Iran's 7-Day Offer, NATO's Europe Fuel Fears, Blood For Bond Yields

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0:10 This is the Bloomberg Daybreak Europe podcast. Good morning. It's Friday the 25th of September. I'm Caroline Hipka in London. Coming up today, Iran proposes reopening the Strait of Hormuz within seven days as Washington and Tehran push for a breakthrough. NATO's chief warns Europe may not have enough refining capacity to meet its fuel needs in a conflict. Plus, give blood, get yield. Romania's unusual pitch for bond buyers. Let's start with a roundup of our top stories. Iran is understood to have offered the U.S. a plan to reopen the Strait of Hormuz within seven days. Iranian Foreign Minister Abbas Araghchi told reporters from multiple news outlets at the U.N.

0:54 in New York that Tehran has submitted the proposal via mediators. Our senior editor, John Herskovich, says that it appears to be a phased deal modeled on the Memorandum of Understanding from June that then later collapsed.

1:10 It would involve the U.S. lifting its naval blockade, cessation of hostilities, allowing Iran to export its oil, and perhaps repatriation of some of Iran's assets. Iran's foreign minister said that this could lead to the reopening of the Strait of Hormuz in seven days. And after that, we could see the resumption of Iran's nuclear program. The difficulty is, here as it was back then, sequencing and trust, whether the events can go off as the two parties would like to see it and if they trust each other to follow through on the next stage.

1:45 John Herskovitz there on the prospect of a breakthrough, but also the difficulties. Now, it comes just 24 hours after the Iranian president, Massoud Pazeshkian, said that Tehran would not allow freedom of navigation through Hormuz while U.S. sanctions and the naval blockade remain in place. But Brent Crude did fall just under 1% on that news to around $ 105 a barrel. That drop in oil comes after a surge of more than 7% in the previous two days. Now, the bigger concern for the real economy, though, is diesel, where global supplies are already historically tight. Now, the Trump administration is considering curbs on U.S. diesel exports to bring down record prices at home. But that has pushed European

2:34 diesel premiums over oil to their highest level since at least 2011. The squeeze is also becoming a security concern with Europe short of refining capacity. NATO Secretary General Mark Rutte has told Bloomberg that that could leave the European continent exposed in the event of a war.

2:55 What we are seeing is no new refineries being built in Europe. We are seeing that refineries are being closed down. And if war breaks out, if the Russians would attack and we have to defend ourselves, we need massive amounts of of diesel and other oil products for our F-35s, our fighter jets, for our tanks, etc. And that is a big worry. But of course, that is not directly linked now to whatever is playing out between the EU and the US.

3:24 So, Mark Rutter speaking there. The Iran war and cuts from Middle East flows have squeezed supplies further. Now, the global bond sell-off is stabilizing after yield surge to multi-decade highs, but investors are questioning whether 5% borrowing costs are becoming the new normal. U.S. Treasury yields have risen sharply as higher oil prices have added to inflation concerns, while heavy government borrowing puts further pressure on bonds. Bloomberg's head of global rates strategy, Ira Jersey, says the energy shock is making it harder for central banks to ease policy.

4:01 It's harder for some central banks to cut interest rates and many will have to continue to hike, right? The ECB was pretty hawkish last week and, you know, they're very reliant on oil and because they have a single mandate, they can't rely on things like, hey, the job market's weak, we can't hike interest rates. Well, they're going to hike interest rates because inflation and inflation expectations are are either sticky or going up. And so you'll see the same thing probably in Japan as well, where the Bank of Japan is going to hike interest rates.

4:30 So the U.S.

4:31 Isn't going to be immune to any of this.

