WEBVTT - Lots More on the Global Selloff in Government Bonds 0:00:02.480 --> 0:00:07.400 Bloomberg Audio Studios, Podcasts, Radio news. 0:00:07.640 --> 0:00:10.280 Joe, are we going to spend this episode just arguing 0:00:10.280 --> 0:00:11.720 about the term premium? 0:00:12.440 --> 0:00:15.200 I do know, like, yeah, maybe you know, I've always like, 0:00:15.320 --> 0:00:18.079 I've always been sort of I wouldn't say a term 0:00:18.079 --> 0:00:21.400 premium denier, but I yes, you are, okay, but like, 0:00:21.720 --> 0:00:24.080 and I was totally ready to capitulate. I was like, Oh, 0:00:24.120 --> 0:00:26.160 it's all the term premium. And I was like, I'm 0:00:26.200 --> 0:00:29.640 totally convinced the term premium is this really important concept 0:00:29.640 --> 0:00:32.880 that can be measured analytically with precision. And then to 0:00:32.960 --> 0:00:35.080 people like, ah, it's actually you don't really have to 0:00:35.120 --> 0:00:38.159 go that far. It's sort of straightforward. I still, you know, there's. 0:00:37.960 --> 0:00:40.480 A middle path where you can say that the term 0:00:40.560 --> 0:00:44.040 premium is hard to measure because you have to estimate 0:00:44.120 --> 0:00:48.080 like a risk neutral rate, but but it still exists. 0:00:48.400 --> 0:00:50.720 It might mean different things to different people. 0:00:50.920 --> 0:00:53.280 But I've never been good in life at taking the 0:00:53.320 --> 0:01:00.240 middle path in anything. I oscillate between extremes. I did 0:01:00.240 --> 0:01:00.800 a deadlist. 0:01:00.880 --> 0:01:04.400 I'm both the most popular trader and most successful trader 0:01:04.600 --> 0:01:05.800 at Citadel. 0:01:05.480 --> 0:01:06.520 That is going viral. 0:01:06.800 --> 0:01:07.640 Uh barges. 0:01:07.720 --> 0:01:09.840 This is an after school special, except. 0:01:09.520 --> 0:01:12.040 I've decided I'm going to base my entire personality going 0:01:12.080 --> 0:01:15.320 forward on campaigning for a strategic pork reserve in the US. 0:01:15.520 --> 0:01:16.199 Black goals. 0:01:16.360 --> 0:01:19.360 These are the important questions that robots taking over the world. 0:01:19.440 --> 0:01:22.280 No, I think that like in a couple of years, 0:01:22.480 --> 0:01:24.759 the AI will do a really good job of making 0:01:24.760 --> 0:01:27.760 the Odd Lots podcast. One day that person will have 0:01:27.800 --> 0:01:28.839 the mandate of heaven. 0:01:29.000 --> 0:01:31.199 How do I get more popular and successful? 0:01:31.520 --> 0:01:32.440 We do have. 0:01:34.760 --> 0:01:37.080 You're listening to lots More where we catch up with 0:01:37.120 --> 0:01:39.840 friends about what's going on right now, because. 0:01:39.640 --> 0:01:42.520 Even when The Odd Lots is over, there's always lots more. 0:01:42.920 --> 0:01:49.000 And we really do have the perfect guest back with 0:01:49.240 --> 0:01:51.800 Jay Berry. He is now the head of Global rate 0:01:51.880 --> 0:01:55.160 Strategy at JP Morgan. The last time we had him 0:01:55.280 --> 0:01:58.600 on was in October of twenty twenty three, and the 0:01:58.640 --> 0:02:01.280 headline on the episode was like Jay Berry on the 0:02:01.320 --> 0:02:04.440 big sell off in bonds and we can just recycle 0:02:04.520 --> 0:02:06.280 all that again. 0:02:06.480 --> 0:02:08.080 Was that the peak when we had him on then? 0:02:08.800 --> 0:02:09.480 I don't know. 0:02:11.040 --> 0:02:13.679 At that time, Yeah, Jay, do you believe in the 0:02:13.760 --> 0:02:14.600 term premium? 0:02:14.800 --> 0:02:16.959 Well, Tracy, I think it's funny you talk about the 0:02:17.040 --> 0:02:19.000 last time I was on because ten year yields are 0:02:19.000 --> 0:02:21.520 basically at the same level they were then, and at 0:02:21.520 --> 0:02:23.800 the time, the funds rate was one hundred bases points 0:02:23.840 --> 0:02:26.760 higher than it is right now. So term premium is 0:02:26.800 --> 0:02:28.960 hard to measure. But I'm a simple man, and I 0:02:28.960 --> 0:02:30.640 think of it as the slope of the yield curve, 0:02:30.960 --> 0:02:32.560 and the slope of the yield curve is steeper for 0:02:32.560 --> 0:02:34.400 a given level of policy rates. So I think it 0:02:34.440 --> 0:02:36.600 tells you that there is more term premium in the 0:02:36.639 --> 0:02:37.840 curve right now. Absolutely. 