WEBVTT - BlackRock CIO Talks Rates, Bonds

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news.

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<v Speaker 2>Joining us now is Blackroft, chief investment Officer of Global

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<v Speaker 2>Fixed Income.

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<v Speaker 3>Rick Reader.

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<v Speaker 2>So, Rick, the unemployment rate goes down, but a surprise

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<v Speaker 2>contraction in jobs. Last time we spoke for last month,

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<v Speaker 2>you said the employment picture is stable, broadly unimpressive. Has

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<v Speaker 2>your assessment of this labor market change since then with

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<v Speaker 2>these numbers in hand.

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<v Speaker 1>No, broadly not impressive. I think it is the right terminology.

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<v Speaker 1>In fact, I I was thinking about it. I think

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<v Speaker 1>it's actually remarkable how unremarkable the data is.

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<v Speaker 4>Listen. I think you know when you look at you.

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<v Speaker 1>Know, people say, well, gosh, we're not hiring many people

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<v Speaker 1>because we have a supply issue, and you saw some

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<v Speaker 1>of that play through today. But that being sad, you're

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<v Speaker 1>not seeing any wage growth, so meaning there's not that

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<v Speaker 1>demand for labor that you would expect when you got

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<v Speaker 1>an economy that's doing as well as it's doing, and.

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<v Speaker 4>We're going to grow.

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<v Speaker 1>I think you're going to see six percent nominal GDP.

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<v Speaker 1>You've got corporate top line revenue that's strong, earnings are strong,

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<v Speaker 1>but you're seeing operating leverage for companies kick in. Like

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<v Speaker 1>you read about I mean, you look at all these

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<v Speaker 1>earnings reports, particularly in the tech space. Companies are growing,

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<v Speaker 1>they're spending immense amounts of capex, but you're actually cutting

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<v Speaker 1>people in many cases. So anyway, I think we're seeing

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<v Speaker 1>a productivity revolution, and I think we're watching it play

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<v Speaker 1>out month in a month out. I mean, to have

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<v Speaker 1>only twenty thousand jobs on a three month moving average

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<v Speaker 1>strip about healthcare, you having negative job growth on and aggregate.

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<v Speaker 1>So anyway, I think it's I just think we're going

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<v Speaker 1>through I think when they summarize the years from now,

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<v Speaker 1>they're going to you're going to witness something that is productivity.

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<v Speaker 4>People say it's Ai kicking in.

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<v Speaker 1>I actually think it's just been a an ethos around

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<v Speaker 1>companies growing their business and seeing how you can operate

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<v Speaker 1>without that much employment.

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<v Speaker 5>Well, also, you've got the fall in immigration that is

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<v Speaker 5>probably contributing to these big declines we're seeing in the

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<v Speaker 5>labor force. But the people who want jobs are apparently

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<v Speaker 5>getting jobs with unemployment at four point one percent. So

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<v Speaker 5>I assume this tells you, as well as the FED,

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<v Speaker 5>that we don't have a problem with the labor for

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<v Speaker 5>sight of the mandate.

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<v Speaker 4>Yeah, I mean, I think that's right. Mike.

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<v Speaker 1>I mean, you know, I've been pretty outamant, but I

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<v Speaker 1>know link the FED needs to hike and A I

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<v Speaker 1>don't think you really will solve the inflation dynamic. Part

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<v Speaker 1>of why I think these task forces will be so

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<v Speaker 1>powerful as you'll get into what are some complex subjects.

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<v Speaker 1>When you break down inflation today, you look at the

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<v Speaker 1>difference between services and goods. You think about what's still

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<v Speaker 1>sticky and inflation, education, healthcare, insurance. So as you're moving

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<v Speaker 1>the overnight funds rate up, really do much and you

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<v Speaker 1>get to the point being if you're restrictive on rate

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<v Speaker 1>and you're driving mortgage rates higher, I just don't see

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<v Speaker 1>that as really effective trying to bring inflation down. You've

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<v Speaker 1>got what I would argue is, yeah, maybe it's an

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<v Speaker 1>okay labor market, but you know you still need in

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<v Speaker 1>a particularly way of this much debt on the country.

