The Bond Market Has Lost Patience, Principal's Shah Says

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00:00A 20-year auction. Now, a 20-year maturity for a lot of people in the bond market,

00:04not a great maturity. A weak 20-year auction for a lot of people in the bond market,

00:08not worth paying attention to. Why was it so important this time around?

00:12Is it a reason to sell or an excuse to sell?

00:16Hi, John. Well, I think you're right. I mean, I think when we're thinking about this,

00:20is it a cause? Is it a symptom? And as you said, a weak 20-year auction is not unusual. It typically

00:25has less demand anyway. But we've already seen in the last couple of weeks, and particularly

00:28this week, especially after the Moody's downgrade, that there's been this narrative of concerns,

00:33which has been like a hum, which has been growing louder and louder, of concerns around the deficit.

00:38Now, if we had spoken maybe three or four months ago at the end of last year, maybe,

00:42and somebody said, you know, when does the US really need to confront its debt issues? A lot

00:47of people would have said, you've got another decade or so. Increasingly, it feels like this

00:51administration is going to have to confront the problems because the bond market has lost patience

00:56and is really going to force the issue through to make sure that there is some realisation that

01:03continuing to expand its deficit, its debt numbers indefinitely, is simply not something which can

01:08continue. Sima, let's talk about levels. Life above 5%, this cycle on the long bond hasn't been

01:13sustainable. How problematic is this level? How self-limiting is this move?

01:19Well, I mean, if we think about it in terms of the 10-year, there's always some thresholds which

01:23are thrown around. Typically, it's been the 5% level is the bit where the equity market really

01:27starts to stumble. I think increasingly, because we've seen growth downgrades over the last couple

01:32of months because of all the issues around tariffs, we're probably looking at a slightly lower level

01:36in terms of equity market resilience. For us, we're looking at a 4.75 handle. Of course,

01:41it depends the speed at which we get to that point. And of course, what the reason is. If the reason

01:46is because of better growth expectations, that's OK. If it's really around concerns around

01:51the fiscal side, well, that's a slightly different story. So we think that the equity market already

01:56is being somewhat pressured. But I think the pressures would likely grow if you start to

02:01cross that threshold.