Why The Bond Market Is Starting To Revolt — ft. Katie Martin

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Go to FetchPet.com/save right now for your free quote. That's FetchPet.com/save. Running a business shouldn't feel like surviving a software group project. One app for accounting, another for inventory, another for sales, and somehow, none of them talk to each other. That's where Odo comes in. And all-in-one business management software that brings every part of your business together. From sales and accounting to inventory and marketing, all-in-one powerful platform. No messy integrations, no bouncing between tabs, and best of all, no spreadsheets. Stop managing software and start managing your business with one unified system. For free today at od.com/vox, that's od.o.com/vox. Today's number, 70,000. That's how many points 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. Did you? Yeah, it was a Monday night. A friend of mine called, and I had cap and 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 douche bag 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, it'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, I don't think I, I know the answer to that. I typically just get a lot, a logger or, um, yeah, I don't, sometimes I do. I like a beer called Rotterberger, which nobody ever has. What is that? I think it's a German beer. My father-in-law drank it and I adopted it from him. This is going to freak you out. I started drinking Michelob Ultra. Interesting. 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? No. Bush light. Really? People your age are drinking bush light. We is. Yeah, it's making a comeback. Um, I don't, I'm not a Guinness fan. What is your, what, what do you saddle up and to with beer? Yeah, a logger for me. I mean, every now and then a Guinness does actually really hit quite nicely, um, but it just, it's very, very heavy and fit for me. It's usually just sort of a standard logger or a pelz, and usually like a stella or peroni. I do like stella. The problem, I've, I've done this as a trick in, in an effort to reduce my alcohol consumption and reduce my blood pressure and stick around to keep this joy bagged on its enterprise podcast going, I am, I am starting to move from alcohol 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 hot alcohol. I'm not drinking spirits as much. When you do drink spirits, what do you drink? Uh, usually a negroni. Jesus Christ. I forgot you out of vagina. Um, sorry, negroni, negroni is not, is, is not a weak drink. Negroni's 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. Do you order a cosmopolitan? Do you know what a negroni is? Yeah, I get a real man's drink. I got a maker's mark in ginger ale. Uh, by the way, just a little bit of a podcast trick hack. Drink bourbon because I make sure voice deeper the next day and you're some more serratative and then Ziffer Cruder wants to advertise. So I need you to start drinking bourbon or whiskey. It doesn't make your voice, I might see how my voice is kind of feminine and ed-like right now. No, no, no. It's because I had beer last night. I should have gone to the hard stuff. You should have gone to the butter. Yeah. Yeah, you need the gravely 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. Boxer 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 30th 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 on to this, whatever kind of narrative you want. But I think the most powerful one is that governments are just borrowing too much damn money. 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 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 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 strizand effect kind of thing that's going on with the US. That moment at which last time you and I spoke at it was around that time that the US was helping Japan to support the Yen. And Scott Besson and the administration had various reasons that they were sort of 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 cost 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. To 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 the US borrowing cost because they are pretty painful. Part of my theory, which I 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 us it. 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 gonna 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 of weakened, borrowing costs have risen. And that's fine, 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 Moran has put to work on this. Stephen Moran, if you'll remember, he was appointed to the Fed by the Trump administration. 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. It 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 'cause 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. (laughing) - 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 or 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 gonna double your money in bonds, right? Because you're only gonna get back what you put in in the first place. - And you wanna 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 policy makers 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 where our friends at Redholds management always ask, they always say, what could go right? And I see, I'm a hammer in everything I see as a nail. I see everything as an elegant transfer of wealth from lower mental and income households to the rich, specifically from the earners to the owners. Is there a scenario, or let me put forward a thesis? Our 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 is 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 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 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 to 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 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? - Yeah, I think it is. And that kind of goes back to my earlier point, really, which is that things don't matter until they do. And people have been saying this about debt-fueled fiscal spending for a really long