0:02:38.400 --> 0:02:41.320 Ira Jersey, who does rates your Bloombering Intelles, had a 0:02:41.400 --> 0:02:45.399 chart and you just said, look, yes, one term premium, 0:02:45.440 --> 0:02:48.560 all that. But one part of the story is just 0:02:48.680 --> 0:02:51.200 that the markets estimate of the terminal rate is now 0:02:51.320 --> 0:02:53.600 higher than it would have been, say, six months ago, 0:02:53.639 --> 0:02:57.480 et cetera, at the start of the cutting process, and 0:02:57.560 --> 0:02:59.320 that a big part of the story with the rise 0:02:59.320 --> 0:03:02.000 and the long ends in September is just that you know, 0:03:02.120 --> 0:03:03.840 there's not as much cutting baked in. 0:03:04.120 --> 0:03:06.720 I think that's exactly it as well. Joe. I think 0:03:06.720 --> 0:03:09.120 that's a really important point because this is. 0:03:08.560 --> 0:03:10.800 Just now the middle ground. It's like, part of it 0:03:10.880 --> 0:03:12.400 is the term premium, and part of it. 0:03:12.400 --> 0:03:15.480 If we get Joe to a middle path, is a success. 0:03:15.600 --> 0:03:17.320 Yeah, I'm a middle of the road guy, and I 0:03:17.360 --> 0:03:20.120 don't think a single explanation or a single factor can 0:03:20.160 --> 0:03:22.800 explain the bond sell of but term premiums one tracy, 0:03:22.880 --> 0:03:27.240 but Joe, FED policy expectations matter because it's fascinating. When 0:03:27.240 --> 0:03:29.800 the FED cut fifty in September, we were pricing in 0:03:29.840 --> 0:03:32.440 a terminal funds rate of like two and three quarters. Yeah, 0:03:32.480 --> 0:03:34.200 and now we're pricing in a terminal fund rate of 0:03:34.200 --> 0:03:36.840 four percent. It's a huge change and that's driven it 0:03:36.880 --> 0:03:39.680 as well, and it's so unusual, and I think it's unusual. 0:03:40.080 --> 0:03:42.680 But what the Fed did was unusual because basically, by 0:03:42.680 --> 0:03:46.160 preemptively cutting fifty, they said, even though inflation hasn't come 0:03:46.200 --> 0:03:48.320 back to target, we do not want to sacrifice this 0:03:48.400 --> 0:03:51.600 expansion and this probably means better growth outturns in the future, 0:03:51.720 --> 0:03:55.320 higher inflation in the future, thus justifying fewer cuts down 0:03:55.360 --> 0:03:57.680 the road and actually higher rates. So that's a big 0:03:57.720 --> 0:03:59.600 piece of the puzzle because that's been one hundred and 0:03:59.600 --> 0:04:01.080 twenty five basis point move as well. 0:04:01.520 --> 0:04:04.000 The one thing I would say, though, I mean, I 0:04:04.040 --> 0:04:12.360 agree Jay, Obviously bond yields react to FED expectations and 0:04:12.400 --> 0:04:15.560 the near term path of the economy and inflation. But 0:04:15.960 --> 0:04:19.160 the one thing I would say is, like in October, 0:04:19.240 --> 0:04:21.920 there were other things you could look at to measure 0:04:22.600 --> 0:04:26.240 nervousness about a potential Trump woin, Like you know, puts 0:04:26.320 --> 0:04:29.520 on the TLT that suggested that a bunch of investors 0:04:29.560 --> 0:04:33.960 really wanted to shed long term bond exposure right after 0:04:34.040 --> 0:04:36.680 the election, And this was happening, like you know, those 0:04:36.680 --> 0:04:40.040 were going up as Trump's pulling odds were going up. 0:04:40.080 --> 0:04:42.560 So I feel like there are other things that suggest 0:04:42.720 --> 0:04:46.120 some of this nervousness is like secular in the long end. 0:04:46.600 --> 0:04:50.400 But anyway, the thing I wanted to ask, Jobs Day 0:04:50.520 --> 0:04:54.440 is coming up, So we're recording this on Thursday, January ninth. 