UPDATE: A Global Bond Rout Shakes Markets

Good morning. It's Wednesday, the fourth of October in London. This is the Bloomberg Daybreak Here podcast. I'm Stephen Carroll.

And I'm Credie Gupta. Coming up today.

The bond sell off continues as a thirty year US treasury yield hits two thousand and seven levels.

US Republican Kevin McCarthy is ousted as House Speaker by those in his own party.

Plus looking for lightning in a bottle, Rishi Sunac seeks to put the Tory agenda back on track. As HS two dominates headlines.

Let's start with a round up of our top stories.

The US treasury thirty year yield touching five percent for the first time since two thousand and seven, the relentless selloff in US government bonds is sparking turmoil across global bond markets. The route accelerated after the latest US data showed job openings increasing by more than expected in August to nine point six million. Our market supporter Valery Titel says the moves are unprecedented in recent times.

This route in the treasury market is just absolutely phenomenal. Honestly, I've never seen anything like it myself been in the markets for nearly fifteen years now. This steepening that we're seeing since Drome Powell's testimony two weeks ago. That was ten sessions ago. The relentless selloff mentioned there by.

Valerie Titel in US government bonds is also seeing conditions deteriorate in corporate credit. At least two corporate borrow We're standing down plant issuances on Tuesday thanks to the market volatility.

The market reaction comes as Atlanta Fed President Rafile Bostic shared his thoughts on the hiking cycle. Speaking at an event in Atlanta, Bostik said the FED should hold rates at elevated levels.

I'm grateful to say is that we've seen inflation come down. I feel like we're in restrictive space now and now we just need to let that restriction play out and let it bring inflation, continue to bring inflation down to get back into the range of our target, and if we can do that, that would be a good thing.

Bostik's comments come as the US Treasury Secretary Joannet Yellen also weighed in on the debate. She told a conference in Washington. While the strength of the US economy suggests rights will remain higher, for longer. Quote it's by no means a given.

Kevin McCarthy has been ousted as the House Speaker after Republican hardliners rebelled over his compromise with Democrats to avert a government shutdown. Goldman Sachs says the raises the risk of a shutdown next month, as his eventual successor will be under quote even more pressure from those on the right of the party. The move ends in tumultuous nine months in the job for McCarthy, who says he won't run for the position again.

I don't regret standing up for choosing governan over grievance. It is my responsibility, it is my job. I do not regret negotiating. Our government is designed to find compromise. I don't regret my efforts to build coalitions and find solutions. I was raised to solve problems, not create them.

Despite McCarthy's lack of regret, the latest turmoil has fueled concerns about deepening dysfunction in Washington. Last time the House even voted on removing a speaker was over nineteen ten. In that case, the officeholder survive the test.

The Prime Minister, Rishi Sunac is today expected to announce that part of Europe's biggest infrastructure project, HS two is being scrapped. It's understood the Prime Minister will use his speech to the Conservative Party conference to soften the blow, announcing that some of the savings will be used to boost other parts of the UK's transport network, but labor is greater. Manchester Mayor Andy Burnham says the plan is a disgrace.

Do not pull the plug on the North of England. Do not treat people here as second class citizens when it comes to transport, because if you do do those things, people here will never forget.

Burnham's criticism has been echoed by both the former Chancellor George Osbourne and Conservative West Midlands mayor and E Street. Here's what he told Bloomberg Radio.

My argument is you do need to have AGES two, so that's not really the question, is it. And of course what's been put to the Prime Minister is a proposal which is supported by private businesses to say let us try to rethink the leg to the North, but it is still needed to win the investment around the world.

Those comments from Andy Street and others have helped to cast a long shadow over the annual Tory gathering. HS two was a core plank of the party's previous pledge to level up economic opportunities across the country.

Pallentteer, the data analysis firm co founded by tech billionaire Peter Thiel, has emerged as the topic for a major NHS data contract. The five year deal could be worth close to half a billion pounds and focuses on analyzing medical information. Palenteer's relationship with the NHS has been criticized by civil rights and patient advocacy groups who worry about data privacy and the firm's work with intelligence and defense agencies.

Billionaire investor Ray Dalio says US China relations are close to breaking down. Speaking to Bloomberg's David Weston at the Bridgewater Associates, founder warned of the risk of conflict between the world's two largest economies.

The US China relationship are in a number of areas on the brink of red lines, so, in other words, these irreconcilable differences, they're right on the.

Brig Dahalio went on to say that the breaking point would be if the United States comes out in favor of an independent Taiwan, that he said would be quote the equivalent of a declaration of war. Dahlio's long nurtured relations with Chinese officials and has previously expressed admiration for some of Beijing's economic policies. So let's talk more than

Was a phenomenal session, one of the worst sessions for the treasury market on the year. And not only did we have the thirty year yield rise fifteen basis points on the session, but all across the curve five year tenure and thirty year breached new cycle highs, and it is phenomenal to see this move extending in the Asia session, in the European session as well as we As you just mentioned that thirty year yield breaching five percent. The weakness in the equity market is continuing. SMP was down

Well, I think the scariest superlative is these are the highest levels in yields going back to two thousand and seven, which doesn't exactly instill a lot of confidence in terms of what comes next, Valerie, what is the ripple effect here.

