WEBVTT - Dollar Doldrums 0:00:00.400 --> 0:00:04.320 Strap on your Parachute's time for What Goes Up with 0:00:04.400 --> 0:00:14.080 Sarah Ponzick and Mike Reagan. Hello and welcome to What 0:00:14.200 --> 0:00:17.880 goes Up, a Bloomberg Weekly Markets podcast. I'm Sarah Pons, 0:00:18.200 --> 0:00:21.320 a reporter on the Cross Asset team, and I'm Mike Reagan, 0:00:21.520 --> 0:00:26.280 a senior editor at Bloomberg and as Sarah's official hype man. 0:00:26.320 --> 0:00:28.800 I have to give a shout out to Sarah this 0:00:28.840 --> 0:00:32.920 week for getting the cover story of Business Week magazine Football. 0:00:32.960 --> 0:00:35.199 Our listeners rush out to the newsstand and grab it 0:00:35.240 --> 0:00:38.680 on Robin Hood. Congratulations, Sarah, Thank you. I'm flattered. Mike, 0:00:38.840 --> 0:00:41.800 I'm so lucky to know that I have such a 0:00:41.840 --> 0:00:44.680 loyal hype man. So everyone who's listening, you have to 0:00:44.680 --> 0:00:47.320 take Mike's word, even though he hasn't read the story, 0:00:47.720 --> 0:00:50.360 um and go read it yourself. Thank you so much. 0:00:50.360 --> 0:00:53.760 It's fabulous. Even though you've only seen the title, We'll 0:00:53.760 --> 0:00:55.720 take it and run with it. But it is about 0:00:55.800 --> 0:00:58.360 Robin Hood. If you haven't listened to last week's episode either, 0:00:58.440 --> 0:01:01.440 we spoke to Listen Saunders over at Schwab about the 0:01:01.480 --> 0:01:03.800 date Trader of Facts, so it's also a great episode 0:01:04.120 --> 0:01:06.920 to listen to if you haven't already, but this week 0:01:06.920 --> 0:01:09.679 on the show anyway, Mike, investors are coalescing around the 0:01:09.680 --> 0:01:12.760 idea that no matter who wins the election, there will 0:01:12.800 --> 0:01:15.480 be more stimulus down the road. But with all this 0:01:15.600 --> 0:01:19.160 government spending, will there be enough demand to meet all 0:01:19.160 --> 0:01:22.039 the supply? And of course we will close out the 0:01:22.040 --> 0:01:25.319 episode with our tradition the craziest thing I saw in 0:01:25.440 --> 0:01:28.360 markets this week. And after all, if you saw something crazy, 0:01:28.480 --> 0:01:31.679 give us a call on the Bloomberg Podcast hotline at 0:01:32.280 --> 0:01:36.880 six four six three two four three four nine. Oh, 0:01:36.920 --> 0:01:39.320 and leave us a voicemail. Maybe we'll play it on 0:01:39.400 --> 0:01:42.240 the show with your crazy thing or any other feedback 0:01:42.280 --> 0:01:45.280 you have for the show. And sorry, let's introduce that guest. 0:01:45.440 --> 0:01:46.960 Sort of a change of pace for us this week, 0:01:47.000 --> 0:01:50.120 because our guest is a real expert on fixed income 0:01:50.200 --> 0:01:54.520 currency markets, so we're gonna dive into things like inflation 0:01:54.600 --> 0:01:58.120 break evens and the yield curve and that sort of thing. 0:01:58.520 --> 0:02:02.480 But without any further ado from Wells Fargo Securities were 0:02:02.680 --> 0:02:05.960 very happy to have one of their macro strategists, Zachary 0:02:06.040 --> 0:02:08.680 Griffith's Zach, welcome to the show. Thanks for having me on. 0:02:08.720 --> 0:02:11.440 Great guy, Great to see you. Again, you know, Zach, 0:02:11.520 --> 0:02:14.120 I wanted to get in all the things Sara mentioned, 0:02:14.160 --> 0:02:16.280 but I wanted to start off with something kind of 0:02:16.280 --> 0:02:19.280 in the weeds because it's a topic that really fascinates me, 0:02:19.320 --> 0:02:22.320 and that's the interest rate swap market. We had what 0:02:22.360 --> 0:02:27.359 they call the Big Bang last weekend where basically, and 0:02:27.560 --> 0:02:29.839 this is amazing to me, Sarah, I'm not sure how 0:02:29.919 --> 0:02:31.760 much you know about the swaps market. I know a 0:02:31.760 --> 0:02:34.960 little bit, not much. I will completely be honest and 0:02:35.000 --> 0:02:37.640 admit that, right right, I I know a little bit. 0:02:37.680 --> 0:02:39.800 I happen to edit a long story on on the 0:02:39.800 --> 0:02:41.440 Big Bag. So now, of course I'm an expert. I 0:02:41.639 --> 0:02:43.760 can I can talk with with guys like Zach about 0:02:43.760 --> 0:02:47.200 it like huge market that I don't think a lot 0:02:47.240 --> 0:02:51.239 of our listeners really necessarily appreciate how it's important. Something 0:02:51.280 --> 0:02:56.160 like a hundred trillion dollars in notional value on interest 0:02:56.400 --> 0:02:59.799 rate swaps, something like eighty some trillion is through clearing. 