U.S. debt faces a tougher market as rate-sensitive buyers grow

Transcript

Transcribed by machine (Whisper) from the episode’s audio, so a word may be off here and there.

1. 20:08

   What is your view of the doomsday Ray Dalio scenario? deficit, and then rates are going to soar because no one's going to want to buy treasuries, etc. Well, it is a serious question. If we had Scott Bessent here, what his defense would be is, you know, hold on, stop blaming us for this. We're just, in some ways, a temporary victim of our own success. Meaning? The economy is doing so great here. AI is exploding, and there's a huge demand for capital. That's true. That is true. That is true. That's pushing up treasury rates, which, interestingly enough, feeds through into the entire global economy. So, we are competing with AI infrastructure, and the treasury is competing with governments around the world for global investments.

2. 21:08

   So, rates are being pushed up everywhere, particularly in countries that are in a very poor fiscal situation. You and I, before we started the podcast, we're talking briefly about France. We're getting to that. Right. We'll get to that now. All right. So, to finish this, so you don't think— The trajectory is ugly. The trajectory is ugly because there's a crowding out effect because of AI, partially.

3. 21:37

   Well, yeah, and there's no longer any serious willingness in Congress or in the executive branch to address it. To cut anything. I mean, you and I are old enough to remember Obama and the Simpson-Bowles Commission. There was one serious effort to get a bipartisan solution. They didn't quite get the majority they needed, but Obama could have embraced it. Instead, he ran away from it. That was the last serious attempt.

4. 22:03

   Now, what do we have? We have the Treasury Secretary telling us not to worry at all, that we're going to, quote-unquote, grow our way out of it. And the numbers don't bear them out. I agree with that. Let's turn to France. So, there are riots going on. That's a political topic. But their problem, it seems to me, is kind of our problem, in that they have very large deficits. They have no political will whatsoever to deal with them.

5. 22:36

   In fact, just as an example, Marie Le Pen, who could be the next president of France, has said she wants— to reduce the retirement age from 62 years to 60 years, which is crazy. We have our own crazies here. Granted. We're just talking about France now. The difference is, nobody needs to own French bonds. Exactly right. Nobody does. Right. I mean, if you're a bank anywhere on planet Earth and you're doing overnight repos, you're doing overnight repos with treasuries.

6. 23:13

   There's no alternative. If you're a big, massive institution like the Norway Sovereign Wealth Fund, and you want to own five-year, 10-year debt, you're owning U.S. treasuries. And there is no Eurozone sovereign debt market, right? The German bonds are, in effect, the closest thing we have to European bonds. So, like I said, no one on planet Earth wakes up any morning and says, I got to own French sovereign bonds.

7. 23:45

   Exactly. So, what does that mean for France, in your view? Well, they are even more than we, competing for interest rate-sensitive investors around the world. So, for many decades, we were in an extremely privileged situation, what the French called the exorbitant privilege, where our borrowers were mainly sovereign institutions like central banks that bought treasuries on reflex just as part of their normal reserve management.

8. 24:19

   They didn't even think about it. They didn't even think about it. Whatever the market rate was, they bought it. So you go back 20 years, and 76% of the market were what we would call rate-insensitive investors. That was a wonderful situation for us. And when you say rate-insensitive investors, meaning they would buy treasuries, whatever the price was that day, they didn't care. That's right. So mostly central banks.

9. 24:43

   Right. That figure is now down to 43%. Okay. So this is a big problem for us. Because the more debt we issue, the more interest-rate-sensitive investors we have to attract into the market to buy our debt. This is for the U.S. Yes. Yes. So, what happens is, you get an accelerationist effect on the rise in interest rates, because the profile of our investors... is getting worse and worse as the deficit gets worse.

10. 25:18

    So, that's the U.S. What about France? Well, France is in an even uglier position, because virtually all of their investors are interest rate sensitive. Like I said before, nobody wakes up any day and says, I'm just going to buy French bonds. They have to convince us that they're going to compensate us enough. You know, you and I grew up calling the U.S. Treasuries a risk-free asset. Nobody is going to call French government bonds a risk-free asset.

11. 25:55

    We look at French government bonds like we would look at corporate bonds, for example.