WEBVTT - Surveillance: US Treasury Refunding & Fed Day 0:00:05.120 --> 0:00:07.119 This is the Bloomberg Surveillance Podcast. 0:00:07.160 --> 0:00:11.080 I'm Tom Keene, along with Jonathan Farrow and Lisa Abramowitz. 0:00:11.280 --> 0:00:15.760 Join us each day for insight from the best an economics, geopolitics, 0:00:15.760 --> 0:00:20.720 finance and investment. Subscribe to Bloomberg Surveillance on demand on Apple, 0:00:20.960 --> 0:00:25.400 Spotify and anywhere you get your podcasts, and always on 0:00:25.520 --> 0:00:29.800 Bloomberg dot Com, the Bloomberg Terminal, and the Bloomberg Business app. 0:00:29.880 --> 0:00:33.919 Where this seth Carpenter at, the chief global economist at 0:00:33.960 --> 0:00:36.199 Morgan Stanley. Is this just about in our start? Are 0:00:36.200 --> 0:00:38.800 we all John Williams this morning and we're readjusting? I 0:00:38.960 --> 0:00:41.080 clared it with me last week at a Bloomberg event. 0:00:41.520 --> 0:00:44.240 At two point zero percent is not two point six percent? 0:00:44.320 --> 0:00:46.800 I mean, are we really talking, as Mike aludes tou 0:00:46.840 --> 0:00:51.200 there about a new inflation regime? 0:00:52.000 --> 0:00:53.960 I think you want to separate out a couple of things. 0:00:53.960 --> 0:00:56.040 One is the new inflation regime, and there if you're 0:00:56.040 --> 0:00:58.840 comparing it to where we were from the financial crisis 0:00:58.840 --> 0:01:02.440 through COVID to say, yes, right, the FED was consistently 0:01:02.480 --> 0:01:04.480 missing it's inflation target to the downside. 0:01:04.520 --> 0:01:06.640 I call it a quarter percentage point. 0:01:07.400 --> 0:01:09.959 We're above, clearly above target now and over the next 0:01:09.959 --> 0:01:11.720 several years they want to bring it down, but I'm 0:01:11.720 --> 0:01:13.560 not sure they want to go back to the old 0:01:13.640 --> 0:01:15.920 days of you know, being below two percent on a 0:01:15.959 --> 0:01:18.240 regular basis. So if they're going to be averaging a 0:01:18.240 --> 0:01:21.119 little higher during expansions, call it a tenth or two above. 0:01:21.440 --> 0:01:24.880 You know, you're talking about twenty five to fifty basis 0:01:24.880 --> 0:01:26.800 points high inflation, so that's got to be there. I 0:01:26.800 --> 0:01:29.040 don't think we're talking about the difference between two percent 0:01:29.080 --> 0:01:30.440 inflation and three percent of I. 0:01:30.440 --> 0:01:32.200 Want to tell you on radio on television where we're 0:01:32.200 --> 0:01:34.720 heading here, what half are we have. We have Dark 0:01:34.800 --> 0:01:38.440 Carpenter with this on the broader economics of this moment. 0:01:38.920 --> 0:01:42.319 Ira Jersey schedule to join us just exquisite here on 0:01:42.400 --> 0:01:45.119 fixed income dynamics, and then we do even better. Mark 0:01:45.160 --> 0:01:47.960 Cabana is going to darken the door. Who's just expert 0:01:48.120 --> 0:01:51.480 on your world about you know, the different tranches of 0:01:51.520 --> 0:01:52.160 the auctions. 0:01:52.360 --> 0:01:54.240 I want to dig into what the implications are of 0:01:54.240 --> 0:01:57.080 this announcement sas and to me, I'm looking at the 0:01:57.160 --> 0:01:59.640 idea that they're really going to force the front end 0:01:59.680 --> 0:02:01.720 to a lot of the heavy lifting here. Does that 0:02:01.760 --> 0:02:04.040 pose a greater risk than people realize. 