Full transcript
0:00The bond market has been the biggest
0:01story in finance for the past 2 weeks.
0:03Everybody's talking about America's
0:05national debt crossing $40 trillion and
0:08the Treasury doubling its bond buyback
0:10program. But those two stories have
0:12something in common. They're both
0:13American stories. And what happened in
0:15the bond market last week wasn't. In the
0:18same few days, we saw America's 30-year
0:20rate hit its highest level since 2007,
0:23Germany's since 2011, the United
0:25Kingdom's since 1998, France's since
0:282008, Canada's since 2010, while Japan's
0:31hit an all-time high. That's six
0:34different countries, all feeling the
0:35same pain in the same week. So, what's
0:37being reported and what's actually
0:39happening doesn't quite line up. At some
0:41point, the coincidence stops being a
0:43coincidence. The obvious answer everyone
0:45reaches for is debt. Governments
0:47borrowed too much, lenders got nervous,
0:49and now lenders want more to keep
0:50lending. But that explanation only gets
0:52you so far. Germany is the fiscal
0:55conservative of the group. They carry
0:56the lightest debt load among the G7
0:58economies by a pretty wide margin. But
1:01Germany's long rates still hit a 15-year
1:03high anyway, which means there's clearly
1:05more to the story. It's not something
1:07happening to just one economy. It's
1:08happening to everyone. And it starts
1:10somewhere nobody was looking with one
1:12very particular buyer. one that sat
1:14underneath every major bond market in
1:16the world. In order to find out exactly
1:18who that is, we have to go back to the
1:2080s. Let's pretend you own Mund Difflin,
1:23the biggest paper mill in town. You've
1:25got a star employee. His name's Dwight.
1:2720 years on the job, never missed a
1:29shift, and a beet farmer on the weekend.
1:31Solid guy. The deal at your mill is the
1:34standard for this time period. Work here
1:36long enough, and when you retire, the
1:38company pays you $2,000 a month, every
1:41month, for the rest of your life. It's
1:43called a pension. For Dwight, it's a
1:45great deal. He never has to think about
1:47running out of money again. For you, the
1:49owner of the paper mill, it's a new bill
1:51and not a bill you pay once. A bill that
1:53starts the day Dwight retires and
1:55doesn't stop until the day he dies.
1:57Might be 15 years, might be 35. Nobody
2:00knows. That's the part that makes this
2:02hard. If you knew Dwight needed exactly
2:0520 years of checks, you could set aside
2:07exactly 20 years of money and be done
2:09with it. But you don't know how long the
2:10beats are going to keep him going. So,
2:12your pension problem has a very specific
2:14shape. You owe a fixed amount on a fixed
2:16schedule, stretching decades out, which
2:19means whatever you buy to cover it needs
2:21that same shape. That rules out almost
2:23everything. You can't put Dwight's
2:25retirement in stocks. Stocks build
2:27wealth over time. Dwight needs $2,000 in
2:30cash on the first of the month,
2:32guaranteed. And you can't take much risk
2:34with it because it isn't your money. You
2:36already promised it. If the market has a
2:38bad year, Dwight's check size doesn't
2:40get any smaller. So, you end up buying
2:42the most boring instrument in existence,
2:44something that pays a set amount on a
2:46set date and has no option to stop
2:48paying, a 30-year government bond. You
2:50line its payments up against Dwight's
2:52payments, and the two schedules cancel
2:54each other out. You couldn't care less
2:56about what the bond you bought is worth
2:57tomorrow. You didn't buy that bond as an
2:59investment. You bought it to cover
3:01Dwight's pension. So, while everyone
3:03argues about term premiums, whether it's
3:05a good time to be buying, and whether
3:06the Fed chair sounded slightly more
3:08worried than he did last month, you're
3:10not even listening to these
3:11conversations because the price only
3:13matters to somebody who wants to sell
3:15and you aren't selling. That bond could
3:17get cut in half and nothing about your
3:19situation changes. The coupons will
3:21still show up on time and the principal
3:23will still come back at maturity, which
3:25makes you a very unique buyer. That's
3:27the defined benefit pension fund. They
3:29were patient, had deep pockets, were
3:31legally required to show up, and
3:33completely unbothered by price. For 50
3:36years, traditional pension funds were
3:37the best customers of the long end of
3:39the bond market. But they're the last of
3:41a dying breed, and I'll show you how the
3:43secret force that held up the bond
3:45market for 50 years has now disappeared.
