America’s thirty-year borrowing cost reached its highest since 2007, France paid four per cent for the first time since the last crisis, a record quarter at Google was sold for the size of its ambitions, oil crossed a hundred dollars again, and the market, sunning itself on thin summer volume, declined to notice any of it.
Every eye in the market is trained on the ceiling. Will the S&P print another record; is the great index a whisker above its high or a whisker below; has the party one more night in it. This is the wrong place to be looking. The important event of the week, and I would argue of the summer, happened not at the ceiling but in the floor, in the concrete foundation on which every other price in the world is poured. Two weeks ago in this column I called Japan’s government bond yields the quiet pin under everything. Last week the pin found the rest of the map. The price of money, which on Planet Finance is the force that does the work of gravity, has been rising almost everywhere at once, and a foundation that shifts is a far more serious thing than a chandelier that swings. The crowd, however, is at the beach, and has decided the noise from the basement is someone else’s problem.
The floor moves
Consider what the sober end of the market did last week, the end that does not trade on memes or hope. The yield on the thirty-year United States Treasury bond, the single most important number in global finance because it is the rate against which almost everything else is measured, climbed above five per cent to its highest level since 2007, the eve of the last great crisis. France, for the first time since 2009, paid four per cent to borrow for ten years, a seventeen-year high for a founding member of the euro. British thirty-year debt pushed towards six per cent as investors took fright at the spending instincts of the country’s incoming government, Germany’s borrowing cost reached levels last seen in 2011, and Japan, where this story began, remains at heights it had not touched since the 1990s. This was not one country in trouble. It was the entire developed world repricing the cost of government money upward in the same few sessions, which is a different and larger phenomenon.
The reasons are not mysterious, and they are not going away. Governments are borrowing on a scale that has no peacetime precedent, the American deficit alone running close to two trillion dollars a year, with more promised everywhere and less discipline than ever. Inflation, fed by the oil I will come to shortly, is sticky and in places rising again, so the central banks that spent a decade buying these bonds have not only stopped buying but are muttering about raising rates instead. Strip it to the bone and you have a market where the supply of new debt is exploding and the largest, most reliable buyer has quietly left the room. When supply surges and the buyer of last resort withdraws, the price falls until a new buyer is tempted, and the price of a bond falling is only another way of saying the yield, the cost of money, going up. That is the machine now running, and it runs under everything.
Is it a crash? A careful answer
I have been asked, in effect, whether this is the beginning of a bond crash, a crash obligataire, and since the question deserves an honest reply rather than a dramatic one, here it is. On the direction and the seriousness, I think the worry is entirely right, and it is the most under-appreciated risk in the world this summer precisely because it is dull to look at. But I would gently change the word. Government bond markets do not usually crash the way equities crash, in a single vertical afternoon. They bleed. They grind lower for months while everyone insists the level is now surely attractive, and then, occasionally, they break all at once, not because sentiment snaps but because somewhere a pile of borrowed money that was built on the old, lower yields can no longer meet its margin calls and is forced to sell into a falling market. That is what happened to British pensions in the autumn of 2022, when the Bank of England had to rush back in to stop a doom loop; it is what happened in the bond massacre of 1994, which bankrupted a California county and several reputations. So the honest picture is not a crash in the Hollywood sense but a slow flood with a real chance of a burst pipe. And there is a second half to the honesty, the part that keeps me from full apocalypse: these episodes usually end not in collapse but in capitulation, the central bank returning as buyer, capping yields, printing again, choosing inflation over rupture. That is the corner Japan is painted into, and it may be everyone’s exit in the end. Which is to say you are right to be worried, and right that it is the story, but the danger is a leak and an accident, not a bang, and its likeliest resolution is the quiet debasement of money rather than its dramatic collapse.
The bill for the machines
Against that rising cost of money, look at what the celebrated end of the market spent its week doing, because the two halves of the story are the same story. Alphabet, the parent of Google, reported a genuinely record quarter: revenue of nearly a hundred and twenty billion dollars, up almost a quarter on the year, comfortably ahead of forecasts. The shares fell about seven per cent. The stated crime was that the company raised its planned spending on artificial-intelligence infrastructure yet again, towards two hundred billion dollars for this year alone. And underneath the headline sat a detail worth pausing on, because it is a small monument to the age. The reported profit had leapt nearly three hundred per cent, a number to make you gasp, until you read the note explaining that most of the jump was paper gains on the company’s stakes in two private darlings, Anthropic and, of all things, SpaceX, the very rocket I wrote last week had just shed a trillion dollars and declined to light its engines. Strip out those marks and the real, operating profit had slightly missed. A record flattered by the bubble, punished for the bill: the whole era in a single line.
