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Why 5% Treasury Yields May Be Just the Beginning · Trumponomics

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  Speaker 1: Bloomberg Audio Studios.
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  Speaker 2: Podcasts.
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  Speaker 3: Radio.
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  Speaker 4: News. The whole edifice of finance is built, consciously or otherwise,
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  Speaker 4: on this keystone of the 10-year yield. Everything else adds
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  Speaker 4: on to that. And a lot of structures haven't been
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  Speaker 4: tested with a 10-year yield as high as 6%. So
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  Speaker 4: this is potentially a big sea change that is still
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  Speaker 4: only starting.
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  Speaker 1: Music I'm Stephanie Flanders, head of government and economics at Bloomberg,
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  Speaker 1: and this is Trumponomics, the podcast that looks at everything
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  Speaker 1: in the economic world of Donald Trump. This week, the
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  Speaker 1: US government bond market crossed a line that investors have
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  Speaker 1: been watching for years. On Monday, the US government The U.S.
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  Speaker 1: 10-year Treasury yield, in effect the rate the federal government
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  Speaker 1: borrows at, breached 5% for the first time in several years.
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  Speaker 1: And on Tuesday, it went higher to 5.04%, the highest
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  Speaker 1: since 2007. And that's up from just 1.3% five years ago.
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  Speaker 1: In living memory, there's never been such a dramatic rise
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  Speaker 1: in the interest rate that investors demand to lend to
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  Speaker 1: the US government. Now, in case you're wondering why this
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  Speaker 1: matters to you, that yield historically sets the tone for
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  Speaker 1: pretty much all private lending rates in the US and
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  Speaker 1: has a massive influence on the cost of money for
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  Speaker 1: all of the world's borrowers, governments, businesses and households. In fact, arguably,
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  Speaker 1: it's the single most important price in the world. So there. Well,
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  Speaker 1: we're recording Wednesday morning ahead of the Federal Reserve's latest
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  Speaker 1: interest rate decision. And markets are watching closely for what
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  Speaker 1: Kevin Walsh and the Monetary Policy Committee decide about the
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  Speaker 1: short-term rate that the Fed controls, the federal funds rate.
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  Speaker 1: The overwhelming consensus is that the US central bank will
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  Speaker 1: raise that short-term rate today, but it actually doesn't matter
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  Speaker 1: for our conversation what happened, because whatever the committee has
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  Speaker 1: decided by the time you listen to this, there probably
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  Speaker 1: isn't very much the Fed can do about those higher
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  Speaker 1: bond yields, because many of the big structural forces that
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  Speaker 1: drive the longer-term cost of money are now pointing to
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  Speaker 1: higher yields for some time to come. In fact, far
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  Speaker 1: from being a ceiling, 5%... maybe the new floor for
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  Speaker 1: the most important number in global finance. So I want
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  Speaker 1: to get into that and also how much higher the
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  Speaker 1: cost of borrowing could go from here with John Authors,
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  Speaker 1: joining me again from New York, Bloomberg Opinion columnist, author
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  Speaker 1: of the Points of Return newsletter. Welcome back, John. Thanks
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  Speaker 1: for being here. I know that you're sort of waiting,
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  Speaker 1: whip it like, for the Federal Reserve decision as we speak.
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  Speaker 2: This is a great way to occupy.
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  Speaker 4: These are some of the deadest hours there ever are.
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  Speaker 4: I could spend time looking at what markets are doing
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  Speaker 4: in the hours before we hear from the Fed.
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  Speaker 2: There's really no point.
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  Speaker 4: A lot of traders actually sleep in because or by
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  Speaker 4: their standard sleep in because they know.
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  Speaker 2: The action is going to start at two.
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  Speaker 1: We've discovered that you're doing absolutely nothing on a Wednesday morning.
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  Speaker 2: I was too busy twiddling my thumbs otherwise, so yes, yes.
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  Speaker 1: And here in London is again Jamie Rush, Bloomberg's Director
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  Speaker 1: of Global Economics, and in fact my co-author with the
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  Speaker 1: Chief Economist Tom Orlick of a book on this subject,
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  Speaker 1: The Price of Money. Jamie, thanks for being here.
