US government borrowing costs hit the highest level since 2002

Bisi Adebayo (0:01)

US borrowing costs hit a more than 20-year high. Why are bond markets under pressure? It's World Business Express from the BBC World Service, IMBC Adebayo. Manchester City's main sponsor considers legal action against the Premier League, and a $110 billion dollar media mega merger gets the green light in the US.

Government borrowing costs are rising sharply around the world, led by Isilov in US government bonds. The yield on the benchmark 10-year US Treasury has climbed above 5.3%, and that's its highest in more than two decades. I've been speaking to Erin McLaughlin, a senior economist at the Conference Board and an independent think tank in New York about what's behind the rise.

Erin McLaughlin (0:50)

There's really three reasons for this. The first is stubborn inflation. The second is the massive US federal debt. And thirdly is that we have strong economic growth, even with those issues. And so that means the Fed in the US is keeping interest rates high. And in fact, they raised interest rates recently a quarter percent, and we think they're going to raise them again.

Bisi Adebayo (1:15)

And what does this then mean for the wider US economy?

Erin McLaughlin (1:19)

Well, for the wider US economy, it means a few things. For the federal government, it means that they're going to be taking on even more debt because these yields are higher. So that's a little bit of a doom cycle that continues on. For your average consumer, it means that interest rates will still stay elevated, and therefore, borrowing costs are going to be higher.

We've already seen that with the housing market. Mortgage rates are very high in the US. They're at or even above 7 percent for a standard 30-year mortgage, and that's really slowing down our housing market. It also just puts a lot of pressure on consumers that are already under pressure for high prices. So if consumers carry credit card debt month-to-month, or need to go purchase an automobile with a loan, they're going to pay more in interest rates.

Bisi Adebayo (2:15)

What about its impact on US stocks then?

Erin McLaughlin (2:19)

Well, it's interesting because in theory, this should slow the stock market down, and the stock market maybe has slowed its growth a little bit over the last couple of months. But in general, the stock market remains really resilient and really strong. Again, it's really because of AI.

So a lot of that strength in the economy, in the GDP numbers, and a lot of that strength that we're seeing in the stock market, is about the Mag-7 stocks as well as other companies that are powering and selling all the components related to digital infrastructure and the build out of data centers and the creation of this new AI world.

Bisi Adebayo (3:05)

Erin McLaughlin there. Well, let's bring in Nicholas Hyatt who is Lead Alternatives Analyst at Hargreaves Lansdowne. Nicholas, you heard Erin there. So how do you see this from your end, especially from a wider markets perspective?

Nicholas Hyatt (3:19)

So the US sets the risk-free rate for the world. It's the base on which other things are priced. So when the US government rates rise, the price of other government borrowing rises as well. In the UK, we've seen the 10-year yield rise to 5.45 percent today. The 30-year bond for 30-year government debt briefly cost 6 percent, which is the highest it's been since 1998

France and Japan also seen the cost of government borrowing increase. That feeds through into the cost of borrowing for consumers, for companies, and as we've seen today, higher bond prices also tend to hurt stock markets, particularly stock markets outside the US that don't have that exposure to AI.

Bisi Adebayo (4:05)

Also in the news today, Nicholas, is the US judge clearing the way for Paramount's $110 billion takeover of Warner Bros. Discovery.

Nicholas Hyatt (4:17)

This deal brings together some of the biggest names in Hollywood. You've got Harry Potter, Batman, Top Gun, all being brought under one roof.

Twelve US states objected to the merger. They thought it would reduce competition in the market. They have worries about the editorial independence of the news groups that are within those two companies. But they've reached an agreement that says that actually the merger can go ahead as long as Paramount commits to doing 30 new films in cinemas a year, and independent editorial boards for CBS and CNN. Today, a judge has said that that agreement is okay and the deal can go ahead.

Bisi Adebayo (4:52)

Thanks, Nicholas.

Now, Manchester City's main sponsor, Etihad Airways, is considering legal action against the Premier League. It follows an independent commission finding Manchester City guilty of serious breaches of the league's financial rules, including using what it described as sham sponsorship contracts as part of a disguised funding scheme. Manchester City denies the breaches and is challenging the findings. And Etihad says it rejects any suggestion that it was involved in proper commercial arrangements. I've been hearing from Simon Maybun, who is Professor of International Politics at Lancaster University, who specialises in Middle East affairs.