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<v Speaker 4>You need to grow faster, you need to put more

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<v Speaker 4>people to work.

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<v Speaker 1>And I think that to me is the is the

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<v Speaker 1>philosophy that the FED has to employ today.

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<v Speaker 2>Well on the inflation side of things, Rick, I know

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<v Speaker 2>you've been a big proponent again, and the type of

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<v Speaker 2>inflation we have isn't something that's fixed by hikes, but

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<v Speaker 2>perhaps by policy, not monetary policy, but fiscal policy. Well,

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<v Speaker 2>what is the policy you think that could start to

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<v Speaker 2>eat away at inflation?

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<v Speaker 3>Is it just like ending a war basically?

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<v Speaker 1>I mean, listen to war is a big deal element obviously,

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<v Speaker 1>not only do you get higher prices in terms of fuel,

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<v Speaker 1>but you're you know, there's a transmission effect through that

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<v Speaker 1>when you talk about obviously trade getting slowed somewhat. So

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<v Speaker 1>I know why the war is a big deal obviously,

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<v Speaker 1>So that will will change then the dynamic and people

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<v Speaker 1>will focus on tariffs, you know, the goods inflation. You know,

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<v Speaker 1>the US economy is not that large of an importer

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<v Speaker 1>of goods. So yes, and I think people got really

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<v Speaker 1>worked up about that last year. So what do you

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<v Speaker 1>do and how do you create fiscal velocity? You know,

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<v Speaker 1>there's a bunch of things you could do, and I think,

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<v Speaker 1>quite frankly, deregulation is powerful. I think the idea around

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<v Speaker 1>how do you help with housing things like zoning, permitting,

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<v Speaker 1>et cetera. How do you get like some of the

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<v Speaker 1>stuck student loan asset reliabilities on that young people have.

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<v Speaker 1>How do you transition some of that? How do you

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<v Speaker 1>help with some of that. I think there's a whole

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<v Speaker 1>series of fiscal dynamics that can help with inflation. But

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<v Speaker 1>I don't think moving the overnight funds right will really

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<v Speaker 1>do it, and we've seen that before it doesn't really

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<v Speaker 1>have that much of an impact.

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<v Speaker 5>I guess I would ask you then in that case,

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<v Speaker 5>because I agree that there's probably not going to be

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<v Speaker 5>anything happening on the fiscal side because they can't even

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<v Speaker 5>vote on an attorney general at this point, and the

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<v Speaker 5>FAD is maybe leaning now towards a hold in September.

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<v Speaker 5>We'll see after the Wednesday CPI report. But that leaves

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<v Speaker 5>us with an inertial economy, And what do you think

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<v Speaker 5>happens to the economy if there's no movement on the

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<v Speaker 5>fiscal or the monetary side?

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<v Speaker 3>Come in?

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<v Speaker 1>I think, I mean, you're unbelievably good at dentalyzing this

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<v Speaker 1>and I appreciated questions you ask a TFMC meeting, etc.

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<v Speaker 1>On thing I will say is I'm not sure I

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<v Speaker 1>agree with the inertial concept. I actually think the economy

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<v Speaker 1>is operating at an amazingly strong level, and you look

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<v Speaker 1>at the CAMPA, it's obviously a big driver of that.

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<v Speaker 1>That from AI that's getting into you know, straight growth

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<v Speaker 1>of the economy in so many different forms. And then

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<v Speaker 1>you look at consumption today. Consumption you see this, you know,

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<v Speaker 1>particularly in areas like leisure and hospitality. You see this

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<v Speaker 1>in some of the transportation dynamics in terms of travel. Listen,

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<v Speaker 1>the economy is operating an actually thing that was pretty

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<v Speaker 1>amazing to me in the last two months, and some

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<v Speaker 1>of you had a fiscal tailwind, but the actually had

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<v Speaker 1>lower and middle income that was actually starting to accelerate.