Yet to be seen? That Critty.

We know that what happened last year here in the UK, when we had that such volatility and long end guilt, it caused pension funds and insurers to really fall out of bed. That one really came out of nowhere. Is there some risk lurking in the US at the moment for those holders of this long end debt. I mean, some of these thirty year treasuries are trading below fifty

Hold because it holds its value.

That's clearly not been the case in the last two years in the treasury market. But we're seeings happen elsewhere across emerging markets bit jitterly when it comes to this dollar strength causing those emerging market currencies to weaken. We saw it in the credit markets yesterday. We're seeing credit spreads start to creep wider, and some issuers in the US yesterday pulling their deals just due to this treasury volatility,

Can we talk a bit about the kind of political implications here as well, because of course, higher yields immediately means the cost of borrowing for the US government gets even higher. And part of this story is the supply issue around the fact that the US government is borrowing that much more.

Yeah, it really is.

And I think part of this is as well, and this is something that Valerie could probably weigh in on as well. As you look at the thirty year yield, is the yield that a lot of people are.

Taking out mortgages on as well. Just on the surface as well.

So when you were talking about a crack in the markets, the fact that the long end affects the housing market, well that's going to affect the broader economy. Can you imagine going into twenty twenty four when people are kind of hitting all of their or say, submitting their ballots and suddenly their household wealth has completely been eliminated or is even more expensive than initially thought, those mortgage payments getting higher.

I think James.

Carville, the political famous political strategists, had said, it's the economy, stupid, that's how you decide who's president. This isn't I mean, how you punctuate that is quite important. Well, it really is, but I mean that happens to be the sense. And I think that's been the concern around why gasoline prices, for example, are such a political mover, but housing is not far behind.

But this is happening at a time when you know, even within the US bascal scene, there's more upheaval because Kevin McCarthy has now gone a speaker, putting essentially Congress into staces until I figure that out.

Yeah, I mean, look, it's not the best time in Washington right now. We aren't exactly setting a great precedent, I want to say, in terms of leadership. But I think what you have to keep in mind here is that, look, this shutdown just got a whole lot harder. And I think those are the calls that matter from a political standpoint.

Because we brought six weeks away.

November seventeenth, Yeah, is when the US government shuts down. And look, I think just for some kind of inside baseball here or inside cricket as I believe it's called on this side of the ocean, is basically that one of the major issues of this spending bill has been you can't touch the fence.

Spending.

Ukrainian aid has kind of gone out the window essentially, and then a lot of it is coming down as well as how you tackle eventually what will be the debt load as well.

And there are calls coming out of Goldman that are saying.

Because of the political politicization of this, you are now going to see it become even harder to actually hit a bipartisan deal.

It come November seventeenth.

The first people that get hit in a shutdown are your servicemen, are your troops. And again coming from the South, that is a real sticking point for a lot of the folks who are very passionate about our army battery.

Sorry, go aheadah, And you have to wonder whether the markets are really going to force some political change when it comes to Washington, and just how much money they're spending because I'll give you some shocking stats. Thirty percent of treasuries have to be refinanced in the next sixteen months, and a lot of questions are now being raised as to whether those debt financing costs are going to become too much of a burden to the US government and

Yeah, Votari, Can we talk a bit about the international impact of this as well, because I mean, we've seen the German YO curve has uninversed in the past few minutes, because we've seen the thirty year yields move above where the two year yield is the ten year German bundshield and over three percent for the first time since twenty eleven. This is a story that is rippling through markets across the world.

It's rippling through and let's be clear, the Central Bank in Europe and the Central Bank here in the UK have really no control over what's going on.

This will tighten financial conditions.

Globally as we see yields rise, and that is not something the ECB or the Bank of England can necessarily fight. This is being led by the US, and let's be honest, even in the US, the FED really does have no control over long end yields unless they intend on embarking again on quantitative easing, which is something I don't think they have necessarily on their radar. So this is going to be a very very hard thing for not just politicians but for central banks to fight.

The other aspect of this, of course, to think about, is where we see the other asset classes. Essentially, as I look across the sea of Red on my Bloomberg terminal this morning, well, I mean, when we're thinking about what happens next in this story, Valerie, where do we need to watch for what might either accelerate this further or potentially bring some calm to market.

Well, my mind goes straight to the big data.

We have.

On Friday, we get the monthly payroll report out of the US, which if it does reflect a hotter than expected labor market. Yet again, we could see a bit more panic when it comes to the treasury market and that hit equities and strengthen the dollar as well. That could be the next kicker. But I mean it could also be the kicker that could end the selloff. Right if we get a week payroll print, let's say, way weaker than expected, we could all calm down now thinking

Spoken like a true macro thinker, I'll do the micro here because I'll take the other side of it, which is when you look at the ripple effects in terms of this in terms of this market, take a look at what the stock market has not priced in the stock market around the world, I might add, has not priced in this higher bar wing cost. We know that the FED has been hiking, We know that a lot of these has been priced in for twenty twenty two.