Front Burner - Is a shaky U.S. bond market good for Canada?

Episode Date: September 10, 2026

Many economists say the bond market is the most important financial market in the world. It sets the baseline for almost everything Canadians borrow: mortgages, car loans, lines of credit. And right now, it’s looking pretty weird. 30-year U.S. Treasury yields are the highest they’ve been since 2007, in the runup to the great financial crisis. The U.S. now spends more on interest payments than they do on defence.Canadian bond yields are rising too. But, on the whole, the market here seems more stable than it is in the U.S. At a press conference last month, Prime Minister Mark Carney assured reporters that “we have our house in order.” John Authers is a senior markets editor at Bloomberg, and he’s on the show to explain why the bond market matters, and whether a shaky U.S. treasury market could be a boon for Canada.For transcripts of Front Burner, please visit: https://www.cbc.ca/radio/frontburner/transcripts 

Emmanuel Lutheran Church in Georgetown invites you to a quiet and compassionate free seminar on supporting those who struggle with substance use. On Saturday, September 12 at 10 in the morning, we will gather to listen, to learn, and to offer hope. Robin Griller of St. Michael's Holmes and Reverend Robert Crestick Lutheran Church, Canada will share gentle guidance on medical, practical, and spiritual care. If you are someone you love is seeking understanding, please call to register 437-297-0056. This is a CBC podcast. Hi, I'm Jamie Poisson. The trade war continued to escalate this week with Donald Trump banning imports of Canadian booze, motorcycles, and weigh protein.

But today, I actually want to rewind a few weeks to when trade talks first collapsed, and Prime Minister Mark Carney gave a speech to explain why he had walked away from the negotiating table. He mostly talked about tariffs and sovereignty, but then a reporter asked him about the bond market. What I'm about to say doesn't make sense, but it's the way the world works. The U.S. bond market has been shaky lately, and Carney seemed to be suggesting that could spell trouble for the U.S. economy. Markets sometimes ignore these fundamentals, and then all of a sudden they focus on them. And when they focus on them, if you don't have your house in order, it's too late. We have our

house in order, and we're getting stronger. So as the trade war continues, we're going to try to unpack what Carney was saying there. Why could the bond market matter? What is it telling us right now? And does Canada really have its house in order? John Authors is a senior editor for Markets of Bloomberg, and he joins me now. John, thank you very much for coming on to the show. It's a pleasure to be with you. Thank you for having me. So I have a little bit of a confession to make. When I hear the word bond market, I can feel my eyes kind of glazing over. But tell me why I should care. about the bond market.

Okay. I mean, you're certainly not the only person who feels that way. I know people who've been working in the bond market for 20 or 30 years and it still has that effect. It's the thing that's a real problem with the bond market is that it's so counterintuitive. You talk about yields which go up when prices go down, et cetera, et cetera. It's the lingo that you need to use to explain yourself to another bond trader's quickly becomes completely incomprehensible to normal human beings in a way that, you know,

stock trading just isn't that far removed from normal human life. Basically, you should care about the bond market because it's the ultimate bank manager for the government, and it sets the terms of the credit that we can receive on all loans everywhere, because a bond is basically a loan to a government. there is nobody who is a better bet to repay a loan than a government, particularly if it's repaying that in its own currency, which it has the power to print. So if you're a Canadian and you buy Canadian bonds, you're going to get repaid. So it's as safe an investment as it gets.

And that means it becomes the keystone for the whole of the rest of the financial system. And just connect this for me to how mortgages or car loans, etc., are calculated. If you're trying to put together the financing, if you're going to be lending somebody a mortgage, how are you going to finance it? You're going to use government bonds. They're going to guarantee you a certain amount of return. You're then, because it's got to be, there will be extra risks from these guys you're extending the loan to. And because you've got to make a profit, you'll then add on to it. But broadly speaking, The higher the government bond yield goes, the higher the mortgage rate will have to go. There'll generally be one or two percentage points higher, but the cheaper the government debt, the cheaper the mortgage can be, and vice versa. So when people read that the U.S. 30-year treasury yield is over 5% right now, just... And their eyes glaze over, yes.

Yeah, yeah. Just tell me more about what that, like, concretely means. Just break it down for me a little bit more. Right. 30 years is particularly useful if you're running a pension plan or whatever, or if you're using the basis for a mortgage. This is about as long term as anybody will ever offer financing to anybody else. If that yield gets well above 5%, above 6%, that means that any debt like a mortgage is going to have to rise. It actually, this is where the other great counterintuitive element arrives. It's actually good news if you're managing a pension plan. It means that if you're Ontario teachers or whoever, it's cheaper to guarantee the income for people when they retire. And that can be almost as important as how well the stock market is doing. So big Canadian pension funds actually benefit from higher yields.