4:33 Iowa Jersey, their markets are now pricing in three more quarter point Federal Reserve hikes over the next year, while the ECB and Bank of Japan are also under pressure to keep tightening. So those are the markets. Let's think a bit about politics. Marine Le Pen is signalling that she may not try to topple the French government over its 2027 budget. Speaking at an event that was organised by Politico, the far-right leader warned that another political crisis could trigger turmoil in bond markets. Her National Rally Party, though, has helped to oust two French prime ministers over budget disputes in 2020. Just the past two years, the warning comes as France's borrowing premium over Germany has risen to

5:16 its highest level in 14 years. President Trump was joined by some of the biggest names in finance and tech for a state dinner honoring China's Xi Jinping last night. Guests included NVIDIA CEO Jensen Wang. AI has been a major focus of the leaders' talks. Trump has pushed for unrestricted development of AI, while China has criticized U.S. export controls.

5:40 Bloomberg's Mike Shepard says that finding common ground may be difficult.

5:45 China certainly has raised its own safety questions toward the U.S., especially with the development of advanced models like Mythos, which have that super capability to break into almost any system, at least according to Anthropic. So we do see a little bit of divergence between the two leaders there. But that does not mean that there will be any sort of grand bargain coming out of this on AI.

6:09 Bloomberg's Mike Shepard there. Trump earlier posted that he wants to keep AI, quote, exactly where it is, while Xi stressed the need to keep the technology, quote, under human control. So some slightly different comments then. It marks, though, the first time that the two leaders have jointly even addressed concerns that advanced AI could pose a major threat. America is looking to send more money and troops to Europe despite previous threats to pull back. President Trump has told European allies to take greater responsibility for their own security while the White House reviews U.S. troop deployments across the continent. However, the U.S. and Poland are working to open the first permanent American military base in the country. Here is Poland's

6:55 Foreign Minister, Radoslaw Sikorski.

6:57 We don't want– we have about 7,000 troops on a rotational basis in Poland right now. This would be a brigade-size base.

7:07 You cannot invade.

7:08 Russia with one brigade, okay? The Wehrmacht tried with 200 divisions, and they failed. So we want the kind of U.S. presence that would reassure us but not be threatening to Russia.

7:22 Radoslaw Sikorski speaking there at the Council on Foreign Relations, one of their events in New York. Meanwhile, Greenland hopes that its new security deal with Washington will bring U.S. investment, with its business association telling Bloomberg that it wants defense to become, quote, a pillar of the economy. And lastly, billionaires are pushing back as UK tax authorities try to map out their wealth. Bloomberg has uncovered that HMRC sent letters to all billionaires with a tax footprint here in Britain this summer, asking about their financial affairs. Bloomberg's UK reporter James Wilcock has more now.

8:03 What property do you own? How are your holdings structured? And in one case, what are your succession plans? Those are among the questions tax lawyers tell Bloomberg they're fielding from His Majesty's Revenue and Customs on behalf of their billionaire clients. In exchange for greater transparency, the UK Tax Authority is promising a more joined-up and direct service. But lawyers are pushing back, arguing the questions go beyond HMRC's legal remit. The requests risk adding to tensions with Britain's wealthiest at a sensitive time after a series of tax hikes and calls for further levies on wealth. In London, James Woolcock, Bloomberg Radio.

8:45 So, those are our top stories then for you this morning. A global bond sell-off is easing somewhat in Asia this morning, but it really is whether we're in a 5% world now for rates. So, 10-year U.S. Treasury yields at 518. Of course, here in the U.K., we're well above that for 10-year yields. We're trading at 538. And we've seen quite significant moves to that U.S. benchmark treasury yield over the last couple of sessions because we're up about 20 basis points. But reports about this U.S.-Iran negotiation over Hormuz, that has helped in terms of oil prices. They are down eight tenths. right now. Brent crude futures at $ 105.

9:26 72.

9:26 You did have a fairly risk-off session for stocks yesterday in Europe and the US. This morning, the MSCI Asia Pacific Index is up 0.4% and US stocks 50 futures are also gaining ground up 0.6% of 1%. So, those are the markets. Now, in a moment, we're going to bring you more on how Governments are trying to attract the ordinary investor by juicing yields. We'll tell you a bit more about that in Romania in particular. And also, what could this deal involve reopening the strait in just a week? So, we'll get into those stories. But something else has caught my eye this morning. I saw that iced coffee meme. Did you see it? I had no idea that the internet had become so obsessed with it.