0:02:04.560 --> 0:02:07.600 So my view is no, the way I would think 0:02:07.600 --> 0:02:09.440 about it. There was a speculation that back and forth 0:02:09.480 --> 0:02:11.880 a little bit earlier, did the Treasury just react to 0:02:11.919 --> 0:02:14.000 the market. And I think you want to remember that 0:02:14.040 --> 0:02:16.920 the folks there at Treasury, Josh Frost, the assistant secretary, 0:02:17.000 --> 0:02:21.160 the career staff in debt management, they have a structure now, 0:02:21.200 --> 0:02:22.760 they have a framework for how to think about what 0:02:22.800 --> 0:02:25.280 to issue, and they're looking at what is the market 0:02:25.360 --> 0:02:27.880 saying about where the market wants to pay up and 0:02:27.919 --> 0:02:31.200 where the market's demanding a discount, and at the margin, 0:02:31.400 --> 0:02:33.480 they'll lean a little bit more to where the market 0:02:33.520 --> 0:02:35.400 wants the paper and lean a little bit away from 0:02:35.440 --> 0:02:38.000 the place where the market's pulling back. And we've seen 0:02:38.040 --> 0:02:39.880 over the past several months a big sell off in 0:02:39.960 --> 0:02:42.520 the long end. It showed up, you know, in models 0:02:42.560 --> 0:02:45.799 speak and the term premium, and they're paying attention to that. 0:02:45.880 --> 0:02:47.679 It's not that one week to the next, or one 0:02:47.680 --> 0:02:49.440 month to the next, or even one quar to the next, 0:02:49.680 --> 0:02:50.440 is it sustained. 0:02:50.600 --> 0:02:52.799 What we are seeing is very much a strong move 0:02:52.840 --> 0:02:56.320 on the long end in that thirty year yield plunging 0:02:56.400 --> 0:02:59.720 back below five percent. As we were talking about do 0:02:59.760 --> 0:03:02.280 you think I think that this indicates that really what 0:03:02.280 --> 0:03:06.040 we're seeing in yields is entirely a supply driven story 0:03:06.280 --> 0:03:09.320 more than anything in terms of an economic read on 0:03:09.440 --> 0:03:11.359 strength and inflation in the US. 0:03:11.639 --> 0:03:15.040 So no, it's so hard depending on any single thing. 0:03:15.040 --> 0:03:17.440 When I talk to our clients here in New York, 0:03:17.600 --> 0:03:20.120 in London, around the world who are trading in treasuries, 0:03:20.480 --> 0:03:23.040 there are a whole set of different narratives, one of 0:03:23.080 --> 0:03:26.040 which has been supplied. People have been worrying about the deficit, 0:03:26.080 --> 0:03:28.840 which is exactly why Secretary Yellen came out and said 0:03:29.000 --> 0:03:32.480 it's not the deficit. People are worrying about stronger growth. 0:03:32.639 --> 0:03:35.400 Q three GDP data was very strong, There's no two 0:03:35.440 --> 0:03:37.720 ways about it, and so that contributed to it. Other 0:03:37.760 --> 0:03:39.720 people are worrying about is there going to be a 0:03:39.840 --> 0:03:42.320 pullback from risk by global investors. 0:03:42.320 --> 0:03:43.720 Other people are looking at the back of Japan. 0:03:43.760 --> 0:03:46.560 We just had that meeting right where they effectively de 0:03:46.640 --> 0:03:48.520 facto got rid of yield crop control. So it's not 0:03:48.680 --> 0:03:51.080 just one single thing, it's everything coming together. 