Treasury yields whipsaw as borrowing costs remain elevated

The CNBC app, global market [music] news in one place. Customizable sections and personalized alerts. Stocks tracking, [music] interactive charts and market insights, all in your hands. Stay connected. Stay informed. [music] Download the CNBC app today. [music] Welcome to Squawkbox Europe. I'm Karen Cho with Steve Sedick [music] and Ben Bulos. These are your headlines. Yield whiplash. Treasuries get some short-lived relief [music] after the 10-year yield hits its level that has not been seen in nearly a quarter of a century, but borrowing costs tick higher [music] again as investors attention turns to September's non-farm payrolls report. >> European debt of course also coming under heavy pressure. The UK becoming the first G7 country to pay 6% on longterm borrowing, the first time since 2012. Whilst French fiscal uncertainty sees the euro tank against the dollar, [music] >> Brent spikes more than 4% as the US reportedly prepares to send up to 10,000 more troops to the Middle East with President Trump said to be mulling strikes on Iran after the midterms. [music] Oops. [music] >> Do you know when you try and give your kids the benefit of your own? By the way, good morning. Good morning. Good morning. Give the kids the benefit of your own mistakes. And some of the biggest mistakes I've made in life where I' i've made an initial mistake, but I've compounded it by trying to be quiet about it or or just ignoring the fact that I'd done something really or or actually not paid my my tax on time and just keep ignoring it because the tax man hasn't got back to you yet. So, and and I feel that that's what these countries are doing on a day. They're ignoring and have been for a long time the fact that we have a real big problem or they've made a mistake or they haven't gone down the right trajectory as well. A and surely the sooner we face up to our fiscal respon I mean yeah we're going to talk about jobs later yeah we're going to talk about inflation and all these are really important and we're going to talk about the AI boom and the crowding out and all that but none of this would be as prevalent as it is now if Musu Macron and about eight different British prime ministers and about four different presidents etc etc had actually gripped gripped the fiscal problem the debt problem and said you know what not on my watch or but what these politicians have done is said well we've got the debt to this level we've got the deficit to this level no one's had a route on us yet we can get away with a little bit more we can get a little bit more which brings into the analogy of the the straw going on the bail of hay on the camel's back and I think we are another one of those moments where the market is suddenly spotted something that has been clear and present in their eyes for months if not years but now suddenly it's all attention and it's the governments themselves fall and the populations as well by the way >> it's beautiful storytelling and what you're highlighting exciting is that the markets now focused on whether governments can pay their bills. So, you're getting some term premium that is built into the bond markets. Uh we were talking at length yesterday that we had a couple of different features here that were driving bond yields higher. It was oil prices. It's been the growth rates that have been surprising to the upside and it now is of course this debt situation that is really bubbling along. So, the fact that we had some tame inflation had us thinking well why are we still seeing an escalation in yields? It's very much the the term premium that investors are watching being baked into the bond markets and that's detrimental if it persists to the point because it is tightening in terms of borrowing costs. It means that some of the strength that we've seen globally and let's keep in mind even though there is some AI strength that has been happening there is fragility under the surface thanks to the multiple different conflicts that we face the different geopolitics around tariffs over time. There is fragility. So if you get tightening things to term premium that isn't addressed by the central banks in terms of lifting interest rates to tackle some of the inflation fears if it's not tackled by governments then you could have this as a feature sticking around on bond markets >> to to slightly extend the analogy about trying to give uh the wisdom of your experience to your children in a way these governments and uh the way they behave it is like children and the bond markets repeatedly say look I'm not going to tell you again I'm warning you I'm running to the end of my patience I'm going to give you 5 seconds. I'm going to give you five. And then what they've learned is that the warning comes. The warning comes, >> but they always pull back. They always pull back. They always pull back because it's in no one's interests for the whole thing to implode. And so they know, yes, there's a slight discomfort for a while, but eventually something happens that means the pressure eases. We saw a slight pullback yesterday. And so I think as long as that happens and the crunch point never actually comes, the countdown, I'm going to give you three seconds before I really lose my temper. >> The countdown never comes and so they never feel they have to actually deal with it though because you're feeling it more than just one asset class. Well, we've been focused on the bond markets. You saw some of that spill across to the euro yesterday. The fact that you had the escalation in the French bond yield over boons, it spilt across and impacted the currency. So you saw it in the euro. We are certainly seeing it in equity markets that the stock market rally that you saw was anticipated yesterday state side even early hours that coming under pressure from that escalation in bond yields and you've seen it I guess over the course of September with the retreat. So multiple different