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Welcome to the Bloomberg Daybreak Asia podcast. I'm Doug Krisner. An escalation of tensions in the Midis triggered more anxiety and markets. In the last session, Oil prices jumped to a five month high in New York trading on speculation the US may join Israel's attack on Iran. WTI settled just under seventy five dollars after rising by more than four percent.
Earlier in the day.
President Trump met with his national security team, and before the meeting, Trump posted a demand for Iran's unconditional surrender. On top of that, the President warned of a possible strike against Iran's leader, Ayatola Ali Kameni. We heard from Australia's former ambassador to Israel, Dave Sharma. He said, it's in Australia's interest to make sure that any tensions arising from this conflict do not manifest themselves in Australia.
We should be looking to support diplomatic efforts, but bearing in mind, what is it is the outcome that we see and we want a Middle East that is at peace with itself, that can grow and prosper and the truth is that Iran has been a massively destabilizing force in the Middle East now for decades, not only through its pursuit of nuclear weapons, not only through its imperialistic designs on its neighbors, but through its support to armed terrorist groups such as Hasbola and Lebanon. But who tis
in Yemen. It's propping up of the Asad regime in Syria for many years, it's fermenting of sheer militias in Iraq. What we would like to see is a situation where that sort of destabilization does no longer occur.
Now.
Whether Iran is prepared to countenance that or not, or at least whether this particular leadership in Iran is prepared to countenance that or not, that is a question for them.
That's Dave Sharma. He is Australia's former ambassador to Israel. By the way, the New York Times is reporting Iran has prepared missiles and other military erry equipment four strikes on US basis in the Middle East should the US join Israel's war against Iran. So let's stay with geopolitics for the moment. The Auchus Pact is a security arrangement between the US, the UK and Australia. It was first announced in twenty twenty one by then President Joe Biden.
But now the Trump administration is reviewing this agreement and this is rattling. One of Washington's closest alliances. Joining me now is Bloomberg opinion columnist Korishma Vaswani. She has been writing about the review and its ramifications. Korrishma joins me now from Singapore. It's always a pleasure to chat with you, Korshma. Can we begin by having you remind me the structure of the Auchus Pact.
Well, at the heart of this arrangement was an agreement between the US, the UK and Australia that would, again, as you pointed out, signed by President Biden in twenty twenty one, that would help Australia develop a fleet of nuclear powered submarines over a thirty year period, and it would involve both the US and the UK. America would provide superior technology, the UK would help Australia build these
nuclear submarines. But ostensibly it was also a way to counter China's growing influence in the Indo Pacific, and at the time when it was announced, China was very upset. It saw it as another example of the American supremacy, the desire to maintain that in the Indo Pacific, and as an attempt by the United States to contain China's influence and military and naval power, which has been, as we've talked about on your program before, growing rapidly over
the last few years. But now given that the White House has come out and said that they're putting this agreement under review, they're going to look at whether OCUS is aligned with the President's America First Agenda. I'm quoting from the Defense Department there, And you know that's really sort of making a lot of allies and partners in the Indo Pacific nervous, not least the Australians themselves, who are really counting on this commitment from the United States.
So I know that AUCAS involves, as I said earlier, the UK, Australia, and the US, but when we think of other allies in the region, I'm thinking of Japan and South Korea, this probably would be a very concerning development to those countries as well.
Yeah, and I think it's even wider than that, because it speaks to the commitment of the United States to the region. And it's really confusing, right, Doug, because you know, just a few weeks ago, at the Shangrila Dialogue, which is this regional security summit held in Singapore, you had the US Secretary of Defense Pete Hetz talking about the US commitment to the Indo Pacific. He said that America
is here to stay. Chinese didn't show up this time the way they have in the past, So that was a really easy win for the Trump administration to point out that Washington is really committed to this region. But it comes with a sort of transactional aspect because he also talked about the need for allies Asian partners to
boost defense spending. Very much what you hear from, you know, the Trump administration when it talks to Europe as well, that it's like, basically, everybody needs to pay more and this can't be the United States responsibility. And that's fine, there are reasons behind that. That's perfectly reasonable, but it does feel sometimes that it's a bit of a carrot
and stick relationship. You know, you have to pay more or we're going to pull out of OCHUS for instance, which appears to be the undercurrent behind the rhetoric of the Defense Department when it comes to this particular deal, and I think what that does is it just you know, it doesn't build goodwill, It doesn't create the kind of partnership that you need with one of your closest allies in this part of the world.