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  Speaker 2: Great to be back. Thank you.
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  Speaker 1: John, we will get into the long-term forces driving this
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  Speaker 1: in a minute with you and with Jamie. But if
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  Speaker 1: we're just thinking about the run-up we've seen and the
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  Speaker 1: sort of discussion around it this year, this big increase
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  Speaker 1: in yields, I guess, in effect, investors becoming less keen
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  Speaker 1: on holding government debt.
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  Speaker 2: Why?
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  Speaker 4: Because the world is getting a somewhat more expensive place
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  Speaker 4: because de-globalisation is happening and that makes everything more expensive
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  Speaker 4: than it used to be. because the quantum of debt
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  Speaker 4: that governments hold is enormous. That doesn't necessarily mean that
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  Speaker 4: they're more likely to default, but it does mean if
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  Speaker 4: you've got that much more debt that you need to offer,
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  Speaker 4: that you may, through the laws of supply and demand,
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  Speaker 4: you're going to have to offer a higher rate to
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  Speaker 4: get people to lend to you. Further, other than the
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  Speaker 4: Iran war, which is obviously a an external shock. But
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  Speaker 4: I think the somewhat more endogenous shock that people still
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  Speaker 4: hadn't really seen coming is the amount of borrowing being
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  Speaker 4: done to fund AI data centres. That's the biggest real
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  Speaker 4: new investment in new capital in some decades. I've seen
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  Speaker 4: estimates that it's actually going to be a bigger proportion
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  Speaker 4: of the US GDP than the Marshall Plan was of
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  Speaker 4: Western Europe's GDP in the years after, to give you
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  Speaker 4: a idea of that. It's comparable to what FDR did
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  Speaker 4: in the New Deal. That is being done by private
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  Speaker 4: sector actors who are mostly possessed of extremely strong credits.
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  Speaker 4: Amazon and Google are not quite as strong credits as
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  Speaker 4: Uncle Sam, but broadly speaking, you do expect them to
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  Speaker 4: pay back.
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  Speaker 2: So you've got this big new source of.
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  Speaker 4: Supply, which again, laws of supply and demand, if there
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  Speaker 4: is more debt looking for people to lend to them,
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  Speaker 4: you're going to have to you're going to have to
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  Speaker 4: offer more before they will lend to you rather than
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  Speaker 4: to somebody else. But in terms of what we couldn't
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  Speaker 4: absolutely see coming 12 months ago that has happened, those
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  Speaker 4: are the main things.
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  Speaker 1: We are talking on the day of the Fed decision.
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  Speaker 1: Without getting into the impact of this particular decision, there
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  Speaker 1: is an expectation, whether it's two or three or maybe
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  Speaker 1: Kevin Walsh is hoping one, but there's a pretty strong
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  Speaker 1: expectation we're going to be in a tightening cycle over
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  Speaker 1: the next year. few months, possibly a year, depending on
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  Speaker 1: how things go. Normally, and you've been looking at the
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  Speaker 1: way markets react to these things for many years, what
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  Speaker 1: does that mean for yields?
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  Speaker 4: There are important differences between overnight rates and 10-year yields,
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  Speaker 4: which I don't think we want to get fully into
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  Speaker 4: the thickets of why that is. But yes, there will
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  Speaker 4: be a connection when the Fed is in a tightening cycle. Generally,
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  Speaker 4: that does mean that 10-year yields will also rise. I
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  Speaker 4: cited some research by Jim Reid of Deutsche Bank, who's
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  Speaker 4: a very good financial historian. In round numbers, you'd expect
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  Speaker 4: a tightening cycle to last for 75 basis points or
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  Speaker 4: a percentage point. That's what the market expects. Broadly speaking,
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  Speaker 4: the base case at this moment is that we will
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  Speaker 4: have a 10-year yield more like 6% than 5 12
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  Speaker 4: months from now. And that is historically... I don't think
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  Speaker 4: the 10-year yield was ever as low as that during
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  Speaker 4: the entire Reagan presidency, and that was still an era
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  Speaker 4: of great prosperity by the end of it.