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4:55back to what happened to that secret
4:57force holding up the bond market. In
4:591985, the Bureau of Labor Statistics
5:02found that 80% of full-time workers at
5:04medium and large American companies were
5:06in a defined benefit plan or a pension.
5:08By 2000, that number was 36. Today, that
5:12number sits around 14%. They weren't
5:15wiped out by a crash. They just weren't
5:16offered anymore. They got replaced with
5:18the 401k, one human resources memo at a
5:22time, which may just sound like a small
5:24paperwork change, but it isn't. Under a
5:26pension, the company owes a fixed amount
5:28on a fixed schedule. So, it has to go
5:30buy something to match that shape. But
5:32under a 401k, the company owes nothing
5:34past payday. The money lands in an
5:36account with Dwight's name on it, and he
5:38gets to decide where the money goes. and
5:39Dwight doesn't want to buy 30-year
5:41government bonds. According to the
5:43numbers from EBRI and the Investment
5:45Company Institute, more than 70% of all
5:48401k assets sit in stocks, while
5:50standalone bond funds get about 5%.
5:53Which means the biggest change in
5:55structural demand in the bond market in
5:5650 years was caused by someone in HR
5:59named Susan. The Organization for
6:01Economic Cooperation and Development is
6:03an international organization of 38
6:05developed countries. You can think of it
6:07as the Avengers, but for economics.
6:09Across its member countries, pension
6:11funds domestic bond holdings have been
6:13cut in half from 8% in 2007 down to 4%
6:17last year. America's own central bank
6:19said the same thing. The desk that runs
6:21the Federal Reserve's bond portfolio
6:23told the committee that ownership of
6:24Treasury securities had shifted from
6:26relatively price insensitive official
6:28sector holders to more price sensitive
6:30private investors and that this could
6:32have implications for the term premium.
6:34Translated out of central bank speak,
6:36the buyers who didn't ask the price are
6:38being replaced by buyers who do, and the
6:40term premium is just the new buyer's
6:43extra charge on top for tying their
6:45money up for 30 years instead of 30
6:47days. The United Kingdom's Office for
6:49Budget Responsibility also found a
6:51similar thing happening to their
6:52government bonds, known as guilts.
6:55Today, British defined benefit pension
6:57funds hold guilts worth about 27% of the
7:00entire British economy. They estimate
7:02that falls to under 6% over the long
7:05term and shifts this size cause damage.
7:07It's estimated that weaker pension
7:09demand could push the interest rate on
7:11British government debt up by around 80
7:13basis points which would cost the
7:15British government about 22 billion
7:17pounds per year. But it's not just the
7:19United States or the bean eating
7:21veneerswearing lads across the pond. The
7:23Netherlands, home to the largest pension
7:25system in the entire European Union,
7:27just finished rolling out the first wave
7:29of a historic overhaul across nearly€2
7:32trillion in assets under management. The
7:34first wave was completed on January 1st
7:36this year. It included 30 Dutch pension
7:38funds and 10 million members. All were
7:41moved from the old collective defined
7:42benefit model to an individual defined
7:44contribution model. Under the old rules,
7:47those Dutch pension funds had to match
7:49every promise with an asset like the
7:51Dwight example. So, they bought
7:52ultra-long German bonds, French bonds,
7:55and longdated swaps. And they bought
7:57them regardless of the yield. They
7:58bought them because a regulator told
8:00them they had to, which is how Dutch
8:02pension funds came to own an estimated
8:0310% of the entire German sovereign bond
8:06market. But under the new rules, they
8:08don't have to be a buyer anymore. The
8:10Dutch Central Bank estimates these funds
8:12could unwind 100 to€150 billion in
8:16longdated bonds and swaps. And the
8:18biggest wave hasn't even hit yet. One
8:20fund, ABP, the largest, holds about a
8:23third of the entire Dutch pension system
8:25on its own, more than 500 billion euros.
8:28It converts next January with almost€1
8:30trillion of Dutch pension assets
8:32scheduled to transition next year. This
8:35matters because on the exact same move
8:36in interest rates, a 50-year bond swings
8:39much harder than a 5-year bond. That
8:41price sensitivity is called duration.
8:43So, somebody has to be willing to hold
8:45Europe's long-term debt and absorb those
8:47swings. That job was being done in
8:49enormous size by those pension funds who
8:52were forced buyers. PIMIMCO measured the
8:54impact of this and their base case
8:56estimate is the equivalent of 115
8:58billion euros of 30-year bond demand
9:01simply vanishing from the long end.