time. And I think we've just reached the point where people think that the system is starting to creak. But you can sense this around the UK. It is absolutely everywhere. The government under the previous Prime Minister tried to make and moves to cutting welfare spending, you can argue about whether that was the right thing to do or not, but it was actually a reasonably, you know, it would have helped UK public finances and they just cannot get it past members of parliament. Who are we talking about? This was Kia Starma. Yeah, it's difficult to keep on top of who's Prime Minister in the UK sometimes, but it's currently Andy Burnham, it was Kia Starma and the Starma government tried to cut some welfare spending and again, politicians and the constituencies where people are very reliant on welfare spending simply will not let it pass. But at the same time, you know, we want good schools, we want good hospitals, we want good roads, we want all of that and there is no real solution to how to pay for it and you have, you know, left-wing parties that are talking about like poorly defined kind of wealth taxes which I really don't think sustainably fill the gap and so while we haven't figured this out, the much, much easier thing to do is go cap in hand, as I say, to the bond markets and the UK issued some government debt today, think I'm writing saying the borrowing costs on that were the highest since 1998. You know, we're having to really pay up for this stuff because when you go to investors and you say yes, inflation is high, yes, there's a war in Iran that could still push inflation much higher again still, we're pretty close to $100 a barrel on oil again and yes, I'm going to be borrowing an absolute shed load after this. I'm going to come back to you again and again and again asking for more and more money. It's no surprise that investors say absolutely sure I'll lend you the money, but I just want, I want a better return for it and that's where your higher borrowing costs come in. Yeah, I just want to warn you from this point forward, I'm going to use a term shed load. If you take away anything from this podcast, go ahead. Yeah, I just want to linger on the fact that this isn't just an American story and then maybe we'll come back to what is going on in America, but we're seeing the same reaction in Germany and France and Japan and the UK as you mentioned, they're all seeing their own bond yields touching multi decade highs. Could you talk a little bit more about what is going on in Europe? It sounds like it's just kind of a mirror image of the US, but by all accounts, it seems like things are going quite wrong over there. Americans like to catastrophise about Europe and it's not normally as bad as it looks. It is still quite bad, however. So look, German borrowing costs are very, very low for a big developed economy, but they are much higher than they used to be because Germany has just recently caught on to this idea of debt fuel spending. It's been absolutely allergic to it for decades. It's getting back on that train now and that has pushed German borrowing costs higher, but like I say, they are still pretty low. France has an extremely polarized political system. You have candidates for the presidential election next year from the far right on the far left and not very much in between and it's very, you know, France just cannot pass a budget. It can't reach agreement on really anything to do with financial matters or anything else because you've got nothing in the middle. You've got this hollowed out middle then you've just got voices on the far left and the far right. So there's a serious risk that when we have the presidential election next year that this could, this could lead to a real loss of investor confidence in France. Now the difference for France is that it's got the European Central Bank behind it with the Brits. We don't have this, right, but France has got the full backing of the European Central Bank and last time we saw a serious debt crisis in Europe, which was sort of back in sort of 2010, 11, 12, the European Central Bank unleashed this torrent of rescue packages and rescue measures and things that were sort of, you know, they were basically rescue packages, but sort of wearing a sort of disguise, burial glasses and disguise moustache so that people wouldn't think they were rescue packages, but they really are. And those, all of those programs, all of those support programs for national bond markets within the Euro area that get into trouble, enjoy enormous levels of credibility and confidence from the market. So there is a low appetite for testing the European Central Bank's nerve on that. So personally, I think there is no way that the European Central Bank would let France fail on its debts. It would come up with something, doesn't matter how ungainly it is, it would come up with something to stop that happening. Nonetheless, you have got an awkward situation now where, for example, Italian borrowing costs are a little bit lower than France's. Italy is always sort of put out there as the kind of problem child of Europe, and actually it's done pretty good job with physical consolidation, market likes, what Italy's been up to. France is your problem right now. So yes, it is possible to construct a scenario in your head whereby Europe is heading for a really awful reckoning with the debt markets, but I do find it hard to believe that the European Central Bank really would let that happen. The UK, similarly, you know, you get lots of voices on the right saying that the UK is in a horrible debt crisis, and we have to go to the IMF for a bailout, which is just bullshit. And you have lots of people on the left who say, why are we being bossed around by the bond market? We should tell them what the yields are, not the other way around, which is also bullshit. You've got a government that's trying to pick away, you know, a path in between those two things, and the new chancellor, so our new finance minister is making all the right noises about there is nothing progressive about high borrow and cost. There is nothing progressive about spending more money on on servicing your debts than you spend on nurses, you know, so they're trying to find a way through this, but we have a budget coming up in the UK, and that's always a high drama moment for our bond markets, so everyone at the FT is just waiting for that to land. We'll be right back after the break, and if you're enjoying the show so far, send it to a friend, and please follow us on YouTube, Spotify or wherever you get your podcasts. Support for the show comes from Vanta. 