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Speaker 1: Our next guest, Lisa I said to make said, you know,

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Speaker 1: what do you think? He says, I'm not coming out

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Speaker 1: again until the tats are in first place, so you

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Speaker 1: know it's worked over well well.

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Speaker 2: Fantastic congratulations Steven Major, Global head of Fixed Income Research

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Speaker 2: at HSBC, And really I am so glad to speak

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Speaker 2: with you. We're at a time of an incredible bond

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Speaker 2: bear market. You've been bullish. How can you reconfirm that?

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Speaker 2: Reaffirm that at a time we don't really understand why

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Speaker 2: the cell off has been so severe.

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Speaker 3: Yeah, there's been a capitulation, So there'll be people like me,

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Speaker 3: but people with skin in the game, people who are

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Speaker 3: actually long of bonds who have had to cut the position.

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Speaker 3: That could be for risk management considerations, it could be

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Speaker 3: because clients are taking their money out and they're having

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Speaker 3: to respond to that. So I think there's a capitulation.

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Speaker 3: There's evidence of capitulation in the way the term premium moved.

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Speaker 3: So it's the back end that's where the action is,

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Speaker 3: and I think there's a lot more safety in the

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Speaker 3: front end. Right now, you can see twos of behaving differently.

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Speaker 3: Maybe for the first time this year, twos have become safe.

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Speaker 3: And I think the mantra has been don't touch the

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Speaker 3: twos all year because you would have been going against

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Speaker 3: the FED. If the fed's done now more or less,

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Speaker 3: then you're fairly safe entering twos. And that's how the

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Speaker 3: bomb market can start to perform better. Money will creep

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Speaker 3: up from the front. That's why people are leaving the

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Speaker 3: back end alone at the moment.

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Speaker 2: There's a lot there to unpack. I just want to

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Speaker 2: go to the whole capitulation story. You said there are

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Speaker 2: signs of capitulation where who is selling so aggressively at

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Speaker 2: a time, and a lot of people are saying it's

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Speaker 2: a buyer strike.

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Speaker 3: Yeah, I think it's probably real money. And there's this

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Speaker 3: game in fixed income about discussing the marginal buyer and seller.

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Speaker 3: The truth is you never know to it afterwards.

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Speaker 4: Right.

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Speaker 3: The bomb market is fairly sophisticated, but you don't know

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Speaker 3: the buyers until after it happened. You can see the

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Speaker 3: supply coming because it's published, but you don't know who

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Speaker 3: actually bought.

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Speaker 4: There's a lot of gaming of who's going to buy. Right.

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Speaker 3: It seems to me the marginal buyer has to be domestic,

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Speaker 3: so it has to be here in the US because

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Speaker 3: the official sector overseas is not sponsoring the market as

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Speaker 3: it was before. The private sector isn't picking up enough,

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Speaker 3: so it has to be inside here. Now seventy percent

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Speaker 3: of treasuries are held in the US. Of course the

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Speaker 3: Fed's a big part of that. But the story is

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Speaker 3: it has to be here. It's probably not the banks.

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Speaker 3: Real money has already taken long positions and maybe adjusting,

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Speaker 3: So it has to go into retail, it has to

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Speaker 3: go to smaller investors. It has to go to those

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Speaker 3: who are inequities, so big investors on a multi asset basis,

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Speaker 3: so people coming out of stocks into bonds, people going

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Speaker 3: from cash into bonds.

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Speaker 4: That's where the marginal bone is.

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Speaker 1: The great furor Steve Major is what I call the

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Speaker 1: whale silence. Chris Whalen with this wonderful one volume of

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Speaker 1: America Financial History. We're in the bond market, You're trying

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Speaker 1: to do something, and all of a sudden on the

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Speaker 1: other end of the phone, whether it's the eighteenth and

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Speaker 1: nineteen twentieth century, there's silence.

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Speaker 4: Are we anywhere near that? Yeah?

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Speaker 3: Well, that's a really good point because it does seem

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Speaker 3: that there's been a bit of a bio strike, and

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Speaker 3: so the evidence for that is in the auctions. You

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Speaker 3: look at the cover issue, so how many people showed

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Speaker 3: up to buy the bonds at the auction. There's less there,

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Speaker 3: especially in the long end of the ten and the

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Speaker 3: thirty year paper. But it's it gets to the point

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Speaker 3: where the value is just too obvious. You've mentioned real

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Speaker 3: yield several times in the on the show and when

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Speaker 3: the but you know, when the real yield is comfortably

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Speaker 3: above the trend GDP rate, the actual trenched DP and

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Speaker 3: the projected trendy DP, then you're fretlly covered. So the

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Speaker 3: inflation piece is locked. When the real yield is above

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Speaker 3: the trenched DP, you're not going to go too far wrong. Now,

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Speaker 3: I'm not saying that today it's free money. It's just

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Speaker 3: that you'll look back in six months time and you

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Speaker 3: should be happy with the investment you made today.