0:04:54.640 --> 0:04:58.800 The bond market is actually off early today for Carter's funeral. 0:04:59.360 --> 0:05:02.760 But how big a deal is the bond market reaction 0:05:02.960 --> 0:05:05.479 gonna be to the Job's Day, Like if we're debating 0:05:05.520 --> 0:05:09.680 whether this is some secular, maybe politically related change versus 0:05:09.680 --> 0:05:12.880 something about the FED and the path of the economy 0:05:12.880 --> 0:05:15.320 and inflation, it feels like jobs are going to be 0:05:15.320 --> 0:05:16.159 a big factor here. 0:05:16.640 --> 0:05:18.440 I think they absolutely are, And I think it depends 0:05:18.440 --> 0:05:20.839 on which part of the term structure you're talking about 0:05:21.279 --> 0:05:23.440 because what's been interesting in this move is that the 0:05:23.480 --> 0:05:26.880 front end has remained tracy, really well anchored. Right I 0:05:26.880 --> 0:05:29.520 think it's because the FED has been asymmetrically dubvish in 0:05:29.560 --> 0:05:33.440 its reaction function. Right now, even with what happened in December, 0:05:33.480 --> 0:05:35.800 with the dots showing only two cuts for next year, 0:05:36.279 --> 0:05:39.080 the FED and aggregate is talking about cutting further, albeit 0:05:39.120 --> 0:05:41.960 at a slower pace, or just going on hold. Nowhere 0:05:41.960 --> 0:05:44.960 in the discussion is hikes, and that's why the money 0:05:44.960 --> 0:05:46.920 market curve, even though we're pricing in few er eases, 0:05:46.960 --> 0:05:50.839 is still inverted. I think that could start to change 0:05:50.880 --> 0:05:52.880 if you see the labor markets start to tighten again. 0:05:52.920 --> 0:05:55.039 So if the unemployment rate starts to come back down, 0:05:55.120 --> 0:05:57.240 that could be meaningful for repricing the front end in 0:05:57.279 --> 0:06:00.640 the opposite direction. But at the same time, even though 0:06:00.640 --> 0:06:02.280 the labor markets are not as weak as that we 0:06:02.360 --> 0:06:05.120 perceive them to be. Back in August and September, there 0:06:05.160 --> 0:06:07.640 has been a steady slowing in private payroll growth. There's 0:06:07.680 --> 0:06:11.279 been a steady slight increase in the unemployment rate, which 0:06:11.320 --> 0:06:13.320 tells you that the demand for labor is moderating. And 0:06:13.360 --> 0:06:15.039 if you get another sense of that, tomorrow, and I 0:06:15.040 --> 0:06:17.360 think consensus is one hundred and sixty k with the 0:06:17.440 --> 0:06:19.520 unemployment rate at four to two. We're one fifty four 0:06:19.520 --> 0:06:22.200 to two, so we're very close. I think that probably 0:06:22.200 --> 0:06:24.600 anchors the front end and tells you that it's probably, 0:06:24.760 --> 0:06:27.240 you know, relatively stable. Here. The long end is a 0:06:27.240 --> 0:06:29.880 different story. I think if the pace of employment growth 0:06:30.320 --> 0:06:32.760 is stable, but you see something like the rate come 0:06:32.800 --> 0:06:36.000 down and average hourly earnings firm back up, you know, 0:06:36.040 --> 0:06:38.000 then the markets can price out a bit more of 0:06:38.040 --> 0:06:39.599 the FETE easing that we've got priced in, and it 0:06:39.600 --> 0:06:41.440 becomes a bit more of a parallel shift because that 0:06:41.560 --> 0:06:44.400 justifies higher long term rates as well. So I think 0:06:44.440 --> 0:06:47.160 it's important with some asymmetry that the front end is 0:06:47.200 --> 0:06:48.919 better supported than the rest of the curve. But this 0:06:48.920 --> 0:06:50.480 has been kind of our whole thesis too, and the 0:06:50.520 --> 0:06:53.160 employment data tomorrow is a key piece of that puzzle. 