9:03Every year, Europe's governments issue
9:05new debt and pay off old debt. The gap
9:07between the two is the new money they
9:09actually have to find buyers for, and it
9:11carries a certain amount of that swing
9:13risk. The Dutch withdrawal is about half
9:15of it. one country's pension funds, half
9:18of what all of Europe needs someone to
9:19absorb every year. So, this is a global
9:22trend we're seeing that ripples through
9:24every major economy. It's not that
9:26investors refuse to lend governments
9:28money anymore. We're still seeing
9:30auctions clear. It's that the buyers
9:31governments once knew and loved got
9:33replaced by buyers who care about the
9:35price they pay, and they want a better
9:36price. Which leaves every debt office in
9:39the world staring at the same question.
9:41If the buyers who had to show up at debt
9:43auctions are gone, what do you bring to
9:44the auction? which leaves debt offices
9:46with a brutal choice. Keep selling
9:4830-year bonds at punishing rates or
9:51start looking somewhere else. And they
9:52started looking somewhere else. Britain
9:54went first. A decade ago, long
9:57conventional guilts were nearly 30% of
9:59the issuance program. This year's plan
10:01has them under 10%. The debt office even
10:03said it on the record. Market feedback
10:05noted continued declining demand for
10:07long-dated conventional guilts, in
10:09particular from the domestic pension
10:11fund sector, which is the polite way of
10:13saying we asked around and nobody wants
10:15them. Japan cut its issuance of super
10:18long government bonds for the coming
10:19year to about 17 trillion yen, the
10:22lowest in 17 years, with the Japanese
10:25Ministry of Finance now considering
10:27reducing issuance even further in the
10:28coming months. America's making the move
10:30to the short end as well. Short-term
10:32Treasury bills now run around 22% of the
10:35debt, above the 15 to 20% range the
10:37Treasury's own advisory committee
10:39recommends. Across the OECD, Treasury
10:42bills now out issue fixed rate bonds
10:44entirely. The ratio of 30-year plus debt
10:47sold against 1 to 5year debt is now the
10:49lowest since 2008. The OECD's phrase for
10:53all of this is that it's costefficient X
10:55and T, which is Latin for beforehand.
10:57So, what they're saying is it's cheaper
10:59for now because shortening doesn't
11:01reduce what you owe. It just changes how
11:04often you have to ask. When government
11:06debt comes due, the government doesn't
11:07pay it off with tax revenue or a
11:09surplus. That would be too fiscally
11:11responsible. Instead, it just borrows
11:14the money again. Same debt, new bond at
11:16today's rate. We pay the old debt by
11:18issuing new debt. So, the debt never
11:20really gets repaid. It just gets
11:22renewed. And every renewal happens at
11:24whatever the market is charging that
11:26morning. This is what's known as
11:27rollover risk. And shortening the debt
11:30is a machine for producing more of it.
11:32Because the shorter the bond, the sooner
11:33you're back at the window asking for
11:35more debt. And here's where it comes
11:37into today. The average interest rate
11:38across everything America owes is
11:40sitting around 3 1/2%. That's low. And
11:44it's low because most of it was borrowed
11:46back when money was cheap, but nothing
11:48being sold today costs 3 1/2%.
11:50Short-term bills are around 4% while
11:5330-year money runs around 5.2. And
11:55roughly a third of America's tradable
11:57debt comes due over the next 12 months,
11:59more than $10 trillion. Which means
12:02every dollar of that cheap debt gets
12:04replaced at the new price investors are
12:06charging today. So every time we roll
12:08the debt forward, the average creeps up
12:10with it one maturity at a time, and the
12:12interest bill grows. It doesn't take an
12:14auction to fail or everybody to panic
12:16sell. It just takes time. It's
12:18inevitable. Interest on the federal debt
12:20already runs more than a trillion
12:21dollars a year. That's more than the
12:23country spends on defense or veterans
12:25benefits. And by the Congressional
12:27Budget Office's own numbers, it passes
12:29Medicare by 2028. It's the fastest
12:32growing thing the United States buys.
