Summary of Key Points
Elian, a renowned economist and chief economic advisor to Allianz Group, has recently made public statements, providing three core judgments about the current chaos in the global government bond market:
1. The trend of mass selling of government bonds worldwide cannot be stopped; the interest rates on U.S. bonds will continue to rise. The main reason is that there are too many entities seeking to borrow money, while there are far too few buyers willing to purchase them. This is not due to factors such as high inflation or the lack of credibility of the Federal Reserve, as previously discussed in the market.
2. Among the G7 developed countries, the debt risks of the UK, France, and Japan are the most prominent, even more so than Italy, which was previously considered a concern.
3. Elian directly criticizes the U.S. government for forcibly intervening in the bond market and publicly pressuring the Federal Reserve to cut interest rates, calling this a foolish move. The world's largest financial market, worth trillions of dollars, cannot be manipulated in the long term by administrative means, as it will only lead to greater systemic problems.
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Detailed and Easy-to-Understand Explanation
1. What exactly is the “bond selling spree” going on?
Many people still think of government bonds as “guaranteed, fixed-interest investments issued by the state.” In the past, these bonds were highly sought after by global investors as a safe asset. However, now they have become a hot potato that everyone wants to get rid of. There are far more sellers than buyers, and holders are forced to sell them at a discount—e.g., for 95 yuan when the face value is 100 yuan. As a result, new buyers pay 95 yuan for the bonds and receive 100 yuan in principal plus the agreed interest upon maturity, resulting in a higher actual return. This increase in return is what is referred to as “rising bond interest rates.”
Elian points out that the underlying cause of this selling spree is a complete imbalance between supply and demand: on one hand, the U.S. government, large tech companies, and various businesses are issuing bonds in large quantities; on the other hand, key buyers, such as countries and institutions, are no longer willing to hold U.S. bonds. This is due to geopolitical considerations, economic issues in some countries, and the reduction in the Norwegian sovereign wealth fund, a former strong holder of U.S. bonds. Therefore, bond interest rates have to rise.
2. Why will U.S. bond interest rates continue to rise? The U.S. itself doesn’t want to save money
Many believe that the current rise in U.S. bond prices will soon come to an end, but Elian disagrees. The U.S. government has no intention of reducing spending or borrowing less. Both Democrats and Republicans promise benefits to voters during elections and spend heavily on military and industrial subsidies. When money is tight, they print more bonds to borrow. The supply of bonds continues to increase, while the number of buyers decreases. To attract buyers, higher interest rates are necessary, and this trend is unlikely to change. The temporary slowdown in sales last Friday was just a short-term emotional reaction; the pressure for rising bond interest rates will persist for a long time.
3. Why are the UK, France, and Japan considered the most risky countries among the G7?
Elian identifies three countries with the highest risks:
- The UK, which he calls a “high-beta” country, is highly dependent on the U.S. economy and financial system. Even a 0.25% increase in U.S. interest rates could lead to a 0.5% or more increase in UK rates, due to its heavy debt burden. The UK’s economy has been weak in recent years, and any rise in interest rates would be devastating for its finances. The UK’s tax cuts in 2022 nearly caused a collapse in its bond market, and the current situation is even more precarious.
- France has seen its debt ratio rise sharply in recent years due to frequent government changes and high welfare spending. Even core Eurozone countries are more concerned about French debt risks than those in southern Europe.
- Japan has relied on near-zero or negative interest rates to sustain its massive debt for decades. With rising U.S. bond rates and a weakening yen, Japan is forced to raise interest rates. Many institutions that held Japanese bonds are selling, and the Bank of Japan is struggling to buy them, potentially leading to a liquidity crisis.
4. Why does Elian criticize the U.S. government for over-intervening in the market?
The U.S. government has made two controversial moves: increasing the buyback of long-term bonds and publicly urging the Federal Reserve to cut interest rates. Elian believes this is a misunderstanding, as the U.S. government thinks it can control the world’s largest financial market with limited resources. This will only damage the credibility of the U.S. dollar and lead to higher inflation, resulting in greater costs than the current rise in bond rates.
5. This seems far away, but it affects everyone’s finances
The impact of the global bond market is direct:
- It raises the cost of borrowing for businesses involved in international trade, leading to reduced orders and affected revenues in related industries.
- Foreign institutions are selling Chinese assets to buy their own country’s bonds, putting pressure on China’s stock markets.
- U.S. bond rates are higher than China’s risk-free returns, prompting people to convert yuan to dollars for investment, putting pressure on the RMB exchange rate.
- China’s central bank’s ability to cut interest rates is limited, as a larger interest rate gap with the U.S. would weaken the RMB and make monetary policy adjustments more cautious.