Why Global Investors Are Dumping Government Bonds

Bond markets keep flashing warning signs, but Treasury Secretary Scott Besant rushes them off. I don't think that we are in any kind of a dire situation. And as I said yesterday, the U.S. bond market has been the best performing bond market. What happens over a month doesn't matter. Plus, OpenAI 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 U.S. 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 Chelsea Delaney 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. Chelsea, let me start. 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. 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 U.K., Italy, multi-year highs. The U.S. Treasury yield is broken above 4.8 percent, 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 U.S., so it doesn't seem to be slowing. 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? Well, I think the immediate trigger for this particular episode is to do with inflation and the effect of, I think, high energy prices coming out of the conflict in the Middle East and particularly Fed Chair Kevin Walsh'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 U.S. where the deficit looks like it's set. It's settled at something around 6% of GDP and that's in a time when really it should be kind of getting narrower. It's not just U.S. Treasuries that have been getting hit. Some of the bond markets that have been getting hit even harder are, you know, Japan, France, the U.K., 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 U.S. tech companies for AI buildup. So that's created a new source of competition in the market. So governments are trying to sell a lot of bonds. And, you know, 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. 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? If you go back far enough, you can get G20 summits, which came up with something like that. Most famously, the Toronto summit in 2010, when they came out with a plan to sort of keep their debts under control after the financial crisis. But it has to be said that the G20 has become much, much more fragmented. And divided and argumentative over the time since 2010. So I think that the expectations were actually pretty low. That isn't to remove responsibility from the finance officials. They ought to be doing something, but it may well be that they just can't agree on what that would be. Yeah. And Chelsea, instead, what we actually heard was the U.S. Treasury secretary almost making matters worse in the eyes of some investors. It seems brushing off concerns about the bond market and saying that the U.S. can essentially grow its way out of the debt problem. I mean, I also don't know how much investors had really hoped for a kumbaya moment between the major economies. But I think a lot of tensions have spilled out into the open. You have the European government's pointing fingers at the U.S. And then you have Treasury Secretary Scott Besson saying the bond market has been the best performing bond market. So I think investors are reading that as quite dismissive of the signal that the bond market is sending. Paul, if we don't see a turnaround in bond markets, the implication? They could be quite wide ranging now. Yeah. I mean, this is the most important price in global financial markets and no financial asset will be unaffected by this if it continues to rise. That is to say that yield on U.S. Treasuries. I mean, there are things that you can do to calm things down. I think that Besson has suggested that he's working on a plan to kind of stabilize the debt. I can kind of understand why Besson wouldn't want to say, you know, we're in a terrible state because that in itself might trigger. More panic. But if the signal is sustained and strong enough, policymakers, officials might listen and might respond. Chelsea, parting thoughts? Yeah. There's this famous phrase, the U.S. sneezes, the world catches a cold. So whatever happens in the U.S. Treasury market, it will spill over. It will impact the rest of the world. And we're already seeing that in the extreme sell-offs we're seeing in bond markets around the world. But it hasn't yet become destabilizing for the global economy. But it will impact everyone. It impacts people who take out. It impacts people who take out mortgages. It impacts credit card rates. It impacts companies. So this will have an impact on growth. It will have an impact on consumers. I've been speaking to Wall Street Journal markets reporter Chelsea Delaney and Dow Jones Newswire's economics editor, Paul Hannon. Chelsea, Paul, thank you both so much. Thanks for having me. Thanks, Luke. Coming up, we've got the rest of the day's news featuring musicians fed up with digital copycats, potentially dangerous new AI models and more after the break. Let's turn now to Massachusetts, my home state, where Senator Ed Markey yesterday easily beat back a Democratic primary challenge from Representative Seth Moulton. It is a progressive movement fueled by young people demanding more from their leaders. And it's your voices that are the ones we need to hear right now. The fight centered on the 80-year-old liberal's age and the party's. At a time when several aging Democrats have lost primaries to younger challengers this year, Moulton tried to use Markey's age as a call for change after the senator was asked about his familiarity with AI tools in a debate last month heard here courtesy of C-SPAN. Senator Markey, do you personally use AI platforms like Claude or ChatGPT in your work? I use whatever is inside of my iPhone and my iPad, whatever comes up. And I don't know what what companies of my iPad might. Despite Moulton's call for a new generation of leaders, Markey was propelled by liberal voters, major labor unions, youth groups and key endorsements from progressive figures like Bernie Sanders and Alexandria Ocasio-Cortez. President Trump has nominated veteran Hung Cao as the next Navy secretary to fill a vacancy left when Defense Secretary Pete Hegseth pushed out John Phelan this spring. Trump praised Cao on social media, calling the former Navy diver and executive. Explosive Ordnance Disposal Officer a, quote, true warrior. In AI news, Google is hoping that a new AI model set for release this week can help it to catch up to its rivals in agentic coding. The release of Flash 3.8 aims to recapture some of last November's magic when the release of Gemini 3.0 briefly propelled Google to frontrunner status in the model development race. Since then, however, it's trailed the likes of Anthropic. At a time when agentic coding has emerged as the premier business use case for AI, Google's Flash models are designed to be smaller and cheaper to run than its Pro series. Despite CEO Sundar Pichai saying in May that a new Pro model would arrive next month, its work has fallen behind schedule. Well, speaking of powerful models, OpenAI has rated one of its upcoming releases called Astra a critical cyber risk and is choosing to limit some of its capabilities. As a result, the company says that internal testing revealed Astra was capable of devising and executing novel cyber attacks with only limited human input, forcing OpenAI to take steps to stop it from being misused or going rogue. Those limits follow a July incident in which a pair of OpenAI models escaped their test environment, hacked their way online, and broke into the company hugging face, sparking calls for tougher security around AI trials. We should note that News Corp., the owner of the Wall Street Journal, has a contract with the company. content licensing partnership with OpenAI. And a group of musicians is suing AI platform Suno for allegedly letting users to generate copycat songs using artists' names, like Jason Isbell, without permission. The proposed class action lawsuit, which was filed by Isbell, focuses on protecting artists' names, images, and likenesses rather than copyrighted music itself. Suno stands behind its platform, maintaining that it uses screening technology to prevent unauthorized use of artists' work. And that's it for What's News for this Wednesday morning. Today's show was produced by Hattie Moyer. Our supervising producer is Sandra Kilhoff, and I'm Luke Vargas for The Wall Street Journal. We will be back tonight with a new show. Until then, thanks for listening. Thank you.