asset classes this is catching up with >> brilliant guest coming up in a moment and and he's been playing the French bonds as well. So we'll get him on in a couple of moments but just to remind everybody that global yields remain elevated after initially pulling back as they hit multi-year highs. The 10-year Treasury yield reached levels not seen since April 2002. That's not a Trump problem, is it? He wasn't around in 2002. You can't blame him for that. It's a multitude of administrations. That's after posting its largest quarterly rise so far this century in the third quarter, whilst the 30-year yield hit its highest level in 24 years. It comes amid warnings from Fed officials that inflation across America is still too high. The excellent Mr. Steve Leeman filed this report. Multiple Fed speakers saying that inflation is too high and suggesting it could need to be addressed with higher rates, but leaving unclear whether the Fed would hike at the next meeting. Vice Chairman Philip Jefferson said risk to inflation are to the upside, and he's concerned that higher energy prices may seep into broader inflation. But while he noted that rising yields suggest the market may want the Fed to hike, he said the Fed itself would benefit from taking more time. Meanwhile, three Fed bank presidents in a separate appearance agreed that inflation is too high and made clear they believe the Fed has more work to do. >> I see more risks on the inflation side. And so with the labor market on relatively solid footing, um monetary policy can focus on ensuring that we restore in a timely way sustainable, durable 2% inflation. But Boston Fed President Susan Collins alongside Barkin from Richmond and Schmidt from Kansas City would not say again if they would hike at the next meeting. Markets have recently discounted the possibility of an October hike, but trade with confidence that a hike is coming in December, though somewhat less in recent trading. Minneapolis Fed President Neil Koskari saying he had only one additional hike pencled in for this year, but didn't say if he supported enacting it in October or December. He has one built in for next year, but he's also watching high yields and taking under advisement that the market itself is predicting a more aggressive Fed. Steve Leeman, CNBC Business News. >> We're going to get US non-farm payrolls along with the unemployment rate later today. Analysts are expecting jobs growth of 84,000 for September. While looking for the unemployment rate to remain unchanged to 4.1%. It follows last month's surprisingly strong figure of 162,000 jobs added along with an upwards revision on prior months. Renard deck joins us now, head of European rate strategy at UBSIB. Thank you so much for joining us today. I know we're going to talk about French paper in a moment, but I want to ask you more broadly about the bond route that we're watching and how significant it seems in your view. >> It's very significant. We live in historic times. We're having uh two things come together. One is energy price risks um which is Russia, Ukraine like what's happening there exactly with the commodities and the second thing is the whole debate about growth resilience ourstar all that kind of stuff. So these two things are now coming together to uh potentially historic repricing going back to the levels in yields of the 2000s and then you're going to see pressures in you know global rate complex um you know there's demand for physical capital for financial capital and that's going to lead to some weaker links being challenged. I've spoken to so many players across financial markets from insurance companies to those in banks to those in the private debt, private credit space, and nobody has been that concerned in recent weeks. But that said, we've been escalating over the course of time. Is there a tipping point where the escalation bond yields catches up with everyone? >> Well, I I've been uh I wrote about this earlier this week, not to look for a Moby Dick or a level where everything normalizes. I think there's just a lot of things going on. I think you want to be aware of what's happening in AI. you want to be aware of what's happening in Europe, but I don't think there's a level of uh you know 5 point something on US rates where everything goes back to the previous world and and we're going to have a a big rally again. I think we're in a world where there's a lot of shocks occurring. Look at physical oil just jumped higher yesterday because of escalation in Iran. It's it this is the market we're living in. We need to be quite nimble and you know close and open things. It's I hope a good time for strategist. Uh Rena, do you think we're going to get to a point where actually the the parameters change and the targets change and the rules about maximum debt for um EU countries, Euro zone countries is rethought, maximum deficits are rethought to sort of to to to take off some of the pressure and and shift the the goalpost as it were or would that cause even more problems? >> That's a very good point because it's not so much I would say about debt ratios. It's really about can you do some primary balance adjustment that's really what's going on here and for France actually at the start of the year the hope was that they will be able to do a bit of uh adjustment or maybe 2% of GDP something like this and as it ends it seems that we're going to have a deficit of 5.4% 4% of GDP this year. [snorts] Some credit to the French government because they didn't explode on the energy price measures, all these things, but there's no consolidation to speak of. And then it the question becomes how would these countries consolidate as you were saying in the opening segment. And then in in history, it's always been higher yields. No, you have higher yields and then you have an increased interest rate costs and then ultimately governments and you know uh populations start caring. But we're probably not at that stage yet in many