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I don't think there's any possibility, you know, to the extent that the AFD has a clearly articulated, financial, you know, government borrowing platform, for example, I don't, it hasn't been enough to really spook the market. It's the politics that really matter on that front and it is significant. You know, there are some, so it's a small region, it's a part of East Germany that has lots of kind of, you know, very old hangovers from the time when the country was divided. I think it's possible to over extrapolate what you see from Saxony and Held. But I think also, you know, this is a demonstration apart from anything else that the chancellor said that the leader of Germany, Mertz, it is in trouble, you know, he, he's effectively like Keir Starmer was in the UK and you have a local election and the, and the far right does very well, just like we did it in the UK. And then it is deemed that the current national leadership hasn't had a strong enough voice in pushing back against the rise of the far right and then they end up having to go. So yeah, chancellor Mertz does appear to be in, in trouble here, but I can't see that being a big problem for European bond markets. If I'm wrong, I'm wrong, but I don't, it's not cited to me by investors as a big risk right now. Just going back to the question of what changed in the bond markets this year. There was perhaps the idea that there was sort of a change in settlement about how politicians and our leaders actually think about fiscal responsibility. But the other more obvious thing to me is the war. And the fact that the price of oil as we record this, Brent crude is nearing $100 a barrel. It's been going up and up and up, went down for a bit, but then it went back up, which is almost even worse. And from my understanding, it doesn't affect just the US and fact it affects the US a little bit less than everyone else. It affects the entire world and the costs of living for everyone. So to what extent do you draw a relationship between the Iran war and the crisis that we're seeing the bond markets right now? There's definitely a link between the two, but the levels of energy, dependency and sensitivity in major economies today is not what it was in the 1970s and the 80s. We do have alternatives, the US is self-sufficient in this stuff. So it is a slightly different picture. Also one of the things that bond investors have been saying to me that just doesn't make sense about what's been happening in debt markets recently is that actually inflation expectations have been pretty well contained. So it's not inflation that's been doing the heavy lifting and weakening bonds over the past few weeks. More of this, the fiscal side, the, what the hell is going on with the Fed kind of side, the mixed messages, all of these signals from Bessent that this really is a problem. If you package all of that together, I think that's much more of a factor weirdly than the oil price in and of itself. What do you make of Kevin Warsh and his first couple months as Chair of the Federal Reserve? What is some of your takeaways? What do you think? Hard job, and it's very easy to kind of, you know, throw shade from the peanut gallery and say, you know, well, I would be doing this much better if I were in charge and then all of a sudden you are in charge and, oh, holy crap, this is actually really difficult. Well, we'll never be in charge, so that's why we can do it. And I think there is a recognition that it hasn't gone terribly smoothly and that Warsh's efforts to say to the market, hey, you're on your own, you price the bonds as you see fit, and I'm not going to stand in your way, I'm not going to give you forward guidance. So I'm not going to tell you where rates are going, I'm not going to spoon feed the market. I think it became clear pretty quickly that what the market would take from that is a signal that it's fine, you know, with the administration and with the Fed, if government bond yields are much higher and so I'm going to push them higher. So it kind of backfired. What I'm expecting to see and what we've already seen signs of actually is somewhat of a more conciliatory relationship really with markets, a recognition that it's all well and good to talk about not wanting to spoon feed the market, but you do need some sort of dialogue because if things get really problematic and if bonds really get whacked, you want that kind of trust and connection with the market to be able to guide them on what you think you should do next to calm that down. So we have seen somewhat more of a conciliatory stance. We have seen strong signals from Kevin Warsh that inflation is higher than we want it to be and that interest rates are the way to deal with inflation, right? Pretty kind of conventional stuff. But then it does get interesting in the sense that you have that blowout job support the other day from the States. What did you add? 160 something thousand jobs? Yeah. 162 I think. Yeah. Way in excess of what the market have been expecting, decent revision higher on the previous months number which have been negative and flip positive. So all of a sudden the market has gone from pricing in a one in three chance of higher of a rate increase later this month to a two in three chance of a rate increase later this month. And then you have Donald Trump saying the Fed needs to get smart. And if they don't cut rates, then I'm going to impose some sort