for a very long time. But if you have rates at 10-year yields were at zero for many years, because the Bank of Japan literally wouldn't let them rise beyond that, they're now at 3%.

That's very serious. I think in Japan, there is the possibility you could just try to close their deficit by selling a lot of public assets. Again, much like Margaret Thatcher did back home in Britain, there might be some relatively easy way out of that problem. But if you look at what is happening to the yields on French bonds, compared to particularly neighboring German bonds, bearing in mind these two countries have the same currency, the same central bank, and they're supposed to be in a union that will merge their economies ever more. The market is plainly saying that it now sees French bonds as being far riskier.

Sarah Holder (4:18)

Right, the gap between French bonds and German bonds is the widest it's been since the sovereign debt crisis back in 2011

John Authers (4:25)

Very nearly close to there, very nearly close to taking that out.

Sarah Holder (4:29)

Why is that so significant?

John Authers (4:31)

If you have that wider gap between two countries are in the Eurozone, that means you don't really believe that the Eurozone can hold it together. You're saying as an investor placing your money that way, that you think there is a real risk that the Eurozone itself will fall apart.