0:03:51.280 --> 0:03:53.880 So what's your compass at a time where we're expecting 0:03:54.000 --> 0:03:57.000 the FED to come out today too in varying shades 0:03:57.040 --> 0:03:59.120 of we have no idea and we will see just 0:03:59.160 --> 0:04:01.760 along with you, what is your guiding loadstar. 0:04:02.440 --> 0:04:04.640 So we're trying to figure out, along with the Fed, 0:04:04.680 --> 0:04:07.320 sort of what's going on with the economy. The strong 0:04:07.400 --> 0:04:10.280 Q three data and notwithstanding there are some signs of 0:04:10.320 --> 0:04:15.040 the economy slowing down. The last jobs report super strong, 0:04:15.120 --> 0:04:16.520 but if you look at the trend over the past 0:04:16.560 --> 0:04:18.839 eighteen month, clear downward trend. If you look at the 0:04:18.880 --> 0:04:22.080 GDP data, consumption spending holding in, but a lot of 0:04:22.120 --> 0:04:26.320 the strength was in inventories. Capex was not very strong 0:04:26.360 --> 0:04:28.719 at all, and so we are seeing that slowing. And 0:04:28.760 --> 0:04:30.800 so what we think is the Feds look in the 0:04:30.800 --> 0:04:34.000 same data we are. They're driving by feel a little 0:04:34.000 --> 0:04:36.160 bit and they're not going to hike today. We don't 0:04:36.200 --> 0:04:39.120 think they're going to hike in December because inflation just 0:04:39.240 --> 0:04:42.680 keeps undershooting their own forecast for where they thought inflation 0:04:42.760 --> 0:04:43.520 was going to be this year. 0:04:43.720 --> 0:04:47.640 What does the job dynamic look like with an ellen 0:04:47.800 --> 0:04:51.920 Zetner's sub one percent Q four GDP. 0:04:52.320 --> 0:04:54.159 Well, I think there This is where we want to 0:04:54.279 --> 0:04:56.560 keep in mind that there's so many swings from one 0:04:56.600 --> 0:04:58.560 quarter the next to some of the spending data. Like 0:04:58.600 --> 0:05:01.280 I said, the inventory, the numbers, that was never going 0:05:01.360 --> 0:05:02.400 to be the primary driver. 0:05:02.480 --> 0:05:04.840 So she starts giving you gloom on the job economy. 0:05:05.040 --> 0:05:05.440 Not at all. 0:05:05.480 --> 0:05:07.919 I will say that we have a Morgan Stanley Ellen 0:05:07.960 --> 0:05:09.920 and I and the rest of the team have been 0:05:10.000 --> 0:05:12.839 consistent from the beginning of this hiking cycle to say, 0:05:13.240 --> 0:05:15.240 the Fed's gonna hike, They're going to bring down inflation, 0:05:15.279 --> 0:05:16.839 but we are not going into recession. 0:05:17.120 --> 0:05:18.279 It is not doing gloom. 0:05:18.279 --> 0:05:20.719 Well, she's expert on the American consumer. What is Zenner 0:05:20.760 --> 0:05:22.160 when she gets fired up? 0:05:22.200 --> 0:05:22.960 You know she does. 0:05:23.400 --> 0:05:26.159 When Zender gets fired up about the American consumer, what 0:05:26.240 --> 0:05:26.839 is she saying? 0:05:27.600 --> 0:05:29.520 Lots of things, but in particular, one of the key 0:05:29.560 --> 0:05:31.800 risks that maybe people are overlooking for why there should 0:05:31.800 --> 0:05:34.560 be a slowdown in the fourth quarter is student loans. Right, 0:05:34.600 --> 0:05:37.040 there is a moratorium on student loans that's been lifted. 0:05:37.080 --> 0:05:40.680 We're starting to see that payback starting to happen, and 0:05:41.000 --> 0:05:44.039 that has to crimp consumer disposable incomes. 0:05:44.160 --> 0:05:46.719 That matters durable goods. 0:05:46.880 --> 0:05:47.040 Right. 