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Speaker 1: Premisterized our guess, global head of rate strategy at t

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Speaker 1: D Securities. I almost can't think of anyone I'd rather

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Speaker 1: talk to you right now, preated the perfect guest for

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Speaker 1: the time. So this better data really complicates the Fed's job.

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Speaker 1: And you know, Bloomberg Economics, as the terminal rate all

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Speaker 1: we have at five percent, you're not that high, but

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Speaker 1: you're still pretty high. A right, thanks for having me, um.

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Speaker 1: So you know our view for the terminal rate is

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Speaker 1: closer to four to four. But I think it does depend,

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Speaker 1: as you said, on the economic data. You know, with

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Speaker 1: the data responds with the lag. So the fact that

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Speaker 1: the Fed has been raising rates, we still haven't really

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Speaker 1: seen the impact of the rate hikes. We have on

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Speaker 1: financial conditions, we haven't on the economy. Our views things

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Speaker 1: are going to slow down, the intersensitive sectors are slowing down,

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Speaker 1: but really it's going to come around to inflation. That's

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Speaker 1: public enemy number one. And if inflation doesn't show signs

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Speaker 1: of moderating, then I think risks to the terminal rate

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Speaker 1: are higher. And the markets pricing in about four very

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Speaker 1: close to our focus, but I would say yes, risks

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Speaker 1: to the upside if inflation numbers don't decelerate, and I

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Speaker 1: don't think we're looking for The FED is looking for

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Speaker 1: two percent, but that monthly change consistent with the you know,

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Speaker 1: point two months of woman. I think that's what they're

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Speaker 1: looking for in order for them to stop that hiking cycle.

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Speaker 1: And that may not happen in the near term. Also,

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Speaker 1: I mean, I think you just said it. We haven't

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Speaker 1: probably seen the effect of the you know, the rate

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Speaker 1: hikes we've already had. That. Of course, it presents another problem,

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Speaker 1: does it, not overshooting and overtightening exactly. And I think

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Speaker 1: that's why the yield curve continues to invert. In fact,

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Speaker 1: I like a flatnow. I think the curve can invert

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Speaker 1: some more because I think the FED is telling us

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Speaker 1: that they're focused on inflation even if there is some

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Speaker 1: pain in the economy. I mean, in chap How's words,

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Speaker 1: and that is till give you know, telling us that

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Speaker 1: the risk of overtightening is growing by the day because

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Speaker 1: they're going to keep tightening then keep rates restrictive for

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Speaker 1: a while. And I think they're almost telling us that

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Speaker 1: their hands are tight. They may not be able to

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Speaker 1: respond to growth slow down if there isn't that inflation

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Speaker 1: you know, deceleration, and that's why the long end of

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Speaker 1: the of the treasure market is seen demand because the

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Speaker 1: front end is all about inflation. But risk assets are struggling,

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Speaker 1: and what's the safest place to be in It's actually

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Speaker 1: long end treasuries. So I think the market is pricing

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Speaker 1: in that overtightening scenario. Yeah, no change for the yield

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Speaker 1: on the tenure at three point one zero percent, but

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Speaker 1: there are plenty who expect that to move up to

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Speaker 1: back around the three and a half range. As you say,

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Speaker 1: the time, the Fed needs some time here to get

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Speaker 1: several inflation prints that would indicate that you know, the

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Speaker 1: job is getting done. So does this mean that the

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Speaker 1: higher for longer we heard from from J Power with

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Speaker 1: his latest data means even higher for even longer. I

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Speaker 1: think the um even longer part is one I'm completely

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Speaker 1: on board with. But you know, in terms of whether

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Speaker 1: they need to go even higher than what's priceton or

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Speaker 1: higher than their dot plot, I think really is going

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Speaker 1: to depend upon both growth as well as inflation. You know,

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Speaker 1: one thing which is quite absent in the speech at

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Speaker 1: Jackson Hooe by Buyer J. Pale was the quodit of tightening.

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Speaker 1: Now it ramps up next month, gives a sense of

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Speaker 1: whether this is really understood and whether it actually is

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Speaker 1: priced in, and if it is, what is priceton. Sure,

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Speaker 1: I'm glad you bring it up, because it is a

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Speaker 1: pretty important tool that the FED users to tighten policy.