0:02:59.800 --> 0:03:02.720 How is and what happened last weekend is it's been 0:03:02.760 --> 0:03:05.880 part of this multi year switch to get away from 0:03:05.960 --> 0:03:10.040 lib war and other interest rate benchmarks and promote the 0:03:10.480 --> 0:03:14.480 secured overnight financing rate or so for um as sort 0:03:14.480 --> 0:03:17.160 of the replacement for library. So what they did is 0:03:17.200 --> 0:03:20.920 they they switched uh, interest rate benchmarks as far as 0:03:20.960 --> 0:03:24.200 the discounting rate of how you value these swaps from 0:03:24.240 --> 0:03:28.760 the effective federal funds rate to so forth. Now it 0:03:28.800 --> 0:03:31.680 sounds like a pretty simple thing to switch, but Bory 0:03:31.760 --> 0:03:34.400 not really. I mean, you think of eighty some trillion 0:03:34.440 --> 0:03:38.840 and notional swaps out there. Having to change discount rates 0:03:39.080 --> 0:03:41.720 even a few basis points is going to cause massive 0:03:42.280 --> 0:03:45.000 sort of changes in valuations of these swaps, which is 0:03:45.200 --> 0:03:48.160 just what happened. And the clearinghouses had to sort of 0:03:48.160 --> 0:03:50.720 match up the winners and losers and sort of divert 0:03:51.120 --> 0:03:54.520 billions of dollars from people who swaps went up in 0:03:54.600 --> 0:03:57.440 value to those who went down, and they also issued 0:03:57.640 --> 0:04:00.960 tens of billions in swaps to compensate it for changes 0:04:01.000 --> 0:04:04.800 in risk in this market. Really fascinating thing that happened 0:04:05.040 --> 0:04:07.120 now is that I know you had a note on 0:04:07.160 --> 0:04:10.440 this talking about sort of the potential ripple effects. A 0:04:10.440 --> 0:04:14.040 lot of people who got basis swaps as compensations, whether 0:04:14.320 --> 0:04:18.560 whether their banks or hedge funds don't really use basis 0:04:18.560 --> 0:04:21.720 swaps to hedge the way, uh, you know, the clearinghouses 0:04:22.040 --> 0:04:25.159 view other counterparties using them. So the idea was that 0:04:25.200 --> 0:04:27.839 there were these auctions of I think was like twenty 0:04:27.880 --> 0:04:31.800 five billion worth of swaps at CME and UH a 0:04:31.839 --> 0:04:35.120 bunch more at lc H in London, and there was 0:04:35.279 --> 0:04:37.880 a lot of concern about sort of dislocations in the 0:04:37.960 --> 0:04:40.240 in the market after that. How did it all go 0:04:40.320 --> 0:04:43.440 down from your perspective, Was there any sort of market 0:04:43.440 --> 0:04:46.640 anomalies that you noticed, any sort of inkling that some 0:04:46.800 --> 0:04:48.760 hedge funds or banks might be feeling a little pain 0:04:48.839 --> 0:04:51.480 because of the switch. Well, I have some heartbreaking news 0:04:51.520 --> 0:04:54.760 to start us out. That was actually my crazy thing 0:04:55.120 --> 0:04:58.240 in markets. I figured, just like last time. I mean, 0:04:58.279 --> 0:05:00.599 any time you can say hut of them funny trillion 0:05:00.640 --> 0:05:04.040 notional of anything occurred, that's pretty crazy, right, And that's 0:05:04.080 --> 0:05:08.240 just for l H. And so far it seems like 0:05:08.279 --> 0:05:12.359 the auctions went fairly well. And we had been concerned 0:05:12.400 --> 0:05:15.480 about some potential widening in the sofa fed funds basis, 0:05:15.680 --> 0:05:18.400 and you may have seen some of that, but overall 0:05:18.400 --> 0:05:21.440 it's it's gone well. But it's really a huge step 0:05:21.760 --> 0:05:25.960 in the process towards shifting away from live or into 0:05:26.040 --> 0:05:30.360 sofa as the risk free rate and the benchmark rate 0:05:30.560 --> 0:05:34.159 in the US. So it's