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<v Speaker 1>And we see that in all of we use a

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<v Speaker 1>lot of this high frequency data. He actually saw consumption

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<v Speaker 1>a pretty good place. So listen, I think the economy

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<v Speaker 1>is operating an extremely solid level. You know, you would

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<v Speaker 1>think in the second half of the year you'd start

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<v Speaker 1>to moderate a bit post a fiscal tailwind, but boy,

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<v Speaker 1>you know, you see this, I mean, this is this

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<v Speaker 1>is a pretty amazing quarter of earnings reports that not

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<v Speaker 1>not not not a pervasively across every single company or industry.

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<v Speaker 4>But boy, I thought it was pretty darn good.

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<v Speaker 1>And you know, part of what we look at the

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<v Speaker 1>equity market and having a pretty good run, particularly recently,

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<v Speaker 1>you're actually looking at multiples that are coming down because

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<v Speaker 1>these companies are earning so fast. So anyway, I'm pretty

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<v Speaker 1>enthusiastic boy where the economy is today.

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<v Speaker 2>And I'm assuming that that enthusiasm over equities translates into

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<v Speaker 2>your world of credit. Rick, you have Bank, of course,

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<v Speaker 2>a fun that has been outperforming the broader benchmark by

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<v Speaker 2>a healthy clip for the past few couple of years.

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<v Speaker 2>I know last time you join you express skepticism on

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<v Speaker 2>USIG credit. You like caring higher income. I think all

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<v Speaker 2>of this is so interesting time at a time, Rip,

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<v Speaker 2>where as you point out, so much is happening because

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<v Speaker 2>of AI, especially in debt, with the huge issuance we're

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<v Speaker 2>seeing from the hyperscalers. We've got another twenty five billion

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<v Speaker 2>that this market easily took up from Google just this week,

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<v Speaker 2>and at the same time we're going to get more

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<v Speaker 2>issues from the Treasury next week. What are you thinking

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<v Speaker 2>about where you want to place bank just given the

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<v Speaker 2>sheer amount of issuance that continues to hit this.

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<v Speaker 1>Market, Dan, I als say one thing about you know,

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<v Speaker 1>because you've had a backup in rates, you're able to

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<v Speaker 1>hit your yield target. So I mean talk about we're

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<v Speaker 1>hitting almost seven, I mean six, you know, high sixes

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<v Speaker 1>in terms of yield, and so a couple of things

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<v Speaker 1>we've been doing is you actually don't need to go

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<v Speaker 1>down in credit quality. You actually don't need to go

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<v Speaker 1>that far down in terms of the liquidity in the portfolio.

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<v Speaker 4>So you know, we've been keeping it.

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<v Speaker 1>You know, we've been adding a bit in terms of

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<v Speaker 1>European fixed income. You know, I think emerging markets are interesting,

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<v Speaker 1>particularly if you assume the dollar is not going to

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<v Speaker 1>be not going to be moving aggressively. You made the point, right,

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<v Speaker 1>I think investment great credit give the amount of supply

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<v Speaker 1>we're going to see data center hyper skill or investment

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<v Speaker 1>credit credit's not that interesting at all. But in the

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<v Speaker 1>securitization market, you know they securitize assets both in commercial

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<v Speaker 1>real estate, abs REZI. You know that that those markets

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<v Speaker 1>are in pretty good shape. So you know, we're in

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<v Speaker 1>an environment we don't feel like we've got to stretch

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<v Speaker 1>a lot. You know, these real rates that today give

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<v Speaker 1>us an amazing ability to keep our yield up without

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<v Speaker 1>really stressing. We're running bank now with an average rating

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<v Speaker 1>of a you know, you're hitting high sixes, like that's

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<v Speaker 1>pretty good today. So we're trying to be in bonds

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<v Speaker 1>we're trying to be as boring as you could be,

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<v Speaker 1>and you know, take the risk in equities, which you know,

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<v Speaker 1>I have a little bit of volatility to them, particularly

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<v Speaker 1>single name.

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<v Speaker 5>A little bit less risk maybe in the bond market,

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<v Speaker 5>but there's such an at the appetite I guess I

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<v Speaker 5>would say for debt, for the hyperscalers, et cetera. How's

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<v Speaker 5>that affecting how you can sell all of these bonds.