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  Speaker 3: Yes.
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  Speaker 4: So it's certainly not the end of the world. If
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  Speaker 4: you're only a bit younger than me, you have difficulty
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  Speaker 4: remembering a world– as an adult, as a professional, you
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  Speaker 4: have difficulty remembering a world with yields.
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  Speaker 2: As high as 6%.
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  Speaker 4: There is definitely reason for concern that finance– has built
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  Speaker 4: as you said at the beginning the whole edifice of
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  Speaker 4: finance is built consciously or otherwise but on on this
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  Speaker 4: keystone of the 10-year yield everything else adds on to
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  Speaker 4: that and a lot of structures haven't been tested with
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  Speaker 4: a 10-year yield as high as six percent and a
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  Speaker 4: lot of people active in this don't personally have the
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  Speaker 4: experience of what that's like and human fallibilities as we
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  Speaker 4: all know very important here as well So this is
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  Speaker 4: potentially a big sea change that is still only starting.
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  Speaker 1: And we can all sort of have a discussion around
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  Speaker 1: sort of some of the risks embedded in what you've
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  Speaker 1: just said. Turning to Jamie, I think it's worth sort
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  Speaker 1: of taking a step back and thinking about some of
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  Speaker 1: those long term drivers for yields, which sort of creep
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  Speaker 1: up over time, but it sort of feels like have
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  Speaker 1: really asserted themselves in the last few years. And that
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  Speaker 1: was what actually this research underpinning that book, the price
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  Speaker 1: of money. From the standpoint of those long-term forces, what
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  Speaker 1: we're seeing is not very surprising. And indeed, 5% could
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  Speaker 1: now be a new floor.
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  Speaker 2: Is that right? Yeah.
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  Speaker 3: Turning to just very briefly on how much should bond
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  Speaker 3: yields move when the Fed moves? It's like John says,
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  Speaker 3: you should expect some move up in 10-year yields. But
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  Speaker 3: Is the fundamental situation in Iran and more expensive oil
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  Speaker 3: going to be with us forever, keeping inflation high forever,
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  Speaker 3: and therefore interest rates high forever? I think the answer
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  Speaker 3: has to be no. I think everyone would agree with that.
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  Speaker 3: So if that's true, why should it be the case
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  Speaker 3: that 10-year yields, 15, 20, 30-year yields have all moved up?
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  Speaker 3: And it leaves you in search of a better explanation.
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  Speaker 3: And some of those explanations lie in the structural factors
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  Speaker 3: that determine interest rates, just like you just flagged. When
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  Speaker 3: we think about Interest rates globally, I mean, we live
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  Speaker 3: in globally integrated capital markets. So you have to think
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  Speaker 3: about the whole world. You have to think about investment,
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  Speaker 3: the desire to invest, the desire to save. What are
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  Speaker 3: the things which are tipping the balance between those two.
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  Speaker 2: Objectives?
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  Speaker 3: And yeah, we heard it. So John mentioned it, demographics,
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  Speaker 3: crucially important. Baby boomers saving for retirement. Well, that bulge
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  Speaker 3: in the population is now moving through the labor market.
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  Speaker 3: Things are going to be turning around. Productivity growth. I mean,
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  Speaker 3: it slowed for a long time. Now it's picking up.
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  Speaker 3: It may pick up a lot if AI turns out
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  Speaker 3: to be as good as everyone hopes. And that's going
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  Speaker 3: to suck up exactly the sorts of capital flows that
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  Speaker 3: we've just been discussing. So those investments, they're going to
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  Speaker 3: be sustained if this technology works, and it's going to
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  Speaker 3: be creating demand for capital. And in particularly with AI,
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  Speaker 3: because the returns and the productivity gains could be so big,
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  Speaker 3: they're going to be very price insensitive. They don't mind
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  Speaker 3: what the interest rate is. So it can take a
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  Speaker 3: lot to suppress it. So all those factors are pushing up.
