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Speaker 1: A batter of Jappar of solk Gen writes in quote,

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Speaker 1: as the immaculate disinflation narrative hits a speed bump, the

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Speaker 1: Fed's data dependent approach likely implies a gradual policy easing

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Speaker 1: path and a higher terminal rate. The longer the Fed

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Speaker 1: keeps policy elevated, the greater the impact will be on

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Speaker 1: the broader economy. We continue to believe the risky yields

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Speaker 1: are biased to the downside. So batter of jappis with

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Speaker 1: us around the table, So great to see you. Why

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Speaker 1: is this still a buy the dip bond market for you?

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Speaker 2: Because we're at the end of the cycle and the

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Speaker 2: market is not going to challenge the Fed like they

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Speaker 2: did last year. August September of last year we saw

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Speaker 2: the sell off tenning yields rules dramatically in a very

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Speaker 2: short amount of time. This is a very different time frame.

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Speaker 2: The FED is telling us that they're going to cut

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Speaker 2: rds three times, and the market's not willing to challenge

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Speaker 2: the Fed.

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Speaker 1: Equity markets aren't hurting even though we've repriced rates higher,

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Speaker 1: stocks are all time highs, high yield spreads are at

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Speaker 1: the tight So I don't think we've seen for a

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Speaker 1: couple of years now in high yield credit. Doesn't that

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Speaker 1: just lift the potential for yields to go higher? At

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Speaker 1: least when I were talking about this in the last

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Speaker 1: hour or soide that usually bond sell offs are soulf

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Speaker 1: limiting because the course pain somewhere else and then the

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Speaker 1: buying comes back in. We haven't seen that so far.

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Speaker 1: Does that lift the potential for yields to go up

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Speaker 1: a little bit more?

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Speaker 2: Probably does, and that's why we've seen the tenning yields

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Speaker 2: especially rise from around four percent to four and a

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Speaker 2: quarter percent. I think that that's part of that narrative.

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Speaker 2: Financial conditions, as you pointed out, are extraordinarily easy. You know,

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Speaker 2: the FED has its own financial conditions index that they

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Speaker 2: put out that looks at the interstate sensitivity of the economy,

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Speaker 2: mortgage rates, as well as you know a variety of

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Speaker 2: other interstrate metrics that they look at, and it shows

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Speaker 2: that financial conditions, even by that index, is quite easy.

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Speaker 2: That said, I think that the market, at least the

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Speaker 2: front end of the of the Treasury yel curve, the

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Speaker 2: two year, is going to be priced to the path

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Speaker 2: of the FED. And I would say that the two

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Speaker 2: year the front end of the year curve is very

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Speaker 2: efficiently pat pricedon for a FED path that's quite benign

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Speaker 2: for the next couple of years.

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Speaker 3: So can you just give me a sense of why

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Speaker 3: inflation would continue to go down if we do have

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Speaker 3: pretty loose financial conditions and signs of ongoing strength and

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Speaker 3: the ability to spend money.

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Speaker 2: Yeah, that's a very good question, and I think that

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Speaker 2: that's exactly the speed bump that we hit in last

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Speaker 2: week's data because of the fact that we saw that

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Speaker 2: the consumer broadly speaking, is still extraordinarily resilient despite higher

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Speaker 2: interest rates, and spending has been extraordinarily robust. We don't

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Speaker 2: really see a path from here on for a steady

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Speaker 2: decline and inflation. If anything, I think you're going to

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Speaker 2: see this back and forth, although the broader trend from

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Speaker 2: here on I think is towards a very gradual decline

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Speaker 2: over the next several years. I think two and a

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Speaker 2: half percent core PC by the end of the year

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Speaker 2: is attainable, but then getting from there to two percent

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Speaker 2: is going to take a little longer.

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Speaker 3: This is the reason why I thought it was really fairting.

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Speaker 3: Stephen Major HSBC came out with one of his major

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Speaker 3: letters overnight. He was talking about how the bond market

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Speaker 3: is being pulled around by the tails. You have the

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Speaker 3: fear of something happening, not the conviction that it will

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Speaker 3: necessarily happen.

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Speaker 1: Right.

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Speaker 3: Tails include geopolitical risks, unsustainable fiscal policy, and runaway inflation.

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Speaker 3: The left side brings us deflation and hard landing risks.

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Speaker 3: It seems like deflation and hard landing risks aren't in

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Speaker 3: the cards when we take a look at some of

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Speaker 3: the data that's been coming in. So why doesn't that

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Speaker 3: mean that yields a whole lot higher if you're talking

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Speaker 3: about the other side of this, which is the inflationary aspect.

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Speaker 2: So yes, there is on the one side you have

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Speaker 2: the inflationary aspect. But the longer the FED keeps rates higher,

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Speaker 2: I think the higher the odds that we see a

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Speaker 2: meaningful sort on in growth as well as you decline

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Speaker 2: in in in pressures and growth pressures in general. So

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Speaker 2: you know, that's a point that I think Jefferson my

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Speaker 2: share of the FED made on made last week, which

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Speaker 2: is that the FED always responds when growth starts to decline.