0:05:47.200 --> 0:05:49.360 Interest rates are high, credit card rates are high. 0:05:49.680 --> 0:05:52.440 People financing cars and other things, it's just costing more 0:05:52.480 --> 0:05:53.919 and so they'll pull back on the spending. 0:05:54.560 --> 0:05:57.280 It just extraorded her. Seth Carpenter, thank you so much, 0:05:58.240 --> 0:05:59.320 really really appreciate it. 0:05:59.360 --> 0:06:07.360 With Morgan's stay, he writes piercing notes for Bank of America. 0:06:07.400 --> 0:06:09.080 There's no other way to put it. Out of US 0:06:09.200 --> 0:06:11.320 rates strategy, He's aged in the. 0:06:11.279 --> 0:06:14.520 Last ten minutes. Mark Cabana joins us this morning. So 0:06:14.600 --> 0:06:17.760 I'm like refunding, so what, I don't care. Everybody's in 0:06:17.839 --> 0:06:20.080 a ladder. It comes out, and to me it was 0:06:20.160 --> 0:06:21.720 sort of I don't you know, I really don't care. 0:06:21.800 --> 0:06:24.480 Jenny Allen said, we're gonna do short paper. Yeah, we're 0:06:24.520 --> 0:06:28.960 gonna do long paper. But we're the United States. Our 0:06:29.000 --> 0:06:32.560 listeners are viewers who are not sophisticated. Do they need 0:06:32.600 --> 0:06:36.039 to fear the fiscal system of America? 0:06:36.240 --> 0:06:38.640 No, you shouldn't fear the fiscal system because the US 0:06:38.680 --> 0:06:40.400 economy is still going to be very robust. 0:06:40.600 --> 0:06:42.520 There will be buyers for treasury paper. 0:06:42.920 --> 0:06:45.320 It's just a matter of at what level will they 0:06:45.360 --> 0:06:49.760 step in, And we've had a relative lack of buying recently, 0:06:50.120 --> 0:06:51.839 but that's meant that yields have had to adjust, and 0:06:51.880 --> 0:06:55.160 as they've adjusted, that should incentivize more investors to think 0:06:55.200 --> 0:06:58.560 about owning bonds and we do think that rates are 0:06:58.560 --> 0:07:01.240 going to keep rising or they're going to stay elevated. Really, 0:07:01.360 --> 0:07:03.920 until you see one of two things. Number One, until 0:07:03.920 --> 0:07:05.839 you see the macro data slow, we don't think that 0:07:05.880 --> 0:07:09.240 you've really seen that yet. Or two until you see 0:07:09.440 --> 0:07:12.280 d risking, until you see investors who think, you know 0:07:12.320 --> 0:07:14.720 what rates are kind of high, really yields almost a 0:07:14.760 --> 0:07:16.800 two and a half percent at the tenure point. That's 0:07:16.840 --> 0:07:18.760 a decent own and maybe I should think about de 0:07:18.920 --> 0:07:20.200 risking in my portfolio. 0:07:20.720 --> 0:07:22.560 This is such a valuable conversation. 0:07:22.720 --> 0:07:24.760 Then I got to get to what we see on 0:07:24.880 --> 0:07:27.360 balance sheets right now, mark to market and the rest 0:07:27.440 --> 0:07:28.120 of it in bonds. 0:07:28.120 --> 0:07:31.760 But let's stay on this theme right now of our new. 0:07:31.800 --> 0:07:36.640 Higher yield regime. How far out are you in the longer? 0:07:36.760 --> 0:07:39.840 I mean, if take any given yield, any given spread, 0:07:40.360 --> 0:07:43.200 is there a cabana one year, is it a cabana 0:07:43.320 --> 0:07:46.680 three years? How do you see the regime of longer? 