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  Speaker 3: And then on top of that, of course, you have
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  Speaker 3: got government debt just hitting new highs year after year.
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  Speaker 3: And government's quite readily doing nothing to address it.
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  Speaker 1: John, is there a positive spin on this, which is
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  Speaker 1: you have effectively had that earlier in your discussion that,
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  Speaker 1: you know, interest rates are going up because there's just
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  Speaker 1: there's more exciting things for places to people to put
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  Speaker 1: their money. Whereas when we had interest rates at the
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  Speaker 1: rock bottom and governments were effectively being paid to borrow
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  Speaker 1: from the markets is because investors had nowhere better to
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  Speaker 1: put it. Yeah.
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  Speaker 4: I mean, there's an old stand-up comedian joke that people
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  Speaker 4: driving secondhand Reliant Robins, which are three-wheeled cars, wants to
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  Speaker 4: get a speeding ticket so they can prove it can
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  Speaker 4: drive that fast. There are many unwelcome facets to higher yields,
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  Speaker 4: but they do very strongly suggest that something is going right,
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  Speaker 4: that if the price of money needs to go up
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  Speaker 4: to ration all the different uses people now have for it,
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  Speaker 4: if the nominal GDP is is rising healthily, that is plainly,
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  Speaker 4: you know, in 1066 and all that terms, a good thing.
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  Speaker 4: It's not particularly about alarm that the US may not
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  Speaker 4: be good to repay its debt. It's not about the
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  Speaker 4: decay of financial institutions, horror at Trumponomics, that's in the
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  Speaker 4: thing rather than the podcast, et cetera. No, that isn't
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  Speaker 4: to say that such a thing couldn't happen and it
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  Speaker 4: isn't to say that there couldn't be a tipping point
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  Speaker 4: ahead of us when that rationing point, that equilibrium point
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  Speaker 4: for the 10-year yields proves to be at a level
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  Speaker 4: that really hurts the government, that really creates issues.
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  Speaker 2: In the economy.
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  Speaker 4: But as it stands at the moment, yes, there are
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  Speaker 4: ways in which this is healthy. And also another very
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  Speaker 4: important point, part of the reason yields were as low
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  Speaker 4: as they were for as long as they were was
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  Speaker 4: that they were being interfered with to be held low.
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  Speaker 4: explicitly so in the case of Japan and only somewhat
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  Speaker 4: less explicitly in Europe and the US. That was an
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  Speaker 4: unnatural state of affairs. So some of what we're seeing
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  Speaker 4: is the removal of an unnatural state of affairs and
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  Speaker 4: a return to a situation where capitalism has more of
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  Speaker 4: a chance to work with the disciplining mechanisms necessary for
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  Speaker 4: it to be efficient for all. So that's my summation
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  Speaker 4: of why, yes, there are ways this is.
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  Speaker 2: A good thing.
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  Speaker 1: It is interesting. You mentioned the question of control. So
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  Speaker 1: if the conclusion of our very educational discussion so far
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  Speaker 1: is that it's actually not a bad thing to have
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  Speaker 1: high yields in many ways, it shows good things about
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  Speaker 1: what's going on in the world. And it's also driven
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  Speaker 1: by structural forces that governments can't really control in the
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  Speaker 1: short term. Donald Trump doesn't seem to think it's desirable,
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  Speaker 1: and he does seem to think it's something that he
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  Speaker 1: should be able to control. And perhaps more surprisingly, his
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  Speaker 1: Treasury Secretary, who is an old master in the markets,
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  Speaker 1: also seems to think that he can have an influence
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  Speaker 1: over bond yields. There's been various bits of financial engineering
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  Speaker 1: he's attempted over the summer to bring down certain yields.
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  Speaker 1: I mean, I'll ask both of you, but Jamie, can
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  Speaker 1: they control.
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  Speaker 2: Any of this?
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  Speaker 1: Well.
