May 18): The global bond selloff will take centre stage as Group of Seven finance chiefs discuss how oil-fuelled inflation risks overshadowing world economic prospects.
While the talks in Paris were meant to dwell on imbalances ranging from the US budget deficit to China’s weak consumption, ministers and central bankers are preoccupied by a another day of spiking yields, driven by investor concerns about consumer prices.
“We want to make sure the G7 sends a message: We are in charge, we are following things, we are acting if necessary,” French Finance Minister Roland Lescure told Bloomberg Television on Monday, before he then reassured reporters that the bond market is “correcting, but I wouldn’t go as far as to say it’s collapsing.”
The backdrop of US President Donald Trump’s extended standoff with Iran keeping the Strait of Hormuz shut, blocking a key artery of global energy supplies, is increasingly alarming investors.
The global debt rout intensified on Monday, with fiscal worries over Japan driving the move, and Treasuries declining across the curve.
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“You’ve seen the bond market very concerned about the conflict, what the impact of inflation is going to be,” Principal Asset Management chief global strategist Seema Shah told Bloomberg TV. “There is a risk that, if the conflict extends and you see this continued rise in oil price, then the bond yield side then becomes something that the equity market can no longer ignore.”
European Central Bank chief Christine Lagarde, questioned on the bond selloff as she arrived at the G-7, said that “it’s always my job” to think about such things, a sentiment echoed by Bundesbank president Joachim Nagel. In contrast, European Union Economy commissioner Valdis Dombrovskis insisted that it’s not his policy to comment on market moves.
While bonds will overshadow the gathering, Lescure cautioned that the underlying economic picture isn’t as worrying as investors might suggest.
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“Obviously I’m preoccupied — I mean who wouldn’t be,” he said. Even so, “there is a slowdown but there’s no recession, so no stagflation. Inflation is on the rise, but we haven’t seen any second-round effect either. So less growth, more inflation, but so far we’re not in a recession.”
US Treasury Secretary Scott Bessent didn’t offer much commentary on the market and economic backdrop beyond observing that the meeting takes place at “an important time” and follows Trump’s “very successful” encounter with counterpart Xi Jinping in Beijing.
Ministers will share their views on the economic situation during the morning before a lunch where they turn their attention to matters the French have sought to emphasise.
President Emmanuel Macron has made tackling global imbalances between the world’s major economic blocs the top priority of the country’s presidency of the G-7. French officials warn that the mismatches of US deficits, China’s surpluses and under-investment in Europe are the fundamental drivers of geopolitical and trade tensions, and potentially the source of future financial crises.
Given how bloated public finances are one of the elements driving the bond selloff, Lescure made the link between that theme and that of the French presidency’s priority.
“We are in a phase in which large budget deficits are part of global imbalances,” he told reporters. “We are no longer in a time when public debt is no longer an issue. We must integrate this into the way we work and our discussions with partners.”
Incongruous with that tone however was Japan, whose Prime Minister Sanae Takaichi, called on the finance ministry to compile an extra budget in response to rising commodity prices driven by the ongoing Middle East conflict. That followed repeated assurances that such a measure wasn’t necessary.
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Data on Monday meanwhile underscored the Chinese element of weak domestic consumption in the imbalance equation. It showed growth slowing across the board in April with investment resuming declines, as booming exports no longer offset a deteriorating economy at home.
Beyond imbalances, the meeting will also cover topics such as critical minerals before turning to matters such as terror financing on Tuesday.
“We call upon all our G7 and indeed all of our allies and the rest of the world to follow the sanctions regimes so that we can crack down on the illicit finance that is fuelling the Iranian war machine and get this money back to the Iranian people,” Bessent said.
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