This is an audio transcript of the FT News Briefing podcast episode: ‘Southern European bond markets make a comeback’
Marc Filippino
Good morning from the Financial Times. Today is Friday, June 13th, and this is your FT News Briefing.
Israel launched a strike against Iran, and sovereign bonds are rallying in some unexpected places. Plus, we hate to be a broken record, but the dollar is down again. Is the slump really that big of a deal, though?
Aiden Reiter
To anybody who believes this is the end of US exceptionalism . . . there’s some reason to believe that that is overhyped.
Marc Filippino
And here’s the news you need to start your day.
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Israel launched a strike against Iran early Friday morning local time. The move dramatically escalates tensions in the Middle East. Israel is now bracing for a counterattack. Now we’re recording this late Thursday night in Washington, so things may have changed by the time you’re listening. The attack by Israel comes after months of hostility over Iran’s nuclear programme. The board of the UN atomic watchdog said yesterday that Iran had broken its non-proliferation agreement. The US said it was not involved and did not assist Israel in the attack. Israel’s strike on Iran sent oil prices soaring. The international benchmark Brent crude jumped as much as 6 per cent after the news broke.
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The dollar is, once again, sliding. It hit its lowest level in three years yesterday. It happened after US President Donald Trump made another series of tariff threats on Wednesday. Here to tell us more about this is Aiden Reiter. He’s a financial reporter for the FT and co-writes the Unhedged newsletter. Hey, Aiden.
Aiden Reiter
Hey, Marc. How’s it going?
Marc Filippino
Doing well. Unlike the dollar. I’m feeling the horrors today. So do me a favour. Explain a little bit more what the latest set of tariffs threats are and why that led to a slump in the dollar.
Aiden Reiter
Yeah, so we got news that Donald Trump has said there will be essentially more negotiations at the end of the 90-day pause on the really sweeping “reciprocal” tariffs he’d put in place on April 2nd. So while the market might’ve been hoping that the 90-day pause would just continue and we wouldn’t have to renegotiate, it seems like all of the US’s trading partners are gonna have to get back in line and start negotiating.
Marc Filippino
Aiden, it’s Friday the 13th, a three-year low on the dollar sounds spooky. How significant is this latest move?
Aiden Reiter
This latest move is not that significant. I mean, it’s just continuing of a trend that since “liberation day”, we’ve seen a big, big slide in the dollar. The dollar had been at a super, super high in January and it’s come down pretty fast since then. But to anybody who believes this is the end of US exceptionalism, the idea that because Trump has done these tariffs or because growth and or corporate earnings are changing the US, everybody’s going to buy stuff in other countries. This would suggest that theme is continuing, right? People are not increasing their exposure to the US, if anything, they’re lessening it. But while we have that theme kind of kicking around the ecosystem, there’s some reason to believe that that is overhyped.
Marc Filippino
Yeah, tell me more about that, why?
Aiden Reiter
Well, if you look at the inflows, and the Federal Reserve has said this, there has actually been an uptick in inflows to S&P 500 and US equities. It’s not like people are really running away from the US that fast. There has been a slight downward trend in people’s exposure to US fixed income, specifically Treasuries. That is concerning because Treasuries are how the US government funds itself and the basis of the entire international financial ecosystem. But for the most part, Treasury auctions had been decently robust. So it seems to be just at the margins as people reallocate away from the United States.
Marc Filippino
Aiden, I want to end on this point and that’s Trump started this whole tariff regime to bring manufacturing back to the US. Does this slide in the dollar and the overall downward trend of the dollar help or hurt that goal?
Aiden Reiter
In theory, a weaker dollar would help US manufacturing. It becomes cheaper to manufacture in the US. Theoretically, foreign companies will want to put factories in the US because they’ll have cheaper labour and it’s easier to export things, etc. But it’s really hard to say where the dollar goes from here. We don’t know where trade policy will wind up. That results in more dollar uncertainty. So it’s hard to say that there’s been a big push by manufacturers to take advantage of the weaker dollar so far. Instead, what we’ve seen in manufacturer surveys is actually really big drops in sentiment and dropping other indicators, like new export orders, hiring. So it’s too soon to say where the dollar will wind up, and it’s just way too soon to say what that means for US manufacturing.
Marc Filippino
Aiden Reiter is a financial reporter for the FT and co-writes the Unhedged newsletter. We’ll have a link to that in the show notes. Thanks so much, Aiden.
Aiden Reiter
Thank you.