it's really an incredible thing 0:05:34.240 --> 0:05:37.400 that that went on over the weekend, and so far, 0:05:37.839 --> 0:05:40.280 I think it's going to be a process seeing how 0:05:40.279 --> 0:05:42.359 it all shakes out. But the initial indications are at 0:05:42.400 --> 0:05:45.240 the auction works fairly well and that the market has 0:05:45.279 --> 0:05:49.560 been stable in the wake of the huge move. So 0:05:49.560 --> 0:05:51.159 we'll put you on the spot. You have about twenty 0:05:51.160 --> 0:05:53.000 minutes now, Zack, to come up with something new by 0:05:53.000 --> 0:05:54.400 the time we get to the end of the podcast. 0:05:55.040 --> 0:06:01.719 That kidding, Zach, wasn't a long time coming though. Were 0:06:01.760 --> 0:06:04.120 there signs that this is going to happen? Yeah, it 0:06:04.160 --> 0:06:06.880 was a long time coming, and you saw some reaction 0:06:07.040 --> 0:06:10.080 in markets as certain participants were setting up for the 0:06:10.120 --> 0:06:12.240 big bang. So there's a chance that a lot of 0:06:13.360 --> 0:06:16.640 positioning around the big bang was was done and dusted 0:06:17.400 --> 0:06:20.520 before the weekend hit, and so I think that probably 0:06:20.560 --> 0:06:26.480 contributed to some of the relative stability around it. And overall, 0:06:26.520 --> 0:06:29.800 I think it's a it's a huge step towards the 0:06:29.800 --> 0:06:32.919 transition to SOFA and I think when any time that 0:06:33.000 --> 0:06:36.640 you have such a shift in these these clearing houses, 0:06:36.640 --> 0:06:39.960 which really see the majority of swaps that are done 0:06:40.240 --> 0:06:44.080 go through, then that's that's really a landmark thing. And 0:06:44.480 --> 0:06:47.880 when we talked to certain clients, it does seem like 0:06:47.920 --> 0:06:50.880 there's still skepticism that this shift from live or is 0:06:50.880 --> 0:06:53.200 going to happen. And this was I think a big 0:06:53.240 --> 0:06:57.320 step in the right direction. And yes it was widely expected, 0:06:57.360 --> 0:07:01.400 but it's just another step towards this this process that 0:07:01.440 --> 0:07:04.280 we've been kind of banging on the drum that it's 0:07:04.360 --> 0:07:07.560 very real and so of the regulators. So it's it's 0:07:07.560 --> 0:07:10.240 a big thing, and um, you know, there's there's only 0:07:10.240 --> 0:07:13.080 going to be more shifting in that direction going forward. 0:07:13.960 --> 0:07:16.680 There's that let's switch to sort of a more mundane 0:07:17.040 --> 0:07:20.440 fixed income topic, and that's the The backup in yields 0:07:20.480 --> 0:07:23.320 we've seen this week is getting interesting. I mean, we're 0:07:23.360 --> 0:07:27.560 still at very low rates in the US uh ten years, 0:07:27.920 --> 0:07:31.400 you know, eightiesome basis points, you know, thirty years, still 0:07:31.480 --> 0:07:34.640 well below two. What do you make of it? Is 0:07:34.640 --> 0:07:37.280 it sort of part of this blue wave trade idea? 0:07:38.040 --> 0:07:40.960 Is it? You know, the economic recovery is starting to 0:07:41.400 --> 0:07:43.280 perk up. What do you make out of what's going 0:07:43.320 --> 0:07:45.880 on with rates this week? Yeah, it's tough to parse 0:07:45.960 --> 0:07:49.720 out what some of these moves are really directly attributable 0:07:49.760 --> 0:07:53.160 to I think part of it comes down to the 0:07:53.200 --> 0:07:56.960 prospect of a blue wave, which equals more stimulus. The 0:07:57.000 --> 0:07:59.400 one thing that's been kind of fascinating to us over 0:07:59.440 --> 0:08:01.480 the past couple of weeks and maybe even a couple 0:08:01.520 --> 0:08:04.560 of months is how much the market has focused on 0:08:04.680 --> 0:08:09.160 headlines around fiscal stimulus, sort of expecting it to happen 0:08:09.200 --> 0:08:11.960 before the election. And we've been in the camp that 0:08:11.960 --> 0:08:15.440 that's a very unlikely outcome and has only gotten less 0:08:15.480 --> 0:08:17.960 likely as we are so close to the election now, 0:08:18.760 --> 0:08:22.240 and I think that's been a key driver of where 0:08:22.280 --> 0:08:24.440 we've gotten to today. So when we think about the 0:08:24.520 --> 0:08:26.880 risks in the near term heading into the election, you 0:08:26.920 --> 0:08:30.040 have a week that contains the US election and f 0:08:30.120 --> 0:08:33.240 O m C meeting, a Treasury refunding announcement, and non 0:08:33.280 --> 0:08:36.200 farm payrolls. We think that I can't believe that's allowed. 