countries. >> And sorry, please. I was going to say is is there anything that they can learn from say what happened in the Greek sovereign debt crisis all those years ago and how things were turned around there that could be applied now or is the landscape so different that none of those lessons really apply? >> No, I think there's many uh Euro area officials who are saying um the lessons of that crisis were that you have to consolidate and you'll be better 10 15 years down the road and we have a stronger architecture in the Euro area. So if that's that's what's going around as a message and that's why you're seeing some pressures now in France because the view is that if they don't do a bit of consolidation you you um you you will have no reform and then you're going to have um >> problem right now. Um >> Mario Draghi brilliant man that I think he's just been very successful at most things he's done. I remember him speaking and I remember Karen and I and others listening into those speeches and it was always we will give the put but you must do this. Well, as far as I can see, he gave the put, but others didn't do their side of the bargain. There wasn't a restructuring of the economy. There wasn't restructuring of the of the debt to a meaningful trajectory to get it lower as well. And so, hence, we're in the problem here as well. And I fear the ECB and others will come in as the same buyer of last resort. They'll use TP. Remember, it was four years ago. I sent this to an email to the team. We all started talking about antifrag tools. >> Antifrag tools. Not fragle rock. anti-fragmentation tools and you can bet your bottom I know that Nagel said no no but he's a German he was always going to say that yesterday but the fact of the matter is we know that the ECB will find themselves under so much pressure that sooner or later whether it's Lagard or someone else will say yeah well you know these spreads are unruly we'll come in and and tighten that spread again as well even if it's just verbal intervention it's going to come isn't it >> uh not that quickly I would say Lagard said two days ago that this death of to GDP of 120% is a serious matter I Nagago yesterday also not too excited. >> Remind me when she was finance minister how much debt consolidation the France >> that's a while ago >> a while ago. Okay. Please carry on. >> No but I think this question I'm getting from clients all the time. What about TPI? I think we have to keep in mind that your area is running at relatively high inflation rates. Going to have the flash today. >> Looks like we may be going to 4% year on year on HICP but further pressures risk from food prices. >> So here's the question to a man who's been short French paper for most of the year but you've closed the short not >> most of the year but since early September. Yes, that's correct. >> Yeah. So you >> good timing. Yes, it happens. >> Congratulations. Um what what do our viewers do? What what are you advising people to do now? >> Well, I closed the short we had a short France versus Eon because I think some of these things were were bound to happen in September. Um it's a different budget round from usually because we have all these political risks and the global backdrop. Uh this morning I opened a short BTP Italy versus um versus uh boons. I think you want to be in core here. Safe asset. The safest asset is still the bound here. and you want to worry about further escalation in parts of the rates market or or the financial sector that are vulnerable that are maybe weaker links and I think Italy maybe there will catch up and people will get more concerned about Italy as well at these higher yields despite a lot of reforms that have been done in Italy >> to your point around whether the frag anti fragmentation tool will be used there was a point where there was another test of this narrative for instance when the French were trying to pass previous budgets and I was asking very similar questions when I was in the IMF uh in Washington as to whether the TPI would be enacted. And the view from the ECB was no. Uh we're not. And I think that's the thing when you've got governments now at at a crisis point where you could bring about some change. And we always say nothing happens in Europe unless you're in a crisis. Some of these governments are genuinely facing a crisis when the parliament is brought down when you have a change in government. I don't think there is a willingness for the ECB to get involved in that situation and again ahead of the the presidential election. >> Do we blame again some it was a brilliant piece? It was Jinang Ganesh and I've mentioned it three times this week. But do we blame the governments for being inept? I actually I'm beginning to agree with him actually. I blame the populations for not wanting change, for not allowing or voting in governments who are who are given the remid to consolidate financially. I mean if the the politicians relatively inept across Europe and UK and whatever for a long time at this at this side of the ledger but isn't it populations that have said we don't want to give up on our pensions we don't want to give up on our benefits we don't want to give up on this and that isn't it them that's to blame the lack of willingness the lesson from the regional elections in Germany just now is very much this note that Matt said the reform agenda that was >> that is not popular and then the question is when the populations potentially start caring and then I think you probably are not at levels of yields where transmits broadly enough across the population. >> How does this end then? I mean, are we going back into a sovereign debt crisis situation or actually is it going to be averted? >> Well, I think there's a lot of the fact that the TPI wouldn't be launched that quickly, I think is potentially a good thing. The fact that the that the Europe as a construct is stronger, that we have, you know, better bank regulation, all these things. Remember, the