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Chapter 1: What is the FT Global Bond Summit and its significance?
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Listen to the Flipside on your favorite platform. Pushkin. The U.S. and Iran have reached a deal to extend their ceasefire and open the Strait of Hormuz. One might expect, given this, that inflation expectations would fall and bond yields would collapse and we'd all return to the land of milk and cheap money. Nope.
This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I am Rob Armstrong, reporting from a sunny and joyful New York City. And I am joined by my colleague, Katie Martin, who is currently in a janitor's closet in a fancy hotel in London somewhere. Katie, how is it in there?
Katie Martin
I can just about hear the plinky-plonk piano that's playing in the lobby from the little kind of office room that I'm in now. But basically, the great and the good of the bond markets, certainly in Europe, are here at this event. It is the FT Global Bond Summit. It's the most iconic week in the bond market, according to itself. I'm willing to endorse that message.
We had the UK Chancellor, Rachel Reeves, here this morning. Our colleague, Chris Giles. Asked us some tricky questions and she dealt with them pretty well, I've got to say. And there's people who are bond investors. They are bond issuers. So they're the people who work for governments that launch bonds into the big wide world. They are investors, they're intermediaries, the whole thing.
Yeah, the whole gang is here.
So as I said, our attention is kind of very much focused on the treasury market here. What are people at the conference talking about? What's on people's minds there?
I think the thing to remember, right, is that so stock markets love this idea that we've got a deal and that there's going to be like a ceasefire and later there's going to be enduring peace between the US and Iran. Stock markets love that sort of thing. But bond market people are just different.
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Chapter 2: What are the current perspectives on the bond market at the summit?
Very confidently, we're heading to $150 a barrel. And now we're at, what, about $80? Yes. So the oil price has proven to be much more resilient in the sense that it's been much lower than people anticipated. And in part, that's because China did the world a favor. It already had shed loads of oil, you know, much bigger reserves and used them much more smartly than the rest of the world.
And so the message then to the rest of the world is, Get your energy resources done right. Be like China. And so the way to fund that, guess what, is to issue bonds. And the more bonds you have, the weaker the other bonds that are already in the market are going to be.
So the world does not have the appetite. The world's central banks specifically don't have the appetite for waging war on a single percentage point of inflation because the governments they work for have big expensive projects they need to do. Energy in Europe, you have rebuilding the military industrial base, et cetera, et cetera.
Yeah.
In this context, Katie, has the name Kevin Warsh come up at all? A few times.
Yeah. So this is indeed an iconic week for the bond markets because not only is it the FT Global Bond Summit in London, but Kevin Walsh has his first spin as chair of the Federal Reserve. They've got a rate decision coming from the States on Wednesday, Wednesday evening, UK time.
As far as I'm aware, no one is looking for the Fed to change rates this time around, but it will be Walsh's first big press conference. And, I mean, get your popcorn out. This is going to be really interesting.
So one interesting issue there is that one of Walsh's primary complaints in his many years more or less as a professional critic of the Fed – Mm-hmm. People are even talking about whether Warsh will leave his dot off of the famous dot plot for listeners who are not central bank nerds.
The dot plot is a graphic on which each member of the open market committee puts a little dot which indicates their expectations for future interest rates. And it's possible that Warsh in his capacity as the new chair may boycott the whole thing.
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Chapter 3: How do stock market and bond market sentiments differ?
I don't want to say that Kevin Warsh is a cipher. On the other hand, though, Kevin Warsh is a cipher. So after the great financial crisis, he was one of the guys saying the Fed is too loose. The Fed is too loose. There's going to be inflation. We have to be careful. Yeah, he was wrong then. After COVID, he was saying the Fed is too loose, the Fed is too loose, and he was right then.
But now, in the run-up to getting this job, he's been saying the Fed is too tight. And he's made this famous claim... in several interviews that AI productivity is going to control inflation and that the Fed has to get ahead of that productivity. In other words, you can't wait until you see the productivity. He used the phrase, you have to make a bet.
In this, he likens himself to Greenspan and the kind of internet revolution 25 years ago. Now- I don't know if he was just saying that so he could get the job from Trump. I don't think other people know the answer to that question either. But we're going to find out in the next few months whether he's really a dove or really a hawk or somewhere in between.
And I really think we don't know what he is. So it's really unusual to have a Fed chair coming in and not knowing philosophically really where they stand.
just not having a read on them. But let me tell you something else interesting that's come out of this bond summit, which is that in advance of that, a lot of bond investors are hedging their bets, right? So we've heard a lot over the past few years about de-dollarization. Let's not get into an argument right now about whether that's a thing, right? You can read it a number of different ways.
But the point is, At this event today, what people are talking about is de-treasurization. So there is an urge among a lot of pretty conservative bond fund managers just to diversify somewhat away from U.S. treasuries. not necessarily to sell any treasuries that they currently own, but just to look to bulk up on other things.
So, for example, there was someone involved in bond issuance on an EU level, which is a whole other thing we should talk about in more detail another time. But he was saying of... When they've been launching new bonds recently, there was one that they put out in May. 28% of the participation in that new issue came from Asia.
So normally the long-term average of Asian participation in these bonds is more like 8%. So there is a whole new bunch of people who want non-Treasury debt. Also, he was talking about another longer-term debt issue they did recently. 18%, 1.8% of the demand for that came from the Middle East. Normally, he would get about 2% demand from the Middle East. Hmm.
So there were people who issued government bonds for a living from Canada, UK, Germany, Italy, a load of the biggies. And they were all saying the same thing, which is we are getting a lot more demand, a lot more interest from parts of the world that we previously never heard from. And that's pretty interesting to my mind, this idea that it is real.
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Chapter 4: What impact does the US-Iran deal have on bond yields?
Seems perfectly prudent to me.
America will continue its retreat from the world stage after a short break when we come back with Long Short.
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We're back. This is Long and Short, that part of the show where we go long things we like and short things we don't like. Katie, what do you say?
I am long the ingenuity of British teenagers. So I don't know if you've heard, but the government is talking about banning kids under 16 from social media. Kids, please don't worry. You will still be able to listen to the Unhash podcast. But... What I'm just thinking is that the government is massively underestimating how good kids are at getting round stuff like this.
Like they already like draw moustaches on their faces to get through like age verification checks and like they're constantly swapping SIM cards around and... I just don't know that you can crack the British teenager.
No, I'm sure that you cannot. Teenagers generally cannot be broken by something as trivial as a law. I, Katie, am long the tie.
No, you've done this before.
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