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  Speaker 3: Maybe for a time, but at what cost? I mean,
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  Speaker 3: if you're trying to fight fundamentals which determine globally, then
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  Speaker 3: it's very difficult and you are going to have to
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  Speaker 3: pay some sort of... It's a bit of a zero-sum
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  Speaker 3: game trying to fight these things. If the fundamentals are
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  Speaker 3: pointing towards an equilibrium price of money around the world,
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  Speaker 3: which is higher than you like, your only option is
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  Speaker 3: financial repression of some sort. And of course, we've seen
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  Speaker 3: that backfire many, many times. And generally, this could be
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  Speaker 3: a very good thing, like John says. But who is
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  Speaker 3: it going to be good for? And that depends on
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  Speaker 3: who gets the rents from the AI, whether you can
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  Speaker 3: tax them. Otherwise, if you can't, it's very, very bad
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  Speaker 3: for governments. It's going to be extremely costly in terms
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  Speaker 3: of the interest bill and not generate any revenue. So
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  Speaker 3: there are some big uncertainties there and big open questions.
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  Speaker 1: Yeah, we had a good discussion a few months ago
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  Speaker 1: about the possible existential risk that AI poses to the
• 14:34
  Speaker 1: income tax base. I mean, John, I haven't had a
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  Speaker 1: chance to talk to you over the summer as Scott
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  Speaker 1: Besant has been doing his histrionics and making his great
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  Speaker 1: statements about I'm the house now.
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  Speaker 4: And the bond market has a fever. Yes, it's really
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  Speaker 4: startling language.
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  Speaker 2: For a Treasury Secretary.
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  Speaker 1: Well, also for someone who actually knows about the difficulty
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  Speaker 1: of fighting the market. So I just wonder, is your
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  Speaker 1: considered conclusion from that that he doesn't really believe what
• 15:01
  Speaker 1: he's saying or that he's had some kind of fever himself?
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  Speaker 2: How do you read it?
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  Speaker 4: I'm sure he believes that he wants... yields to be
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  Speaker 4: lower if they possibly can. And he said that, and
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  Speaker 4: there are plenty of sensible reasons why it would help
• 15:18
  Speaker 4: him if he were. And he also wants a weak dollar,
• 15:22
  Speaker 4: which if you're throwing in your lot with protectionism, you
• 15:26
  Speaker 4: could do with a weak dollar. If that's the strategy,
• 15:28
  Speaker 4: which more or less has to be given that that's
• 15:30
  Speaker 4: the platform on which the president has been elected, then
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  Speaker 4: it's part of a package of things that makes sense
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  Speaker 4: for Besson.
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  Speaker 2: To try to achieve.
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  Speaker 4: The comment about the House he made regarding the yen,
• 15:41
  Speaker 4: where it was a very startling decision to intervene to
• 15:45
  Speaker 4: help the Japanese strengthen the yen. And that's ultimately because
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  Speaker 4: otherwise he seemed to be concerned that otherwise the Japanese
• 15:53
  Speaker 4: would just have to strengthen the yen. If the Japanese
• 15:56
  Speaker 4: authorities involve selling treasuries, involve doing something which pushes up
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  Speaker 4: treasury yields. And he was concerned enough about the risk
• 16:04
  Speaker 4: of any new source of treasury sales that he wanted
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  Speaker 4: to do that. I think his bluff has definitely been called.
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  Speaker 4: The main thing he did was he increased this very
• 16:15
  Speaker 4: small program in the greater scheme of things where the
• 16:18
  Speaker 4: Treasury can buy back debt. He announced that he was
• 16:21
  Speaker 4: going to at least double it. He, in fact, tripled it.
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  Speaker 4: But the market was expecting it to be even more
• 16:27
  Speaker 4: than that. And so yields went up. And then when
• 16:30
  Speaker 4: they first buy back under the new regime happened, they
• 16:32
  Speaker 4: didn't actually buy back all that they could have done
• 16:34
  Speaker 4: because the people working for the treasury were actually looking
• 16:38
  Speaker 4: for good deals. If you're intervening, you just take the hits.
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  Speaker 4: It costs you some money to intervene. That's returning to
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  Speaker 4: the very short term is why we had the very
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  Speaker 4: sudden rush up to 5% in the last.
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  Speaker 2: Few days before we recorded.