10:10 I didn't think about it much. Should you bring an iced coffee into a job interview? The answer seemed obvious to me, no, because it would show that you either don't know the rules of job interviews or that maybe you don't care about them, which frankly would be more terrible in the eyes of the hirer, I suppose. Then I read Beth Coet's story about it, The War Over Iced Lattes, and she made some really good points. mainly that professional standards do change over time. She cited things like tattoos. You used to have to cover them up, but now people do not. And so she said that coffee is a sort of symptom of a workplace war that is going on about the future of work, Gen Z versus older generations, and how corporate America at the

10:56 moment is very tough on any kind of defiance in the You know, they grew up in the age of climate change, living through a pandemic, and they're being told that their jobs might disappear to AI. So I just thought it was fascinating, the internet going wild about coffee and how you deal with a job interview and just what is going on with the future of work. So I'm going to put a link to it in our podcast show notes, Bloomberg's Beth Carratt writing about, yeah, the future of work. Really interesting. Now, U.S. and Iranian negotiators are apparently exploring a new deal that would see Tehran reopen the Strait and Washington lift its blockade of Iranian ports.

11:36 Stephen Stapchinsky covers energy markets and renewables and joins us now. Stephen, good to speak to you. What would this deal involve? Would it really be a reopening? That's what oil markets have been poised for and really focused on for months now.

11:52 Yeah, I mean, I think what we're seeing here is it will be a phased deal that would see Iran reopen the Strait and Washington lift its blockade of Iranian ports. You know, they were trying to make a push, a breakthrough on the sidelines of the U.N. General Assembly on Thursday. Qatari officials are mediating this deal. The sequence deal would be very similar to the memorandum that was signed between the U.S. and Iran in mid-June. And that did lead to that fragile ceasefire. While it collapsed weeks later, it did result in quite a bit of traffic during that period, and traffic where ships had their AIS on and were going back and forth. Now, that did eventually break down, but that's what the market has been looking at. And

12:38 if you just look at Brent prices over the last week or two, we were at as high as about $ 110, or we're now closer to $ 100. And part of that decline has been, well, due in part to an expectation that there could be some sort of breakthrough.

12:54 Okay. So, that's on the U.S. and Iran, perhaps these negotiations. I mean, oil, as you say, has eased because of that. But then there have also been this series of warnings about energy needs, particularly for Europe, So the NATO Secretary General Mark Rutte was talking about that. You heard a little clip of it earlier, that Europe's oil refining capacity is really not adequate. And then there's also been this warning from David Byrd, who is the CEO of Dangote Petroleum Refinery. So have a little listen to what he has to say.

13:29 I think we're quite bullish in the medium-term outlook for refining. Going into the Middle East crisis, there was already high utilization of the refining portfolio. There had been quite a bit of rationalization, particularly in developed markets. Then there's obviously been damage in Russia and the Middle East. But I think what's mitigated it to date has been that inventory depletion.

13:47 But now I think inventories of refined products, crude is somewhat different, but all crude has to be processed through a refinery, I think are at record low levels. And if I look at diesel in Europe, for.

13:56 Example, now, it's very concerning. So very concerning. It's about diesel inventories. Diesel is basically the backbone of the economy, isn't it? And Bird was making those comments in an exclusive interview with Bloomberg's opening trade yesterday. What does all of this mean for Europe as we head into winter?

14:18 I mean, it's going to lead to more inflation. Diesel is what we like to call the workhorse fuel. It's used not just for transport, it's used in the agriculture industry. And with prices in Europe, in the U.S. and in Asia near record high levels, this is going to mean that power generation will also be high because high gas prices, you sometimes switch to diesel instead, you switch to coal instead.

14:39 It's all moving up the complex, and it's making it more expensive. Now, I do want to note that this is an interesting discussion about refining capacity, because this is more about the energy transition itself. Because as we shift to EVs and away from oil, there will inevitably be closures of refineries, as we've seen in Europe and in Australia and in other places. Now we're seeing in moments of crisis, if there's a bottleneck that's hit, like the US potentially banning exports of diesel temporarily, then suddenly those closures hit the reality that we're still using that fuel.