of new trade tariffs and you just think what? So the difficulty I think for Kevin Warsh, if he really is going to demonstrate that he's his own man and that he has an orthodox position towards the role of mantra policy in taming inflation, he's going to have to raise rates this month about six weeks ahead of your midterm elections. Good luck with that Kevin Warsh. Hope that works out nicely for you. So you have had a big reset in market expectations around what he's going to do. There's lots of people now saying that the Fed's likely to do three 25 basis point rate hike. So three quarter point rate hike. So one in September, one in December, maybe one in March. For me, the kind of the interesting bit in the drama is what does Donald Trump say and do about that, and does he turn on Kevin Warsh in the same way as he turned on Jay Powell, who let's not forget was his appointment, you know, his urge, Trump's urge for lower rates, you know, this is not like a new position for him. He's been calling, you know, he's been a low rates guy since he was a real estate guy in the 80s. He believes in low interest rates and high trade tariffs. So I do think there is a bit of a potential clash coming again, just ahead of these mid terms. And I think it's possible that for example, the Fed gets a lot of blame for stuff that's actually not its faults if Trump is trying to deflect attention away from, you know, problems in the US economy that are pretty squarely down to his war in Iran. When I think about the markets that we kind of get what we deserve in terms of leadership when we reference this earlier, and that is until the markets respond, until a leader stands up and says, we're raising taxes and cutting spending, and we have an eight year plan to get the deficit, the growth in the deficit below economic growth. And the market responds really positively until that happens. I just think we're going to have more of the same. It doesn't seem to me that the markets really want to have this conversation yet. And until the markets reward some sort of fiscally responsible rhetoric or narrative out of one of our potential leaders, I mean, we have a ton of Democrats and people is jockeying for, you know, to be number one on Cal State for the Democratic nomination or to be present in 2028. I don't, I haven't seen one of them talk about fiscal discipline. I don't, I just don't see that as a talking point yet. Isn't it going to be, can you point to any economy where a leader has said, look, we got to get the deficit under control and it's going to be hard choices. I don't see it anywhere. Do you see it anywhere? No. And it is a very difficult conversation to have with an electorate that is not necessarily particularly financially literate and, you know, I get that. I guess, you know, the only many example that immediately springs to mind is after the disastrous mini budget in 2022 in the UK when Liz Truss was prime minister, which, you know, blew up the UK government bomb markets and then tripped over a trip wire and it blew up still further. And, you know, pretty much one of the very first things that happened when she went was that a new chancellor, so a new finance minister was installed who just unwound pretty much everything that had been in that mini budget and said, right, all of that, just forget it ever happened. We're going to kind of get, get back on track. So a pretty humiliating moment really for Liz Truss and for Quasit Quarten who was her finance minister at the time. But generally speaking, no, I mean, it's just not a vote winner to kind of stand up on a podium somewhere and say, guys, I've got this great idea. How about you all pay more taxes? I just, we have forgotten as developed economies, how to do that, how to say to people, you know if you want all these lovely things. you want lovely schools and hospitals and roads and yadda yadda, then that costs money. There's just this idea that you can lean on the bond markets to do it. And particularly since COVID, that is just what we've done. So that's, I think that's why we're in the situation we're in today, you know, as you've been asking, why is the market freaking out about this now? I think we, just the amount of borrowing stepped up so high around the time of COVID. And don't get me wrong, that was the right thing to do with, there was a pandemic going on and governments had to, had to step into where the private sector was before. But the, the right thing to do after that period would have been to say, okay, look, that was all emergency borrowing. We're now getting back to normal. And instead, governments were like, this is awesome. We've found this magic money tree. Let's just keep blocking money off it. And, you know, now here we are in 2026 and the money tree is bare and it's, you know, it's just a fundamentally more expensive exercise to borrow. There's a great line in the show Billions where someone says to Bobby Axe, you know, this, this thing's going to cost 10 million dollars. And he's like, well, it's like I'm a rich man. And I feel as if the US gets not a hot pass but can kind of say, well, it's like I'm a rich man, the growth, the economic growth in the economy in the US as much as I like to shit post it because I'm hoping for a change in the administration. I think the economy on any honest analysis, there's, there's, there's red flags or there's blinking yellow lights. But I would, I would challenge anyone to point to an economy that's stronger than the US is. The US has a couple of advantages, yet it does have, you know, great growth envy of the world. And that's the other way that the US can get out of this problem is just to grow really, really fast. You're stealing my thunder. I'm going to rub to you because I want to ask a question here. Growth solves almost all problems. Yeah. I want to go back to the UK. We are growing. The US still isn't growing fast enough to, to in my opinion, maintain this ridiculous spending. But we're less screwed than everyone else. The UK is not growing. For all the noise around Canada