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  Speaker 4: It was because Scott Besant's, I think, I gather you
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  Speaker 4: think as well, rather ill-advised decision language backfired that his
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  Speaker 4: bluff was called. And indeed, his old boss was among
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  Speaker 4: the people who recommended in an op-ed that traders should
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  Speaker 4: call Mr. Besant's bluff. He's in a very difficult situation.
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  Speaker 4: Jamie raised the issue of financial repression, which is almost
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  Speaker 4: certainly not a good idea, but can in certain circumstances
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  Speaker 4: be the least worst option. I think there probably is
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  Speaker 4: a good case that financial repression just directly intervening to
• 17:26
  Speaker 4: limit yields on bonds, which is another way of forcing
• 17:30
  Speaker 4: people to lend to the government at uneconomically low rates,
• 17:34
  Speaker 4: that was probably the best way to deal with war
• 17:36
  Speaker 4: debt in the years after the Second World War. It's
• 17:39
  Speaker 4: difficult to see how we square the circle that Scott
• 17:42
  Speaker 4: Besant is currently trying to square without some modern version
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  Speaker 4: of financial repression and of some way in which the
• 17:50
  Speaker 4: Treasury steadily becomes more important and the Fed becomes less important.
• 17:56
  Speaker 4: Just to make clear, the What the Fed can do
• 18:00
  Speaker 4: that the Treasury cannot is actually create the money. QE
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  Speaker 4: involves creating money to buy back bonds.
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  Speaker 2: Well, currently it can't create the money. Yes, exactly.
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  Speaker 1: There's plenty of rules that are being torn up by
• 18:12
  Speaker 1: this administration.
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  Speaker 4: Precisely, and that's the fascinating shift that we could see.
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  Speaker 1: Well, I hesitate to give the President more ideas, but
• 18:21
  Speaker 1: I guess the sort of one final beat on this
• 18:23
  Speaker 1: particular conversation is Jamie... In this world where you've already
• 18:28
  Speaker 1: introduced quite a lot of friction and geopolitical pressure in
• 18:33
  Speaker 1: the world of trade, you're mixing up your different diplomatic instruments.
• 18:37
  Speaker 1: You're imposing tariffs on people for geopolitical reasons and vice versa.
• 18:41
  Speaker 1: Any effective financial repression would probably have to, at some level,
• 18:45
  Speaker 1: be global or at least have an international element. Is
• 18:48
  Speaker 1: there a world in which the administration or Trump starts
• 18:53
  Speaker 1: using diplomatic pressure to force countries, for example, to continue
• 18:58
  Speaker 1: to invest their foreign exchange reserves in treasuries. I mean,
• 19:02
  Speaker 1: he certainly talks about that in the context of the BRICS.
• 19:05
  Speaker 1: He doesn't like the idea that people are going to
• 19:07
  Speaker 1: move away from the dollar. I saw the Dutch central
• 19:10
  Speaker 1: bank had said it was buying more gold the other
• 19:11
  Speaker 1: day because it was getting rid of some of their
• 19:14
  Speaker 1: dollars because of geopolitical risk. Presumably, Donald Trump could threaten
• 19:19
  Speaker 1: them not to do that and use quite effective tools
• 19:22
  Speaker 1: for preventing them.
• 19:24
  Speaker 3: Well, he has bashed people over the head with tariffs
• 19:27
  Speaker 3: once or twice in the past to achieve aims, I suppose. No,
• 19:30
  Speaker 3: I think it's a very reasonable threat. I mean, he
• 19:34
  Speaker 3: could use leverage. Where would he go for that? Rather
• 19:37
  Speaker 3: than sort of geopolitical strategic rivals, it would be people
• 19:41
  Speaker 3: with loads of money. So you would go to Japan,
• 19:44
  Speaker 3: you'd go to the state pension fund, and you'd say, right,
• 19:47
  Speaker 3: you need to buy treasuries. And you could do that
• 19:50
  Speaker 3: with other other players as well i suppose you have
• 19:53
  Speaker 3: limited impact on china but you could try and persuade
• 19:54
  Speaker 3: them to to direct more of their resources towards treasuries
• 19:57
  Speaker 3: which of course would take us back to where we
• 19:59
  Speaker 3: were during the go-go years of globalization but i mean
• 20:02
  Speaker 3: again this stuff comes at a cost though because you
• 20:04
  Speaker 3: you might get investment in treasuries but they would sell
• 20:07
  Speaker 3: other dollar assets potentially to finance that. So you end
• 20:10
  Speaker 3: up with just a bit of a merry-go-round, a reshuffling
• 20:12
  Speaker 3: of assets with no actual net effects on US borrowing costs.
