The End of the Bond Hedge?

The world's biggest wealth fund calls time on government bonds after recent volatility. Plus, diesel prices hit an all-time high, teeing up more inflation from farm to table. And battered by foreign competition, VW banks on six-figure job cuts as part of a desperate turnaround plan. We're talking a number of job losses that has never been seen before at Volkswagen, which is Europe's largest industrial company. So it really is a seismic magnitude. It's Friday, September 4th. 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 world's biggest sovereign wealth fund is looking to slash its holdings of U.S. treasuries. The head of Norway's oil fund wants to cut the portion of its bond portfolio that's allocated to government debt. To 50%. 50% from a current 70%, citing recent market volatility and arguing that greater exposure to equity markets would boost returns and limit its exposure to risk. That follows this week's bond market route, which rippled through global markets, unnerving investors unused to major shifts in the traditional safe haven asset. Well, to help unpack the week that was, I'm joined by Ludovic Subran, the chief investment officer at Allianz. Ludovic, in your opinion, what has been driving this route? Well, I think it's been a lot of work. Oh, boy. The bond route really started in the U.S. It's something that has been creeping up for quite some time. It's a mix of soaring deficits, a Fed unfazed by inflation caused by the many friction points and wars. Certainly, the idea that you can tweak the markets, the interventionism, is something that market actors don't like. And there is a bit of AI, a bit of competition for capital, a bit of, you know, is it growth ahead? Is it abundance? Is it inflationary, deflectionary? So all of that has been repricing the U.S. bond market. And this has been sending seismic waves across the world. I mean, given that, how are you responding to this as an investor? And should retail investors listening to this be worried about their portfolios, their pensions? Looking ahead, I think it can get worse before it gets better. I think there is this idea that we could see bond yields test new limits because of the situation that is not coming down. We don't see an end of the war in Iran. We don't see an end of the trade war. We certainly don't know exactly how you re-anchor the Treasury-Central Bank type of relationship in many of the markets. We have elections that are very open. So I think all of that are things that could, in the near future, continue to reprice, continue to reprice the so-called safe haven. So I would say to investors, try to mind that and not keep very passive your bond investing. Don't think that you bought some bonds and you're expecting your coupon to pay and you feel very confident about this. Try to be very active. Try to get expert advice to try to see if you can reposition this so that it is something that is benefiting to your portfolio. And more importantly, look also at what you're investing in. Look also at what you can do on equity, because whatever is happening on bond could actually trickle down to equity. So try to make sure that you also protect that part of your portfolio. Bonds, not the hedge they used to be. Bond is not the hedge that used to be. That's over for now. Let's move along and talk about another effect of rising yields, increased government borrowing costs. It's not hard to see how this eventually could lead to a fiscal crisis. But as we've discussed here on the podcast earlier this week, if anything, investors heard too little from G20 finance ministers about their plans. They're not expecting any sort of dam to break on this front in the near term, where this shifts from being a future, if quite inevitable, risk to a live crisis. Look, I'm watching particularly what is called debt servicing costs. So how much it costs for governments to repay their backlog of debt and how much more points of GDP do they have to pay on a given year for their indebtedness. That's something that is very worrying in Japan, where because of the zero rate environments, the debt servicing costs were very low, below 3% of GDP. And the forecasts are showing double digits, points of GDP for the debt servicing costs. That's something that I'm very worried about for the US, for the UK, somehow also France. You know, my country was thriving on debt servicing costs always being below 2% of GDP. Now it's creeping up to 3% of GDP. It's still very low. It's less than Italy, for example. And this is why I mentioned tax revenue. I think what is very interesting for the G20 is that there is also another race that is happening in the background, is that everybody knows that what could solve this situation, what could soothe bonds vigilantes is a tax increase. Because when you spend so much for defense, for climate, for subsidies, for industrial policy and whatnot, you need to put tax revenues on the other side of the equation so that your budget is balanced. And this is not what we see. In the US, deficit is running to 7%. In my country, it's 5%. In Germany, it's 4%. In the UK, there is basically no room to maneuver. And this is why the GILT has been really moving. So there is a bit, the G20 has been completely blindsided. Or at least they put, they play ostrich a bit, not talking about what could restore the fiscal credibility of a lot of these countries. And nobody wants to talk about that because there is such a race for being so attractive and competitive and basically enabling the economy, especially the AI revolution, that nobody wants to talk about taxes. If anything, they're not talking about taxes. They're much more likely to talk about growth. You know, the Treasury Secretary Scott Besson saying this week, growth can outrun the debt. And we almost, even today, heard something somewhat similar from Japan's finance minister playing down concerns that the swelling budget there was unsustainable and sort of citing the prime minister's efforts to boost Japanese growth. It doesn't sound like you believe this is all that. It's credible in and of itself. You know, we've been running a lot of numbers trying to understand, for example, whether some of the repricing of the government bond price or the cost at which they borrow basically is linked to the so-called productivity gains and therefore higher real growth in the midterm. So that's the big question everybody has. We don't see that much happening. We expect, of course, AI to boost growth, really potential growth, but not maybe to the amount that people are pricing in right now. They expect that to save the day and basically help them get out of a hyper spending spree. So I'm positive. I'm positive in growth. But can growth really stabilize your debt? You need a lot of growth to stabilize debt when you run 7% deficit like in the U.S. I can just tell you this. You need at least 5, 6%, 7% nominal growth. That's the number, right? That's the equilibrium. But for that, you need at least 4% real growth and 3% inflation, which would be, you know, something like this is a dashboard that we don't see in the U.S. anytime soon. Ludovic Subran is the chief investment officer at Allianz. Ludovic, thanks so much for being with us on What's News. Thank you, Luke. Well, oil prices. Oil prices have, of course, been a key driver of sticky inflation lately, with crude tracking towards its biggest weekly gain since July as a flare up in U.S.