0:06:53.279 --> 0:06:56.760 The ecomomy overall seems very noisy to me right now 0:06:56.839 --> 0:06:58.960 and hard to parse because there do seem to be 0:06:59.000 --> 0:07:02.240 signs like, look, growth continues, no real signs of slipping 0:07:02.240 --> 0:07:04.800 into recession. But on the other hand, there are signs 0:07:04.800 --> 0:07:07.400 that the labor market is softening. Maybe the labor market 0:07:07.400 --> 0:07:10.119 is strengthening. I think it's actually really noisy. Let's zoom 0:07:10.120 --> 0:07:13.160 out those sort of big picture to talk about. I 0:07:13.200 --> 0:07:17.520 guess since September what's happened, So there's been a few developments. 0:07:17.520 --> 0:07:20.320 First of all, just looking at the ten year you know, 0:07:20.760 --> 0:07:24.120 that bottomed at about three point six on September sixteenth. 0:07:24.160 --> 0:07:27.000 It's currently at four point six four six ' five 0:07:27.400 --> 0:07:29.480 as of this second, when we're talking at eight oh 0:07:29.560 --> 0:07:33.040 one a m. January ninth, twenty twenty five. Since then, 0:07:33.800 --> 0:07:36.400 obviously we did have the Trump way in we did, 0:07:36.400 --> 0:07:39.040 we're not going into there are still no signs of 0:07:39.080 --> 0:07:42.360 imminent recession. How would you tell the story basically of 0:07:42.480 --> 0:07:46.960 just what's happened, you know, and explain perhaps the upward 0:07:47.000 --> 0:07:50.560 repricing of that terminal rate since that initial fifty basis point. 0:07:50.680 --> 0:07:53.200 I'm glad you asked that, and I think it's fascinating 0:07:53.240 --> 0:07:55.520 that that trough and yields was a day before the 0:07:55.520 --> 0:07:57.720 FED thing, right, So that was when we were priced 0:07:57.760 --> 0:08:00.000 for maximum dubbishness. 0:07:59.680 --> 0:08:02.320 And so at that point we had seen the unemployment 0:08:02.400 --> 0:08:04.960 rate had been solidly ticking higher in the months before, 0:08:05.320 --> 0:08:07.239 and you could maybe it turned out to be wrong 0:08:07.600 --> 0:08:09.480 but you could at least tell a story then Oh, 0:08:09.520 --> 0:08:11.400 this looks like what happens before recession. 0:08:11.480 --> 0:08:13.360 Yeah, And it wasn't just the unemployment rate, because I 0:08:13.360 --> 0:08:15.440 think it's tough to disentangle what's happening with the rate 0:08:15.440 --> 0:08:18.760 because there's obviously supply side factors going on there. But 0:08:18.880 --> 0:08:22.040 the pace of private payroll growth had accelerated. 0:08:21.600 --> 0:08:22.520 US sharp as well. 0:08:22.560 --> 0:08:24.280 So that was a big one with what the July 0:08:24.360 --> 0:08:27.120 and August data showed. So I think since then, first, 0:08:27.200 --> 0:08:30.240 it's what the Fed did when they went fifty. I'm 0:08:30.280 --> 0:08:32.280 not going to sort of toot our own horn, but 0:08:32.320 --> 0:08:34.760 Mike Fole, my colleague in our chief US economis, I think, 0:08:34.800 --> 0:08:37.240 was one of the few calling for a fifty. And 0:08:37.320 --> 0:08:39.120 I think that was a surprise of the markets because 0:08:39.160 --> 0:08:42.120 it showed the Fed's hand with respect to its reaction function. 0:08:42.280 --> 0:08:45.840 It really valued the labor markets over inflation and did 0:08:45.840 --> 0:08:48.800 not want to sacrifice this soft landing. And again that 0:08:48.840 --> 0:08:51.840 generates better growth out turns and higher inflation in the future, 0:08:51.880 --> 0:08:55.080 which was a turnaround in rates because perversely enough, it 0:08:55.240 --> 0:08:58.480 requires fewer eases down the road. So that's a big 0:08:58.800 --> 0:09:01.160 dominant driver, and I think we can see that in 0:09:01.200 --> 0:09:04.560 the interim since then, to support this, growth expectations have 0:09:04.640 --> 0:09:06.800 moved up. And just for example, we've got our series 0:09:06.840 --> 0:09:09.040 of forecast revision and disease and our year ahead growth 0:09:09.080 --> 0:09:11.280 forecasts over the last three months have gone up something 0:09:11.400 --> 0:09:14.360 like a percentage point. And right we've come off consecutive 0:09:14.360 --> 0:09:16.079 three percent