15:14 We're still in the middle of this energy transition, and it's a very challenging discussion to have because if you're trying to invest in new facilities, who would want to invest in a refinery that would have to operate for 30 or 40 years to get its money back if Europe wants to be net zero by 2050?

15:29 Yeah, this is the clash, isn't it? How do you make that transition when there are so many pressures and things like wars in the world, as you say? Stephen, thank you so much for explaining all of this. Stephen Sapchinski covers energy markets and renewables on not just the negotiations in the Middle East, but obviously the knock-on effects then in markets all around the world. Thank you. Stay with us. More from Bloomberg Daybreak Europe coming up after this. Now, governments globally are facing heavy debt burdens. We know that.

16:02 But it means that they are using increasingly creative ways to try to lure investors. Now, in Romania, if you give blood, you get a certificate giving you a higher interest rate on government bonds. Joining us now is Andra Timu, who is our reporter in Bucharest and has been writing about this story. I mean, this is a really eye-catching story.

16:25 What's the thinking behind this in Romania? And I suppose, is it working? Yes, it is working.

16:31 It's a program that started three years ago in 2023. And it's an interesting campaign that initially was started by this radio, rock radio, it's called Rock FM. And subsequently, the finance ministry and some of its employees, who are rockers, had this idea, okay, how can we support this campaign? And they decided to talk to the finance minister then and propose this incentive for people who want to also become investors in retail bonds. and also support blood donations.

17:05 So the people who donate blood and also want to buy retail bonds can get a higher interest rate, so up to one percentage point on top of the actual interest rate. So now that's about 7%, which is a very high return for the country. It's definitely higher than bank deposits. So, it makes it very interesting instrument to invest.

17:31 It also led to an increase in blood donations. So, it's basically a win-win.

17:37 Okay. Well, isn't that fascinating? I suppose the idea, though, is also why target retail investors? I mean, this has ramifications in lots of places, doesn't it? Why are governments now focused on retail investors?

17:53 So as we report in our story, this is a trend that's going globally because debt is surging all over the world. And Romania is one of the highest issuers of debt in Europe. It used to have the highest budget deficit in the European Union. It pays the highest borrowing cost because of its political uncertainty. So they tried to diversify their funding sources and find ways to improve that burden, basically. Now, the retail investors account for about 17% of the total issue debt. This is something that is going on in Japan, for example, and everywhere. Hungary is one of the countries in Europe that has a high share of retail bonds sold to people because mostly people tend to hold this investment. They buy these retail bonds,

18:58 and usually they hold them to maturity. So this is something that is, even though the state pays, it's a bit more expensive for the state compared to institutional investors, for example. But people tend to hold this type of bonds to maturity, so it's less volatile.

19:17 A benefit for the government, isn't it, if it's more stable?

19:20 Yeah, it's a benefit for the government and it's also a benefit for the buyers as well. So this is something that's increasing. It's kind of a competition to bank deposits. And actually, some of the banks had some comments about this, that the state is becoming a competitor in attracting savings. But yeah, we'll see how this develops going forward.

19:45 Yeah, absolutely. They may not like that. Andrew, it is a great story. And I love the fact that you have included the poster, as you say, from the rockers who are also involved in this, you know, blood donations for a high interest group. rate on your government bonds. Yeah, you have the whole the poster included in your article, which I thought was lovely. Andra, thank you so much for being with us. Very good to speak to you.

20:10 Andra Timu is our reporter in Bucharest on that fascinating story then. As of course, the issue of government indebtedness is one that is growing around the world. It's not just that governments need more debt. It's also that the big tech companies, AI needs more funding as well. So there are plenty of pressures. Thanks for listening to Bloomberg Daybreak Europe. If you're enjoying the podcast, give us a follow, leave a rating or review, and maybe send it to that one friend or colleague who's always trying to keep up with the news.

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