being such good people and I'm on the side of Canada, the Canadian economy is a shit show. It hasn't grown in 10 years. The UK economy is a shit show. It hasn't grown in 10 years as far as I can tell. Other than, okay, so there's the AI. But what are some of the fundamental pillars of non-growth in the UK and play in Canada? Because we, we talked so much about managing our house. But you can order champagne and ketamine if you're killing it at work and you're making a shit ton of money or a shed load of money. In the UK and Canada aren't. If you were advising the UK or the British government around how to inspire growth, what would your recommendations be? The kind of original sin with the UK was Brexit. It's 10 years now since we voted to leave the European Union world's biggest trade block right across the water from us. You can practically see it from the south coast. We left and then that meant that we spent a lot of time and effort as a government and as a civil service in trying to figure out how to fix that and how to reconfigure that relationship. That was a huge effort sink that we never got back and it just threw sand in the gears of every single trade transaction or export or import from Europe. We're really still seeing the effects of that and it's not just the trade. It's the UK's investment destination and we kind of blew up quite a lot of credibility and and and. So you do see politicians in the UK talk about the need to rekindle a more friendly relationship with Europe but it's just politically a nightmare because you know the vote for Brexit cut a cross-traditional party line. So you have lots of traditional labour voters who voted for it and so and you have lots of traditional you know Tory party voters who voted against it and so neither party is really able to have a proper conversation about what the effects of it have been. We're only now 10 years after this bloody vote having a proper honest conversation about what the impact of this whole thing has been and it has been horrible. So that's you know that's kind of that's the core of a lot of problems certainly in the UK. I'm not an expert in the Canadian economy but there is just a kind of comparison kind of effect going on here where the US has just been such a success story. It has owned AI. Now what kind of a vote has the US really got around that? What does China have up its sleeve? Could there be even another deep seek moment? Is there a possibility that all of these companies which by the way are borrowing unbelievable amounts of money to build these data centres? Is there a possibility that they're building data centres for a technology that people simply will not pay for or politically will not tolerate? Yeah absolutely there's a bunch of things that could go wrong with AI but you know for now to kind of use that hackneyed phrase in markets you know the music is still playing so people are still dancing and that's just you know it is not correct to say that AI is the only thing that is making the US economy grow but it is a large part of what behind what is behind making the US economy grow and for reasons that you know maybe the rest of the world should regret and maybe we shouldn't we've just allowed the US to have enormous leadership on that. 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That still feels like your skin. Try new grippy setting mist from Mavily New York. Maybe it's Mavily. I really appreciate how you are showing the sort of chain of events that are worth caring about, if you care about economics, if you care about the state of the United States and also just the world. And it seems though what we have here is a situation where we're borrowing unprecedented amounts of money in our governments and the answer to why that is okay, that we hear from many of our leaders and that we hear from Scott Besson, that we heard from everyone who is in the White House in America today, is that we will grow our way out of that. And maybe we should have a conversation in a moment about how legitimate that argument is, but that is the argument we can go. grow our way out of it, we can just create more and more prosperity and that will solve the problem. But the growth has become so highly dependent on this one thing, which is AI. And if we look at AI and we look at why it has become so successful, we learn that it is because it is highly dependent again on a handful of companies and their ability to spend specifically the big tech companies right now who are now borrowing huge amounts of money but also open AI and anthropic for whom that is the majority of the revenue that is coming in for these big techs and big tech AI efforts. So the whole thing is extremely concentrated and we talk a lot about this problem of concentration risk. It's a very well-known thing in economics in finance and it seems like the entire structure of our system has become heavily dependent on this thing that when I look at it and I look at the economics of these companies and also what we don't know about these companies which is a lot, to me I'm think this is incredibly unstable, I'd be curious to hear if you agree. Another little thread that you can kind of tease out of that as well is that a couple of years ago there was this huge AI CapEx spend coming from the big hyperscalers, the kind of, you know, methods and Microsoft's and Amazon's of the world and 18 months ago they were paying for all this out of their free cash flow. And then they ran out of that free cash flow so they started paying for it out of money that they are borrowing from the bond markets and again I don't want to go all kind of always sunny in Philadelphia and kind of get my kind of pinboard and all the rest of it but everything is connected in the sense that these companies are now borrowing so much money that that is sucking some demand out of the government bond markets. So if you're an investor and you've got a huge debt issue over here from the US government but you've also got another debt issue over here that you could buy into on