quarters. It looks like we're running two and 0:09:16.080 --> 0:09:17.680 a half percent right now. So that's a piece of 0:09:17.679 --> 0:09:20.320 the puzzle. The second is, and this is where we'll 0:09:20.320 --> 0:09:22.840 get back to Tracy in term premium, is the change 0:09:22.840 --> 0:09:27.400 in the fiscal expectations because of the reelection of President 0:09:27.480 --> 0:09:31.240 elect Trump. And that is meaningful because we expect the 0:09:31.280 --> 0:09:34.720 TCGA to basically be extended in full and that's going 0:09:34.760 --> 0:09:37.079 to add an additional four trillion to deficits over the 0:09:37.160 --> 0:09:39.360 next decade on a baseline of what I believe was 0:09:39.400 --> 0:09:42.559 about twenty two trillion to begin with. And that matters 0:09:43.040 --> 0:09:45.240 because I think, as we spoke about the last time 0:09:45.280 --> 0:09:48.400 we were here, the budget deficit running at six to 0:09:48.400 --> 0:09:50.720 seven percent of GDP when we're close to full employment 0:09:50.760 --> 0:09:53.680 is highly unusual, and the growth of the treasury market 0:09:53.720 --> 0:09:57.720 is just outstripping demand from its sort of most price 0:09:57.760 --> 0:10:01.680 in sensitive historical investors the FED and US banks and 0:10:01.760 --> 0:10:04.760 foreign official investors. So we've got to find other price 0:10:05.000 --> 0:10:08.559 sensitive investors to underwrite this supply. And when that happens, 0:10:08.559 --> 0:10:10.840 it just requires a higher term premium and higher yields 0:10:10.840 --> 0:10:12.920 and a steeper curve for a given level of policy rates. 0:10:12.960 --> 0:10:15.520 So I think those are the few drivers there. And 0:10:15.600 --> 0:10:18.000 it's a global story. Yes, the US is led the way, 0:10:18.480 --> 0:10:33.599 but it's been happening everywhere as well. 0:10:33.679 --> 0:10:36.840 So back in October, I think I think it was October, 0:10:36.920 --> 0:10:39.520 you had a note where you sort of mentioned your 0:10:39.679 --> 0:10:44.760 former colleague Josh Younger's famous Volfefe index. I think probably 0:10:44.800 --> 0:10:47.960 the only piece of JP Morgan bond research to ever 0:10:48.000 --> 0:10:50.680 make it into New York Magazine's like Hot or Not 0:10:51.200 --> 0:10:54.000 graph at the end of the magazine. You remember that shoe? 0:10:54.440 --> 0:10:56.839 Uh do they still have they still have that hot 0:10:56.880 --> 0:10:57.360 I don't know. 0:10:57.320 --> 0:10:58.840 If they do, but they did when. 0:10:58.720 --> 0:11:00.640 It was first Do you remember that that was a. 0:11:00.640 --> 0:11:04.360 Good hot idea approval matrix? 0:11:06.320 --> 0:11:08.920 Yeah, that's right, and you sort of you mentioned it. 0:11:08.960 --> 0:11:11.080 Are you guys going to be reviving it under the 0:11:11.080 --> 0:11:12.040 Trump administration? 0:11:12.640 --> 0:11:16.120 So I can't comment on things that we intend to research, Tracy, 0:11:16.200 --> 0:11:17.880 But as you said, we talked about it a few 0:11:17.880 --> 0:11:19.439 times in the last few months, and I think it's 0:11:19.480 --> 0:11:23.680 important to understand that during the first Trump administration that 0:11:24.880 --> 0:11:29.400 announcing policy via Twitter or via x right Now or 0:11:29.400 --> 0:11:31.880 truth social as the case may be, was something that 0:11:31.920 --> 0:11:37.079 did actually raise implied rate volatility, and higher rate volatility 0:11:37.200 --> 0:11:40.520 necessitates higher term premium and thus more sticky higher rates. 0:11:40.960 --> 0:11:42.960 So it's something I think in the background that we're 0:11:43.000 --> 0:11:45.000 sort of focused on. And it's funny talk about Josh 0:11:45.040 --> 0:11:47.320 actually was on the phone with him yesterday, and so 0:11:47.400 --> 0:11:49.200 I think this is all kind of coming full circle. 0:11:49.240 --> 0:11:50.840 But I think that's something in the background that we 0:11:50.880 --> 0:11:52.480 need to focus on as well. No doubt. 