Why do you think there's been such a divergence between the equity markets and the bond markets?
One reason for that is they are literally different people in the bond markets and the equity markets. They are different tribes. And I think if you're outside finance, all finance people kind of look the same. They're not the same. People in different asset classes think very, very differently. People in bonds, your mindset is, why is this lying liar lying to me? And what can go wrong and how much money can I lose? In stocks, you're thinking, what's the upside? But the other thing is, if the brown stuff hit the fan, you know full well that the Fed would cut rates and do something to stop the bleeding if the stock market really took a hit.
Today's number, 70,000. That's how many pints of Guinness were stolen near Liverpool last week. Yet, I've taken inspiration from Trump's renaming of geographic bodies of water. It's no longer Lake Ontario, but Lake America. I'm starting a water park called Lake America where with admission you get chlamydia.
I went to a pub last night here in the UK.
Yeah, I did. It was a Monday night and a friend of mine called and I had cabin fever and so I went and met him and we could not find trouble for the life of us. There needs to be way more drinking and clubs and hot people. Where are the Eastern European hot people and the douchebag tech guys that drive the nightlife scene of New York during the week?
It's a good question. We're going to need to investigate that. Maybe we can do an episode on that. Where are the hot people?
How's New York right now? I am so jealous. US Open. Is the city on fire right now?
Not on fire. I mean, the World Cup was a different level. The city really was on fire, but you know, it's nice. The weather is good. US Open is great. Our team is going. It'll be a lot of fun. Yeah, New York's not on fire, but it's calm and it's pleasant is how I would characterize things here. While we're on the topic of pubs, by the way, just so I know, what is your pub order? I don't think I know the answer to that.
I typically just get a lager. Yeah, I don't. Sometimes I do. I like a beer called Roderberger, which nobody ever has.
I think it's a German beer. My father-in-law drinks it and I adopted it from him.
This is going to freak you out. I've started drinking Michelob Ultra.
It's lower carbs and it actually tastes pretty good. Do you know what the fastest growing beer brand in the US is right now, Ed?
People your age are drinking Bush Light.
Yeah, it's making a comeback. I'm not a Guinness fan. What do you saddle up with beer?
Yeah, lager for me. I mean, every now and then a Guinness does actually really hit quite nicely, but it's very, very heavy and for me it's usually just sort of a standard lager or pils. Usually like a Stella, Peroni.
I do like Stella. I've done this as a trick in an effort to reduce my alcohol consumption and reduce my blood pressure and stick around to keep this Joy Bag of Donuts Enterprise podcast going. I am starting to move from spirits to beer because I find beer more filling and I don't drink as much.
I've got to say I'm drinking a lot less hard alcohol. I'm not drinking spirits as much.
When you do drink spirits, what do you drink?
Jesus Christ, I forgot you had a vagina.
Sorry. Negroni is not a weak drink. Negronis are strong. Actually, it's one of the strongest drinks.
Do they make that drink for a man?
Let's hear your cocktail order.
Let me get it. Did you order a Cosmopolitan?
Do you know what a Negroni is?
I do. I got a Maker's Mark and ginger ale. By the way, just a little bit of a podcast trick hack: drink bourbon because it makes your voice deeper the next day and you sound more authoritative and then ZipRecruiter wants to advertise.
So, I need you to start drinking bourbon or whiskey. It makes your voice like my... See how my voice is kind of feminine and Ed-like right now?
It's because I had beer last night. I should have gone to the hard stuff.
You should have gotten the bourbon.
Yeah. You need the growly voice. Okay, I'll try it out. Market research. Maybe it'll sell more ads.
I'll give it a try. Commit. Well, let's get into this interview. We have a very, very fascinating conversation with the one and only Katie Martin. Stay with us.
Stocks are up, but the bond market is starting to tell a very different story. Last week, yields on government bonds in Japan, the UK, Germany, and France all hit multi-decade highs. And in the US, the 30-year Treasury yield recently reached its highest level since before the financial crisis. As we've discussed, Treasury Secretary Scott Bessent tried to bring down long-term borrowing costs by buying back Treasury bonds, but the effort failed to move yields lower and instead drew criticism from investors across Wall Street, including Stanley Druckenmiller, who was once his mentor. So, while the stock market has largely shrugged off Trump's policies, the bond market is actively speaking out against them. We wanted to understand why that is happening. So today we are speaking with our friend Katie Martin, markets columnist and editorial board member at the Financial Times. Katie, it's great to have you back on the show. I want to jump right into the bond markets and what we're seeing. The 10-year yield topped 4.8% today, the highest since October 2023. The 30-year is back above 5.25%. This episode will come out later, so we'll see where it is by the time this is published. But the story remains that the bond market is not looking great, at least in the US. Bond investors are not very happy right now. And I'd like to start with why.