0:07:47.040 --> 0:07:49.240 Well, we just think that rates are going to have 0:07:49.280 --> 0:07:52.560 to stay higher for longer. Not to reiterate the Fed mantra, 0:07:52.600 --> 0:07:55.040 but we really believe it because we've seen an economy 0:07:55.080 --> 0:07:58.040 that's been so resilient in the face of relatively elevated 0:07:58.080 --> 0:08:00.520 interest rates. And as long as that happens, that just 0:08:00.640 --> 0:08:01.720 is going to mean that the f it doesn't have 0:08:01.760 --> 0:08:03.600 to cut for a while. Now, when I think about longer, 0:08:04.000 --> 0:08:05.720 I personally think about five years plus. 0:08:06.040 --> 0:08:08.280 Oh wow, okay, my attention. 0:08:09.080 --> 0:08:13.360 Just because you know, most investors who really focus on 0:08:13.400 --> 0:08:17.520 liquidity and liquidity management, they think generally two years, three years. 0:08:18.160 --> 0:08:20.520 But when I think about intermediate to long end, I 0:08:20.560 --> 0:08:21.760 think about five years plus. 0:08:21.920 --> 0:08:24.200 Okay, And I'm going to invent this phrase right now. 0:08:24.240 --> 0:08:26.080 I haven't seen it anywhere else. I want to copyright 0:08:26.120 --> 0:08:26.400 on this. 0:08:26.400 --> 0:08:28.880 If you use it. Is it normal for longer? 0:08:29.000 --> 0:08:31.040 Is that really what we're talking about, is we're back 0:08:31.080 --> 0:08:32.280 to a normal rate regime. 0:08:32.520 --> 0:08:34.760 Well, it's certainly we're back to a regime that looks 0:08:34.800 --> 0:08:38.000 a lot more similar to the pre financial crisis than 0:08:38.040 --> 0:08:39.200 the post financial crisis. 0:08:39.240 --> 0:08:40.920 You've got a five year window on that. So what 0:08:40.960 --> 0:08:42.199 maturity do you buy? 0:08:42.360 --> 0:08:47.000 I'm in cash, I'm really comfortable at Bank of America. 0:08:47.120 --> 0:08:50.400 What maturre do you buy given a five year normal 0:08:50.440 --> 0:08:51.240 for longer view? 0:08:51.280 --> 0:08:55.679 Well, it really depends upon what your overall investment horizon 0:08:55.800 --> 0:08:58.200 is and where your preferences are. We think that if 0:08:58.240 --> 0:09:00.400 you're focused at the front end, you probably we want 0:09:00.400 --> 0:09:03.559 to be neutral to slightly overweight your benchmark. And if 0:09:03.600 --> 0:09:05.920 you're a more long term investor, we think that you 0:09:05.960 --> 0:09:08.240 at best want to be neutral right now, and you 0:09:08.280 --> 0:09:10.240 want to stay neutral until you see those signs of 0:09:10.240 --> 0:09:13.560 feedback that tell you that higher interest rates are finally 0:09:13.679 --> 0:09:16.760 slowing the economy, not just one data point here or there, 0:09:16.800 --> 0:09:20.080 but in the tier one stuff in labor more clearly 0:09:20.160 --> 0:09:23.640 an inflation. You want to stay neutral until you see 0:09:23.640 --> 0:09:26.160 those signs, or until you believe that there's a clearer 0:09:26.360 --> 0:09:29.400 and more definitive negative feedback from risk assets, which I 0:09:29.480 --> 0:09:32.600 don't think that we have really seen sufficiently yet. 0:09:32.640 --> 0:09:36.840 I love to bust Brian moynihan's chops because he, like 0:09:37.040 --> 0:09:40.400 no other CEO, quotes his research staff and I'll go 0:09:40.520 --> 0:09:43.160 blah blah blah about Bonzi and his own Cabana says, 0:09:43.520 --> 0:09:45.640 So let's get the report from Cabana that you would 0:09:45.640 --> 0:09:46.559 give to Brian. 