Notes from the FT Global Bond Summit

Rob Armstrong (0:09)

The US and Iran have reached a deal to extend their ceasefire and open the Strait of Hormuz. One might expect, given this, that inflation expectations would fall and bond yields would collapse and we'd all return to the land of milk and cheap money. Nope.

This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I am Rob Armstrong, reporting from a sunny and joyful New York City. And I am joined by my colleague Katie Martin, who is currently in a janitor's closet in a fancy hotel in London somewhere. Katie, how is it in there?

Katie Martin (0:56)

I can just about hear the plinky-plonk piano that's playing in the lobby from the little kind of office room that I'm in now. But basically the great and the good of the bond markets, certainly in Europe, are here at this event. It is the FT Global Bond Summit. It's the most iconic week in the bond market, according to itself. I'm willing to endorse that message. We had the UK Chancellor, Rachel Reeves, here this morning. Our colleague, Chris Giles, asked us some tricky questions and she dealt with them pretty well, I've got to say.

And there's people who are bond investors, they are bond issuers, so they're the people who work for governments that launch bonds into the big wide world. They are investors, they're intermediaries, the whole thing. Yeah, the whole gang is here.

Rob Armstrong (1:45)

So, as I said, our attention is kind of very much focused on the treasury market here. What are people at the conference talking about? What's on people's minds there?

Katie Martin (1:57)

I think the thing to remember, right, is that so, stock markets love this idea that we've got a deal, and that there's going to be like a ceasefire, and later there's going to be enduring peace between the US and Iran. Stock markets love that sort of thing. But bond market people are just different.

If you're a normal person who doesn't work in finance, you probably think people who work in finance are all the same. They're not. They're very different tribes. And stock market people are paid to be optimistic and like, well, hey, line go up and look, rockets and data centers in space, let's buy that thing. Whereas bond market people are much more programmed to think, what can go wrong? How can I lose my money? They're just completely different sets of people.

And, you know, right or wrongly, and the bond market people look down their noses at the stock market people, and the stock market people don't care. So, because they make much more money.

Rob Armstrong (2:53)

But you can see this, what you just described, Katie, is very visible in the prices in the US.

Since last Thursday, when the possibility of a deal between the US and Iran became credible, the S&P 500 has rallied sharply, and we are now once again pressing at all time highs there. Meanwhile, in the bond market, the 10-year treasury yield is now at 4.45 percent, hasn't moved much, and that is up for about 4 percent pre-war. So, that means bond prices have fallen, yields and prices move in opposite directions, of course, and haven't really recovered on news of the deal. So, there you see the effervescent equity person and the dour and dreary bond person doing their collective work.

Katie Martin (3:48)

Yeah. All of the bond investors that I've seen on stage or spoken to so far today have said, okay, there's a deal. We haven't seen this deal. There's a whole negotiation period that has to come after the deal. We still don't know what's happening with the straight forward moves and so on and so forth. Let's not get carried away with ourselves and think that this is all finished and over. But look, a few important long-term points that come out of the way that the bond market has reacted to the start of the war in Iran and everything that's happened ever since. One thing is a couple of people on the stage I was watching earlier today were saying, three is the new two, by which they mean forever for the past few decades, most big central banks have targeted a 2 percent inflation rate.

And the vibe now is that's almost like they're targeting a 2 percent floor for inflation now. Pretty much everyone has accepted that inflation has settled something closer to 3 percent for the long term. So three is the new two.

Rob Armstrong (4:50)

Certainly settled there in the United States. I mean, we've written a lot about this. They just can't get that last percentage point done.