Yeah, there's a lot going on. The bond markets globally are not looking very happy at all. And I guess it's a bit of a paint-your-own-adventure kind of picture, right? You can kind of stick onto this whatever kind of narrative you want, but I think the most powerful one is that governments are just borrowing too much damn money. You know, the US national debt has of course crossed through $40 trillion for the first time. You've got a whole bunch of countries, including the US, that are now spending more money on keeping current with their debts than they are on defense. And that's just a bit of a kind of marker that this has all got pretty out of hand. I feel like there's a lot of countries including the UK that just seem to have forgotten how to talk to the electorates about trade-offs and taxes and instead it's much easier to just keep going cap in hand to the debt markets. Keep borrowing more and more money to keep the lights on, pay for your defense, fix your roads, build your schools, all the rest of it. And at a certain point, bond investors say, 'Look, I'll buy these bonds, but it's going to cost you. I'm going to want a higher return on them.' And that's exactly what's happening here. And, you know, inflation plays a little bit of a role here. Bonds famously hate inflation. It eats into their returns. So, again, investors ask for a higher return if they're going to be investing in bonds in a high inflation environment. But they're the kind of main reasons why we have this horrible malaise in debt markets at the moment. As you say, the US has been most activist, shall we say, in trying to calm this situation down, but it still doesn't seem to be ready to have a proper conversation about properly cutting spending or raising taxes. So, it's difficult to see how they can properly turn this around.
We'll come back to inflation in a moment, but just on government borrowing, my understanding is that governments have been borrowing like crazy for years. And yet it seems as though something happened in the past month or so. Investors decided that something changed. What exactly are they reacting to? What changed in terms of both the US and its relationship with debt, but also the world?
It sounds silly, but it is nonetheless true that things don't matter in markets until they do. And once you get enough people who are worried about a particular point, whether that's private markets or AI or government borrowing levels, suddenly it becomes an issue that people are focusing on. And honestly, I think a lot of this is a kind of strand effect kind of thing that's going on with the US. You know that moment at which, you know, last time you and I spoke, Ed, it was around that time that the US was helping Japan to support the yen and Scott Bessent and the administration had various reasons that they were sort of, you know, inviting us to believe why they were doing this, but the reason that the market settled on was, hang on, you just don't want Japan to sell down its US government bond holdings to support its currency. You're telling us that you're worried about people selling Treasuries and now I'm worried about people selling Treasuries and I'm worried about your borrowing costs getting much higher. And so I think there was a certain, you know, particularly when you build into this the fact that the US has increased the size of its debt buybacks and it's done various other things in relation to its Japanese yen intervention, that just brings focus and attention to the fact that the US is uncomfortable with its borrowing costs and that has sparked a little bit of soul-searching across private investors around, hang on, maybe we should all be a bit more worried about US borrowing costs because they are pretty painful.
Part of my theory, which I'd like to get your reaction to, it seems as though in the past few weeks it has become abundantly clear to investors that despite what our leaders might say about our need to get fiscal spending under control, they don't ultimately at the end of the day give a... They don't really care. And it seems evident from Trump's actions and his words where he said he would balance the budget. That was kind of like part of his main platform. And then he goes out, he increases our deficit to whatever it will be this year, probably $2 trillion. He explodes the national debt to $40 trillion. He launches these wars and doesn't seem to care much about the inflation that will make all of this worse. And then you have Scott Bessent who goes out and says, 'My solution to the bond problem is I'm just going to use more money, government money, spend it, and hopefully that'll fix the problem and bring yields down.' Is that also what investors are reacting to, that it's clear that our leadership actually doesn't care?