So, Karishma, we have seen among NATO countries a definite willingness to spend more of their GDP on military defense. I'm thinking of Germany in particular. Obviously this is tied to war in Ukraine. Can you give me a sense of the willingness of the countries in the APAC has spent more if we're using aucas as an example of some type of cooperation with the United States that would ultimately help these countries defend against some perceived threat that China represents.
Yeah, I mean, I think that's a really good point. And we've seen the commitments coming through loud and clear. You know, everybody from Japan to Taiwan to Australia itself, they've been talking about arming up. And you're seeing a trend across Asia for defense budgets. They've been on the rise. Everybody's spending more on defense, and I think the statistic for Australia. Currently CANBRA has military spending at about two point four percent or it's on track rather to achieve
that by the mid twenty thirties. But the United States wants Australia to up that to three and a half percent of GDP. So, you know, it's the gap between what the US wants and what is currently on offer, and each country has its own sort of particular and unique circumstances to be able to try and achieve that. But on the whole, across the board, the Trump administration I think has been quite successful in convincing Asian countries that they need to spend more on defense.
So how do you think this is being viewed in Beijing?
Oh? I think that this makes China very happy because for the you know, on the one hand, there are now real concerns over whether ORCUS will go ahead in its original form. My views that it will. I think that the United States would, even given the Trump administration's transactional nature. I do not think that the White House would allow this security agreement to fall by the wayside.
It would be problematic and possibly embarrassing. But I think that there will be compromises and concessions made on the part of the Australians who will feel compelled to do some of the things that the United States may be asking for behind closed doors. And what that does is play into Beijing's narrative that America first means other countries alone.
And you know, China has consistently positioned itself as the global, sensible, rational leader in the Indo Pacific given what appears to be sort of an erratic, you know, behavior, the erratic nature of how Donald Trump does business on the global stage. And I think that these kinds of agreements and the reviews of these agreements just add credits to that narrative.
And even if they're not saying it publicly, because you know, the Australians have been very quick to sort of defend the review and dismiss it as just business as usual. I've spoken to diplomats who've said to me, well, it's not a great look, and it does mean that countries like Australia are going to have to think and are already thinking about what this means in terms of future alliances.
So you're going to start to see you know, Japan, Australia, South Korea coming together, maybe India as well, to sort of find a way through working without the superpowers. They can't do it completely, but I think you're going to see a lot of middle and smaller countries banding together as it as these larger nations sort of you know, have this each country for themselves approach to global politics.
So imagine for a moment that the US does play a diminished role in August. Can you imagine a world where the Europeans, let's say, step in to fill some of that void.
Yeah, I can, and I think that been talked about already. You know, the Europeans have been in the past, certainly recently talking to the Australians about what kind of military engagement or any kind of you know, partnership that they could work on. It would be challenging given the number of countries in Europe, but not impossible. And again, I think these are the kinds of partnerships that we will see being formed going forward, and I think they are necessary.
In fact, I think they are essential because countries cannot navigate this next period of what appears to be this sort of you know, I hate using this word, but multipolar system. That's the nature of politics these days. And I think they're going to have to band together in that way, no doubt.
About that, Karishma. It's always a pleasure. Thank you so much, Karishma of Vaswani Bloomberg Opinion columnists joining from Singapore here on the Daybreak Asia podcast. Welcome back to the Daybreak Asia Podcast. I'm Doug Chrisner. So, the Fed's two day meeting will wrap on Wednesday afternoon, and the Central Bank is expected to hold rate steady this month and in July as well. And at the same time on Wednesday, the Fed may telegraph its intentions through its revised economic
and rates forecast. Now, markets right now are continuing to bet on the likelihood of two quarter point rate cuts this year, the first move perhaps fully priced in for the October meeting. Today we had yields down right across the treasury curve. And to help us take a look at what's happening in the macro and especially in the fixed income space, I'm joined by Bill Campbell. He is Global bond portfolio manager at Double Line. Bill is on the line from Santa Monica, California. Bill, thank you for
making time to chat with me. Talk to me a little bit about the moving parts that you see in the macro right now and how they fit with the inflation story, particularly as it relates to this spike that we have seen over the last couple of days in crude oil.
Doug, thanks for having me back, and you know, what a time to come back and discuss macro. There are countervailing forces happening, you know, across the macro landscape at the moment, and you see them playing out in the interest rate market when we look at long term rates. You were just mentioning the rally that we've seen today, but if you look back, you know, just for the past month, we've seen rates rising, you know, moving ever higher.