12:34And it buys nothing. But like everything
12:36else we've covered, this isn't just an
12:38American problem. Every year, the OECD
12:40publishes a report on exactly this. It's
12:43200 pages of reading that's so data
12:45heavy it makes you question all the life
12:48choices that brought you to reading it
12:49on a Saturday morning. In the report,
12:51there are some big takeaways. Nearly 80%
12:53of everything its member governments
12:55borrow this year doesn't pay for
12:57anything. It goes to refinancing the
12:58debt they already have, not paying for
13:00roads or schools, just moving the old
13:02pile of debt forward. Last year, the
13:05borrowing cost to refinance existing
13:07debt was about $13.5 trillion. This
13:10year, it's expected to grow to closer to
13:1214.5, and it doesn't arrive evenly. A
13:15third of all the fixed rate debt those
13:17governments owe comes due by 2027, which
13:19matters because of when it was borrowed.
13:21Similar to the United States situation
13:23we just covered, 60% of the fixed rate
13:26debt in the OECD that matures by 2027
13:29was issued in 2021 or earlier, back when
13:32money was nearly free. Since 2023, the
13:35rate on new government debt has run
13:37about 2 percentage points higher than
13:39the maturing debt it's replacing. So, a
13:41third of the developed world's debt is
13:43about to get swapped out. one maturity
13:45at a time for the same debt at a much
13:47higher price. And we're already seeing
13:49it happen. 1/5if of the fixed rate bonds
13:51outstanding in 2025 have been issued at
13:54a yield of more than 4%, the highest
13:56rate since 2015. And the private sector
13:58is only adding fuel to the fire. The
14:01major tech companies issued a record
14:03$122 billion of bonds last year to help
14:06pay for the artificial intelligence
14:07buildout. If tech firms financed just
14:10half of their AI buildout with debt,
14:12nine companies would take about 15% of
14:14all corporate bonds issued on Earth.
14:16Across the tech industry, total AI
14:18infrastructure spend is projected to
14:20have crossed $4 trillion by 2030.
14:23Governments and companies put together
14:25are on track to borrow about $29
14:27trillion in 2026, $4 trillion more than
14:30they borrowed just 2 years ago, with the
14:32share of longerterm issuance in that
14:34pile of debt reaching the lowest point
14:36since 2009. Which means every government
14:38on Earth, the entire investment grade
14:41corporate market and the largest capital
14:43buildout in history are all about to
14:45walk into the same room looking for the
14:47same cheap capital. So there's only one
14:50question left to ask. Where does this
14:52leave us? If you've taken an economics
14:54101 class, you know how this ends. The
14:57supply of paper is exploding while
14:58demand for it thins at the long end,
15:01which results in the cost of borrowing
15:03going up for everyone at the same time.
15:05And while the long end continues to get
15:06more expensive, as the demand doesn't
15:08match the supply, everyone moves short.
15:10There's more than $8 trillion sitting in
15:13American money market funds, an all-time
15:15record. So, this was never a story about
15:17the world running out of money. The
15:19world has plenty of money. What it ran
15:21out of is money that will sit still. We
15:23already tried the workaround. That was
15:25the whole point of shortening. Stop
15:26selling the 30-year bond nobody is
15:28forced to buy and sell the short stuff
15:30people actually want. Except short debt
15:32doesn't go away. It comes back and it
15:34comes back more expensive than it was
15:36before. That's a third of the developed
15:38world's fixed rate debt maturing by
15:402027. Not a forecast, a slow renewal
15:44from cheap debt to expensive debt at
15:46about 2 percentage points higher.
15:48Nothing has to go wrong for that to
15:50happen. The bonds just have to reach
15:51their maturity date. We've been trained
15:53to expect financial risk to arrive as a
15:55single event, like a bubble popping or a
15:58headline. Traditional media finds
16:00whatever gets the most clicks and runs
16:01it into the ground until a new story
16:03they can sell comes along. But that's
16:05not how things actually work. Global
16:07trends that reshape the world don't
16:09happen overnight. They take years to
16:11unfold. And none of what's happening is
16:13hidden. The data is sitting right in
16:15front of our eyes. You just have to know
16:16where to look. Nobody takes the time to
16:18connect the dots and dig deeper anymore,
16:20which is why I made this channel. These
16:23videos take a lot of hours to make, but
16:24I like to think they're worth it. So, if
16:26you found any of this useful, it would
16:28mean the world if you hit subscribe
16:30because six governments had the same
16:32week. And it wasn't for six different
16:34reasons. Markets don't do coincidences.
16:36When the same thing happens everywhere
16:38at once, the story being reported is
16:40usually not the story that's actually
16:42happening.
16:48>> [music]