Bond Ructions Gatecrash Talks by G-7 on Skewed World Economy

(Bloomberg) — Global bond jitters took center stage as Group of Seven finance chiefs discussed how oil-fueled inflation risks overshadowing world economic prospects.

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The talks in Paris were meant to dwell on imbalances ranging from the US budget deficit to China’s weak consumption, but the state of government debt markets left ministers and central bankers preoccupied by spiking yields, driven by investor concerns about consumer prices.

“We want to make sure the G-7 sends a message: We are in charge, we are following things, we are acting if necessary,” French Finance Minister Roland Lescure told Bloomberg Television on Monday, before he then reassured reporters that the bond market is “correcting, but I wouldn’t go as far as to say it’s collapsing.”

The backdrop of US President Donald Trump’s extended standoff with Iran keeping the Strait of Hormuz shut, blocking a key artery of global energy supplies, is increasingly alarming investors.

Market moves were less drastic than Friday’s rout, but 30-year US yields remained at the most elevated since 2007, and the rate on similar-maturity German debt was the highest in 15 years. Japanese government bonds notched the biggest losses, driven by fiscal worries there.

“The length of conflict just hasn’t been helpful,” Kim Crawford, a portfolio manager at JPMorgan, told Bloomberg TV. “The longer the Strait of Hormuz remains closed or impaired, the more global inflationary pressures build, the higher the risk of second-round effects.”

European Central Bank chief Christine Lagarde, questioned on the bond selloff as she arrived at the G-7, said that “it’s always my job” to think about such things, a sentiment echoed by Bundesbank President Joachim Nagel. In contrast, European Union Economy Commissioner Valdis Dombrovskis insisted that it’s not his policy to comment on market moves.

While bonds dominated the tone of the gathering, Lescure cautioned that the underlying economic picture isn’t as worrying as investors might suggest.

“Obviously I’m preoccupied — I mean who wouldn’t be?” he said. Even so, “there is a slowdown but there’s no recession, so no stagflation. Inflation is on the rise, but we haven’t seen any second-round effect either. So less growth, more inflation, but so far we’re not in a recession.”

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US Treasury Secretary Scott Bessent didn’t offer much commentary on the market and economic backdrop beyond observing that the meeting takes place at “an important time” and follows Trump’s “very successful” encounter with counterpart Xi Jinping in Beijing.

Ministers shared views on the economic situation before a lunch more focused on matters the French have sought to emphasize. President Emmanuel Macron has made tackling global imbalances between the world’s major economic blocs the top priority as his country chairs the G-7.

French officials warn that the mismatches of US deficits, China’s surpluses and under-investment in Europe are the fundamental drivers of geopolitical and trade tensions, and potentially the source of future financial crises.

Given how bloated public finances are one of the elements driving the bond selloff, Lescure made the link with the French presidency’s theme.

“We are in a phase in which large budget deficits are part of global imbalances,” he told reporters. “We are no longer in a time when public debt is no longer an issue. We must integrate this into the way we work and our discussions with partners.”

Incongruous with that tone however was Japan, whose Prime Minister Sanae Takaichi, called on the finance ministry to compile an extra budget in response to rising commodity prices driven by the ongoing Middle East conflict. That followed repeated assurances that such a measure wasn’t necessary.

The rest of the G-7 is not much less concerning for investors. In the UK, Andy Burnham, the mayor of Manchester who is seeking to replace premier Keir Starmer, tried to reassure investors at the weekend that he would manage the public finances responsibly, but declined to back existing fiscal rules.

Meanwhile Italian Prime Minister Giorgia Meloni has just asked the European Commission for greater latitude from the European Union to extend energy aid to consumers. And a measure of US debt recently surpassed the threshold of 100% of gross domestic product.

Data on Monday meanwhile underscored the Chinese element of weak domestic consumption in the imbalance equation. It showed growth slowing across the board in April with investment resuming declines, as booming exports no longer offset a deteriorating economy at home.

Beyond imbalances, the meeting will also cover topics such as critical minerals before turning to matters such as terror financing on Tuesday.

“We call upon all our G-7 and indeed all of our allies and the rest of the world to follow the sanctions regimes so that we can crack down on the illicit finance that is fueling the Iranian war machine and get this money back to the Iranian people,” Bessent said.

–With assistance from Joe Mayes, Kamil Kowalcze, Toru Fujioka, Daniel Flatley, Richard Bravo, Cécile Daurat, Eloise Hardy, Tomoko Hatakeyama and Lizzy Burden.

(Updates with analyst in sixth paragraph, G-7 debt starting in 16th)

Bond Ructions Gatecrash Talks by G-7 on Skewed World Economy

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