Tesla told the neighbouring version of the tale, falling about fourteen per cent as revenue beat and profit missed, margins thinned, and free cash flow turned negative. All told, something close to eight hundred billion dollars of technology value evaporated in a single session. And the thread tying this to the floor beneath it is the one no press release will draw for you: the artificial-intelligence build-out is, at bottom, an enormous act of borrowing against the future, hundreds of billions poured into concrete and silicon on the faith that the returns will come. That wager was placed when money was nearly free. It is now being financed, and refinanced, into a world where the cost of money is climbing to a twenty-year high. The bill for the machines is arriving in the same post as the rising rate at which the bill must be paid. This is why records are being returned to sender: the market is beginning, dimly, to price the interest.
Oil crosses a hundred, again
And the accelerant under the inflation that is driving the whole thing is back over the symbolic line. Brent crude has pushed above a hundred dollars a barrel once more, the price up something like forty per cent since the start of the month and diesel up more, as the United States pressed a further round of strikes on Iran and the Strait of Hormuz stayed effectively shut. Here the week took a genuinely darker turn, and it belongs in this column because it runs straight back into the price of money. The American president has begun threatening not merely more bombing but the confiscation of Iran’s assets, frozen for a decade and more, to be handed to Gulf allies as reparations, a step without real modern precedent. Tehran’s answer, should he take it, would not stop at Hormuz: the credible threats now include closing the second great chokepoint at Bab-el-Mandeb, which would force the container traffic of Asia the long way round Africa and add weeks and cost to the price of nearly everything, and even the cutting of undersea cables. Every one of those roads leads to the same crossroads, higher prices, and higher prices lead to higher yields, and higher yields are the flood in the basement.
The market’s serene response rests on a single wager, and it has even acquired an acronym: TACO, for the belief that Trump always chickens out, that the threats are theatre and the man will, at the last moment, decline to do the ruinous thing. It is not a foolish bet; it has paid before. But it is worth naming plainly what it is, which is a market pricing near-certainty on the restraint of one unrestrained person, with a fifth of the world’s oil sitting behind a locked door as the stake. I have said it before and the week only sharpens it: a market that has priced certainty about a war is usually pricing the last one.
Sunbathing while the tide comes in
Which brings us back to the strangest fact of all, the one that prompted this whole reflection. Set beside a forty per cent move in oil and thirty basis points added to the long bond in a matter of weeks, the American stock market has done, essentially, nothing. The S&P 500 sits about one per cent below where it began the month; the Dow is flat; the surface is a portrait of calm. But the calm is not conviction, and it is worth understanding why, because it is mechanical rather than serene. It is high summer, the professionals are away, and the volume is thin enough that a trivial sum can shove an index a couple of per cent in either direction. Into that thinness runs a familiar machine: a trader who spends the morning selling, with every headline in the world to justify it, finds by the afternoon that the index has been squeezed higher, that his loss is mounting and his margin with it, and is forced to buy back the very position he was right to hold. The reluctant buying of people who wanted to sell is not a vote of confidence in anything. It is the market eating its own bears on an empty stomach. The beach, in other words, is not evidence of safety. It is evidence of an empty trading floor.
Keep one eye on the basement
So let me set the week down where it belongs. The foundation under every asset on earth, the cost of government money, was repriced upward across the entire developed world at once, to levels not seen since before the last crisis. The grandest companies of the age were sold not for failing but for the size of the bill their ambitions now carry, a bill that falls due precisely as money grows expensive. Oil crossed a hundred on a war the market has agreed to treat as theatre, financed by a threat without modern precedent. And the index, on holiday and on thin volume, noticed none of it, held aloft in part by the forced repurchases of the very people who can see what is coming. I will not tell you the day the floor gives way, because the graveyard of this trade is full of people who were early and were called wrong, and I will grant, in fairness, that it may not give way at all, that the central banks may flood it once more and drown the problem in fresh money rather than let it break. But I will say this with some confidence. The important risk this summer is not in the ceiling that everyone is watching. It is in the floor that no one at the beach can see. Prudence, as ever, is not fear; it is simply keeping one eye on the basement while the band plays on upstairs, and noticing that the water has begun, quietly, to rise around the ankles of the dancers.
Eric Lefebvre
See also: The Future Refuses to Catch Fire
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