the same day that's from Meta and you think, you know, actually when I think about it, who is the safer credit here? Is it the US government or is it Meta? Which of these bonds should I buy and then you think well the Meta one is actually a little bit more generous because this is a corporate bond and it's got pretty much the same duration. You know, I'm pretty comfortable with Meta as a credit risk so I'm going to buy the Meta bond instead and all over the world this is leaching demand out of government bond markets at precisely this time that people are worrying about the fiscal incontinence and about the share levels of borrowing that governments have got to do. You know, in Europe, you know, an investor was telling me the other day there are some government bond issues that had been planned by smaller European governments. They've had to move the timing of these issues so that they can negotiate their way around these massive hyperscaler bonds that are hitting the market on the same day so that they can try and ensure that the demand is there to buy these government bonds. It's messing with the whole ecosystem. You know, I think this is one of the big kind of underappreciated stories in global finance at the moment, I've written about it a couple of times, but is that the corporate bond markets are getting new wings attached to them and a new engine while they're flying along through the air and nobody is noticing what a big impact that has both on the corporate bond market in and of itself, but also the second round effect on government bond markets. And yet, so again, you know, where does that leave us if the AI trade does fall over? Not in a great place. I would argue that it would free up more demand maybe for the government bonds, but you know, when people talk about the AI trade is really dominant in stock markets, that is not even half the story. It's also super dominant in private markets, private equity, private credit and public corporate bond markets. It's bending everything out of work. Which to me is a very good reason to think very critically about the probability that the AI trade could fall over. And it does seem as though whenever we have this conversation, we have the conversation on this podcast a lot, because as you can tell, I think it's really important, but it seems like when we do have the conversation, what I hear from the AI bulls is, you know, you're missing out on the greatest thing of all time, like they think that it means that I'm shorting something. They think that it means that I'm just like this permabare, which is not the case. But to me, it's just like, it's something that we have to care about and we have to get to the bottom of, you mentioned what we're seeing in the corporate bond market, also exclusive reporting from the FT, which just came out today, which is that I'm throwing an open AI and now having conversations with credit agencies about getting an investment grade credit rating and it sounds like their strategy is just to ask them nicely to give them a low rate. Which to me is another red flag. I mean, it feels like this is extremely, extremely big deal and I almost wish, I'm surprised that people don't care enough about it. I know people care, but I feel like they should care more. I think it's not unusual for companies to talk to credit rating agencies in an effort to get those credit rating agencies to understand what they do in the hope they will give you a low rating. I hear your point that it can look a little bit iffy from the outside. But again, even if you think you're not a tech investor, you're a tech investor. If you've got any money in any market anywhere, whether that's through pension or through allocations that you make to ETFs or whatever it is, you think of just how much of the S&P 500 is tech. You think of how much of emerging market stock indices are in tech and AI. It's the entire Korean stock market. It's a large part of the Taiwanese stock market. It's a huge part of the Japanese stock market. Even if you think you're just buying an index because you want exposure to a certain country, you are buying an active tech fund. So yes, it's in everyone's interest to think carefully about what can go wrong here. I don't have the answer. I'm not a tech pointy head. I don't know whether this technology makes sense. I don't know whether it is remunerative over time, whether people really will pay for this technology. But I do know this is like to a large extent, the only game in town. And I was talking to a large asset management firm earlier that was saying that clients are coming to them and saying, I don't want to think about the world in countries anymore. I want to think about, okay, I've got my tech allocation over here. And maybe that's a kind of pretty plain vanilla US national stock index. And I want exposure to things in the rest of the world that are not techs. I want you to take the tech and AI out of that part of my portfolio. And guess what, but the UK and Europe look pretty good from that regard as diversifiers. So they're actually doing surprisingly well in this environment. But yeah, tech is just shot through absolutely everything at the moment. And if it were to go wrong big if I have no crystal ball, I don't know, but there's a lot of things that would go wrong at the same time. Looking at the bond market or the credit markets right now, do you feel like any one credit market is underpriced or overpriced? I just think there are some credit markets that have been traditionally really, really tiny that are suddenly actually operating at scale. So the bad thing about the fact that the hyperscalers are kind of coming in and borrowing huge amounts of money in loads and loads of different currencies is that the hyperscalers are bossing around the rest of the borrowing markets for other companies that are domiciled in those smaller currencies. The good news is that the hyperscalers are demonstrating that you can borrow in size in little currencies like, you know, little in corporate bond terms, like Yen