Debt, deficits, and the rise in bond yields — Transcript

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1. 0:01Hi, I'm Ira Kalish, chief economist of
2. 0:04Deloitte, and this is your weekly
3. 0:06economic update.
4. 0:07Lately, bond yields in many countries
5. 0:10around the world have risen sharply.
6. 0:12But let's consider specifically what's
7. 0:15happened with US government bonds.
8. 0:17In recent weeks,
9. 0:19inflation expectations have remained
10. 0:21relatively tame, and expectations for a
11. 0:24tightening of monetary policy have
12. 0:26actually eased somewhat. And yet,
13. 0:28despite that, we've seen bond yields
14. 0:31increase even further
15. 0:33with the yield on the 30-year bond
16. 0:35rising to the highest level in almost 20
17. 0:37years.
18. 0:39So, why did this happen? Well, in
19. 0:41addition to concern about inflation and
20. 0:44monetary policy, bond yields also
21. 0:46reflect a risk premium, which has to do
22. 0:49with supply and demand conditions in the
23. 0:51bond market and the possibility of
24. 0:54default as well. One reason is there's
25. 0:56been a sharp increase in the supply in
26. 0:59the bond market because of the huge
27. 1:01issuance of debt by technology companies
28. 1:04meant to fund the rollout of AI. And so,
29. 1:08when there's a big increase in the
30. 1:10supply of debt, investors require a
31. 1:13higher return in order to absorb that
32. 1:16into their portfolios. The other reason,
33. 1:18I think, which is probably more
34. 1:19important, is that investors, both here
35. 1:23in the US and in many other countries,
36. 1:25are increasingly worried about the scale
37. 1:28of government debt and the continuing
38. 1:30structural budget deficits. Here in the
39. 1:32US, the budget deficit is actually
40. 1:34historically quite high, especially at a
41. 1:37time when we're not in recession and
42. 1:39we're not in a major war.
43. 1:42And the volume of debt continues to
44. 1:44increase. Moreover, there does not
45. 1:47appear to be any movement in terms of
46. 1:49policy to bring that debt level and
47. 1:52those deficits down, which evidently has
48. 1:55concerned investors. Now, the US
49. 1:58government has mostly run large budget
50. 2:00deficits for the past half century. In
51. 2:02fact, I can remember back in the '80s
52. 2:04many people saying this can't go on
53. 2:07forever, and yet it did. And despite
54. 2:10those concerns, bond yields actually
55. 2:12came down over that period. But now
56. 2:14they're they've gone way up. And
57. 2:17investors evidently are starting to
58. 2:19really be concerned about the future
59. 2:21trajectory of US fiscal policy. Not that
60. 2:24they're concerned about default, but
61. 2:26they are concerned about the ability of
62. 2:28the financial markets to absorb so much
63. 2:31debt.
64. 2:32It's not clear how this is going to
65. 2:34unfold over time, but in any event,
66. 2:37that's the outlook for this week, and I
67. 2:39hope you have a good week.