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<v Speaker 5>I was really surprised yesterday with the Google alphabet offering

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<v Speaker 5>that it was so oversubscribed.

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<v Speaker 4>You know, Mike, we're living through something.

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<v Speaker 1>And so one of the real benefits to all the

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<v Speaker 1>financing that has to come Data Center, Hyperscaler US, Treasury,

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<v Speaker 1>UK Japan is we're actually going through a pretty historic

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<v Speaker 1>demographic that is supporting this demand for yield insurance companies,

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<v Speaker 1>life insurance, pension. So it's amazing if you price assets

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<v Speaker 1>right on the dead side, you can place an awful

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<v Speaker 1>lot of Now that being sad, I mean, the hyperscalers

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<v Speaker 1>have clearly widened quite a bit, and so you're getting the.

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<v Speaker 4>Levels I say, these real rates.

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<v Speaker 1>If you're a pension today and think, gosh, I can

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<v Speaker 1>defease a good portion of my liability stream. At these

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<v Speaker 1>real rates, it brings a lot of people in, particularly

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<v Speaker 1>if you get some spread on it and you're watching

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<v Speaker 1>that play out, I would say, one thing I'm in,

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<v Speaker 1>the supply is not going to stop coming. And you

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<v Speaker 1>know next week we get a lot of treasury supply.

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<v Speaker 1>So you know, in terms of interest rate exposure, we

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<v Speaker 1>feel like we don't have to be in a rush

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<v Speaker 1>to add a bunch of interest rate exposure.

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<v Speaker 4>And just like clip coupon.

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<v Speaker 3>All right, Rick, you're going to stick with us.

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<v Speaker 2>We have to see how this market opens up, and

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<v Speaker 2>would love to get your commentary on a continued market reaction.

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<v Speaker 2>So Marcus overall are rallying, as are this bond market

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<v Speaker 2>led by the front end as we get rate hipes

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<v Speaker 2>price out. We are back with black Croft, Chief investment

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<v Speaker 2>Officer of Global fixed Income Rick reader.

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<v Speaker 3>Rick.

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<v Speaker 2>Okay, so this basically takes, in your view, a hike

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<v Speaker 2>off the table. I wonder about cuts though, because when

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<v Speaker 2>we had spoken about a month ago, you said, perhaps

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<v Speaker 2>we've still could get cuts in the back half of

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<v Speaker 2>this year. Do you think that's still a possibility.

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<v Speaker 1>So listen, I mean, I you know you still have

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<v Speaker 1>a FED committee that is uh, that is generally hawkish.

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<v Speaker 1>You still have a committee that is more focused on

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<v Speaker 1>inflation than the labor readings. So listen, I mean, I

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<v Speaker 1>think I think you could. It could still happen. You'd

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<v Speaker 1>have to see some deceleration in the economic conditions.

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<v Speaker 4>You'd have to see.

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<v Speaker 1>You know, we think core PCE is going to come

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<v Speaker 1>into the into the high twos down to the high

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<v Speaker 1>twos next year. We think we're going to get in

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<v Speaker 1>the mid twos. Can you still get it done this year?

0:10:37.000 --> 0:10:39.800
<v Speaker 1>I think so? But it listen, I mean, I think

0:10:39.800 --> 0:10:41.920
<v Speaker 1>you have to One thing I've learned about investing, it's

0:10:41.920 --> 0:10:44.320
<v Speaker 1>not what you it's not what you think they should do.

0:10:44.360 --> 0:10:45.240
<v Speaker 4>It's what they're going to do.

0:10:45.280 --> 0:10:48.080
<v Speaker 1>And today the structure of that committee clearly is in

0:10:48.200 --> 0:10:51.200
<v Speaker 1>the we're going to fight inflation and and use the

0:10:51.280 --> 0:10:54.960
<v Speaker 1>rate tool to be that that tool. Do you get there?

0:10:55.040 --> 0:10:57.360
<v Speaker 1>So listen, I think they still could. I just think

0:10:57.480 --> 0:10:59.160
<v Speaker 1>hiking doesn't make a lot of sense today.