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Speaker 2: So I think that that's always in the back of

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Speaker 2: the mind of investors as well. As the markets is

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Speaker 2: that even though inflation is a concern, with inflation having

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Speaker 2: declined quite meaningfully over the last year, if there's a

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Speaker 2: decline in growth, the FED is going to respond, and

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Speaker 2: the FED is locked and loaded. So if there is

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Speaker 2: a meaningful store round in growth, I think they're going

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Speaker 2: to cut rates.

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Speaker 1: Lisa wents through the numbers a few times already this morning.

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Speaker 1: Let's do it again. Sixty three billion dollars or two

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Speaker 1: year notes, five year notes today, sixty four billion tomorrow,

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Speaker 1: seven year notes forty two billion. Disupply matter anymore?

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Speaker 2: It does, but there's a lot of cash on the

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Speaker 2: sidelines and investors are finding ways to put their money

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Speaker 2: to work. You look at the equity markets that you

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Speaker 2: pointed out, it's at all time highs. High yield spreads

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Speaker 2: are tight, IG spreads are tight. So this is a

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Speaker 2: very good diversification for investors that are already heavily invested

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Speaker 2: in all these other A classes. And you look at

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Speaker 2: two year yields in the context of YO to DAT highs,

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Speaker 2: it is a buying opportunity. So that's where I think

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Speaker 2: that you're going to see this demand come into the

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Speaker 2: bond market, regardless of what the fundamentals would say, and

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Speaker 2: the potential for perhaps even higher yields from here.

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Speaker 3: What I'm hearing from you is that the idea of

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Speaker 3: the FED put is basically making it risk on no

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Speaker 3: matter what happens in the actual economy. Risk on when

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Speaker 3: it comes to buying bonds, risk on when it comes

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Speaker 3: to buying riskier credit, risk on what we see in

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Speaker 3: the stock market. Do you agree with that?

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Speaker 2: That's how it's been playing out so far. I think

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Speaker 2: you're going to start seeing the weakness and the data

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Speaker 2: appear from here on. We expected it in the first quarter.

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Speaker 2: It doesn't look like it's materializing. But in the upcoming quarters,

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Speaker 2: with interestrates staying as high as they are, you should

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Speaker 2: start seeing some weakness in some of the data sectors.

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Speaker 2: You're seeing delinquencies, the rise. You're seeing retail sales for instance,

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Speaker 2: starting to come under a little bit of pressure. So

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Speaker 2: you are going to see the consumer come under pressure.

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Speaker 2: Interstrates remaining as high as they have been for as

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Speaker 2: long as they as they have been.

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Speaker 1: Lindsaypaks are stayful trying to make the argument earlier this morning,

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Speaker 1: to us, the consumer balance shapes are strong, and the

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Speaker 1: space to lever up do you not agree with that.

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Speaker 2: There might be space to lever up. I think it's

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Speaker 2: you know, to me, the way of you is it's

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Speaker 2: haves and have nots economy. There are some investors who

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Speaker 2: can and they have the bandwidth to do that, and

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Speaker 2: then you have the cohort. Perhaps those are the investors

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Speaker 2: that are forty and under that are paying student loans,

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Speaker 2: have these credit card delinquencies, are seeing delinquencies, and auto

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Speaker 2: loans that are going to come under pressure. So you

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Speaker 2: do have a bifurcation in the economy. Some sectors of

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Speaker 2: the economy are doing well and others are not. And

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Speaker 2: that's really where you're going to see the pressure. Do

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Speaker 2: you not buy that January then, which just seasonal is

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Speaker 2: a blit?

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Speaker 3: You actually think that there's pressure on this consumer.

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Speaker 2: There is, and I think that the longer interstrates stay high,

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Speaker 2: you're going to see the pressure build up, especially in

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Speaker 2: sectors like housing and auto loans. I mean, I think

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Speaker 2: that you seeing a decent amount of pressure already. You

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Speaker 2: are seeing some easing of conditions there because interest rates

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Speaker 2: have come down from ten years around five percent to

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Speaker 2: four and a quarter percent now. But broadly speaking, investors

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Speaker 2: are I mean consumers are not able to buy homes

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Speaker 2: like they did several years ago. So the housing market

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Speaker 2: is still under pressure. There's not enough supply and housing

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Speaker 2: prices are still relatively high. So there are certain sectors

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Speaker 2: of the economy that are coming under pressure. It's just

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Speaker 2: not broad based in all sectors. And I think that

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Speaker 2: that'll come over time with the industrates remaining high for longer.

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Speaker 1: It's just the problem with the US economy is people

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Speaker 1: with three percent mold just it won't stund that home.

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Speaker 1: You know, they can't.

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Speaker 2: Because they can't move.

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Speaker 3: You know what, I actually think that's a feature of

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Speaker 3: our economics stright is that people were able to get

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Speaker 3: three percent mortgages and they bought beautiful homes that they

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Speaker 3: absolutely love, and they've got no desire to move whatsoever.

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Speaker 3: And I just want to say that, you know, there

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Speaker 3: was upholding.

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Speaker 1: This economy is personal, pighly personal, partly personal. Good to

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Speaker 1: say it suction