The increasingly odd bond market

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Ethan Wu (0:36)

Thank Pushkin, the 10-year treasury yield just hit its highest level since 2007, and the same goes for the 30-year treasury. We're in the middle of a historic change in US government bond pricing, and it remains the biggest story in markets.

Last week, bonds and stocks even moved in the same direction, down. It's not supposed to happen, it's not good for investors. Today on the show, we're gonna try to figure out what's going on with the bond market.

This is Unhedged, the Markets and Finance show from the Financial Times and Pushkin. I'm reporter Ethan Wu, back here in the New York studio, joined from London by Katie Martin. Katie, it was quite something to come back from the land of delicious meat pies. And the first thing I saw, you know, after getting out of the airport at JFK, was a wonderful slice of half-eaten stale pizza on the floor. Greeting me back to the great city of New York.

Katie Martin (1:26)

That's the city you know and love. This is where you're at home with half-eaten bits of pizza on the pavement, sorry, sidewalk, whatever it is.

Ethan Wu (1:35)

I didn't see any half-eaten pies in London.

Katie Martin (1:37)

No, that's because we eat the pies. The pies are delicious.

Ethan Wu (1:41)

Yeah, England is a truly famished country.

Well, Katie, we're not here to talk about pies or pizza lining New York City streets. We're talking about the huge rise in yields in the long end of the bond market.

This is something we've talked about a few times in recent shows, but we gotta touch on it again. There's so much to discuss here and it remains just absolutely so important for financial markets, but we should say why, right? Like, why does this matter? And I mentioned it a bit at the top. It's about correlation.

Katie Martin (2:09)

Yeah, exactly. So the US government bond market is the single most important market in the world and what happens there has ripple effects through to every other market on earth. Now, generally speaking, when bond yields are rising, because people are selling bonds and the price of those bonds is falling, you gotta remember those things move in opposite directions.

Generally, that means people aren't so keen on holding safe assets and they're very happy to hold stocks instead because they think they'll get higher returns out of that. So normally the two things are like a seesaw. So your bonds go down and your stocks go up and it all balances out and everybody's happy. That's not happening. What we've got at the moment is there's a bit of a chill, autumnal wind sort of going through markets right now where you've got stocks in a little bit of trouble, bonds in a lot of trouble, and it really feels like there's been a bit of a shift in gear in markets and people are getting a lot more nervous about kind of everything.

Ethan Wu (3:05)

Yeah, in the last couple of months, there's been a market shift in the way stocks and bonds are moving together.

It's not pretty. I mean, you know, this negative correlation with stocks and bonds falling is what led to some of the worst returns we've ever seen for diversified investors in 2022 when you had this big inflation scare driving stocks and bonds down at the same time. That's really, it's a tough time to be in markets because there's not an easy way to win, right? Like where do you invest?

Katie Martin (3:29)

And it's really easy to be wrong. So early this summer before I went on my holidays and sunned myself for a while, I was doing my normal kind of chats with fund managers and they were all telling me, right, that's it, the top is in, in yields. Central banks are done or nearly done. And with the rate rises that have been so aggressive, so harmful to bond prices over the past 18 months or so, so this is a once in a generation opportunity to back up the truck, absolutely load up your portfolio with bonds because they've got the highest returns you're gonna see pretty much in your professional lifetime, just stock up on bonds while you can. Specifically the bonds that are not going to default.