0:11:53.000 --> 0:11:55.760 Why is this a global story? I get the the 0:11:55.920 --> 0:11:58.920 labor market looks stronger, perhaps than it did six months 0:11:58.920 --> 0:12:02.480 ago or five months ago, but a lot of headlines 0:12:02.520 --> 0:12:07.120 this week about the UK specifically and now the global seat. 0:12:07.200 --> 0:12:09.200 I can ask you UK question, so why is this 0:12:09.280 --> 0:12:11.840 a global story? And maybe tell us something about the UK? 0:12:12.200 --> 0:12:15.080 Yeah, thanks for that, Joe. But I think there's a 0:12:15.080 --> 0:12:18.520 policy story globally that's divergent. Right, So the FED and 0:12:18.600 --> 0:12:21.000 the US isn't a very different spot from rest of world. 0:12:21.640 --> 0:12:25.560 Euro Area ECB is cutting and cutting twenty five until 0:12:25.559 --> 0:12:28.040 it goes into slightly accommodative territory, we think. So there's 0:12:28.040 --> 0:12:31.920 a slightly divergent factor there. BOJ is in the midst 0:12:31.920 --> 0:12:32.760 of normalizing rates. 0:12:32.800 --> 0:12:34.120 The ES rates are going high. 0:12:34.160 --> 0:12:36.840 In the rates are going higher exactly. And then you 0:12:36.960 --> 0:12:39.640 ask about the UK. I think the UK is sort 0:12:39.640 --> 0:12:41.880 of stuck somewhere in between the US and the Euro 0:12:41.960 --> 0:12:45.560 Area because it's got the fiscal issues that we're talking 0:12:45.559 --> 0:12:48.080 about in the US, it's got the sticky inflation that 0:12:48.080 --> 0:12:51.160 we're talking about in the US, but it lacks the 0:12:51.240 --> 0:12:54.920 labor supply and productivity benefits that we've had in the US. 0:12:54.960 --> 0:12:56.840 So you've got a central bank that's kind of getting 0:12:56.840 --> 0:13:00.719 stuck here and can only ease at a somewhat more 0:13:00.760 --> 0:13:03.040 gentle pace. And there's nothing really we can point to 0:13:03.080 --> 0:13:06.080 this week in the UK about the fiscal pressures, but 0:13:06.160 --> 0:13:07.840 they're just there in the background. And it's the same 0:13:07.840 --> 0:13:09.480 way the US has sort of seen that's moved a 0:13:09.520 --> 0:13:11.439 higher rates since we've walked into the new year, that 0:13:11.480 --> 0:13:12.760 they're coming back in full force. 0:13:13.200 --> 0:13:16.240 So just to summarize the sort of core tension, it 0:13:16.320 --> 0:13:20.200 has the same fiscal pressures as the US but it 0:13:20.280 --> 0:13:24.280 doesn't have the same productivity growth as the US. Therefore, 0:13:24.320 --> 0:13:28.000 all that spending is running into a less productive economy 0:13:28.640 --> 0:13:31.000 and that sort of creates that upward moving rates and 0:13:31.000 --> 0:13:33.319 the inflationary pressure. And so far is that the idea. 0:13:33.960 --> 0:13:35.880 It is to an extent, and I think it's also 0:13:35.920 --> 0:13:38.600 more idiosyncratic Joe as well, because look at what happened 0:13:38.600 --> 0:13:41.120 with the UK market. What was it back in September 0:13:41.160 --> 0:13:43.840 October of twenty two when the LDI sell off happened. 0:13:44.320 --> 0:13:47.280 It's a market which, yes it's smaller than the treasury market, 0:13:47.720 --> 0:13:50.520 but it's less liquid, it's more concentrated in its ownership. 0:13:50.600 --> 0:13:52.880 So when you have a market where I think it's 0:13:52.920 --> 0:13:55.000 a bit more concentrated in its ownership than a very 0:13:55.040 --> 0:13:57.480 diffuse set of ownership in the treasury market, you can 0:13:57.520 --> 0:14:00.000 go through these balances of idiosyncrasy where it's hard to 0:14:00.040 --> 0:14:03.200 identify a single driving factor to see what happened with 0:14:03.240 --> 0:14:05.760 this sell off, but it can get exaggerated by those 0:14:05.760 --> 0:14:06.520 factors as well. 0:14:06.720 --> 0:14:10.839 There is also a reflexivity at play here where if 0:14:10.920 --> 0:14:13.880 