Bloomberg Surveillance TV: October 8th, 2026

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1:28This is the Bloomberg Surveillance Podcast. I'm Jonathan Farrow, along with Lisa Abramowitz and Anne-Marie Hordern. Join us each day for insight from the best in markets, economics and geopolitics. From our global headquarters in New York City, we are live on Bloomberg Television weekday mornings from 6 to 9 a.m. Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen. And as always, on the Bloomberg Terminal and the Bloomberg Business App. We begin this hour with stocks drifting lower as bond yields and crude climb. Ed Yardeni of Yardeni Research writing, given where the 10-year yield stands relative to nominal GDP growth, the current sell-off can't be dubbed the revenge of the bond vigilantes.

2:05Not just yet. Ed joins us now for more. Ed Welcome, how would you describe the sell-off then with yields at multi-decade highs? Well, I think when you look around the globe, there are different explanations for what's going on. If you're looking for one explanation for the increase in bond yields around the world, we discussed this last time, it's probably the unwind of the yen carry trade. As the Bank of Japan has been raising interest rates, all those hedge funds and speculators that borrowed money in Japan at near zero rates are now unwinding their positions. They bought a lot of government bonds, I think.

2:43And that explains the global rate increase. Here in the United States, I would say a more important explanation for what's going on is that we've seen an economy that's really on fire. It's booming. Consumer spending is hanging in there really, really well. The baby boomers are retiring and still spending money. Capital spending is absolutely booming. And as you said, the AI hyperscalers and others just keep borrowing more and more. And then, of course, the deficit is extremely large. So I think the kind of happy spin, if there is one, for this backup in bond yields in the U.S., I think it's to a large extent reflecting the strength of the economy.

3:30And that's why TIPS, the real rate, has actually been leading the increase in the nominal deal rather than inflation. Can you put a positive spin on what's happening elsewhere in places like France, Ed? No, I don't think you can really put a positive spin on France. I mean, France is starting to look like a Greek debt crisis. The Greeks had that debt crisis back in 2010. Bond vigilantes pushed the bond yield all the way up to 40 percent. And that got the attention of the politicians finally. And as a result, the bond yield now in Greece is below the bond yield in France. So, Ed, do you think that they're hitting the danger zone, the idea where suddenly you do enter this doom loop where higher yields beget higher yields without some sort of fiscal solution?

4:25Well, we're certainly heading into the direction of the danger zone. I've kind of called it a spectrum of bond yield scenarios. And the good end of the spectrum is better than expected economic growth, leading to an increase in the neutral interest rates. Remember, at the beginning of the year, Fed officials were saying that the Fed funds rate was still slightly restrictive. Now the new Fed chair Warsh, as most recently said, that the 25 basis point increase in September in the Fed funds rate was eliminating or removing a dose of accommodation. So now all of a sudden Fed officials are saying that the real rate's higher.

5:08And I think that has to do with stronger economic activity. But look, the other factor, of course, is oil prices. They're up a lot today. And the bond yields, the French bond yields almost at 5%, 4.9 % as last I saw. And meanwhile, the U.S. bond deal is kind of relentlessly moving towards 5.5%. And then we'll be starting to talk about, well, where do we settle this thing between 5.5 % and 6%. And you make a lot of great points. One of them is that the bond vigilantes haven't really come out with pitchforks yet about the U.S. deficit. They are responding more to the strength in the U.S. economy, the borrowing binge that we're seeing from AI, as well as higher oil prices.

5:56That could be looked at positively and negatively. The negative side is when they start to care, and if there is an additional round of bombing ahead of the midterms, after the midterms, if there is ongoing costs tied to the war in addition to any kind of compromise to expand the deficit, how high could they go if the bond vigilantes actually start to take a look at the deficit? Well, if they started to really focus on the deficit, that they could go higher relative to nominal GDP. One way to kind of try to assess the impact of the bond market on the economy is to look at the bond yield, the 10-year bond yield, which is almost 5.5 % relative to nominal GDP growth on a year-over-year basis, and that's running about 6%, 6.5%.