• 20:17
  Speaker 3: So he could go down that route. I would not
• 20:19
  Speaker 3: be surprised if he did. I think it would be
• 20:21
  Speaker 3: unlikely to solve his problems.
• 20:23
  Speaker 1: Jamie, on the sort of longer term, if we're in
• 20:26
  Speaker 1: a 5% or 6% world, even if you think that's healthy, ultimately,
• 20:30
  Speaker 1: and indeed not very different from what it was years ago,
• 20:34
  Speaker 1: we've had quite a long period where it was very low.
• 20:37
  Speaker 1: And we tend to worry about those transition moments in
• 20:41
  Speaker 1: the financial system. From an economist standpoint, globally, where would
• 20:45
  Speaker 1: you look for those? Is it mainly governments who are
• 20:48
  Speaker 1: going to face that kind of transitional cost?
• 20:50
  Speaker 3: I'd be mostly focused on the sovereigns, I think, because
• 20:53
  Speaker 3: if you think about how they finance themselves, going from
• 20:55
  Speaker 3: three to six is a big change compared with going from, say,
• 20:59
  Speaker 3: six to nine. I mean, in terms of the burden
• 21:02
  Speaker 3: that creates and debt servicing costs relative to your balance sheet.
• 21:05
  Speaker 3: much worse to go from a low rate to a
• 21:07
  Speaker 3: high rate than a high rate to a high rate.
• 21:09
  Speaker 3: And so for sovereigns, that ticks that box. So I
• 21:13
  Speaker 3: would be looking there. It also has implications for lots
• 21:16
  Speaker 3: of companies who perhaps borrowed at low rates or refinanced
• 21:19
  Speaker 3: at very low rates during the post-pandemic era. But they
• 21:22
  Speaker 3: seem to be managing their finances reasonably well and refinancing
• 21:25
  Speaker 3: where they can.
• 21:26
  Speaker 1: John, I mean, I guess the last word with you,
• 21:28
  Speaker 1: I mean, you actually had a column saying, who's afraid
• 21:30
  Speaker 1: of big, bad bond yields? And your basic view was
• 21:33
  Speaker 1: the stock market has not been troubled by this because
• 21:36
  Speaker 1: the rise in yields, for all the reasons we've discussed,
• 21:38
  Speaker 1: comes from broadly sort of good reasons, not scary reasons.
• 21:43
  Speaker 1: We have worried a bit about the things that Jamie
• 21:45
  Speaker 1: has said, you know, that hidden beneath the surface, there's
• 21:47
  Speaker 1: all these companies that might go bust when they have
• 21:50
  Speaker 1: to refinance their debt. Haven't seen that much of that.
• 21:53
  Speaker 1: I mean, where would you be looking for painful transitions
• 21:57
  Speaker 1: as we go to this sort of 5% or 6% world?
• 22:01
  Speaker 4: US housing market has to be the number one. And
• 22:04
  Speaker 4: that is what Donald Trump, obviously being a property developer,
• 22:07
  Speaker 4: understands very clearly. And that market has broadly come to
• 22:12
  Speaker 4: a standstill and will continue to be at a standstill
• 22:14
  Speaker 4: if long-term rates continue to rise. That's one of the
• 22:18
  Speaker 4: most direct transmissions from high long-term yields is obviously into
• 22:22
  Speaker 4: the rates at which you can finance mortgages. As the
• 22:26
  Speaker 4: very low mortgages that people took on during the pandemic,
• 22:31
  Speaker 4: low-rate mortgages, will begin to be expiring soon, that could
• 22:37
  Speaker 4: create some interesting developments, whether they're still going to be
• 22:40
  Speaker 4: able to finance it at their new rates. So that's
• 22:44
  Speaker 4: one area. Because we're starting from a position that isn't
• 22:48
  Speaker 4: greatly overextended, I don't know that there's any risk of
• 22:51
  Speaker 4: anything like 2007, any major housing crisis, but it's certainly...