bond yields are going up, particularly at the long end, 0:14:14.600 --> 0:14:17.240 when the US is planning to do more long issuance 0:14:17.640 --> 0:14:20.920 that means the cost of borrowing is going to go up, 0:14:21.040 --> 0:14:24.800 which maybe increases the fiscal burden, and then yields go 0:14:24.960 --> 0:14:27.960 up even further. Is that the kind of risk that 0:14:28.000 --> 0:14:30.360 we should be thinking about in twenty twenty five. 0:14:31.360 --> 0:14:34.280 I think it's a slow moving train there, Tracy, because 0:14:34.320 --> 0:14:37.520 the average maturity of the US Treasury market debt's about 0:14:37.640 --> 0:14:41.120 six years, So higher rates will definitely lead to higher 0:14:41.120 --> 0:14:44.520 interest expense and will add to the burden. But I 0:14:44.560 --> 0:14:47.080 think a large part of that burden and that increase 0:14:47.080 --> 0:14:49.320 occurred as the FED was raising rates rapidly, and we 0:14:49.400 --> 0:14:52.040 know that T bills are about a twenty percent share 0:14:52.080 --> 0:14:53.880 of total debt outstanding, so there's a fair amount of 0:14:53.920 --> 0:14:55.920 short term deat outstanding, and it's less expensive than it 0:14:56.000 --> 0:14:58.520 was a year ago. So this will continue to feed through, 0:14:58.880 --> 0:15:01.320 but it will be at a very slow rate. So 0:15:01.360 --> 0:15:03.440 I think it's certainly there in the background as well, 0:15:03.480 --> 0:15:06.840 but not as primary or secondary driver as these other 0:15:06.880 --> 0:15:08.200 factors that we've been talking about. 0:15:08.480 --> 0:15:12.880 You know, speaking of policy by Twitter, I don't think 0:15:12.920 --> 0:15:17.200 that Cure Starmer or what's the chancellor's name reeves in 0:15:17.240 --> 0:15:21.080 the UK they're not doing as much posting policy by Twitter, 0:15:21.480 --> 0:15:25.360 but the owner of Twitter is posting a lot about 0:15:25.360 --> 0:15:28.440 the UK these days, so to the extent that there 0:15:28.520 --> 0:15:31.920 is just a lot of noise about the government going on. 0:15:32.440 --> 0:15:35.720 Setting aside everything else, there is a lot of just 0:15:35.800 --> 0:15:39.240 political noise in the UK on top of all the 0:15:39.440 --> 0:15:40.800 sort of core economic stuff. 0:15:41.080 --> 0:15:43.560 And it's not just the UK, Joe, I think this 0:15:43.640 --> 0:15:46.560 fiscal noise is going on everywhere. Right, We're talking about 0:15:46.600 --> 0:15:49.080 the TCGA and the fiscal bird in the US. You're 0:15:49.080 --> 0:15:51.960 talking about fiscal in the UK. Look at what's happened 0:15:52.000 --> 0:15:55.000 with France right with its government falling and they've got 0:15:55.000 --> 0:15:57.320 deficit issues to try and get back out of the 0:15:57.680 --> 0:16:00.680 EDP over the next few years, which seems unlikely. You're 0:16:00.720 --> 0:16:03.200 talking about it in Japan as well. So fiscal and 0:16:03.280 --> 0:16:06.960 supply is a belief, a global story to varying degrees 0:16:07.000 --> 0:16:08.600 across developed markets. Right now. 0:16:08.880 --> 0:16:11.040 You need to do a vall Elon index. 0:16:11.120 --> 0:16:15.280 That's right, vall X Oh vall x is good. The 0:16:15.360 --> 0:16:18.040 volt Yeah, a global VOLA you can have that one. 0:16:18.080 --> 0:16:22.120 A global Blex index, just a measure of social media 0:16:22.240 --> 0:16:26.360 talk around the world relating to fiscal policy. That's a 0:16:26.360 --> 0:16:29.280 free one to break it down my country there on 0:16:29.320 --> 0:16:32.040 that yeah, the volat I'm gonna trade vult, I'm gonna 0:16:32.040 --> 0:16:35.080 trade vall X. I like that idea. What about central 0:16:35.120 --> 0:16:38.240 bank like QT? People I don't know. People don't seem 0:16:38.240 --> 0:16:41.160 to talk about as much about QT, But what about 0:16:41.200 --> 0:16:45.240 the role of central bank asset purchases or sell offs 0:16:45.280 --> 0:16:47.120 in this story or on wines. 