But mortgage holders right now would not. Mortgage holders directly miss out. Yeah, we got a lot of those in Canada. Yes, this is good for old people, bad, for younger people hoping to get onto the housing ladder. Evergreen statement. Generational justice. Okay, so let's talk about what is happening in the bond market right now. Over the last couple of weeks, I've been seeing these headlines describing it as shaky, unstable, weird.

And how would you describe the bond market right now? I think shaky and unstable, certainly don't want to sound like a polliana. I've written quite a lot of stuff telling people you should be worried about this. I don't know that I would think it's unstable, however. I think if anything, what's worrying is how steadily the bond market is repricing towards higher yields. And the reason it's doing that is because there's, are ample reasons to think that the world is going to be a more expensive place. I imagine we're going to need to talk about the latest trade war between the US and Canada,

but it's all an expression of the steady retreat from globalisation, which may have had negative effects for certain people, may have left people feeling that it was unfair in terms of distribution of wealth, but did make the world cheaper. You could buy stuff from wherever it was cheaper. and similarly, bond yields could, you know, the financing could therefore be made available more cheaply. The other point, given that there is less confidence that norms and institutions will persist in the US, which for the foreseeable future will continue to be the bedrock

of the global financial system, it can only be, that's where the money is. If you're more concerns about exactly what you can trust in that jurisdiction. That will mean you don't necessarily think they'll actually default on their loans. I see no real reason to fear that that would happen. But if you're less confident about exactly how that country is going to operate, that adds, somehow or other, that adds to the extra risk you'll perceive and you'll want to be compensated for that risk by receiving a higher yield when you lend Uncle Sam some money. That means, thanks to this whole pyramid that's built on top of the bond market, that because people aren't so confident about Uncle Sam and the institutions of Uncle Sam,

money will get more expensive for everyone. I've also heard you say that the AI buildout has caused these yields to go up in the US, and just tell me more about that. Not just the US, although, again, because the US is the place where the most money is, it's the one that matters most. It's very unusual to have the sheer scale of money being raised and spent by private operators that we're seeing at the moment for AI. It's also very unusual to have companies that are such obviously, basically good credits borrowing so much money. So I'm not saying Amazon or Google are as safe as Uncle Sam, but those are huge well-established companies who reasonably can be trusted for a really big loan. If they're starting to borrow massive sums of money, and I've seen figures that we're talking about the proportion of US GDP,

domestic product that's going to be spent just on building data centers over the next three years is more than the Marshall Plan made up for European GDP in the years after the Second World War. It's an enormous shock to the economic system. It's a fascinating comparison. Yes. Now, when you've got that kind of money being borrowed by a good credit, they will offer you a slightly higher rate of return than you'll get from the US, and that many more institutions, pension funds will be inclined to lend to Amazon or Google rather than the US, and that forces the US Treasury to

offer a better return if it wants to make its own borrowings, if it wants to raise the debt that it needs to raise. So it's the laws of supply and demand. If there are more people out there offering pretty safe-looking debt that will generally force everybody to offer it at slightly more generous terms to the lenders, which in turn will mean tougher terms for everybody else once you build this edifice of credit on top of it. So it is, the AI phenomenon at this point really is a macroeconomic phenomenon and the fact that the US has allowed it to expand so rapidly with so few controls is very significant. Emmanuel Lutheran Church in Georgetown invites you to a quiet and compassionate free seminar

on supporting those who struggle with substance use. On Saturday, September 12 at 10 in morning, we will gather to listen, to learn, and to offer hope. Robin Griller of St. Michael's Homes and Reverend Robert Crestick Lutheran Church, Canada will share a gentle guidance on medical, practical, and spiritual care. If you are someone you love is seeking understanding, please call to register 437-297-0056. Okay, so we've been talking about how yields are rising everywhere, Canada, Germany, France, the UK, Japan, But people are paying particular attention to the U.S. Treasury market. The U.S. is now spending over a trillion dollars a year to pay off the interest on their national debt.