• 22:55
  Speaker 4: a problem for the economy. So that would be the
• 22:59
  Speaker 4: single most clear problem that could.
• 23:03
  Speaker 2: Stem from this.
• 23:04
  Speaker 4: Beyond that, yes, the point I was making in the piece,
• 23:07
  Speaker 4: the earnings multiples on stocks have come down a lot
• 23:12
  Speaker 4: because of high yields. We won't bore you with why
• 23:14
  Speaker 4: that is, but you would generally expect that mathematical relationship
• 23:17
  Speaker 4: to be there. And share prices are still done perfectly
• 23:21
  Speaker 4: well this year because earnings have shot up.
• 23:27
  Speaker 2: If you finally get to.
• 23:28
  Speaker 4: A point where long-term yields are high enough that they
• 23:32
  Speaker 4: really choke off the economics of building data centers, that
• 23:37
  Speaker 4: changes things very profoundly. AI at this point really is
• 23:41
  Speaker 4: a macroeconomic factor that bails us out of all kinds
• 23:45
  Speaker 4: of other problems.
• 23:46
  Speaker 2: I don't think it does, though.
• 23:48
  Speaker 4: I think if something goes wrong with AI, it's going
• 23:50
  Speaker 4: to have something more to do with, oh my God,
• 23:52
  Speaker 4: the Chinese really have worked out a way to do
• 23:54
  Speaker 4: it much cheaper, or oh my God, people are not
• 23:57
  Speaker 4: going to live with having data centers in their neighborhoods,
• 23:59
  Speaker 4: et cetera. It's going to be something more tangible rather
• 24:02
  Speaker 4: than to do with the base finances. But that's the
• 24:06
  Speaker 4: other point. As it stands at the moment, financial conditions,
• 24:09
  Speaker 4: as we ourselves measure them, as Bloomberg Economics measure them,
• 24:12
  Speaker 4: are as easy as they have been in 30 years,
• 24:16
  Speaker 4: taking into account equity market, cash, et cetera. This is
• 24:21
  Speaker 4: just not a difficult time to be raising funds Fed
• 24:26
  Speaker 4: funds rate, if you're the central bank, it's not necessarily
• 24:28
  Speaker 4: a harmful time for bond yields to be rising.
• 24:33
  Speaker 1: Okay, so I think we can take a resounding conclusion
• 24:38
  Speaker 1: from that, that there are many, many things to be
• 24:40
  Speaker 1: worried about. And God knows we talk a lot about
• 24:43
  Speaker 1: them on this show, including existential risk posed by AI.
• 24:47
  Speaker 1: But a 5% or even 6% US 10-year yield is
• 24:52
  Speaker 1: not one of them, except possibly if you're Donald Trump.
• 24:56
  Speaker 1: John Authors, Jamie Rush, thank you very much. Thanks for
• 25:10
  Speaker 1: listening to Trumponomics from Bloomberg. It was hosted by me,
• 25:12
  Speaker 1: Stephanie Flanders. I was joined by Jamie Rush and John Authors.
• 25:16
  Speaker 1: Trumponomics was produced by Sama Saadi and Moses Andam with
• 25:20
  Speaker 1: editorial guidance from Megan O'Neill from Bloomberg Economics. Sound design
• 25:24
  Speaker 1: was by Blake Maples and Kelly Gary. And Amy Keene
• 25:28
  Speaker 1: is the executive producer of Talk Podcast with Cheryl Brumley,
• 25:32
  Speaker 1: the head of Bloomberg Podcast. To help others find the show,
• 25:35
  Speaker 1: please rate and review us highly wherever you listen.