sovereign crisis was also a banking crisis. No, European banks are in a very different >> I started off in Iceland >> as last you know. [laughter] I know my my world tour started off in Iceland. It didn't start in the Euro zone. It was I remember I was staking out Gor who was the then prime minister in Reavik for weeks. We finally got it. But oh my god, it was cold up there and cheap though actually for once. >> So I just add the hook we have now is global growth being okay, resilient, that can change. But as long as there's part of the global economy that's doing well, we're going to have consolidation. >> Brilliant. >> Ultimately, >> okay, Renault, thank you so much for joining us this morning. Ronald to Bulock, head of European race strategy at UBSIB. Still to come on the show, Brazil prepares to head to the polls in a presidential election race [music] that is too close to call. We'll break down what you can expect. Plus, we'll get the latest from Charlotte on the French budget as the country battles to bring its soaring debt under [music] control. And we'll hear from the president of the Unruly Corporation. That's the name, that's not me being shady about it. and former UN Deputy Secretary General Mark Malik Brown on why a combination of human expertise and AI risk assessment is the way forward in an [music] increasingly challenging geopolitical climate. Executive Decisions is the new podcast from CNBC where I ask powerful leaders about their decisions [music] that changed everything. I'm Steve Sedick. Here's Miss Joe Malone at CBE. >> I started that first business of skincare. [music] That's when I knew that I was in charge of my own life. And then that's when the entrepreneur really, although I didn't know what the word entrepreneur meant, that's when the entrepreneur really took hold. >> That's executive decisions with me, Steve Sedwick. Get it [music] wherever you're listening to this. >> [music] >> There's no doubt it's been a very down big week on the European markets. The stock 600 has lost to the tune of about 1.9% over the course of the trading week. Even more off some of the individual markets, 3% down for French stocks this week. And as we gear up to the start of trade uh for the final trading day of the week, you can see we're chasing a bit more green. So the stocks 50 futures looking to lean positive slightly stronger range on the Footsie futures seen up about a third of a percent. I want to take you to US futures because the market there stalling out yesterday really showing very little direction as it was looking at the face of the 10-year US Treasury yield climbing to the highest level since 2002. So that impacted the appetite on equity markets again as we keep watch of this expanding term premium. We've got markets states side looking to bounce for the Friday session. It is modest territory but seen higher at this point and again a reversal for the course of the trading week. I mean the Dow has been down about 1 and 3/4 of a percent. Soaring borrowing costs from the bond market route has sent the US dollar to a 17-month high. It is now on track for its third straight week of gains, but this comes at the expense of the euro, which has dropped to its lowest level since May 2025, a decline fueled by France's fragile fiscal health. And this morning, we're perched at the 11250 odd handle. Ben, >> well, the UK has been caught up in the global bond route with the yield on the 30-year guilt hitting 6% on Thursday, its highest level since 1998. In doing so, it uh earned the unenviable title of becoming the first G7 economy to pay a rate that high since the euro crisis more than a decade ago. UK banking stocks were also under pressure after Sky News reported that chief executives from some of the country's largest lenders had been summoned to a meeting with Chancellor John Healey ahead of next month's budget. This amid speculation that the Treasury could be mulling possible taxes on banks in the forthcoming autumn part. The answer. That's the answer. Great Britain. You tax the banks more so that they charge more for mortgages and they char because they will pass on the cost. How stupid are British politicians? If you charge a bank and this is I can say it generically because you can't defame a group of people. You can only defame individuals. So you get a I know my um 1996 defamation act. Trust me. >> You've done your compliance training, haven't you? You've done >> I may have done I may have [laughter] done where was I ranting? Oh yeah. How stupid are British politicians that when you charge banks more, you think the bar the banks are just going to absorb that? You do realize, and I'm talking to you, the British political class, that if you charge the banks more, they will offset that cost by charging more for personal loans, more for corporate loans, more for other products, and certainly more for mortgages. So, the spreads will widen, and they will make their net interest margin. They will make their money back because they have a group of shareholders who they're responsible to. Just just confirming that you backbenches in the Labour Party and and on the other side for that matter, you do understand how this works. No, you don't. Okay. All right. Let's move on. Uh meanwhile, the 10-year bond yield spread between French and German government bonds has hit its widest level in 14 years. Concerns over the French budget have hit investor sentiment. The Prime Minister Sebastian Loru's government is targeting a number of savings measures as well as tax increases paving a way for a contentious debate in the National Assembly. Charlotte joins us with more. Charlotte, I don't know what more we can say. Um, it's so modest. Even if he gets his budget through, we will still have >> if >> and it's a massive hit if >> but the deficit will still be at 5% even if he gets everything through. And that's based on a scenario of a growth of around 1% next year which the high council of public finances which