Sterling, Canadian, Dollar, Swiss, Frank. So actually what they're doing is kind of offering this proof point that it can be done and that this is an area where there is the potential to borrow much more. In terms of which bits are overpriced, again, it all comes back to the same question which is does it make sense to have such a large allocation to the AI story? And credit investors generally operate under stricter rules than stocks investors in terms of the concentration they're allowed to have in one sector or another or one company or another. So it does throw up all sorts of kind of technical and complicated problems for credit investors. But yeah, we're all just sort of circling around that same question which does this stuff make sense and it is quite sort of gratifying to me actually that in corporate bond markets you do get somewhat of a sort of stricter treatment from investors that you do in stocks. Stocks investors are like, "Sure, I'm sure this thing will go up. I'm going to buy it." Whereas credit investors ask some pretty awkward questions about, "Okay, where's the money coming from and how can this go wrong for me?" Just going to tariffs, just what I've said about the tariffs thus far, to me the tariffs are like America's Brexit. It's like our way of throwing sand into the gears, as you said, for no real reason other than a sense of patriotism, nationalism, we don't like those other countries, we prefer America, Rar-Rar-Rar. And ultimately, in the case of Brexit, it led to basically economic stagnation. It basically ruined an entire country. Do you see tariffs the same way? Do you think it could have those levels of effects? For the US. Yes. The beauty of the US is that it is a massive and very closed economy. You can get along just fine without really anybody else. So it is somewhat different in that the UK You know, don't tell Brits, but it's a small island and we meet like stuff from abroad. Whereas, you know, the U.S. is in a much better situation, not least because of its shell oil to get by on its own. I think really the victim of the tariffs, and you know, I know there's a school of thought among colleagues of mine who are much bigger specialists on trade than I am, like Alan BT and Simea Canes that, you know, we've passed peak tariff, you know, we've gone past the point where, you know, Trump is like threatening and executing tariffs on anyone for any reason whatsoever. But yeah, this odd line that he's taken since the payrolls report that happened to have it written down in front of me, lower the interest rate, or I'll stop trading with countries with which we have a deficit. It's really struggling to get my head around this one, not sure how it makes sense for the U.S. to shoot itself in the foot because it's because he doesn't like interest rates, really struggling with this one. He's still fixated on it on some level. And I, you know, it's interesting as well that one of the reasons why Scott Bessent has been arguing that government bond yields are much higher is because the U.S. isn't getting the revenue in from the trade tariffs anymore. You know, again, it goes back to my first point, paint your own adventure. If you really want to argue that that's an input into high yields, not sure I get it, but be my guest. So yeah, it's not helpful geopolitically and it, but I think I just don't think the world takes Trump terribly seriously on threats of tariffs anymore. You mentioned the midterm elections and the fact that we're in a position where a rate high is on the table in the months leading up to the midterm elections and the politics and the drama around that. It does seem to be a very good example of how politics really does matter in economics and in markets. I feel like sometimes we get criticism and like, why are you talking about politics? I thought this was a market share, it's like because the two are connected, they relate. In terms of the midterms, to what extent do you think that the midterm elections might have an impact on markets, might have an impact on the U.S. economy? Is it an important event in that regard and what are you focusing on in the build up? I think investors are, you know, from the notes that I read in the conversations that I have, they're just trying to start getting their head around what it would mean if there was a big tilt in power in Congress and I don't think anybody really knows just yet, you know, a lot hinges on, you're going to do these elections, right? And it is all going to kind of be normal and you are going to respect results, you know, and and and and and, and, you know, there's some pretty kind of meaningful questions. But there is also an idea that, you know, the more that Trump has perceived as a, as a, you know, he should technically be, you know, a lame duck president, he should be getting towards the end of his position in the White House. Does that embolden aggressive regimes around the world to think, well, I'm going to get done. All of the terrible stuff that I want to get done while this guy is still in the White House and I've only got like a year to do it. So does this ramp up the pressure on Taiwan is obviously the big one? Does this ramp up pressure still further on poor old Ukraine from from the Russians? So I think there's a possibility of, you know, depending on how cornered Trump feels after the midterms and you'd have much better insight into that than than I would, it is possible that we get this kind of flurry of worrying geopolitical news that comes after it while people perceive that he really doesn't have a long left in the job. Just going into the, the second half of 2026, in your mind, what are the biggest, most important things to look at and to examine in terms of their effect on global markets? I mean, just to list off a few things, there's the war in Iran, there's the Fed Federal Reserve and the decision on interest rates. There's the IPOs, the incoming IPOs of Anthropic, which is supposedly going to happen at the end of the year, potentially open AI though they've