JGBs Selloff Is Today's Risk-Off Trigger: 3-Minutes MLIV

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00:00Mark, let me start with the European agenda because we're just ahead of the European Open.

00:03French futures are weaker. There could be a tariff perhaps on champagne, we hear, overnight.

00:10U.S. stocks set to fall on Greenland, but of course they are playing catch-up.

00:13This is one area of negativity that markets are dealing with.

00:16But then, of course, you layer on top higher yields in Japan.

00:21Yes, I think there are two very big risk-averse events happening at the moment.

00:26The obvious one is Greenland is going to be a really slow-motion train wreck.

00:31I think the problem is here, kind of as Ali outlined there, is there's no incentive for either side to back down.

00:37There's no incentive for Trump to back down from the hard line.

00:40And there's no incentive for Europe to kind of concede any major ground until the populace in Europe starts squealing on the economic front,

00:47which probably won't happen to at least those 25% tariffs in June.

00:51So we're going to take a while to price this because we're not going to get more aggressive lines from Europe.

00:55We're going to try finding a diplomatic solution, but it's hard to see where the compromise comes.

00:58So that's the slow-motion risk aversion.

01:00And I understand why people aren't overreacting at the moment,

01:03given the track record over the past year of Trump always chickens out.

01:06But there's less incentive there this time.

01:08The other more immediate concern, and the one I'm really concerned about because it's definitely been underappreciated at the moment,

01:13is what's happening in the JGB's market.

01:1630-year JGB yields are trading 40 basis points above where they were on Friday.

01:19They're about to close, the yields are about to close the highest today,

01:22about 27 basis points higher on the session.

01:25Now, this is really important because it has global macro consequences that will come delayed.

01:30When will they come?

01:31They'll come when JGBs find a floor.

01:34Now, I'm not sure that's going to happen.

01:35We're still a couple of weeks away from the election.

01:37And this is, you know, we've talked about it for a long time,

01:40that JGB yields should ultimately be much higher.

01:42The country's got a massive debt problem and it's about to expand fiscally very aggressively.

01:47So it won't be a global problem until they find a floor, but that could be much higher.

01:51It'll be a domestic Japanese problem.

01:52But when they find a floor, Japanese investors own assets all over the world.

01:58If they have a chance to buy JGBs at, well, 40 basis points yields already over the last few days,

02:03but could be much higher yields, they're going to pull back money from around the rest of the world.

02:06That will blow up the carry trade as well.

02:09This is a large bond market.

02:10So the consequences here are massive and being underappreciated.

02:14Just what happens next then?

02:16How does this, just give me the implications for the Treasury market, the European government bond market,

02:21people's portfolios.

02:22Mark, when does this start?

02:24How seismic could this be?

02:27I think this is very big, but I can't work out the time.

02:31Several people have asked me today and I'm struggling to work out when it feeds in.

02:34What I will say is that I don't think it's immediate because, as I said,

02:38I think that the global impact is when JGBs sell off enough to find a floor

02:43and that's when you get money back home.

02:45And I don't think we're close to that level yet.

02:47As I said, the election is still, you know, almost three weeks away

02:52and therefore we've got a lot of time for this to play out.

02:54And I think it's getting its own self-reinforcing dynamic.

02:57Who wants to go into this market right now?

02:59We're talking about the Bank of Japan having to hike maybe three times this year

03:02to defend the yen and the JGB market, which is just creating the dynamic even worse.

03:06So I think it's delayed for the rest of the world.

03:08It's Japan focused right now.

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