6:44I would say that the bond vigilante concept would be a real concern if we started to see the bond yield get up to 6 % and higher. Because I think once you get above nominal GDP, you do start to slow it down. Right now, the economy is less interest rate sensitive. The consumer, I mean, a lot of the retiring baby boomers, if rates are going up, that's a positive for them in terms of money market fund yields. and the AI borrowers, the market, as you said, is still very liquid. Maybe the AI borrowers are the new sovereign bonds in the sense that investors feel actually more comfortable owning them than they feel owning sovereign debt certainly from France and maybe even the United States.

7:33As you get into the heart of the issue, what will it take to slow this all down? What does this Federal Reserve need to do? How far are they willing to go? How hard do you think they're willing to go? Yeah, well, you know, the Federal Reserve matters, but not as much as it mattered in the past. Partly that's because the economy is less industry sensitive. But let's face it, the problem is fiscal policy. Scott Besant knows that, and he's kind of trapped because, you know, he's the only solution he really has is what we're seeing now coming out of France. and the best in bazooka would be buying back a lot more treasury bonds and issuing a lot more treasury bills.

8:16That might calm things down, and that's what he might have to do in the event that this thing really gets out of control. And he's basically conceded that he can't control what's going on, which suggests that he's not all that convinced that he needs to put, So the Pope using the bazooka is going to do much to make this all go away. Define out of control. What kind of levels do you think potentially then you'd see the Treasury step in? Well, again, I think it's all relative to nominal GDP. I'd say it's not just the level, but it's also the speed. If we get to 6 percent very quickly, I think we could start to see some real cracks in the financial system.

9:04and that would probably require the Fed to start thinking about liquidity facilities. If we get there kind of in a leisurely fashion, I don't think it'll do as much damage. But clearly, right now, all the focus is on the increase in bond yield. That's why back in mid-September, we turned more cautious on the market, because we did start to perceive that between higher and longer oil prices and stronger-than-expected economic growth and all the demand for credit, that we could have a problem in the bond market, and we do. Stay with us. More Bloomberg Surveillance coming up after this.

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11:23Ed, good morning. Good morning. Would you still describe things as orderly? I think so. You know, by and large, corporate bond markets have behaved quite well. The sovereign bond markets, like you were mentioning, in terms of the auction, has seen solid demand. Even in France, we're seeing, you know, low liquidity. French spreads have obviously widened out. So far, I would characterize it as orderly, but it's not guaranteed to stay that way. Well, let's start with the U.S. and maybe we can move to France. The U.S. at the front end of the curve, things have become a bit more anchored around 480, particularly given some of the dumbest Fed speak we've seen.

11:58And it's been reinforced by some of the softer data as well. The question is still being asked ultimately, though, how hard, how fast does this Fed need to go? How hard and how fast do you think this Fed needs to go? Yeah, I mean, it's been striking to me how quickly we've pivoted away from sort of high conviction coming out of the September FOMC meeting that these guys are going to front load the tightening cycle to now they have all the time in the world to relax and sit back. It's very strange. I think it's premature, given the data that's continued to come in. But all indications are they're going to sit out of the October meeting and then take another look in December.

12:33I think they have to go at least three or four. At least three or four more times in quick succession, or can they take their time? In other words, if they don't hike rates in October, do you expect the yield curve to continue to widen out? You know, I think there was a really strong case coming out of the September meeting of front-loading the process, offsetting some of the heat we see in the economy right now from a growth perspective, and seeing how inflation evolves. At the moment, inflation's on track to end up somewhere in the high twos by the beginning of next year. It's not a bad number, but it's still nowhere near the target.

13:08And at this stage, it looks like they're taking a little bit more of a lackadaisical approach. The slower they move, the more they might have to do next year, and that's kind of the risk for them. So this is what a lot of people are debating is how much the Fed has any control or influence over what's happening in the 10-year and the 30-year denominations. We hear from Scott Bessett, the Treasury Secretary. This is a global phenomenon. We talked a lot this morning about all of the bond issuance coming from hyperscalers. Would that really have any effect on the long end of the yield curve if the Fed acted more aggressively?