It's our view here at double Line that you know, the that medium term pressure or the likely trajectory for rates, especially in the long end of the curve over the
next quarter, is higher. But near term we're seeing now treasuries exhibit a little bit of that flight to quality or flight to safety property that they'd had in the past due to the increased geo political concerns around Israel's current operation in Iran and the potential for the US to potentially strike the four TOOH enrichment facility in Iran. Now that being said, the countervailing force to that rally that we saw is exactly what you alluded to, is
higher oil prices. Over the past quarter we'd actually seen oil prices falling to a local low, and just over the past couple of weeks, with these rising tensions in the Middle East, oil prices have again spiked from the low sixties up to the mid seventies. And as you know, oil prices have wide have kind of a wide reach in the way that they impact the economy and prices
in general. And the concern here is that over the next couple of months, higher oil prices could lead to higher gas prices, higher shipping prices, and that could put upward pressure on inflation, which then would counteract some of
this flight to safety that we've seen. So the balancing act that we are really watching play out in the long end of the US treasury curve is this you know, back and forth of will increase deficits, the potential for higher inflation and h you know, the the pulling back of purchases by global central banks of treasuries pushing rates higher be offset by the potential you know, flight to quality that we had seen in the past.
Uh, there's one caveat to all of this.
When the tariffs were initially announced by the Trump administration, Uh, something strange happened in the long end of the interest rate curve. We actually saw yields rise, and that was counterintuitive to the flight to safety trade that we have
gotten used to over the past three decades. And you know, the return on the geopolitical concerns is another nuance that we need to separate as fixed income investors of will the market view, you know, an upcoming hiccup to growth as more of a US specific growth shock with a US led slowdown or a global growth shock with a global growth slowdown potentially driven by the geopolitical concerns, And the answer to that question will answer in the near
term which way interest rates may trend. But on the long term we think that, you know, over the next several quarters, you know, to the next year, the pressure still should be higher, you know, on interest rates.
So we had the meeting yesterday from the Bank of Japan and not surprisingly, the BOJ held its policy rate steady at fifty basis points. The BOJ also announced a plan to begin to slow the pace of its bond market buying, the JGB purchases that the BOJ has been conducting. What is your understanding of how that's going to impact the global bond market story.
Yeah, So the reduction of you know, their quantitative you know, their their tapering program is not actually going to you know, be implemented until April or the second quarter of twenty
twenty six. The reason that they did that, though, is we had seen you know, a tremendous spike across the Japanese government bond curve, Japanese government yields, you know, rising ever since the Bank of Japan decided to stop their yield curve control policy about a year and a half ago, and you know, that's caused a lot of concern about the pass through you know, from higher yields to the
Japanese economy. And you know, obviously this is one step in the direction of trying to curb the pace of the rise of Japanese interest rates.
But the rise of Japanese interest rates is.
Happening alongside the rise in the US interest rates, the rise in long term United Kingdom interest rates. And I think that this is now a global issue that all central banks and all treasuries and ministries of finance are going to have to think about and deal with going forward that long term interest rates continue to rise, and
I think are rising on a secular basis. And when we look at the outlook for the fiscal trajectories not only in the United States, but in the United Kingdom and in Japan and to a certain extent in the European Union. When you look at countries such as France, they have a very difficult trajectory, very difficult outlook that is likely to put continued pressure not only on US and Japanese interest rates, but I think long term interest
rates across the global government bond market. And that's why at double Line, you know, we're continuing ourselves and to you know, talk to our investors about favoring more of the belly to the front end of the interest rate curves, because we still believe that interest rates between the two year and let's say the seven year or the two year and the ten year maturities, you know, should exhibit that flight to safety quality and you can pick up
you know, high quality gield. It's once you go to those longer tenors past ten years, that you're really starting to deal with these long term forces that maybe you know, signifying a structural change to what we've seen over the past several decades.
You know, it was only a couple of weeks ago when global bond markets were unnerved by the issues around fiscal deficits, not just here in the US, but jurisdictions like Japan as well. And I'm curious, has the concern over fiscal deficits really faded into the background where the bond market is concerned.
The fiscal policy.
I think it first of all, I think when we look at markets, unfortunately, it seems that you know, markets have a difficult time trying to hold on to multiple themes at once, and you know, we focus on different themes, you know, as we move through time. And as an example of this, uh, you know, first, you know, around April Round Liberation Day, the main theme that we focused on was tariffs and what new US foreign policy would do to the bond markets, putting upward pressure on interest rates.