That's almost 19% of all U.S. revenue, more than they spend on defense, as I understand it. And just how big of a problem is that for the U.S.? And how does that fit into what we've been talking about? Well, potentially it's a huge problem. again, it prints dollars, it will not be a problem repaying it. The issue is that if it does that purely by printing money, create inflation, which it needs to avoid doing if it possibly can. We've had yields considerably higher than they are now for many years in the past. The entire of the Reagan administration yields were higher than they are now and the US prospered very nicely under Reagan. The difference is, people were angry about the deficits under Reagan. They were not remotely as high as they are. Now, the deficits have built up over the last 20 years when yields were extremely low and it was that much easier, that much cheaper to borrow. So yes, that that creates a serious issue that everybody

in the Western world to greater or lesser extent has to deal with, that any given level of field is harder to deal with now than it used to be because everybody has so much more debt outstanding, thanks to the global financial crisis and the pandemic. Now, that's, that, that, that, that, that, that, that, that, that what I just said is broadly true of everyone. It varies very significantly. Japan has far more of a problem of outstanding debt than any of the other big economies. Canadian listeners will be glad to know that Canada has the least serious problem of any of the, the leading economies, largely because it dealt with the global financial crisis in its banking system better than pretty much

anybody else therefore didn't need to throw so much money at it and that has left it with a lower deficits, a lower overhang of debt than others. Sadly, I've not had the chance ever to talk to Mark Carney in his current exalted position. He did in a previous life. He was the governor of the Bank of England and I did get to know in then. And he seriously knows his markets. And those comments you began with, he was absolutely bang right about. You can ignore fundamentals on markets for a very long time.

But there will always occasionally come moments when suddenly nothing matters more. And that is a very nice card, which he is plainly well aware of in Canada's pocket at this moment. So just to be clear, when Mark Carney got up the other week and said, We have our house in order. And he was essentially saying that the US might not. You think he's right. I mean, yes, relatively, who has their house better in order out of Canada and the US? Canada does.

I don't see a serious argument against that. That said, there are still plenty of arguments you could make that Canada's house should be very much better in order than it is. And there are other countries around the world that are a worse state than the US. But in terms of the relative dynamics, in terms of global investors, money is fungible, it can easily go to any number of different destinations now. The fact that Canada is in a somewhat stronger fundamental position than the most obvious alternatives to it should help. And just say more about that, for me, this slightly better position that we're in vis-a-vis the US.

I know the 30-year yield in Canada is 4.18% in the U.S. U.S. It's 5.26. Like, like, how does that give us an advantage in this trade war that we are currently in? Okay. When you model it by gaming, this is like a game of bullying. The U.S. is bigger and the U.S. can try to bully the smaller party and that's because it's bigger.

So just to be clear, this is an advantage, but it doesn't mean that Canada overall has, is in the stronger position overall. compared to the US, just to be clear, to compartmentalize what we're talking about. If you have got greater ability to borrow more money because you are currently able to borrow at a lower rate than the US, then you can, for example, pay more money to help people through the tough effects of they're suddenly having to pay far more for their US imports. you have more freedom to do that than the US does. For example, you've given yourself somewhat more room for maneuver by not having overextended yourself so much in the past.

And the bond market is giving you somewhat more freedom of action by setting lower rates for you. I think ultimately this is about politics and it seems to me. that what really matters in the trade conflict is who is prepared to take more pain. That's also part of the game theory of how you deal with the bully. You can deal with the bully if you're prepared to absorb some pain from them first. It would seem to me that American consumers reasonably enough see no reason why they should bear any pain at all to have a fight with their perfectly friendly neighbours in Canada. While Canadians, as far as I can tell from south of the border, are extremely motivated and prepared to put up with quite a lot of pain to stop their neighbours

trying to bully them. This is CNN far more existential terms for... Yes, exactly. And I think it's more about politics who wins a trade or almost than the kind of technical factors we were just discussing. If Canada is going to win, it's because it's going to have, its politicians are going to be able to motivate the population to put up with pain for longer, that is how I think, from my vantage point, that is how I would suspect Canada will eventually prevail in the trade conflict.

The fact that its finances are somewhat better in order and that it has somewhat more fiscal room to maneuver will help. Just to come back squarely to the bond market here, Economic historian Adam Tooz has said that the worst thing could happen with all of this weirdness in the bomb market would be a large-scale sell-off and a collapse of the treasury market as a functioning institution, which sounds bad. But is that even possible? Okay. Right. Well, Mr. Toos is brilliant.

And I would never disagree with him. For as long as I have been covering this, which is longer than I care to. think that that is exactly the scenario that most worries people. If you have a loss of confidence in treasuries and a really, the question here is how fast yields move so that it really messes up all the finance that's based on it, that you don't have time to adapt. That is absolute meltdown disaster scenario and because it's the US, it will affect absolutely everybody else. If you want an example of what we're talking about. talking about. It's Liz Trusts back home in the UK four years ago. I won't go into all the

details about why the UK guilt's market revolted the way it did. But basically, she announced a mini-budget where they announced unfunded tax cuts. To reduce our tax burden to make sure we grow the economy and also curb inflation. And that's so important. So immediately direct increase to the amount of deficit they were going to run. And the markets flat out didn't believe that that was going to work. More or less said in as many words, who are these guys? Yeah, I don't trust them. I remember this.