0:08:36.600 --> 0:08:39.760 Neither can we. It's I feel like even two of 0:08:39.760 --> 0:08:42.319 those things is too much. And and we have four 0:08:42.880 --> 0:08:46.120 Tier one super Tier one events all in one week. 0:08:46.200 --> 0:08:49.880 But when we think about the risks too yields in 0:08:49.920 --> 0:08:53.120 the near term, we think it's to the downside. And 0:08:53.160 --> 0:08:55.840 that's sort of a weighted average of these different outcomes 0:08:55.840 --> 0:08:58.559 that you can have with the election, with the fo 0:08:58.679 --> 0:09:01.040 MC meeting, with treasury re lending. And the thing that 0:09:01.080 --> 0:09:04.560 we think might not be reflected in yields right now 0:09:04.880 --> 0:09:07.920 is the possibility of a delayed election outcome or a 0:09:07.960 --> 0:09:10.800 contested election outcome where you have a big risk off move. 0:09:11.320 --> 0:09:15.319 The tenure yield shifts dramatically lower in that scenario, and 0:09:15.800 --> 0:09:18.199 that will sort of be dynamic. As you know, I 0:09:18.440 --> 0:09:23.280 don't think it's anticipated that will have the results at 0:09:23.280 --> 0:09:27.520 the end of November three, just depending on how close 0:09:27.600 --> 0:09:31.200 the race is and how many mail in ballots you have. 0:09:31.320 --> 0:09:34.720 You're really dealing with an election that is unlike any 0:09:34.760 --> 0:09:36.880 others we've had in recent past, with all of the 0:09:36.920 --> 0:09:40.720 potential mail in voting. So we think that the risks 0:09:40.720 --> 0:09:43.440 are to the downside in the near term, but over 0:09:43.480 --> 0:09:46.200 the medium term, we do think that the story remains 0:09:46.679 --> 0:09:50.600 extremely heavy heavy treasury issuance. And that's even without another 0:09:50.600 --> 0:09:53.560 fiscal package, which might become more likely once you have 0:09:54.000 --> 0:09:57.480 an election result in a better understanding of who's in 0:09:57.520 --> 0:10:01.120 the White House and in Congress, and you know that 0:10:01.280 --> 0:10:05.040 that only increases the risk of of higher yields from here. 0:10:05.080 --> 0:10:07.440 So short term you could see yields come down a 0:10:07.480 --> 0:10:10.640 bit depending on how things go with the election. Over 0:10:10.679 --> 0:10:13.960 the medium term, we think the directionally, it's yields higher 0:10:14.000 --> 0:10:16.520 and curse steeper. I am going to go ahead and 0:10:16.600 --> 0:10:19.400 head yourselves a little bit and just say, we do 0:10:19.520 --> 0:10:24.240 record this podcast on a Thursday, so if by chance 0:10:24.400 --> 0:10:28.040 something happens with stimulus on Friday, we will have recorded 0:10:28.080 --> 0:10:30.280 this beforehand. I feel like I have to say that 0:10:30.440 --> 0:10:35.240 just in case. But that's important said, very important disclosure. 0:10:35.400 --> 0:10:38.840 But going forwards, if no matter what, we do get 0:10:38.880 --> 0:10:41.040 another stimulus package and and say we do have a 0:10:41.080 --> 0:10:45.719 blue wave, and that means trillions dollars more worth of 0:10:45.800 --> 0:10:48.640 fiscal stimulus down the pipeline. I remember the last time 0:10:48.679 --> 0:10:52.240 we spoke earlier this year, we talked about the supply 0:10:52.760 --> 0:10:57.680 coming to the treasury market from that first round of stimulus, 0:10:57.720 --> 0:11:01.840 the Cares Act, and there were are a few concerns 0:11:01.880 --> 0:11:06.200 about supply or demand meeting that supply. If we got 0:11:06.280 --> 0:11:09.920 trillions and trillions dollars more worth of stimulus, what is 0:11:09.960 --> 0:11:13.640 that going to look like from US supply and demand standpoint. Yeah, 