Latest / Early Edition with Ryan Bridge / Brad Olsen: Infometrics Principal Economist on how an uncertain global bond market could impact New Zealand

Transcript

Brad Olsen: Infometrics Principal Economist on how an uncertain global bond market could impact New Zealand · Early Edition with Ryan Bridge

• 0:00
  Speaker 1: So the global debt situation might be catching up to us.
• 0:02
  Speaker 1: The global bond markets are starting to get quite anxious.
• 0:05
  Speaker 1: On Friday, our 10-year yields closed at the highest level
• 0:08
  Speaker 1: since November 2023, over 5%. And the Prime Minister was
• 0:11
  Speaker 1: worried about it in the weekend. Obviously, with the US
• 0:14
  Speaker 1: coming out and talking about a $ 40 trillion US debt
• 0:17
  Speaker 1: and the subsequent reaction that you've seen in the bond markets,
• 0:19
  Speaker 1: we're very conscious of it.
• 0:21
  Speaker 2: All right.
• 0:21
  Speaker 1: So we're joined by Brad Olson, who is Infometrics Principal Economist. Brad,
• 0:25
  Speaker 1: good morning to you.
• 0:26
  Speaker 2: Good morning.
• 0:27
  Speaker 1: The Dummy's Guide to the Global Bond Market. What's happening here?
• 0:30
  Speaker 1: Why should we be worried and how worried should we
• 0:32
  Speaker 1: be about the global economy?
• 0:35
  Speaker 2: Effectively, you've got these bond rates, these long-dated bond rates
• 0:39
  Speaker 2: continuing to increase. think of them effectively as the sort
• 0:43
  Speaker 2: of signals for interest rates on everything else that we pay.
• 0:46
  Speaker 2: So the official cash rate looks at interest rates in
• 0:49
  Speaker 2: the short term over a sort of a couple of days,
• 0:52
  Speaker 2: couple of months, has a much greater influence. Your bond
• 0:55
  Speaker 2: rates influence why you pay, what you pay for sort
• 0:58
  Speaker 2: of mortgage rates Of one, two, three, four plus years.
• 1:02
  Speaker 2: And so the fact that they're all increasing across the
• 1:05
  Speaker 2: world does start to raise that borrowing cost that not
• 1:08
  Speaker 2: only households will have to pay, but also, of course,
• 1:11
  Speaker 2: what government has to pay on its pretty large stock
• 1:14
  Speaker 2: of debt. What you're seeing across the world, I think,
• 1:17
  Speaker 2: is quite a few things coming together all at once.
• 1:20
  Speaker 2: Of course, with all of these eruptions in the Middle
• 1:22
  Speaker 2: East and further attacks coming through, oil prices have spiked
• 1:26
  Speaker 2: higher again. And everyone's now thinking, well, maybe this is
• 1:29
  Speaker 2: more persistent. Maybe there is more inflation in the system.
• 1:33
  Speaker 2: You've got, again, worries and sort of concerns around bubbles
• 1:37
  Speaker 2: within the AI tech stock area. But most importantly, you
• 1:41
  Speaker 2: seem to have all of that coming at a time
• 1:43
  Speaker 2: where everyone's going, we don't seem to be doing anything
• 1:46
  Speaker 2: about government debt. In the US, they're over 100% with
• 1:49
  Speaker 2: a debt-to-GDP ratio. The president's talking about finding a trillion
• 1:55
  Speaker 2: dollars to pay everyone $ 5, 000. Everyone's just worried that there
• 1:59
  Speaker 2: is a lot in the system at the moment, a
• 2:01
  Speaker 2: lot of challenging things, and we seem to be not
• 2:04
  Speaker 2: addressing the elephant in the room.
• 2:06
  Speaker 1: We keep seeing headlines like, worse since the GFC. Are
• 2:10
  Speaker 1: we headed for an economic collapse of that scale?
• 2:13
  Speaker 2: I don't think so. I'm really hoping I'm right on
• 2:16
  Speaker 2: that front. I mean, you look at what's happened since
• 2:19
  Speaker 2: the GFC, there's a lot more protections in place and
• 2:22
  Speaker 2: regulations around, you know, ensuring effectively we don't go back there.
• 2:27
  Speaker 2: But you are seeing very clearly the market sending out
• 2:30
  Speaker 2: a warning signal. The likes of the 10-year U.S. bond rate,
• 2:33
  Speaker 2: the 30-year U.S. bond rate, both of those have hit
• 2:36
  Speaker 2: high levels in recent times. In fact, the 10-year went
• 2:39
  Speaker 2: above 5% for the first time in a couple of
• 2:41
  Speaker 2: years overnight, our time. What that's saying is that markets
• 2:45
  Speaker 2: are effectively, or the bond markets, are almost like the
• 2:49
  Speaker 2: final guard in the financial system. And you often see
• 2:54
  Speaker 2: political figures that really do have to watch what happens
• 2:57
  Speaker 2: with those bond rates. You saw, of course, Liz Truss
• 3:00
  Speaker 2: lose her job in the UK a couple of years
• 3:03
  Speaker 2: ago when bond markets sort of rejected her financial plans.
• 3:07
  Speaker 2: And again, even US President Donald Trump has had to
• 3:09
  Speaker 2: pull back his expectations for tariffs in the past when
• 3:13
  Speaker 2: bond rates sort of got too high. So these are
• 3:15
  Speaker 2: very clear warning signals. I don't see that as an immediate,
• 3:19
  Speaker 2: things are going to collapse in the financial market, but
• 3:21
  Speaker 2: they are very much saying that we just can't keep
• 3:23
  Speaker 2: on the same path, or if we do, it's going
• 3:26
  Speaker 2: to be more expensive, and normally that curbs some of
• 3:28
  Speaker 2: that more outrageous behaviour.
• 3:30
  Speaker 1: The good news is we're actually doing something about that.
• 3:32
  Speaker 1: We are addressing our debt, and even Labour says they
• 3:34
  Speaker 1: want to address that debt, and that's all well and good,
• 3:36
  Speaker 1: but we're quite small and everybody else is quite big.
• 3:38
  Speaker 1: So really, if they don't address the debt, if they
• 3:41
  Speaker 1: don't take the medicine, we're just going to have to
• 3:43
  Speaker 1: hang on for the ride.
• 3:45
  Speaker 2: Yes, it's a challenging time. I mean, you look out
• 3:47
  Speaker 2: at other parts of the world. Japan's at 250% debt-to-GDP ratios,
• 3:52
  Speaker 2: the US over 100. New Zealand's in a better place, sure,
• 3:56
  Speaker 2: but I do also worry a little bit that we're
• 3:58
  Speaker 2: talking a big game here on, you know, that we're
• 4:01
  Speaker 2: going to be doing debt reduction. We haven't so far.
• 4:03
  Speaker 2: We've still added more debt every year the last couple
• 4:06
  Speaker 2: of years, and the consolidation comes... in a couple of years' time,
• 4:09
  Speaker 2: hopefully if the forecasts are right. So I think we've
• 4:12
  Speaker 2: got to be a bit cautious in New Zealand that
• 4:14
  Speaker 2: we're saying the right things. We get to put that
• 4:16
  Speaker 2: into action. And so unless we really do that, and
• 4:19
  Speaker 2: it will require us to knuckle down hard, we don't
• 4:22
  Speaker 2: get those gains and we might be in just as
• 4:23
  Speaker 2: bad of a place as everyone else.
• 4:25
  Speaker 1: Brad, thank you very much.
• 4:28
  Speaker 2: For more from Early Edition with Ryan Bridge, listen live
• 4:31
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• 4:36
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