0:09:46.280 --> 0:09:47.880 Moynihan right now. 0:09:48.080 --> 0:09:52.920 I got balance sheets, nationwide, mark to market I get, 0:09:53.200 --> 0:09:57.439 and I got everything else with massive bond losses, priced down, 0:09:58.000 --> 0:10:01.880 yield up. Should our listeners and viewers be afraid of 0:10:01.920 --> 0:10:05.400 this non marked market garbage on balance sheets. 0:10:05.559 --> 0:10:07.839 Well, I think you're talking about bank balance sheets, and 0:10:07.880 --> 0:10:10.240 we do appreciate that. Brian reads our research. He's a 0:10:10.280 --> 0:10:13.800 staunch supporter, and we really do appreciate that. We think 0:10:13.840 --> 0:10:15.839 that what banks are doing right now is that they 0:10:15.840 --> 0:10:20.280 are really prizing liquidity. They really want to hold as 0:10:20.360 --> 0:10:23.520 much liquidity as possible. They're choosing to hold cash, they're 0:10:23.600 --> 0:10:28.200 keeping reserves with the FED, and they're not buying bonds, 0:10:28.240 --> 0:10:31.760 they're not buying treasuries or mortgages, and they're prizing liquidity 0:10:31.800 --> 0:10:34.920 because they know that they need to meet their outflow needs. 0:10:35.240 --> 0:10:38.160 They know that their securities book is not particularly liquid 0:10:38.280 --> 0:10:40.520 because it's so low in value. You don't want to 0:10:40.559 --> 0:10:42.760 sell and realize the loss. We saw what happened with 0:10:42.760 --> 0:10:43.480 some of the regional band. 0:10:43.600 --> 0:10:44.280 So what do you do? 0:10:44.400 --> 0:10:45.160 This is the key thing. 0:10:45.240 --> 0:10:46.360 So what do you do if you're a bank? 0:10:46.600 --> 0:10:47.840 What do you do if your bank? 0:10:48.160 --> 0:10:50.760 If you've got all this out there and you don't 0:10:50.800 --> 0:10:54.360 want to sell, just like you said, but things can happen, 0:10:54.440 --> 0:10:55.440 things can change. 0:10:55.559 --> 0:10:57.439 How do you process that reality? 0:10:57.520 --> 0:10:59.200 If you're a bank, what you're doing right now as 0:10:59.240 --> 0:11:02.160 you're holding that is the game. That's why the Fed 0:11:02.200 --> 0:11:05.000 shrunk their balance sheet through QT by a trillion dollars, 0:11:05.040 --> 0:11:07.600 and you've seen bank cash holdings not move down very 0:11:07.640 --> 0:11:10.360 much at all. They are bidding up on the liability 0:11:10.360 --> 0:11:13.360 side of the balance sheet. They're issuing CDs, time deposits, etc. 0:11:13.960 --> 0:11:16.959 To take in more money because they're seeing retail outflows. 0:11:17.000 --> 0:11:19.440 And then they're holding cash and they're going to continue 0:11:19.440 --> 0:11:22.440 to do that until they see signs that the economy 0:11:22.480 --> 0:11:24.960 is turning, until they know that their loan growth is 0:11:25.080 --> 0:11:27.959 really slowed down and maybe negative on a year over 0:11:28.040 --> 0:11:31.600 year six month average or whatnot. And they're gonna wait 0:11:31.640 --> 0:11:33.960 until the economy slows more meaningfully to extend out the 0:11:33.960 --> 0:11:36.680 curve and buy those bonds. Right now, banks are not 0:11:37.040 --> 0:11:40.880 buying duration. They've been shrinking their treasury and agency holdings, 0:11:41.000 --> 0:11:43.480 and they're going to wait to add duration until they 0:11:43.480 --> 0:11:46.440 see definitive signs that the economy is turned. And so again, 0:11:46.440 --> 0:11:48.720 what banks are doing right now, it's holding out liquidity 