0:11:13.640 --> 0:11:15.640 that's a great point, Sarah. And if you think back 0:11:15.720 --> 0:11:20.600 to March, April, even May all of that supply was 0:11:20.760 --> 0:11:23.640 handled through the bill market. Almost all of that supply 0:11:23.880 --> 0:11:29.280 is Treasury less frequently adjusts its coupon auction sizes as 0:11:29.320 --> 0:11:33.640 it wants it's auctions to be regular and known and 0:11:34.040 --> 0:11:38.480 not very volatile. They sort of handle any shifts in 0:11:39.160 --> 0:11:42.360 issuance needs through the bill market. So that's I mean, 0:11:42.760 --> 0:11:45.520 the what they did back then as they introduced these 0:11:45.559 --> 0:11:47.960 cash management bills that they have been issuing on a 0:11:48.000 --> 0:11:51.360 regular basis since then, and they've driven up the cash 0:11:51.400 --> 0:11:54.400 balance to one point seven trillion I think it's at 0:11:54.880 --> 0:11:59.120 around now, and so the big difference going forward is 0:12:00.080 --> 0:12:03.840 of this additional stimulus will be able to be handled 0:12:03.960 --> 0:12:07.480 with the cash balance. That's that's really so high if 0:12:07.480 --> 0:12:10.559 you think about it, treasuries own forecast for the cash 0:12:10.559 --> 0:12:12.400 balance for the end of this year is eight hundred 0:12:12.440 --> 0:12:16.719 billion dollars or nine billion dollars above that. Now now 0:12:16.720 --> 0:12:20.200 Treasury has baked into its forecast one trillion dollar fiscal 0:12:20.240 --> 0:12:24.120 stimulus package, which has not materialized yet. So when we 0:12:24.160 --> 0:12:28.360 think about the next one to three trillion, a lot 0:12:28.400 --> 0:12:31.400 of that can be handled through the cash balance, and 0:12:31.520 --> 0:12:35.840 that sort of takes the edge off of the ultimate 0:12:35.920 --> 0:12:38.440 size of the new package because they can they have 0:12:38.520 --> 0:12:40.520 the cash to pay for a certain amount of that, 0:12:41.200 --> 0:12:44.240 and having that cash on hand, if they are to 0:12:44.440 --> 0:12:48.720 decide to ramp up unemployment insurance to the additional six 0:12:49.120 --> 0:12:54.040 billion per month again or right checks to certain US households, 0:12:54.040 --> 0:12:56.839 they can do that with that supply of cash. And 0:12:58.559 --> 0:13:02.880 going forward, more of that supply is going to be 0:13:02.960 --> 0:13:06.920 turned out. And and you've really seen extreme increases in 0:13:07.080 --> 0:13:10.760 long term auctions at May and August, even higher than 0:13:10.800 --> 0:13:14.200 we had anticipated. But they've gone fairly well up to 0:13:14.240 --> 0:13:16.880 this point. But we do think going forward you're gonna 0:13:17.000 --> 0:13:20.800 hit a point where some of these buyers that maybe 0:13:21.120 --> 0:13:23.760 are buying out of need and not of want, they 0:13:23.840 --> 0:13:26.480 just need the duration and they don't necessarily have to 0:13:26.520 --> 0:13:29.840 look at at the yields, which are still quite unattractive. 0:13:30.400 --> 0:13:32.839 As that starts to dry up and people can take 0:13:32.880 --> 0:13:37.160 a step back and perhaps reconsider, then, I think that's 0:13:37.200 --> 0:13:40.240 one of the contributing factors that that sends yields higher, 0:13:40.640 --> 0:14:02.120 especially if you do get another fistical stimulus package. Well, Zack, 0:14:02.160 --> 0:14:05.040 you talked about buyers in the treasury market, which I 0:14:05.080 --> 0:14:07.559 think obviously the elephant in the room there is the FED, 0:14:07.720 --> 0:14:10.160 who I still believe. Correct me if I'm wrong. But 0:14:10.200 --> 0:14:12.600 the last figures I saw, they're still buying something like 0:14:12.679 --> 0:14:17.240 eighty billion a month in UH treasury treasury notes and bonds. 