-Iran tensions raises the likelihood of supply constraints carrying into next year. And that is rippling through to the pump. According to AAA, gas prices are averaging just shy of $4.15 a gallon today in the U.S., up around 6 cents from a week ago. And diesel prices have hit a new all-time high of $5.85. Topping a previous record dating back to Russia's 2022 invasion of Ukraine. Prices are now more than $2 higher than when the war in Iran began, a jump that's likely to show up in grocery stores given diesel's use across the agricultural supply chain. Some analysts expect diesel to climb even higher as harvest season kicks off in the U.S. and the East Coast begins to burn heating oil. Coming up, facing a make-or-break moment for the business, VW turns to drastic, job cuts. We've got that story and much more after the break. Volkswagen's board has approved a sweeping restructuring plan that will eventually see 100,000 jobs cut worldwide and a slashing of its vehicle lineup by 2035. The surprise move comes ahead of what would have been a make-or-break meeting today, following two months of wrangling between company management and the union-led board. Auto's reporter Stephen Wilmot says, the aggressive overhaul aims at reaching an operating margin of 9% by 2030, an increasingly competitive environment. The whole car industry is under huge pressure and Volkswagen, perhaps the global carmaker that's most affected by these pressures, particularly the rise of Chinese automakers. Volkswagen was the leader in China for many, many years. Now those Chinese automakers are coming to Europe and elsewhere, putting a lot of pressure on Volkswagen's business in Europe. It hasn't lost that much market share yet, but it's certainly felt the pricing pressure, particularly on the latest cars. technologies such as plug-in hybrids. And then last but not least, there's the auto tariffs introduced by President Trump last year. Those have been particularly tough for Volkswagen to handle because it doesn't have many US factories. Stephen said that small US footprint could be about to change. Volkswagen on Wednesday confirmed the appointment of a new US boss. He's reporting directly to the CEO, which the previous guy didn't, which is a demonstration of how much they want to focus on the US as a market, but also just this idea that they need to empower the regions a bit more and be a bit more serious about putting down deeper roots like Toyota in North America in order to really grow there rather than relying on a vast German hinterland in order to manage its global business. By cutting the number of model variants by 75 percent, Volkswagen hopes to increase production per model with lower costs and higher-end technology. The company punted on the contentious question of plant closures, instead committing to develop a competitive production plan for its European sites by next June. For the second time in two weeks, the Trump administration has returned to the Supreme Court seeking to deploy the US Postal Service to regulate mail-in ballots ahead of November's midterms. The emergency appeal asks to immediately enforce rules requiring states to hand over voter data and allowing the Postal Service to reject non-compliant ballots. A federal judge previously blocked the proposal, proposal as likely unconstitutional. In a blow to Republicans, the Missouri Supreme Court ruled Thursday that the state can't use redrawn congressional districts that could have benefited the party in November's midterms. The judge said that voters can decide in November if that map can be used in the future, but that until then, a previous map created in 2022, quote, remains in full force. President Trump has named Adam Tell as the new acting army secretary, effective immediately, the latest in a personnel shakeup at the Pentagon. Army Secretary Dan Driscoll resigned earlier this week following months of friction with Defense Secretary Pete Hegseth. And take it away, Elon. The first car that is specifically built for unsupervised full self-driving is called a cybercab. Tesla's steering wheel free cybercabs are hitting the streets of Austin, Texas today, enabling customers to book rides via the company's robo taxi app. That launch marks the long-awaited first public test for Tesla's transition to fully autonomous cars and makes it the second company in the U.S. to offer rides in purpose-built autonomous vehicles. Tesla has said that cybercabs will eventually be available to purchase, though federal safety regulations currently prohibit their sale. And finally, Jobs Friday is practically a holiday for some market watchers, but prepare for this one to underwhelm. Today's labor market report, it's expected to show that the economy added just 53,000 jobs in August as an aging population and immigration clampdown constrain the supply of workers. And with such a tight market, careers and workplace reporter Ray Smith says that companies might want to rethink their old hiring strategies, especially when it comes to candidates who change jobs frequently. This study, which was conducted by researchers from Cornell University and Rutgers University, they looked at 8,700 hedge fund managers who had switched jobs, and what they found was they hit the ground running much faster than other new hires. It took them maybe two months to get up to speed on a new job versus five months for other new hires. Long written off by hiring managers, Ray says that job hoppers hold a secret superpower. One of the ways that job hoppers can stand out is to use their adaptability as a selling point because AI technology is something that all employers are looking for people to use. People to bring to the table. And so it's really important in this age to sort of sell that adaptability trait and not as something that shows that you're a flighty job hopper. Ray added that recruiters may be more inclined to hear about people's particular career stories now than in years past, given that many resumes aren't as linear as they were pre-COVID, a trend that's only continued as companies downsize and AI disrupts jobs. What are you hearing? Whether you're on the hunt for a new role, or looking to fill one, we're always curious to hear about the state of the job market. To join the conversation, send us a voice note to WNPOD at WSJ.com, or leave us a voicemail with your name and location at 212-416-4328. And that's it for What's News for this Friday morning. Today's show was produced by Hattie Moyer. Our supervising producer is Sondra Kilhoff, and I'm Luke Vargas for The Wall Street Journal. We will be back tonight with a new show. Otherwise, have a great holiday weekend. And thanks for listening.