Bonds: “This puts concerns about an AI bubble into perspective”
The increased bond yields show how nervous the financial markets are. Before his appearance at the German summit organized by Handelsblatt and WirtschaftsWoche, the Harvard economist explains the reasons - and explains the consequences.
Harvard professor Ludwig Straub comes from Freising in Bavaria and researches national debt in the USA.
WirtschaftsWoche: Mr. Straub, the financial markets are currently sending out some warning signals. Government bond yields are rising, the euro has lost value and the price of oil remains at a high level. Are you afraid of a new euro crisis?
Ludwig Straub: I find the situation in France particularly worrying. The French government has almost completely used up its fiscal space and will find it increasingly difficult to take on new debt. Because every additional euro of new debt would increase the interest costs for all other debt securities. From now on, all new spending will be penalized by the bond markets.
Why is the situation in the EU getting worse now?
If a country's growth rate falls below interest rates - the price at which the government can borrow - then this can become a problem. Because long-term budget deficits are then no longer possible.
This is particularly acute in France, where ten-year government bonds now have yields of over 4.5 percent, but the nominal growth rate is around two percent. In Germany, the ten-year bond yield and the nominal growth rate are about the same at 3.5 percent. But even that is a huge change compared to the time before the corona pandemic, when German interest rates were at zero for years.
Bond yields are rising not only in Europe, but worldwide. What's behind it?
Debt levels are indeed high globally. Added to this are the global energy supply shocks caused by the Russian invasion of Ukraine and the Iran War. This leads to higher inflation, which in turn increases bond yields. But not all return drivers are negative: AI investments in the USA also increase returns. Demand is increasing, which in turn causes the US Federal Reserve to keep interest rates at high levels or raise them.
What do these distortions mean for the German economy?
From Germany's perspective, the increased energy prices are the biggest problem. But higher bond yields aren't necessarily all bad. For the state, yes, because new debts become more expensive. But one must not forget: companies and households have large foreign assets. Companies hold claims abroad due to their exports, and private investors invest in funds or stock indices and thus benefit from rising returns.
Recently, the exchange rate of the euro against the US dollar has depreciated sharply again. Were the doubts about the dollar as a “safe haven” for the financial markets exaggerated?
The dollar remains attractive as a currency, but the reasons for this have shifted. The US government has to pay significantly more interest on its federal bonds than before, even compared to safe US companies. At the same time, the American stock market is extremely attractive: it has increased by 100 percent in the past four years and many investors want to benefit from this development. This also puts concerns about an AI bubble into perspective. If prices fell by 20 percent, the overall performance of the stock market would still be very strong.
You are speaking at the Germany summit today. What is their message?
Germany is weakened after a phase of economic stagnation from 2016 to 2025. The federal government's goal must now be to enable more growth through additional investment incentives and far-reaching reductions in bureaucracy. An example: If you want to set up a GmbH in Germany, you have to go through 14 different administrative processes in seven different offices. Germany can no longer afford something like that today.