0:14:17.960 --> 0:14:21.440 I mean that seems like a lot to me. And 0:14:21.520 --> 0:14:25.920 you know, the motivation originally was to restore liquidity in 0:14:25.960 --> 0:14:29.520 the treasury market. It's the liquidity still that bad that 0:14:29.600 --> 0:14:33.120 we need eighty billion of purchases a month from the Fed. 0:14:33.240 --> 0:14:35.480 Where is this kind of maybe a little bit of 0:14:35.560 --> 0:14:39.440 yield curve control in disguise in your opinion, Yeah, that's 0:14:39.440 --> 0:14:43.400 a great point. Market liquidity has largely been restored for 0:14:43.400 --> 0:14:47.920 several months now, and some of the discussion around asset 0:14:47.960 --> 0:14:51.600 purposes has shifted toward the FED needing to do more 0:14:52.160 --> 0:14:55.920 by way of accommodation, and that could involve either increasing 0:14:55.960 --> 0:15:00.240 purposes overall or shifting them further out the curve. One 0:15:00.280 --> 0:15:03.640 thing that they changed in the policy statement recently is 0:15:03.920 --> 0:15:08.160 they explicitly recognize that these purchases are not simply for 0:15:08.360 --> 0:15:13.120 stabilization and restoring market liquidity. They are providing accommodation. So 0:15:13.600 --> 0:15:17.520 when we kind of balance some of the public speeches 0:15:18.080 --> 0:15:23.080 and some speculation around shifting purchases further out the curve 0:15:23.240 --> 0:15:25.560 with with the policy statement, it would suggest that they're 0:15:25.600 --> 0:15:29.520 acknowledging what they're already doing is providing accommodation. So maybe 0:15:29.560 --> 0:15:33.600 that's an effort to buy them time to really understand 0:15:33.680 --> 0:15:35.760 what's going to happen on the fiscal side before they 0:15:35.760 --> 0:15:40.240 try to adjust their purchases, increase their purchases to become 0:15:40.240 --> 0:15:43.560 more accommodative, since they recognize now that they are already 0:15:43.560 --> 0:15:47.600 providing accommodation, and when we think about what's sort of 0:15:47.600 --> 0:15:51.320 missing from the equation on the fiscal side, the fiscal 0:15:51.680 --> 0:15:54.480 side of the equation is much more equipped to handle 0:15:54.520 --> 0:15:57.640 the issues that we have now, whether that be writing checks, 0:15:58.360 --> 0:16:03.040 providing additional unemployment insurance. I don't think that you can 0:16:03.080 --> 0:16:08.520 replace the fiscal those fiscal policies with buying more treasuries. 0:16:08.960 --> 0:16:11.480 I mean, we have seen a backup and yields, but 0:16:11.880 --> 0:16:17.280 borrowing costs are low and increasing asset purchases from I 0:16:17.320 --> 0:16:21.480 don't see that really providing the type of relief that 0:16:21.600 --> 0:16:24.960 the U. S economy needs now as we continue to 0:16:25.000 --> 0:16:29.000 deal with partially shut down economies and people there are 0:16:29.000 --> 0:16:32.440 still out of work. That's asset purchases are not really 0:16:32.480 --> 0:16:34.800 well equipped to handle that situation, which is why we 0:16:34.880 --> 0:16:38.840 think that any adjustment to the asset purchase program is 0:16:38.960 --> 0:16:41.760 probably a little ways out at this point. So when 0:16:41.800 --> 0:16:44.000 we look up at this backup and yield that we've 0:16:44.040 --> 0:16:47.080 seen this past week and its components, something I've seen 0:16:47.160 --> 0:16:50.480 highlighted is that the backup and yields that we're seeing 0:16:50.680 --> 0:16:53.960 is actually due to arise in the term premium, so 0:16:54.000 --> 0:16:56.880 that being the premium that investor holds for holding a 0:16:56.920 --> 0:16:59.560 longer dated security instead of just rolling a shorter dated one. 0:17:00.120 --> 0:17:04.040 Not so much actually inflation expectations. I want to get 0:17:04.040 --> 0:17:06.080 your take on this. Are you guys seeing the same breakdown? 0:17:06.160 --> 0:17:08.080 And if so, I mean I feel like that has 0:17:08.119 --> 0:17:10.159 a lot of implications for other trades if we're not 0:17:10.200 --> 0:17:14.400 seeing a backup and yields for inflation or growth reasons. Yeah, 0:17:14.480 --> 0:17:17.359 that's an interesting point, and it's it's tough to to 0:17:17.440 --> 0:17:20.160 break all of this down because you have seen break 0:17:20.240 --> 0:17:23.679 evens come back quite a bit, especially in you know, 0:17:23.720 --> 0:17:27.159 looking at tenure break evens moving back towards a hundred 0:17:27.160 --> 0:17:29.840 seventy bass points, and when you think about how that 0:17:29.920 --> 0:17:34.280 compares to inflation fundamentals, it's actually in excess of what 0:17:34.320 --> 0:17:38.280 you're seeing or right around what you're seeing in core inflation. 