0:11:00.240 --> 0:11:03.120
<v Speaker 5>Interpret Wednesday for me, though, the CPI we saw a

0:11:03.160 --> 0:11:06.559
<v Speaker 5>big drop in market expectations, sort of a need jerk

0:11:06.640 --> 0:11:08.960
<v Speaker 5>move after the labor report. What's it going to take

0:11:09.000 --> 0:11:11.480
<v Speaker 5>to move one way or another in the fixed income

0:11:11.520 --> 0:11:13.199
<v Speaker 5>markets on Wednesday with CPI.

0:11:14.040 --> 0:11:15.280
<v Speaker 4>Yeah, that's a great question, Michael.

0:11:15.280 --> 0:11:17.400
<v Speaker 1>And so you know you've gotten a couple of softer

0:11:17.520 --> 0:11:20.600
<v Speaker 1>prints on inflation recently. You know, we think we're in

0:11:20.640 --> 0:11:24.440
<v Speaker 1>this mode of getting point two's type of type of

0:11:24.520 --> 0:11:26.439
<v Speaker 1>numbers when you look at Core.

0:11:26.760 --> 0:11:29.040
<v Speaker 4>And and you know even you know, I was.

0:11:28.960 --> 0:11:31.160
<v Speaker 1>Looking at the numbers for Core PCEE maybe a little

0:11:31.200 --> 0:11:34.520
<v Speaker 1>under the point two monthly reading. So you know, listen,

0:11:34.520 --> 0:11:38.040
<v Speaker 1>if you got something significantly aberrational to that, you know,

0:11:38.080 --> 0:11:40.640
<v Speaker 1>that would certainly move markets. Listen, if if the number

0:11:40.679 --> 0:11:43.840
<v Speaker 1>came in significantly higher, which would be incongruous with what

0:11:43.880 --> 0:11:46.600
<v Speaker 1>you've seen over the last couple of months, Listen, you

0:11:46.600 --> 0:11:48.600
<v Speaker 1>know it's the FAG going to be on alert for that. Yes,

0:11:48.880 --> 0:11:50.600
<v Speaker 1>I think so, you know, you know it's better than

0:11:50.640 --> 0:11:52.520
<v Speaker 1>anybody and I think this, I think this. You know

0:11:52.520 --> 0:11:55.200
<v Speaker 1>what the chairman has stated, what Chairman Wars has stated,

0:11:55.679 --> 0:11:58.000
<v Speaker 1>it's not just one number that he's laser focused on.

0:11:58.040 --> 0:12:00.840
<v Speaker 4>He's looking at the pet and happily of.

0:12:02.640 --> 0:12:07.200
<v Speaker 1>Readings and our senses, inflation is slowly moderating. But it'll

0:12:07.240 --> 0:12:09.480
<v Speaker 1>be interesting to see those report, like you said, that

0:12:09.520 --> 0:12:10.360
<v Speaker 1>comes out Wednesday.

0:12:10.960 --> 0:12:13.040
<v Speaker 2>I do wonder Obviously, yields are coming in now, but

0:12:13.080 --> 0:12:14.760
<v Speaker 2>we have had a thirty year yield that has been

0:12:14.760 --> 0:12:18.160
<v Speaker 2>stubborn and stubbornly moving higher above five point two at

0:12:18.200 --> 0:12:21.120
<v Speaker 2>one point. Now it's obviously below five twenty. Do you

0:12:21.200 --> 0:12:24.479
<v Speaker 2>think that this market is at all reflecting its concerns

0:12:24.559 --> 0:12:29.320
<v Speaker 2>about credibility over the FED and chair warsh?

0:12:29.840 --> 0:12:32.480
<v Speaker 1>You know, I'm a little surprised that the at the

0:12:32.920 --> 0:12:35.480
<v Speaker 1>concern around you know, whether it was the last of

0:12:35.600 --> 0:12:38.480
<v Speaker 1>them CE meeting or you know, you know, some of

0:12:38.520 --> 0:12:38.720
<v Speaker 1>what I.