Yeah, there is a sort of fiscal incontinence thing going on. And look, the US is not alone here. Look, I invite you to look at France or the UK or Japan or any of these high-debt countries. The other element here is that we've had a lot of mixed messaging recently from really senior kind of finance people in the US recently that is unhelpful. So, you'll remember when Kevin Warsh first took the reins at the Federal Reserve, he used his first couple of press conferences to say, 'Look, in the time since I've been appointed, yields have risen, bonds have weakened, borrowing costs have risen, and that's fine. I, you know, I welcome that. I think there are various benefits that come from that.' And then you fast forward to Scott Bessent and he's saying, 'No, no, no. Yields are too high. The market is wrong. I know something that the market doesn't know and yields shouldn't be this high and I'm going to try and massage them lower.' And then you've got the kind of fiscal incontinence piece that comes on top of that and you just think, guys, what is going on here? Someone tell me what to believe. The other optimistic way of looking at this is the kind of analysis that Stephen Miran has put to work on this. Stephen Miran, if you'll remember, he was appointed to the Fed by the Trump administration and he was chair of the Council of Economic Advisers. He's like that guy, right? He's around, he's advising the administration on economic matters and he's saying, he wrote in the FT, you know, you could pick a lot of holes into what he wrote, but one of the reasons why he was saying that yields are higher is that the market is moving to price in a higher growth environment in the US.
Sounds kind of wacky and I would dispute the idea that this is what kicked this whole thing off. But it is reasonable to say that we've got pretty robust growth actually in the US and that all things being equal does mean you have a higher inflation environment. The good kind of inflation that comes with lots more growth. Maybe we do need to level set differently and think that benchmark interest rates from the Federal Reserve really do need to be higher. Now, Trump won't like that. He has been very active in calling for lower interest rates, even after the blowout jobs report that came from the States the other day. But maybe that really is the environment that we're living in, in part due to the AI miracle and that whole build-out. Maybe we do have a higher growth, higher inflation situation in the US that calls for higher interest rates and that means higher borrowing costs and higher yields in the bond market. So again, this is why I say it's a paint-your-own-adventure. You can say this actually is great because it means that the US is growing really fast and people are really optimistic. You can say this is terrible because the US is borrowing too much money. You can say this is a result of these kind of horrible mixed messages that we get all the time.
I guess on some level, does it matter? Fact is, borrowing costs are really high and it costs the US a lot of money to stay current on this debt and this is money that the US doesn't really have to spare.
I heard one analogy that the market or stocks are dating Donald Trump and bonds are married to him and when you're married you notice things more. Why do you think there's been such a divergence between the equity markets and the bond markets?
One reason for that is they are literally different people in the bond markets and the equity markets. They are different tribes. And I think if you're outside finance, all finance people kind of look the same. They're not the same. People in different asset classes think very, very differently. People in bonds, you're never going to double your money in bonds, right? Because you're only going to get back what you put in in the first place.
Yeah. You want to limit your downside.
Exactly. So your mindset is, why is this lying liar lying to me and what can go wrong and how much money can I lose? In stocks you're thinking, what's the upside? You know, so they do come from very different places, almost kind of philosophically. But the other thing is, you know, you look at stocks and the earnings are just great and it's not just in AI. These companies in the US stock market are making bucket loads of cash and you know that whatever the policymakers say, if the brown stuff hit the fan, you know full well that the Fed would cut rates and do something to stop the bleeding if the stock market really took a hit, in part because so many Americans own stocks and it would be such a problem economically for wealthy households. So, there's a bit of a moral hazard thing going on, I think, in that regard. But there is just this idea that it's very hard for stocks to lose at the moment because companies are just making so much damn money.
I love what our friends at Holts Management always ask. They say, what could go right? And I see, I'm a hammer and everything I see is a nail. I see everything as an elegant transfer of wealth from lower-middle-income households to the rich, specifically from the earners to the owners. Is there a scenario, or let me put forward a thesis: they're politicians and they're just responding to the electorate. We like to think that the voting public are saints and it's our leaders. Leaders respond to the electorate. The electorate has said, I know, let's go to war and cut taxes. I like that. And so the US public has voted for and embraced these deficits and they like the idea of spending more money than they're paying in taxes, realizing that all they're doing is creating inflation and greater debt burden on Ed and his colleagues or a younger generation. Is there a scenario, or what it seems to me is that the biggest, most trusted economies in the world have all adopted this profligate spending strategy, this debt-fueled spending orgy which results in inflation, but if you already own assets, you're already rich, you're somewhat protected, which again is nothing but a transfer of wealth. Inflation goes up, our debt goes up, but the landowners, the gentry, the people who are already rich are protected. It's wage earners and people whose wages can't keep up with inflation, they get hit hardest. This is just, we're just doing what we've always done, or have done for the last, I would say, 30 or 40 years, and that's decide, that's how can we keep the populace with cheap calories and Netflix somewhat happy while continuing to transfer wealth from lower- and middle-income households to upper-income households. And I would also add to your point, everyone's doing this. We're not unique. Everyone in a Western economy, I can't, it's hard for me to point to an economy, a large economy that is fiscally disciplined right now. Anyways, isn't this just more of the same?