started to push it out. I mean, what do you think is most critical? Because I'm like a sad macro person, I'm going to say that like a lot comes down to the credibility of the Federal Reserve and a lot comes down to the extent to which war really is willing to demonstrate that he's an orthodox policy maker even despite the howls and wails from what might be a somewhat kind of cornered US president. I think that is incredibly important. I think if war gets this wrong, then that will be another unhelpful factor for the bond markets. Heaven knows it is a bit of a mystery why equity markets have been ignoring debt markets up until this point. But if something really did snap, then I think we'd all have something to worry about. So I think people close eye on what war says and much more importantly does in the months ahead. I was shocked to see that Kalashy has the likelihood of a rate increase. It's 74% by the end of the year because I thought it's like biting or performing surgery on the hand that writes your check. And then as I think about it, it's a 12 year appointment from a president who can't remove him at least legally. And quite frankly, at some point, war probably goes hunting badger don't give a shit. This is my opportunity for a profile and courage. And this is a guy who can't remove me. And then it's all of a sudden a rate hike started making sense to me. Whereas I thought of it as unthinkable just a week ago. What do you think? Do you think we see a rate hike before the end of the year? I do. Yeah. Whether it's, you know, next week, you know, whether it comes in September, I don't know, but I think there will be something before the end of the year. If you carry on with inflation being sticky, we've got a big CPI report coming up from the states in a few days. If inflation stays sticky and payrolls keep doing what they're doing, I don't see how wash has a choice. You know, he has to stick to the script because we've seen how unhelpful it is when he doesn't. You mentioned earlier, Katie, that wash needs to get this right, or he can't get it wrong. What would getting it wrong look like? I think it would look like another quite explicit acceptance from wash that it's fine if bond yields keep pushing higher. You know, that, what that I think was a bit of a misstep. And, you know, if he keeps signaling that, you know, actually I'm very happy for the market to do my job for me and I want yields to be much higher, then they'll push higher because, you know, wash like, you know, he used this analogy that, you know, I don't want to be a player on the pitch. I want to be a referee tough. You're a player. So play properly. Do you see the merit because part of me almost likes where he's coming from, which is like, I'm not, I don't, I want to intervene as little as possible. I want the markets to do their thing. And I don't want people to be, I don't want to game anything. And I see your point. But do you see those merits? Like, where do you find it problematic? There's absolutely merits in that. And I'm not suggesting that the Fed has been a perfect institution over the past sort of decade or so. What I am saying is that again, you need that dialogue and trust and predictability in situations where something bad happens, whether that's a recession reshawk or an inflation reshawk, you investors need to know where the Fed is. And if they really don't know where the Fed is, then the only thing they can price is not knowing. And that means just not buying so many treasuries, you know, buying something else instead. Because, you know, then you don't have the US currency risk and you don't have the US institutional risk. So I think one thing that is, you know, would be helpful to US policy makers is a more kind of explicit acceptance that investors don't have to buy these bonds, you know, up up to now, there's been no efforts to put a gun to their head and make them buy them that we don't have any kind of particular kind of efforts at financial repression right now. So except for when the president threatened military intervention in the bond markets, except for that. That was good. I did, I did enjoy that. That was great. You know, we will, we will fight them at the discount window. Um, there is a choice. Investors have a choice about where they put their money. And this is something that governments in the UK and France and Japan and everywhere else, I've got to take much more seriously. Katie Martin is a market columnist and member of the Financial Times editorial board. She writes the weekly long view column on market trends and appears weekly on the un-hedged podcast. Previously, she spent four years as the FD's markets editor and also several years on the FD's live news service prior to joining the FT in 2015. She spent 11 years at the Dow Jones Wall Street Journal group Katie always love having you. Pleasure. Thanks, Katie. This episode was produced by Claire Miller and Alison Weiss and engineered by Benjamin Spencer. Our video editor is Jorge Corti. Our research team is Dan Chalan, Chris Nodonecchio and Mia Salverio. Jake McPherson is our social producer, Drew Burrows is our technical director and Katherine Dillon is our executive producer. Thank you for listening to Property Markets from Property Media. If you liked what you heard, give us a follow and join us for a fresh take on markets. und lande. [Musik] Running a business shouldn't feel like surviving a software group project, one app for accounting another for inventory another for sales, and somehow none of them talk to each other. That's where auto comes in, and all-in-one business management software that brings every part of your business together. Try for free today at od.com/box. That's od.o.com/box. [Musik] Imagine setting your makeup, then forgetting it's even theirs. Meet new groupy setting mist from Mabel in New York. Jeldermist technology locks in your look for up to 24 hours, with flexible all day comfy grip. Just plump, dewy hydrated skin. Try new groupy setting mist from Mabel in New York. Maybe it's Mabel in.