Then we moved over, you know, to focusing on fiscal which has been the past month or so, uh, you know, focus for long term bond yields. Just recently, the new geopolitical concerns that popped out of the Middle East have taken the front and center focus, and I think that
is really what we're trading now. But we need to break out as investors what is short term cyclical move which maybe move over the course of a couple of weeks to a couple of months, versus the long term secular move, which is the general trend that tends to last quarters or even years.
And in that respect, you.
Know, we do think, you know, there may be a potential for a little bit more rally if we see the US enter into the Israeli I ran conflict with the bunker buster bomb to try to you know, address the Iranian fourtoh enrichment facility. That may cause a little bit more near term flight to safety.
But over that longer term, the.
Structural quarterly or yearly trend, we tend to think that the forces that we discussed are likely to keep you know, upward pressure on interest rates. And that's you know, until unless and until we see a break a change in
fiscal policy. In broad central bank policy, central banks again are stepping back from their purchases, which is is removing a price insensitive buyer from the market and allowing interest rates to rise and we need more clarity around our long term inflation forecast as we discuss there's lots of questions about tariff pass through and energy price passed through. Until those bigger questions are answered, we think that the longer term trend of interest rates.
Is still higher. Bill.
Before I let you go, let's talk a little bit about what's going on the dynamic and the currency market right now. You mentioned the have in trade and perhaps the idea that the US treasuries would be a beneficiary. I'm imagining that the dollar would be a beneficiary as well. Certainly that's what today's price actions seem to indicate. And frequently the end is a beneficiary of haven buying as well, but that didn't really seem to be playing out today.
How is everything that you're kind of laying out there connected to foreign exchange?
Yeah, I think the dollar is probably a front and center for most investors right now. Discuss you know that piece in just a little bit more detail. After Liberation Day, we've seen, you know, well, really after the president, the new President Trump came into office, and then especially after the Liberation tariff, you know, announcements, we've seen a pretty
aggressive move lower in the dollar. There have been a lot of reports that this has been foreign you know, foreigners starting to dump their large investments in the US, but I have really not seen significant evidence that that is the case. In fact, what I think has been happening is, yes, there's been a large amount of foreign investment in the US, but a lot of that investment was left unhedged up until this year because hedges are expensive.
So for the first couple of quarters of this year where the dollar came down you know, about nine ten percent, I think that was more reflective of foreigners increasing the hedges that they had on their dollar investment, and I think that is now roughly played out. Now the theme, the macro theme is now switching from uncertainty about US policy to uncertainty about global growth. So with increased geopolitical risk, now the uncertainty is shifted.
From the US to the globe.
And if that continues, I can see a near term upward pressure you know on the dollar.
You know.
Again, in this let's call it two week to a couple of months cyclical trend, but ultimately we believe a double line that the secular trend has started with the dollar. Over the next couple of years is likely to trend lower.
And the idea really underpinning this is that the massive amount of foreign savings that's come into the United States over the past three decades, which the BEEA now estimates as of the end of four q TWEO the latest data available at sixty two trillion of foreign savings or foreign investment in the United States.
You know, that is an overweight position, and.
We think some of that can start to unwind, that there will be portfolio diversification of that back towards home countries. And then secondly, we think that the idea that the dollar is going to you know, continue to be the main unit that underpins global trade, we think that that is also going to continue to erode, as we've already seen it evidenced by central banks now signing memorandums of understanding between each other to settle trade between their countries
and their own currencies. So, for example, why should Australia and Singapore need the US dollar to settle trade between those two countries. In fact, they should, as developed economies, accept each other's current see which they now are, and over time, their reserve currency baskets are going to reflect that increasing the holdings of each other's currencies while simultaneously
decreasing the holding of the dollar. So for those two structural reasons, we think that over time, the trend of the dollar on the long term basis, you know, should continue to trend down even but near term we first need to get through the you know, near term geopolitical risks that may cause a little bit of this flight to safety reversal in the dollar higher just over you know, the very near term.
Bill will leave it there. Thank you so very much. Bill Campbell there. He is Global bond portfolio manager at Double Line, joining from Santa Monica, California. Here on the Daybreak Asia Podcast. Thanks for listening to today's episode of the Bloomberg Daybreak Asia Edition podcast. Each weekday, we look at the story shaping markets, finance, and geopolitics in the Asia Pacific. You can find us on Apple, Spotify, the
Bloomberg Podcast YouTube channel, or anywhere else you listen. Join us again tomorrow for insight on the market moves from Hong Kong to Singapore and Australia. I'm Doug Prisoner and this is Bloomberg