Cristiano Ronaldo's Portugal walkout could cost millions

Liana Byrne (0:00)

Borrowing is getting more expensive for governments around the world.

Andréa Bastos-Damko (0:04)

For the federal government, they're going to be taking on even more debt. That's a little bit of a doom cycle that continues on.

Molly Brooks (0:11)

Financial conditions may need to actually be tighter than what the Fed thinks right now.

Liana Byrne (0:15)

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

I'm Liana Byrne. Government borrowing costs are climbing across major economies. We'll look at what's driving the sell-off in bonds. Brazil heads to the polls with Lula and Bolsonaro locked in a close race. What does the choice mean for Latin America's biggest economy? And Cristiano Ronaldo walks out on Portugal after a rift with the manager. What could it mean for one of the biggest brands in world sport?

So let's start with government borrowing costs. They're climbing sharply around the world as investors sell off government bonds. So let's spell this out. Yields in the United States, Britain and France have reached levels not seen for decades as investors are worrying about higher inflation, rising oil prices and the prospect of further interest rate rises. And these moves matter far beyond financial markets. Higher government borrowing yields can feed through into more expensive mortgages and business loans, but governments themselves have to spend more simply servicing their debts. In France, those pressures come as the government is already trying to get its public finances under control. Here is Roland Lescure, French Finance Minister.

Roland Lescure (1:33)

Let me reiterate. France remains a highly credible borrower. Our current account is balanced. Our strengths are widely recognised, whether in energy, technology or finance. Our financial sector is robust and our banks are among the strongest and best capitalised in the Eurozone.

Kerry Leahy (1:49)

The French economy is the best capitalised.

Liana Byrne (1:53)

So what's driving investors to sell government bonds so aggressively? And why is the pressure spreading across global markets? Let's hear from Molly Brooks, US rate strategist at TD Securities in New York.

Molly Brooks (2:05)

I would say we've had the same key themes that we've kept going back to for probably the last month or so, one of which is persistently high oil prices.

Higher growth expectations has also been driving long-end rates here, as well as fiscal concerns seem to be popping up in the background.

And then finally, I would say, AI hyperscaler issuance has also been another fear that has been percolating through markets. Over the past two weeks, it seems like we may have just hit some type of repositioning event, that this has kind of triggered some concern in markets and some repositioning once we hit through specific levels. I know 5 to 5 and 10s, for example, we've been above there the last couple of days now, we're now below it, but above 5, 5 and 30 So very elevated rates at this point. But I don't think that this has been a last two weeks story, but rather the last month story that all of these factors have been contributing to the long end continuing move up.

Liana Byrne (3:18)

Because the thing is, the US economy is still looking pretty resilient, isn't it? And normally that sounds like good news. So why is strong growth actually adding to that pressure in the bond market?

Molly Brooks (3:28)

Yeah, so higher growth actually increases interest rates. So that's one of the components that we look in in terms of specifically the long end. I think some of this may be the AI story.

We have gotten a number of good indication of current growth, whether it's GDP yesterday, just consumer remaining resilient. We have seen the US economy hold up in despite of higher rates at this point. So I think that that's one of the factors that is actually a good thing. And that's why you actually see kind of the correlations between equities and rates. In good times, you don't see higher rates actually weighing on equities because it's driven by this higher growth, which is good for equities. It's really when it's more of the inflationary side that you see higher rates weigh on equities. So right now, we're kind of in a good environment in terms of the economy, but that is leading us up to the highest level of rates that we've seen in decades.

Liana Byrne (4:35)

Because markets seem to be pricing in more rate rises than the Fed itself is actually signalling. So what does that tell us? Are investors essentially saying they don't think the Fed has inflation under control yet?

Molly Brooks (4:48)

I think some of this is actually just that we think that financial conditions may need to actually be tighter than what the Fed thinks right now for for rates to be high enough to be impacting the economy enough to impact inflation. If we're not seeing the impact on the equity markets and other types of financial conditions, if these aren't coming down due to higher rates, the Fed might actually need to tighten more than they initially were planning to.