0:17:38.400 --> 0:17:41.680 So I think you are seeing some of the rising 0:17:41.760 --> 0:17:45.679 yields as as a result of rising inflation expectations, but 0:17:46.440 --> 0:17:50.280 with the economy as fragile and frail as it still 0:17:50.440 --> 0:17:54.520 is coming out of the largest shutdowns that we had 0:17:54.560 --> 0:17:58.679 back in in March and April, I think the the 0:17:58.760 --> 0:18:01.840 story remains that some of these or all of these 0:18:01.880 --> 0:18:06.159 factors are contributing at least somewhat, But the FED just 0:18:06.240 --> 0:18:10.800 saying that they are targeting average inflation is not enough 0:18:10.880 --> 0:18:15.439 to push up expectations materially until you start to see 0:18:15.480 --> 0:18:17.960 some of of it in the hard numbers, which which 0:18:17.960 --> 0:18:20.080 we haven't seen yet. And if you think back to 0:18:20.119 --> 0:18:23.040 the latest CPI figure, almost all of the growth and 0:18:23.119 --> 0:18:27.280 core CPI was in used cars and trucks. So you 0:18:27.400 --> 0:18:32.919 have a situation where court prices aren't rising broadly, you 0:18:33.000 --> 0:18:36.280 have you're still having some of this funky data, and 0:18:36.440 --> 0:18:38.920 it's sort of hard to back out what that really 0:18:38.960 --> 0:18:43.879 means for inflation going forward. But I think you know, 0:18:44.160 --> 0:18:46.560 part of part of the story is certainly an increase 0:18:46.640 --> 0:18:49.920 in expectations, and like a lot of these FED policies 0:18:49.960 --> 0:18:53.120 we saw back in March in April, just the announcement 0:18:53.119 --> 0:18:55.720 of them restored a lot of liquidity to the commercial 0:18:55.760 --> 0:18:58.800 paper markets, the corporate bond markets, and I think you 0:18:58.800 --> 0:19:01.680 get a little bit of that and in inflation expectations 0:19:01.680 --> 0:19:04.159 based on the new policy, But it remains to be 0:19:04.200 --> 0:19:07.040 seen if if the if the hard data will actually 0:19:07.040 --> 0:19:10.440 back it up. It's like, let's shift gears a little 0:19:10.440 --> 0:19:13.600 bit and talk about currencies a little bit. You know. 0:19:13.640 --> 0:19:16.479 The other big trend we've seen in recent weeks and 0:19:16.560 --> 0:19:20.280 months is uh, some pretty noticeable weakening of the dollar 0:19:20.560 --> 0:19:23.359 versus other currencies. To me, what I find interesting is 0:19:23.640 --> 0:19:26.199 you tend to have these regimes where the dollar can 0:19:26.240 --> 0:19:30.320 be sort of appreciating for months or even years at 0:19:30.320 --> 0:19:32.879 the time and then depreciating for months and years at 0:19:32.880 --> 0:19:36.639 the time. Obviously too early in this sort of phase 0:19:36.720 --> 0:19:40.000 of weakening too to say if we're a new regime 0:19:40.080 --> 0:19:42.359 or not. But but what's your take? Is this a 0:19:42.440 --> 0:19:45.359 sign of more to calm or can we expect a 0:19:45.359 --> 0:19:49.080 week er dollar, say going into one? I mean, is 0:19:49.080 --> 0:19:51.440 is this a new sort of regime for the dollar? 0:19:51.520 --> 0:19:55.280 In your opinion, we do expect to see sort of 0:19:56.480 --> 0:19:59.240 dollar weakness over the medium term. I guess, I would say, 0:19:59.280 --> 0:20:03.159 and that's as global growth starts to come back. What 0:20:03.280 --> 0:20:06.239 you've noticed over the past six months or so is 0:20:06.760 --> 0:20:09.280 the US dollar really has been the number one safe 0:20:09.280 --> 0:20:12.480 haven currency. So in times where you have a risk 0:20:12.560 --> 0:20:15.960 off tone, that's that's positive for the dollar. And and 0:20:16.000 --> 0:20:18.080 when you have risk on, the dollar has fallen. And 0:20:18.320 --> 0:20:21.400 when you think about what's happened in equity markets over 0:20:21.440 --> 0:20:24.840 the past six months, you know, we're touching new highs, 0:20:24.840 --> 0:20:28.520 and while we're off recent highs, the the story has 0:20:28.560 --> 0:20:32.000 been mostly risk on. Improved risk sentiment. You have corporate 0:20:32.000 --> 0:20:36.280 bond spreads hitting new tights and things have gotten a 0:20:36.280 --> 0:20:39.040 lot better, and that's really been a negative for the U. S. Dollar. 