Markets Wrap: Bond Market Turmoil, Inheritance Tax and AI risks

SPEAKER_1 (0:02)

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John Stepek (0:13)

Welcome to the Merryn Talks Money Market Wrap, where we talk about the biggest moves in markets this week and what's driving them. I'm John Stepek, senior reporter and author of the Money to Still Newsletter. Merryn's out today, but joining me in the studio is Bloomberg's team leader for markets live, David Goodman. David covers UK markets today and Squawk in London. In today's show, we thought we'd probably chat about basically what's been going on in markets this week. We've got the kind of, I'd hate using the word carnage, so I'll just say sort of like the messiness in the bond markets. We'll have a wee chat about AI as well, and maybe a wee chat about what happened at the Tory conference, and specifically what they mentioned about inheritance taxes. I think that was probably the most eye-catching thing to come out of that. David, thanks very much for joining us. It's good to take time out of our other Hectic Markets Week to talk to us.

So yeah, what's been the big driver in markets this week?

David Goodman (1:10)

I think that's a really good question because you said bond markets are messy. That feels like a bit of an understatement. I mean, I was kind of preparing for this, looking at where markets were, and then leave your desk for half an hour, and then there's been a massive bond rally. So trying to get a handle on this is quite tricky. I think one of the concerning things about this, I think particularly in Europe, is that I haven't really seen a big trigger for anything. I mean, obviously, we have concerns about France and French risks. But if you look at France now versus France, say a month ago when the spread was below 100, the French-German spread.

John Stepek (1:46)

Actually, this is the gap between French government bond yields and German government bond yields.

David Goodman (1:51)

Yeah, so the kind of bond premium that is a kind of measure how much riskier France is than, and France and Germany used to be seen as similar-ish credits. I mean, Germany was always the kind of benchmark, but France was kind of there. We call it kind of semi-cor, and it wasn't a big risk, but it wasn't the safest credit. But so that spread was below 100 basis points. Even in mid-September, it's now kind of blown out to 150

No, I mean, take any guess where it is now, and you'll be wrong in five minutes time, but it's been massive.

John Stepek (2:21)

And that's something, just to be clear, we haven't seen since the Eurozone crisis.

David Goodman (2:26)

No.

John Stepek (2:27)

The thing that struck me was that I remember saying, oh, that's the highest it's been since June 2012, and then realizing that July 2012 was when Mario Draghi made his whatever it takes speech. So you really are talking about this, this was the crisis period here.

David Goodman (2:43)

Yeah, I mean, and interestingly, back then France wasn't the problem, I think. It was Spain, it was Italy, it was obviously Greece. There were all these other countries who were bigger problem and France looked relatively okay, but obviously what the UCB did in response to that, after that whatever it takes speech, closed these spreads down massively. I remember I was getting geekily excited this time last year.

Like this, the spread between Germany and any of the Eurozone bond is, I can't remember where it was, but it was like there was a 70 basis point spread across the whole market. That just is mad when you, I mean, I started my career in 2011, 2012 when we had spreads are completely huge, blown out massively and we're really causing problems. So, and obviously we're seeing some of that come through today but at the moment, but I think if you're France, nothing has really changed fundamentally in the last two weeks. There's been some political noise.

SPEAKER_1 (3:33)

Yeah.

David Goodman (3:34)

Obviously we've kind of got the unrest, which is a big social problem. But I think it's interesting that in the past we've had these episodes in French debt, it's been a clear kind of political trigger either, the fall of the government and no confidence for budgets getting through. We haven't really had this time. It's almost just that there was this big vibes shift where suddenly it was like, oh, France is a problem. As soon as that thought entered people's minds, selling was the kind of default mode. And then we've just seen this move, it's kind of gathered pace.

And the worrying thing about it is that it's spread out into other European countries. I mean, Italy's been moving pretty much bang in line with France despite, we were talking earlier in this year about Italy being, people are positive in Italy, like they like what's going on there. That hasn't really helped them. I mean, this might mark me out as a complete bongi, but I was looking at the Belgium from Germany spread.