Yeah. And Gilles shot up in a way that mortgages and pensions were going to become completely untenable. And Mark Carney had actually left the Bank of England at that point. The Bank of England intervened and this trust lost her job within weeks. And we set out a vision for a low, tax, high-growth economy that would take advantage of the freedoms of Brexit. I recognise, though, given the situation, I cannot deliver the mandate on which I was elected by the Conservative Party.

That is the UK, and you had an immediate course-correcting thing to do there, which was to just reverse the policy and get rid of the Prime Minister. If that were to happen in the States, there is no fallback after the state. states the treasury debt is the bedrock for the rest of the global financial system. And the checks and balances in the US system have their advantages, but one disadvantage is that you can't, as you can in the UK or to a lesser extent in Canada, just restore confidence by having a snap election or bringing in somebody you. So if you did have something like what happened to Liz Truss four years ago, like suddenly

we woke up tomorrow and the 10-year yield, which is currently 4.5. point eight percent would say six point two, that's a sort of 30 percent increase in how much people are having to pay on their debt overnight. If that were to happen, that could very quickly lead to chaos. That is the ultimate nightmare scenario. I would like to be clear, Adam Tuesday, as I read these comments, I haven't spoken to him about it. I don't think he's predicting that would happen. He is definitely saying, when bond markets get anxious, that is what you fear. If there is a sudden flood of money out, then that is, there are almost no safeguards in the system to deal with it. It is very dangerous if that happens. I don't see a particular reason to think that it will happen at this moment, but yes, that's the risk you've always got to be prepared for. Okay, so I know that we're talking about a disaster scenario here, and you seem to think that things are okay right now, that maybe we're not on the brink of some.

financial crisis or anything like that. But I'm curious, what would change your mind? What should people be looking out for? That would be a much bigger deal. First of all, it's the speed of the rise. So if you get, we have a round number coming up, which is 5%. The moment we're 4.8, 1% I think, as we're speaking. So 5% is still a ways away. But if you get there quickly, 5% has 2%. has two, a double meaning for the US Treasury markets at the moment. First of all, it's obviously it's a round number and people respond to round numbers just as people care about turning 60 in a way they don't care about turning 61, et cetera, et cetera. But it's also the case, the US Treasury market, this is, again, we're not wanting to get too far into the weeds. Most of the other main

bond markets are at their highest yields since the global financial crisis at the moment. The US actually isn't. It got higher than it is now three years ago at exactly 5%. And it then fell back down again. And just to be clear for everyone, you're talking about the 10 year here. Yes, the single most important one. So there's a sort of double significance that traders might put. If we break through 5%, it's not only as we've gone through that round number, that big psychological pivot, but we're also at a high for almost 20 years that now. the sky is the limit. So if you see, if you were to see us go through five percent and then very quickly rise sharply beyond that, rather than lots of people just looking at this and saying, oh, well, if I'm being going to be paid five percent to lend to Uncle Sam, I'm going to fill my boots with that. If you see an immediate negative reaction and see Bondi'll rise sharply

beyond five percent, that would be scary. And just like, What kind of event hypothetically could precipitate something like that? Or would it be a single event? Could it just be accumulation of many things? Well, it's more likely to be accumulation of things. I mean, bad things could, an assassination of somebody significant. I'm not predicting this. I'm just stating it in general, abominant. attack on Congress or whatever, some really horrific event.

9-11 could have, did have quite significant financial effects. Brexit in the UK briefly looked as though there was a threat that you were going to see a disorderly response to that. As it turned out, there was nobody who was so exposed to the UK that you didn't get the real disastrous cascade of somebody goes bust, has to sell everything, and then as they sell other people lose money and it becomes a waterfall, that there was a risk of that after Brexit, but it didn't happen. But some political event of that magnitude that isn't immediately corrected could have such an effect. But it needs to be something that isn't just

a financial event. It needs to be something genuinely obviously scary to any normal person before you really knock the bond market out of its position. Oh, I suppose you could add Liberation Day. There was a brief tremor. Yeah. And again, there was a way to get around that, which was to just call off the terrace for three months, which is what company.

And he did, and I think his reason was... Well, I thought that people were jumping a little bit out of line. They were getting yippy, you know. They were getting a little bit yippy, a little bit afraid, unlike these champions. He didn't deny that it was basically the bond market that had forced him to do it. This was really interesting. John, thank you so much for this and for taking me through it.

It's been really helpful. Thank you, thank you. Well, thank you. All right. That is all for today. I'm Jamie Poisson. Thanks so much for listening. Talk to you tomorrow.

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