13:42I think the short answer is yes. I think what distinguishes the repricing here in the U.S. so far this year has really been Fed expectations. It hasn't been the term premium. It hasn't been a lot of inflation risk premium further out on the curve. It's really been like the economy has accelerated. The Fed has license to tighten policy here. And the less they do, the more damage they risk to the longer end of the curve. So I think front-loading this tightening process, and again, look, they have a couple of meetings to get their act together, but front-loading it into the end of the year, into the beginning of next year, gives them a better chance of stabilizing that long end.

14:20That's not true in France. France is a distinctly fiscal issue. And the hyperscaler issue, again, I think hyperscaler, that premium is showing up in the corporate bond market. The spillover into the treasury market so far is there, but it's relatively small. Ed, three or four more times, potentially, for the Fed to hike. That says to me this is going to be painful for some parts of society. I think we're already seeing the pain, and you can see it start to matriculate into the housing market, mortgages. Mortgages have just had a really bad month. 7.5%. The adjustment in interest rates, which has been relatively smooth so far this year, over the course of the past six weeks, has started to show up in interest rate volatility, which tends to widen out those mortgage spreads.

15:06So, mortgage investors are starting to accumulate some losses. It's starting to show up in the high-yield bond market. So, corporates with weaker balance sheets are going to see some pressure. It's obviously going to show up in the loan market where we're very directly indexed to the Fed funds rate. Do you need to tap the brakes on the AI CapEx build-out to ultimately get inflation back to target? That's really tough, and I'm not sure who can do it. At the moment, expectations are nailed to the ceiling. there's the perception that the sector is interest rate insensitive. I think that perception is incorrect, but they're insensitive to the current level of interest rates.

15:45How much higher is it? And I think the next step really has to be more in corporate credit spreads rather than rates. What's your target for spreads? How are you thinking about things developing? Still around 300 on high yield. It's around 300 on high yield. We're starting to see again. So far, the move has been consistent with interest rate volatility. We haven't really priced in the deterioration in corporate balance sheets. It's very early in that process. But if you look at the investment grade market, those hyperscalers are getting punished. They are getting punished. And the extent of underperformance in that hyperscaler sector, there's a lot of room for that to continue well into next year.

16:22Clearly, there is a rate where things get problematic. Can you give us an idea of where you think that rate is for these issuers to sit back and say, you know what, we won't then. It's probably not a good idea. I think we're feeling it out. The ultimate confirmation has to come through the labour market, in my mind. Once you start to see unemployment rates go up, that's when you know you'll finally squeeze the economy too hard. So far, we've had a really stable labour market. We've been very lucky this year. The unemployment rates come down. That stability, I think, is at risk next year, I think these high rates will start to impact the economy.

16:59Stay with us. More Bloomberg Surveillance coming up after this.

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18:47the estimate in our survey was 200 000 we got 197 the four-week moving average drops down to about 198 it's nearly always 200k equity features off the back of it on the s &p 500 unmoved by much of this softer across the board throughout much of this morning on the s &p on the nasdaq under russell on the s &p down four tenths of one percent and yields least higher throughout much of the session as well tens and thirties yields bleeding higher again this morning yeah this data point's becoming the Muzak of economic data, considering the fact that ultimately it just continues to grind in at the same levels and nobody really even pays attention to it anymore.

19:19Nonetheless, I will extrapolate out the lack of a breakdown in the labor market gives people confidence that the Federal Reserve can keep focusing on inflation and trying to bring rate expectations under control, given some of the jitters that we've seen in the bond market. We've got Nita Richardson of ADP joining us now to break this down. Nita, welcome to the program. Just how resilient, how stable is this jobs market? There's stability. We're seeing that. We're seeing stability, but not across the board. Healthcare continues to be the reliable indicator. But this number, this jobless claims number, yeah, it's consistent from week to week, but the context is changing a lot.