is a body of indep independent experts said this is actually an optimistic scenario. So you know straight away there's a lot of doubt on the measures have been presented yesterday by the prime minister again bearing in mind that his two predecessors have been toppled around the questions of the budget. Overall an effort of around 43 billion e 17 billion in new taxes 26 in cuts. Now the rate of taxation will rise slightly next year to 44.2% 2% of economic output from 43.9% last year. Presenting the proposal yesterday, the finance minister Hollon Escure talked about a carefully calculated effort to reassure investors and preserves the engine of growth. We again try to bring down deficit to 5% in the back of the mind of many investors called the weight of the debt and the sustainability of the debt reaching almost 120% of GDP and projected to be even higher next year. So some measures that we were discussing yesterday that were expected including the non-indexing on inflation of pensions that's a highly contentious one because usually pensioners have been protected where this time only the smallest pensions will be indexed but the higher ones won't be again the contribution from motorway and airport operators and exceptional tax on on profits of larger groups that is not so exceptional because it'll be the third year that is reconducted. uh some parts have been protected like defense of course they will have a higher um a higher budget. Now again what we keep hearing from the government including again the finance minister this morning speaking on French television saying that all parts of this budget are negotiable because of course now this will go to the national assembly for discussion. What we heard from other parties, particularly the socialist, the tokenist budget is a provocation and the socialists were instrumental in supporting the government last year because again the government doesn't have a majority in parliament to get the budget through. We haven't heard yet from the fine right from Marin Lupench hasn't talked about this budget just yet. The far-left LF said it completely oppose it. So we have to wait and see how the debates go whether we will have a budget by the end of this year and the past couple of years was actually pushed into the beginning of the following year. Uh so wait and see. But what is interesting is that all these questions around the budget which would be normally the big headlines in the news is actually was almost secondary because there were also some big protests happening that started in pockets just in in high schools and they really seems to be gaining momentum is going into universities around 400 schools today will be closed and this seems to be a growing crisis that kind of gives the context of you know you had students complaining about the conditions in classes about teachers not attending class about them freezing in class in winter and boiling in summer etc etc. So in this contest government is trying to make some cuts and that is you know arriving like cold water uh here. So the the education minister will be meeting with some representatives of uh unions and teachers and students today to try and diffuse this crisis because here again it shows a context where there's a lot of social discontent to certain extent and presenting some cuts as part of this budget is politically very difficult again 7 months before an allimp important presidential election >> which takes us to the question as to whether the bond markets are doing the French a favor here because similar to what we saw in the UK where there was very little appetite for cuts very little appetite to tackle some of the hard choices and then the guilt market just moved very aggressively. You saw investors just take control of the situation forcing the hand of government. Do you think that could be the same situation where the French can scrap amongst themselves but as soon as you get a very strong message from the bond markets that look your cost of borrowing is going to escalate so much that the pressures are going to be unbearable, you need to make some hard choices. Do you think that is actually something we're looking at today that will move the needle on the French decision-m? >> That's a message that has been hammered whether it was Bar when he was prime minister, whether it was Beiru who was prime minister, whether it's Luku now. It's a message that has been very clear from the government say we have to make an effort. We have to make some cuts on our own terms because if we don't do it on our own terms then the terms will be decided by other institutions by first by the market and then potentially by other institutions. So we have to do it now our way. It's painful now but it could be more painful later. But again, when you reach when it trickles down to the public opinion, people don't want to work for longer. People don't want to seek cuts, but and there's a feeling that the the weight of taxation is getting heavier and it is the numbers are showing it and that the public services are deteriorating and that's also fueling a certain unhappiness of we're paying more and more for less and less. And so it's really difficult balance politically uh to to to hit and you know then you have a lot of populist parties that are saying it's okay, we will retire at 62, it's okay, we don't need to. And you know a lot of these promises seems to be gaining momentum in the public opinion with that election next year. So it is difficult to come out and come out with a bad message and say we need to make those cuts because a lot of people actually don't want to hear it. >> Yeah. And there's a lot of politicians as you say on the periphery quite rightly who are just peddling lies about what the reality is. Thank you. Superb. Okay, let us move on. We're going to take a short break. Uh safe to say the European equity futures look like this. We are seeing a small bounce in the futures markets at the open. >> [music]