Why Global Investors Are Dumping Government Bonds

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Luke Vargas (0:33)

Bond markets keep flashing warning signs, but Treasury Secretary Scott Bessent rushes them off.

Scott Bessent (0:39)

I don't think that we are in any kind of a dire situation. And as I said yesterday, the US bond market has been the best performing bond market.

What happens over a month doesn't matter.

Luke Vargas (0:52)

Plus, Open AI restricts its latest AI model, rating it a critical cyber risk. And Google tries to challenge the frontrunners in agentic coding.

It's Wednesday, September 2nd. I'm Luke Vargas for the Wall Street Journal. And here is the AM Edition of What's News, the top headlines and business stories moving your world today.

The global bond market has had its say, and it's not pleased with the outcome of a G20 Finance Minister's Summit. The task of reassuring investors was already looking like an uphill battle, with the US fresh off a breakdown in trade talks with Canada, a flare-up in fighting with Iran, and lingering questions around recent bond and currency market interventions. But as Chelsey Dulaney and Paul Hannon are here to discuss, investors the world over seem to be in agreement that the gathering in Asheville, North Carolina failed to clear even a low hurdle, as talk of summit success was overshadowed by tariff spats, public insults, and a global bond sell-off that worsened throughout the meeting's final hours. Chelsey, let me start with you. We talked a bit yesterday on the PM podcast about this bond sell-off, but just remind us about the significance of what has really been coming to a head here lately.

Chelsey Dulaney (2:07)

So we're breaking through a lot of historic levels in the bond market. Japanese yields up to the highest level since 1996 yesterday.

Germany, France, the UK, Italy, multi-year highs. The US treasury yield is broken above 4.8%, the highest level of the Trump presidency. And it seems to be continuing today. I'm looking at my screen and bonds are selling off in Japan, Europe, the US, so it doesn't seem to be slowing.

Luke Vargas (2:34)

Paul, we've seen a number of explanations put forward for this bond sell-off. Inflation, one of them, especially amid the prospect of higher for longer oil, but also fiscal deficits, something very profound and hard to see much shifting there in a short period of time. What are bond investors telling you?

Paul Hannon (2:52)

Well, I think the immediate trigger for this particular episode is to do with inflation and the effect of high energy prices coming out of the conflict in the Middle East and particularly Fed Chair Kevin Warsh's comments at Jackson Hole last week, which indicated that the central bank may raise its key interest rate soon. But that really overlays a more sort of fundamental and scary concern that investors have about the scale and rapidity of the buildup in government bond levels around the world, but I think primarily in the US, where the deficit looks like it's settled at something around 6% of GDP, and that's in a time when really it should be kind of getting narrower.

Chelsey Dulaney (3:36)

It's not just US treasuries that have been getting hit. Some of the bond markets that have been getting hit even harder are Japan, France, the UK, Italy.

These are all places that have debt problems, so I think you can't ignore that either. And then I think the other thing that you hear a lot from investors is that you have a ton of debt being issued by US tech companies for AI buildout. So that's created a new source of competition in the market. So governments are trying to sell a lot of bonds, and these tech companies offer higher yields on their bonds. So governments are having a little bit of a tougher time attracting investment at the same time that they're trying to issue record numbers of bonds.

Luke Vargas (4:15)

Paul, the Journal's chief economics commentator, Greg Ip, penned a column overnight saying that the bond market had issued world leaders gathered at this summit a failing grade. They just didn't hear anyone talking about addressing government debt. How realistic was it though for them to have expected to hear that out of a G20 summit or actually get any kind of concrete action around spending?