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Marc Filippino
A Boeing aeroplane travelling from western India to London crashed yesterday. The Air India flight fell shortly after take-off. At the time of this recording, more than 240 people are reported dead. It’s the first time a Boeing 787 model has crashed, and right now we don’t know what caused it. But the incident comes at a time when Boeing is trying to rebuild trust after a series of safety issues. Last year, a door plug blew open mid-flight on one of its 737 Max 9 jets. And there were two fatal crashes of a similar model in 2018 and 2019. Boeing shares ended yesterday down 4.8 per cent.
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The overall global bond market has been on the fritz because of concerns of high government borrowing. But some unexpected winners emerged from all that investor anxiety. Sovereign bonds in Italy, Spain, and Greece are all rallying. That is quite a turnaround for these countries. Here to explain why is the FT’s senior markets correspondent, Ian Smith. Welcome back, Ian. (Thanks.) So what is happening with these bonds?
Ian Smith
So, as you say, at a time when there is mounting concern about the record levels of sovereign debt and whether they are sustainable, we’ve had some unlikely winners in this global bond sell-off. And that has been a rally in the debt of countries that have been previously much scrutinised for their poor debt dynamics, for example, Greece, Italy and Spain. And so these countries who were once demeaned as pigs along with Portugal and Ireland during the Eurozone debt crisis for their debt woes are now doing really well. The bonds rallied heavily in the past few weeks, making them a surprise beneficiaries of this reshuffle in global debt markets.
Marc Filippino
Do me a favour, for people not familiar, how do we measure success when it comes to bonds, at least European bonds?
Ian Smith
In the Eurozone, Germany is the benchmark borrower. It’s the safest borrower as investors view it and everyone else’s credit worthiness is viewed in comparison to Germany. So it’s the additional interest rate that these countries pay over Germany’s bonds that matters. And what we’ve seen is Spain, its additional 10-year borrowing cost over Germany is falling below 0.6 percentage points in recent days, Italy about 0.9 percentage point and even Greece which whose debt woes triggered the Eurozone debt crisis led to a series of bailouts has seen its additional interest rate over Germany fall to around 0.7 percentage points. So that is nearing the smallest since before the Eurozone debt crisis.
Marc Filippino
Right. And just for the record, when yields go down, that means demand for bonds is high. Ian, why are these southern European bond markets so appealing to investors right now?
Ian Smith
So it’s a mixture of better economic growth relatively in southern Europe, especially with a post-Covid tourist boom. There’s been common EU debt issued during the pandemic, which changed how people viewed the overall credit worthiness of Eurozone borrowers and this prospect of potentially more common EU debts. These countries also are benefiting from better economic growth and then at the same time we’ve seen Germany’s benchmark yield moving inversely to prices. They’ve risen those yields as the price of Germany’s debt falls after it has come forward with a big spending package. So that’s helped to narrow the gap between Germany and these other perceived riskier borrowers.
Marc Filippino
We started off by talking about how these countries were at the epicentre of the Eurozone debt crisis more than a decade ago. Are we sure that these debt concerns are behind Italy, Spain, Greece?
Ian Smith
No, these are still countries with debt-to-GDP around or above 100 per cent, which is a bit of a warning level for investors on debt sustainability. It is more that other countries, such as France, the UK, and the US, have worsened rather than these have got much better. And they’re definitely, if there was a political shock, these have kind of vulnerable starting points. But better economic growth, some domestic demand for bonds coming through has helped shield these countries and make them look relatively stronger, which is giving some faith to investors.
Marc Filippino
Ian Smith is the FT’s senior markets correspondent. Thanks, Ian
Ian Smith
Thank you.
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Marc Filippino
Something big happened to Argentina in May. The country’s month-on-month inflation rate dropped below 2 per cent for the first time in five years. It’s a real win for President Javier Milei. When he came into office a year and a half ago, monthly inflation was an eye-watering 25.5 per cent. His main message since then has been price stability, and he’s made some big moves to get there, like implementing harsh austerity and deregulation measures. But don’t pop the champagne just yet. We’re only talking about monthly inflation. Argentina still has one of the highest annual rates in the world, even though it’s trending down.
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You can read more on all these stories for free when you click the links in our show notes. This has been your daily FT News Briefing. Check back next week for the latest business news. The FT News briefing is produced by Sonja Hutson, Fiona Symon, Mischa Frankl-Duval, Ethan Plotkin, Kasia Broussalian, Henry Larson and me, Marc Filippino. Our intern is Michaela Seah. This week’s engineers were Blake Maples, Kelly Garry and Sam Giovinco. We had editing support this week from Michael Lello, Peter Barber, David da Silva and Gavin Kallmann. Our acting co-head of audio is Topher Forhecz, and our theme song is by Metaphor Music.