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Speaker 1: I think it's a nonlinear impact, meaning the initial qute

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Speaker 1: doesn't matter as much as it ramps up over time,

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Speaker 1: it just results in more treasury supply, and it really

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Speaker 1: impacts the long end of the market. You know, that's

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Speaker 1: ultimately what impacts borrowing costs. So I do think it's

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Speaker 1: a big deal. I think the ramp up should be

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Speaker 1: largely priceton because we've known that it's going to ramp

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Speaker 1: up in September. What is not I think fully pricedon

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Speaker 1: or appreciated is that the longer it goes on, the

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Speaker 1: more it tightens financial conditions, and it it tightens intersensitive sectors.

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Speaker 1: It puts up put pressure on interest rates, and you know,

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Speaker 1: I think that's just going to build over the course

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Speaker 1: of the next few months. So yeah, as you said, September,

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Speaker 1: it ramps up month after month, We're going to get

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Speaker 1: as much as ninety billion of treasuries and mortgages that

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Speaker 1: the private market has to take down, and I think

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Speaker 1: that's what prevents long end treasuries from declining even if

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Speaker 1: we start to see growth slowing down. I wanted to

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Speaker 1: ask you about that as well, but more on how

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Speaker 1: do we actually measure the impact and know what's priced

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Speaker 1: in right? It is difficult. In fact, the FED has

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Speaker 1: a bunch of studies about what is the equivalence of

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Speaker 1: x billion of runoff on interest rates, and even their

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Speaker 1: estimates vary from fifteen basis points per month to entire hikes.

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Speaker 1: So it's you know, I think the very wide ranges.

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Speaker 1: What I look at is real rates, long end real rates.

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Speaker 1: You know, that's less dependent on FED high makes. It's

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Speaker 1: more dependent on supply demand issues. And the fact that

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Speaker 1: QUT results in more supply puts up put pressure on

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Speaker 1: those rates, and they have been rising over the course

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Speaker 1: of the last few months. I think that's a function

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Speaker 1: of QUT, and it's just going to continue. I think,

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Speaker 1: you know, as as QUT continues, and QT will continue

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Speaker 1: even when they stop hiking, I think they really have

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Speaker 1: to cut rates to stop duty. So this is just

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Speaker 1: an ongoing form of tightening going forward. Let's just quickly

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Speaker 1: have a look at elsewhere as well, because I mean

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Speaker 1: in this part of the world, in emerging markets, much

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Speaker 1: pressure a day under their central banks to raise rates

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Speaker 1: because it becomes a story about defending the currency ultimately,

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Speaker 1: because that would if you don't, you end up importing

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Speaker 1: a ton of inflation exactly. And I think it's not

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Speaker 1: just the emerging market world or Asia. I think it's

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Speaker 1: also Europe is also facing that issue. So you know,

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Speaker 1: as much as I think that there are these spillows,

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Speaker 1: I think for the FED, it's all about domestic pressures

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Speaker 1: that unfortunately has the spill over into em So you know,

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Speaker 1: our view is that central banks globally are trying to

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Speaker 1: fight this global inflation problem, and they're all going to

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Speaker 1: be more hawkish than what was expected or or is

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Speaker 1: largely priced in. We saw credit spreads come in a

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Speaker 1: lot during the big rally from from sort of lows

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Speaker 1: in June up to this recent bout of selling. How

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Speaker 1: how far does that go the other direction? Now? I mean,

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Speaker 1: could you see how yield getting up? So I am

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Speaker 1: worried about credit more maybe high yield or the less credit,

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Speaker 1: uh you know, or the less the more risky parts

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Speaker 1: of the credit spectrum. Not so much because of interest rates.

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Speaker 1: I think you know, our views of the ten ures peaked.

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Speaker 1: I mean whether it's three or three in a quarter,

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Speaker 1: so the interest rate repricing is done. I'm more concerned

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Speaker 1: about the growth aspect. If the Feds telling us that

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Speaker 1: they could be pain and they won't respond to that

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Speaker 1: pain because they're worried about inflation, I think that tells

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Speaker 1: us that there could be a deeper downturn in the economy.

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Speaker 1: And I don't think that defaultress premium has been priced

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Speaker 1: accurately in the credit space, so especially the higher risk

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Speaker 1: sector in the credit markets. I am concerned that the

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Speaker 1: market has become too complacent about interest rates and not

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Speaker 1: quite appreciating that there's true credit risk in that product,

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Speaker 1: and so I am a little worried that those spreads

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Speaker 1: can widen back out to the highs. Always a pleasure.

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Speaker 1: Thank you so much for joining us there. Mr Globalhood

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Speaker 1: of Rate Strategy, A t D security is getting her

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Speaker 1: take on the market action