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Speaker 1: Seven hundred pages at the IMF, the blue Book, the

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Speaker 1: Green Book, the Red book. Grigiva says she's going to

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Speaker 1: print a copy just for me so I can read it.

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Speaker 1: The one appendix I read was tobis Adrian Fiscal instability,

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Speaker 1: liquidity and SOLVEGNCY does Steve Major have liquidity and salvency issues,

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Speaker 1: is written in his appendixes.

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Speaker 3: Get the solvency the US is going to pay its bonds.

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Speaker 3: So the idea that you have a ratings issue, and

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Speaker 3: that ratings explain the yield shift liquidity. Now, this is

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Speaker 3: the price of getting stuff done. In plain English, right,

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Speaker 3: that's what liquidity is. So when the market is illiquid,

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Speaker 3: it's more difficult to get a big trade done, so

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Speaker 3: you have to pay a bigger bid, officer spruit. That's

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Speaker 3: my simplistic, plain English explanation. There is a liquidity issue

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Speaker 3: right now because the banks aren't prepared to hold big inventory.

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Speaker 4: The intermediariesm are just not there.

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Speaker 3: And liquidity and risk premium tend to move together. So

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Speaker 3: if we have an ill liquid market, then the risk

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Speaker 3: premium goes up, and that's your term premium and the

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Speaker 3: higher yield and the long end.

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Speaker 4: That's what's happening right now.

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Speaker 3: I look back at this and I think you've got

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Speaker 3: record moves in the term premium, even back to twenty thirteen.

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Speaker 3: And don't forget the context is important here, Tom and Lisa.

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Speaker 3: Back in twenty thirteen, the tape a tantrum was like

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Speaker 3: the main thing that happened. Now you've had a two

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Speaker 3: year bear market going into a three year bear market,

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Speaker 3: so rates moved up a lot. Then the term premium flipped.

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Speaker 3: You didn't have that back in twenty thirteen. So you

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Speaker 3: really are entering a good level of yield at the moment.

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Speaker 2: Given the fact that you think that we're at a

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Speaker 2: good level of yield, how do you sort of lean

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Speaker 2: into the front end and not the back end?

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Speaker 1: Right?

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Speaker 2: Why aren't you just going all in on the ten year?

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Speaker 4: Let me be absolutely clear.

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Speaker 3: I think that investors who want to buy bonds for

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Speaker 3: the first time, who rather shy, can creep into the

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Speaker 3: two years out of a money market product and they're

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Speaker 3: not going to lose a lot of money, if any.

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Speaker 3: You're safe in the two. So if you're shy and

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Speaker 3: you're going into bonds for the first time, you're safe

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Speaker 3: in twos. Then you creep up to threes. Now, for me,

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Speaker 3: if I'm making a call for the next six months,

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Speaker 3: of course I'd buy tens or thirties, because I'm going

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Speaker 3: to look back in six months time and think that

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Speaker 3: the yield's fallen one hundred paces.

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Speaker 2: Where's it going though at the end of the year.

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Speaker 3: Well, our forecast is three and a half. We're running

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Speaker 3: out of weeks and months, of course, but three and

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Speaker 3: a half could be the right number in six months time.

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Speaker 3: So it's I don't think we've got the directional call

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Speaker 3: wrong here. I think I think it yields will be lower.

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Speaker 3: It's just that maybe our timing could be off.

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Speaker 1: Yeah, it's the same as I guess in west Ham's

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Speaker 1: going to do well. We're running out of time.

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Speaker 4: Steve Major one final question, the really just change.

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Speaker 1: JP Morgan on stage in Morocco said she's modeling out

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Speaker 1: of two and a half percent inflation adjusted yield. That

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Speaker 1: took me back, That se mean was elevated. Take your

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Speaker 1: nominal lower yield call and squeeze it into a real

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Speaker 1: rate call.

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Speaker 3: Yeah, so the two percent inflation is locked. If there's

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Speaker 3: one thing that's come through all of this is that

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Speaker 3: inflation target targeting is credible. The two percent inflation has

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Speaker 3: not been been challenged in the break even forwards. So

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Speaker 3: for me, it's all about real yeard two and a

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Speaker 3: half is just way above trend. Therefore we can take

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Speaker 3: one hundred basis points off of that. Yeah, I think

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Speaker 3: that a fairer level for the real yield would be

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Speaker 3: one and a half, not the two and a half

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Speaker 3: half that we're raiding at at the moment. And by

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Speaker 3: the way, that would still be above one hundred over

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Speaker 3: The Feds are star measures. So so you people are

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Speaker 3: saying that the real rate needs to be higher, Well,

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Speaker 3: it's priced has a lot higher.

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Speaker 4: We've got to go.

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Speaker 1: Stephen Major joining us with the Hong Kong Singa Banking

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Speaker 1: Corporation