Why Are Global Bonds Crashing? How Next ‘Fiscal Crisis’ Starts 'Suddenly' | Justin Wolfers

Justin Wolfers (0:00)

The oil price has gone up very sharply over the past month.

So, I've been surprised, there's not been more recession commentary. The underlying pace of economic growth is not particularly strong, 1.5% in the last quarter. That's not keeping you excited. We have, at this point, I'm gonna say a Fed chair who is untested, that's the polite way of saying there are doubts about what he's going to do and whether he's up to the job. If you look at consumer confidence, consumer confidence is absolutely in the toilet.

David Lin (0:27)

Justin Wolfers returns to the show. He's a professor of economics at the University of Michigan and founder and host of Platypus Economics. He has a great show. He's on all the different social media. I'll put the links down below, including YouTube. Podcast is why everybody should check out his channel. Justin, welcome back to the show. A lot going on, so very timely to have you back, thank you.

Justin Wolfers (0:45)

What a world we live in, mate. There'll be no shortage of conversation topics.

David Lin (0:49)

That's good for people in our business, in the information business. Not so great for the bond market. You're a bond investor in the last year and a half.

You have not been doing well. I've generated a table, which I'll show on the screen for my audience here. Just on a year-to-date basis, actually on a one-year, 12-month basis, the US 10-year bond yield has climbed 90 basis points.

The US is not alone. All G7 countries have seen similar trends. Canada up 76, Germany 85, the UK 74, France up 98, Italy up 92, Japan up an astounding 135 basis points on their 10-year. Why is there a global bond sell-off and this is just the G7 countries?

Justin Wolfers (1:33)

Yeah, so I'm going to make things real simple. I want to start with the simplest version of economics. Think about the market for apples.

When more people want to buy apples, the price of apples tends to go up. Well, the bond market is just the market for loans. If more people want to buy loans, the price goes up. And the price of a loan is the interest rate you pay. And I think that's really basically the story. So you say, well, Justin, who is it who suddenly wants to buy loans? And I'm going to give you two big suspects. And then I want to throw a third thing in the mix. First suspect is the AI build out. We have an enormous amount of investment going on. Companies miles over their skis, borrowing billions and billions of dollars. So that's like an increase in the demand for apples. It's an increase in the demand for loans. That's pushing interest rates up. Second, who is the biggest borrower in the world? The United States government. And a couple of things have become clear. So first of all, our budget deficit, which is the amount of money the federal government is going to have to borrow, this year looks to be roughly the level that would be the highest post-war budget deficit outside of a recession or a war.

So sort of unprecedented given the state of the economy.

And I think the second thing that the bond market has woken up to is that that's not a story about 2026 or 2027, that fiscal responsibility in any form, repairing the budget has been completely crowded out of public policy discourse. The president doesn't talk about it. The Republicans don't talk about it. The Democrats don't talk about it. We know why. Politicians only talk about the deficit when the voters talk about it. And voters have got so many other things flying at them right now.

And so, what I think you're looking at is a prospect, not just of the US government borrowing a lot of money this year, but each and every year for the foreseeable future. And so, when you know there's going to be a whole lot more borrowing coming up, jack up the rates. So those are the two big ones. I want to add a third, which is a risk factor, which is just geopolitical risk, which is just a bucket for all the fears we have that suggest we don't know how the world is going to turn out.

And I want to emphasize that you can think about Russia, Ukraine. You can think about the US, Iran. You can think about the role of the United States in the world. You can think about changes to the global trading system. You can think about concerns about American governance and America's role in the world, whether the post-war stability is likely to continue. And the reason this matters, rather than all your other hopes, dreams and fears, is these big geopolitical moments, they're the moments that can get really expensive. If countries in Europe no longer feel secure under the US security umbrella, they're going to invest more in their militaries. If the US wants to sustain global military dominance, it will have to respond by spending more. If countries through the Middle East are worried about the state of the world right now, they're going to be spending more. And so, you know, all of those factors generally push in the direction of, wow, there could be a whole lot more lending coming down the pike.