0:12:38.720 --> 0:12:40.920
<v Speaker 4>Thought was a little bit harsh on credibility.

0:12:41.600 --> 0:12:43.959
<v Speaker 1>I think, you know, I think reduced forward guidance is

0:12:44.000 --> 0:12:49.280
<v Speaker 1>not terribly intimidating from to market participants. So you know,

0:12:49.320 --> 0:12:51.600
<v Speaker 1>I don't really think, you know, can we get more

0:12:51.720 --> 0:12:53.800
<v Speaker 1>from the FED in terms of the metrics they're looking

0:12:53.800 --> 0:12:56.080
<v Speaker 1>at in terms of the structure of what is going

0:12:56.120 --> 0:12:58.160
<v Speaker 1>to be important to them going forward? I think so,

0:12:58.200 --> 0:13:00.559
<v Speaker 1>And I think we'll get more details around that. Listen,

0:13:00.600 --> 0:13:02.720
<v Speaker 1>any I think it is we're getting a lot of

0:13:02.720 --> 0:13:05.679
<v Speaker 1>supply of products. You know, you're pushing real rates up

0:13:05.880 --> 0:13:09.640
<v Speaker 1>because you're getting a financial transmission that is historic in

0:13:09.720 --> 0:13:13.480
<v Speaker 1>terms of whether it's fiscal supply that's coming from not

0:13:13.559 --> 0:13:16.120
<v Speaker 1>just US, but obviously you know pressures and whether it's

0:13:16.200 --> 0:13:19.440
<v Speaker 1>UK Japan, plus the amazing amount of supply we're getting

0:13:19.440 --> 0:13:20.679
<v Speaker 1>into the credit markets.

0:13:20.440 --> 0:13:23.240
<v Speaker 4>So I think it's more that than it is anything else.

0:13:23.280 --> 0:13:25.320
<v Speaker 1>And like y'all have said, I mean, we still have

0:13:25.480 --> 0:13:29.560
<v Speaker 1>some stickier inflation that is keeping these rates up. So anyway,

0:13:29.559 --> 0:13:32.160
<v Speaker 1>those are where I would put the what's the influences?

0:13:33.720 --> 0:13:35.920
<v Speaker 2>Hey, Eric, just super quickly because we're about to talk

0:13:35.960 --> 0:13:37.839
<v Speaker 2>to our tech reporter. I love about all the AI

0:13:37.920 --> 0:13:40.080
<v Speaker 2>debt coming and we talked about it just a moment ago.

0:13:40.520 --> 0:13:42.120
<v Speaker 3>You talked about what it does with the IG market.

0:13:42.200 --> 0:13:44.880
<v Speaker 2>Do you think it changes the attractiveness or the pressure

0:13:45.200 --> 0:13:47.160
<v Speaker 2>on the treasury market at all? Getting all that supply

0:13:47.200 --> 0:13:49.040
<v Speaker 2>from the AI hyperscalers.

0:13:49.400 --> 0:13:51.160
<v Speaker 1>I mean, I mean when you whenever you push that

0:13:51.240 --> 0:13:53.240
<v Speaker 1>much supply on the market, you think about there's a

0:13:53.240 --> 0:13:55.800
<v Speaker 1>crowding out effect. I mean, listen, the US Treasury is

0:13:55.840 --> 0:13:58.560
<v Speaker 1>still the behemoth in terms of issuance, but you know,

0:13:58.600 --> 0:14:00.880
<v Speaker 1>you take what's coming in IG set backs on the

0:14:00.920 --> 0:14:03.400
<v Speaker 1>backside of it through data center. So yeah, I just

0:14:03.440 --> 0:14:06.000
<v Speaker 1>think we're getting a lot of supply and all markets,

0:14:06.000 --> 0:14:08.680
<v Speaker 1>including government bonds are reflective of that.

0:14:09.360 --> 0:14:11.800
<v Speaker 2>Hey, Rick, we always appreciate your time, especially on a

0:14:11.880 --> 0:14:12.480
<v Speaker 2>job's Friday.

0:14:12.480 --> 0:14:13.880
<v Speaker 3>Black Rocks Rick reader