20:00I would note that the long-term unemployment rate is up to 27.1 % in the last BLS employment report. So we have to look at this number in context. And another contextual point that I'd like to point to is just overtime hours. I actually think this labor market is a little bit hotter than people are giving credit to it. In our numbers at ADP, we're tracking right now about 95 ,000, a runway of 95 ,000 jobs a month. And where we're seeing that signal even stronger is in the overtime hours and manufacturing. So even though those gains have been modest, people are working a lot more on the factory floor.

20:45Nina, context. Let's just sit on context. The context for 90K month on month, month on month, month on month. Where's the breakeven now compared to where it was? And how good is 90 ,000 in 2026 compared to 90 ,000 pre-pandemic? Initial jobless claims, easy to predict, breakeven, almost impossible. I've heard anything from zero to 70 ,000 jobs. And in the BLS numbers, what they're telling us is that there is a confidence interval of plus or minus 122 ,000 jobs. That means every time we get a number coming from the official data, we have this wide confidence interval. It's going to be really hard to judge in real time where we are in the cycle.

21:25So we have to look at other data in addition to these headcount numbers. I'm looking at overtime pay. I'm looking at premiums between job changers and job switchers. I'm looking at activity in the goods sector that supports this capital investment boom that could lead to higher growth, potentially higher prices. Neela, how long would it take of rates being at this level before you start to see it bleed into the labor market, if at all? I think there would be a challenge here. Where you're probably going to see it is in small firms. So you may not see that interest rate bleed into larger companies and their hiring.

22:05You might see it more in the small firms that are more dependent on bank loans. And so small firms are really that intense signal of the transmission mechanism to Main Street. Right now, small firm hiring looks OK. And so they're not signaling that they're bearing the burden of this rate increase. So that's a place to look, though, as we continue through the cycle and maybe another rate increase. Neela, what does that tell you about the neutral rate right now? If you aren't seeing any kind of ramification when it comes to hiring plans of small firms from rates being at elevated levels currently relative to the past 20 years, does that suggest to you a higher neutral rate that this economy is less rate sensitive, even in some of the areas that traditionally have been more rate sensitive?

22:51I think when it comes to the capital investment, the economy is more rate insensitive than it has been historically. So when we're looking at where this overtime, which I think is a tremendously good signal of manufacturing, it's coming upstream from the traditional factors of production. Upstream meaning transportation equipment, industrial chemicals, technology, hardware. These are the things that we're seeing an increase in activity, and they are suggestive of an economy that's ready to make an investment boom despite higher interest rates. And I think that's really important to keep in mind the insensity of some sectors, but it's not going to be one note.

23:35You're going to see some sectors continue to expand while others retreat. retreat. Notably, we're not seeing overtime in consumer-oriented sectors like apparel, like food and beverage. So this is not something where consumer spending is really taking off, and consumers may ultimately pay the biggest burden from higher interest rates. Well, Nila, that's the point when it comes to some of those sectors that they're still spending even with these higher rates, but they're not immune. What could potentially pull them back? Do you mean manufacturers or the capital investment or consumer? Manufacturing.

24:17I think what could pull them back, what has pulled them back in the past is uncertainty on the policy landscape. So that's even outside this monetary story. If they look at geopolitics, if they look at, you know, trying to plan out these big investment projects five, 10, 20 years out and not having that kind of certainty about what the landscape is, that's going to lead to a retrenchment. But that's, again, why ours is so effective when it comes to hiring. If we're talking about hiring, it's an effective lever because you can add activity without adding people. So you don't make the people investment.

24:56You just change the short-term metric, which is ours. And I think that's what we're seeing. Maybe that's not why, Anne-Marie, we're not seeing the hiring expand in manufacturing, which has been modest, but we're still seeing activity. This is the Bloomberg Surveillance Podcast, bringing you the best in markets, economics, and geopolitics. You can watch the show live on Bloomberg TV, weekday mornings from 6 a.m. to 9 a.m. Eastern. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen. And as always, on the Bloomberg Terminal and the Bloomberg Business App.

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