0:20:39.200 --> 0:20:42.360 You also have the backdrop of the FED still has 0:20:42.400 --> 0:20:45.080 all of these U. S. Dollar liquidity facilities in place. 0:20:45.119 --> 0:20:48.480 They're really not getting tapped anymore. I know the repo 0:20:48.600 --> 0:20:51.040 facility has gone down to zero. I think central bank 0:20:51.080 --> 0:20:54.480 liquidity swaps has fallen a bunch as well, not quite 0:20:54.480 --> 0:20:57.720 down to zero, but I think you have a super 0:20:57.800 --> 0:21:02.919 combinative FED, and that's that's certainly not unique. To defend 0:21:03.040 --> 0:21:06.240 all these major global central banks are are very accommodative 0:21:06.280 --> 0:21:09.639 and considering new policies every day to try to combat 0:21:09.680 --> 0:21:12.840 the fallout from the virus. But the one thing that's 0:21:12.920 --> 0:21:16.520 changed materially is if you look at the yield differential 0:21:16.640 --> 0:21:22.360 between treasuries and other major government bonds on currency unadjusted basis, 0:21:22.400 --> 0:21:24.560 that's collapsed the ton. So that's one of the things 0:21:25.160 --> 0:21:27.800 that we think had prior to all of this supported 0:21:28.160 --> 0:21:30.280 the dollar and is now more of a head and 0:21:30.359 --> 0:21:32.040 for the dollar. And we expect that to be the 0:21:32.119 --> 0:21:35.320 case going forward, as we do expect yields to rise, 0:21:35.480 --> 0:21:40.880 but the differential between European government bonds and treasure yields 0:21:41.200 --> 0:21:43.800 is going to remain pretty low on a historical basis 0:21:44.760 --> 0:21:47.520 now is and it all connected the sort of you know, 0:21:47.600 --> 0:21:51.439 your old textbook catalysts for for the dollar, meaning the 0:21:51.480 --> 0:21:54.320 trade depsit and the and the budget depthsit the twin 0:21:54.400 --> 0:21:57.400 deficits really kind of blowing out. Um, is that part 0:21:57.480 --> 0:21:59.520 of the story here or is it a matter of 0:21:59.640 --> 0:22:02.760 you know what government is really uh running a huge 0:22:02.760 --> 0:22:05.280 StarPlus now anyway? Is it? Is it? Or those catalysts 0:22:05.320 --> 0:22:07.080 not as important to say they would be in in 0:22:07.119 --> 0:22:10.200 a quote unquote normal, normal world where we're not dealing 0:22:10.240 --> 0:22:12.920 with all the drama we've dealt with this year. Yeah, 0:22:12.960 --> 0:22:15.440 I think that's safe to say. And what we've really 0:22:15.480 --> 0:22:18.480 focused on for the U s Dollar in the near 0:22:18.560 --> 0:22:22.280 term is really just general risk sentiment and thinking about, 0:22:22.320 --> 0:22:25.200 you know, tying that into the election and what might 0:22:25.240 --> 0:22:27.080 happen in the next couple of weeks. We sort of 0:22:27.119 --> 0:22:31.280 see an outcome where if it's highly contested or a 0:22:31.359 --> 0:22:35.600 very close election, that would result in US dollar strength 0:22:35.680 --> 0:22:39.160 because that's really more of a risk off story and 0:22:39.560 --> 0:22:42.320 would probably push people in into the dollar. But if 0:22:42.359 --> 0:22:46.720 you have a clear election outcome, big fiscal stimulus coming, 0:22:47.240 --> 0:22:50.680 more inflation coming, that's that's more of a dollar weakness 0:22:50.840 --> 0:22:52.920 risk on trend. And so those are those are really 0:22:52.960 --> 0:22:55.120 more of the things that we're focused on. It's almost 0:22:55.400 --> 0:22:58.960 more of a sentiment thing at this point rather than fundamental. 0:22:58.960 --> 0:23:02.439 It's just because fundamental US have shifted so drastically with 0:23:02.560 --> 0:23:05.840