0:16:47.200 --> 0:16:50.120 I think I think it's something in the background, right. 0:16:50.200 --> 0:16:53.320 I think back to twenty eighteen when share Pell talked 0:16:53.320 --> 0:16:56.240 about QT and referred to it as watching paint dry, 0:16:56.440 --> 0:16:58.440 and I think it is just sort of going on 0:16:58.520 --> 0:17:00.280 in the background. And of course in the US it's 0:17:00.280 --> 0:17:01.880 at a slower rate than it has been for most 0:17:01.880 --> 0:17:04.040 of the last couple of years. But in our work, 0:17:04.840 --> 0:17:07.680 the Fed's balance sheet as a share of GDP matters 0:17:07.680 --> 0:17:10.720 for rate levels. It matters more for curve slope as well. 0:17:10.760 --> 0:17:13.720 So that's something that's happening in the background, because the 0:17:13.720 --> 0:17:16.399 Fed's balance sheet has been not only shrinking on a 0:17:16.440 --> 0:17:19.240 nominal basis, but shrinking relative to the size of the economy. 0:17:19.480 --> 0:17:22.040 And we found that every one percentage point move relative 0:17:22.040 --> 0:17:23.600 to the size of the US economy has been worth 0:17:23.600 --> 0:17:25.560 a handful of basis points on the yield curve. So 0:17:25.960 --> 0:17:28.280 as it continues to normalize. That is something that's in 0:17:28.320 --> 0:17:31.840 the background also placing steepening pressure on the yield curve. 0:17:32.320 --> 0:17:34.600 And it's of course a global dynamic because you've got 0:17:34.640 --> 0:17:36.400 the ECB, the Bank of England, and now the Bank 0:17:36.440 --> 0:17:38.720 of Japan all doing this as well. And you can 0:17:38.720 --> 0:17:41.440 see it not just in curve slopes globally, but visa 0:17:41.480 --> 0:17:43.400 v swap spreads. I think there's been a story where 0:17:43.440 --> 0:17:46.600 swap spreads until recently have been narrowing globally across the 0:17:46.640 --> 0:17:48.800 DM as well, so you can see the imprints of 0:17:48.840 --> 0:17:51.200 QT there. It's there, but I think it's probably again 0:17:51.359 --> 0:17:53.560 kind of a third order factor when considering the term 0:17:53.560 --> 0:17:55.960 structure of rates in the US and globally as well. 0:17:56.119 --> 0:17:58.760 This might be a weird question, but since we brought 0:17:58.840 --> 0:18:01.480 up QT and earlier you were talking about the need 0:18:01.520 --> 0:18:05.480 to find new buyers for bonds, what exactly can the 0:18:05.600 --> 0:18:08.880 US do if a bunch of traditional buyers like banks 0:18:09.080 --> 0:18:12.560 the FED for the past more than a decade, are 0:18:12.600 --> 0:18:16.280 stepping away from the market other than yields going up, 0:18:16.440 --> 0:18:18.720 is there anything else they can do to market debt 0:18:18.760 --> 0:18:21.320 to the outside world or I don't know even internally 0:18:21.600 --> 0:18:23.159 how banks buy more bonds. 0:18:23.920 --> 0:18:26.720 So it's funny because the Treasury Department can only deal 0:18:26.760 --> 0:18:28.720 with the symptoms and not the root cause. But the 0:18:28.760 --> 0:18:31.640 Treasury and it's sort of cadre of private sector advisors. 0:18:31.640 --> 0:18:33.400 The Tea back have done a lot of strong work 0:18:33.440 --> 0:18:36.720 on this, and there are charge questions that are asked 0:18:36.720 --> 0:18:40.240 at every single we're funding process, and one that was 0:18:40.280 --> 0:18:42.040 asked of the Tea BAC a couple of quarters ago 0:18:42.160 --> 0:18:44.800 is what new products and processes can we open up 0:18:44.840 --> 0:18:46.800 to sort of widen the spectrum of demand. I think 0:18:46.800 --> 0:18:49.800 they're asking this question Tracy for that very reason. And 0:18:49.840 --> 0:18:52.240 two products that were talked about were adding another floater 0:18:52.320 --> 0:18:53.719 at the short end of the curve. There's a lot 0:18:53.720 --> 0:18:56.440 of demand for short duration floating rate product that's latent. 0:18:57.080 --> 0:18:59.000