0:11:48.800 --> 0:11:51.080 because that is the most valuable thing that they seem 0:11:51.120 --> 0:11:51.960 to believe that what. 0:11:51.840 --> 0:11:55.480 Does holding out liquidity mean for mere mortals that can't 0:11:55.520 --> 0:11:59.400 hold out liquidity? Small business? Torsten Slocke at Apollo talks 0:11:59.440 --> 0:12:02.679 about ten percent small business loans as well. I saw 0:12:02.720 --> 0:12:04.840 a thirty one percent charge card the other day. It 0:12:04.880 --> 0:12:05.920 wasn't Bank of America, of. 0:12:05.960 --> 0:12:09.120 Course, thirty one percent charge card interest rate the other day. 0:12:09.120 --> 0:12:10.559 What does the public. 0:12:10.280 --> 0:12:14.880 Do given price down, yield up banks saying I'm scared stiff, 0:12:14.920 --> 0:12:15.800 I got a whole cash. 0:12:15.840 --> 0:12:17.680 Look, it's a tough time to be a borrower. I 0:12:17.679 --> 0:12:18.600 think we know that, right. 0:12:18.640 --> 0:12:20.240 It's tough time to move, it's a tough time to 0:12:20.240 --> 0:12:21.800 buy a home, it's a tough time to be a 0:12:21.840 --> 0:12:24.360 business if you need a loan. And that's exactly what 0:12:24.360 --> 0:12:26.280 monetary policy is trying to do, right, It's trying to 0:12:26.320 --> 0:12:31.560 slow down activity by reducing demand for loans and borrowing. 0:12:32.040 --> 0:12:33.480 And so if you're a small business and you do 0:12:33.559 --> 0:12:35.520 need a loan, well you need to think about, Okay, 0:12:35.720 --> 0:12:39.560 what other liquidity sources do I have? Can I draw 0:12:39.600 --> 0:12:41.439 on any other type of liquidity? And then you've got 0:12:41.480 --> 0:12:44.120 to ask yourself do I really need to expand? Do 0:12:44.240 --> 0:12:47.520 I need to make that next investment? And you got 0:12:47.559 --> 0:12:49.360 to make sure that you can clear a much higher 0:12:49.440 --> 0:12:51.840 hurdle rate in order to justify those costs. 0:12:51.960 --> 0:12:53.439 That's how monetary policy works. 0:12:53.480 --> 0:12:56.360 It should slow down activity through the lending channel, and 0:12:56.440 --> 0:12:58.880 to some extent we're seeing that, but it hasn't happened, 0:12:58.880 --> 0:13:00.800 I think to the extent of the FED, like Mark. 0:13:00.600 --> 0:13:11.320 Commander, thank you so much. With the Bank of America 0:13:13.760 --> 0:13:16.160 joining us now to begin strong on this day of 0:13:16.200 --> 0:13:18.960 a Federal Reserve meeting is Dominic Constem. He's head of 0:13:19.000 --> 0:13:24.160 macro strategy at Mosile Americas. For years literally iconic Credit 0:13:24.200 --> 0:13:27.840 Suite were thrilled that doctor Constem could join us today. Dominica, 0:13:27.840 --> 0:13:32.000 I give you the phrase super restrictive. Is Jerome Powell's 0:13:32.120 --> 0:13:37.760 FED combined with market action a super restrictive FED. 0:13:40.280 --> 0:13:44.839 Well, yeah, in the context of the sustainability of the 0:13:46.080 --> 0:13:50.439 US consumer, and if you like the overhang of debts 0:13:50.480 --> 0:13:54.440 refinancing in the corporate sector really beginning in twenty twenty five, 0:13:55.240 --> 0:13:58.760 you know, clearing the front end is super restrictive, and 0:13:58.800 --> 0:14:02.240 it's going to have to get first quite aggressively. As 0:14:02.280 --> 0:14:06.560 some stage that the issue is a timing, and you 0:14:06.559 --> 0:14:10.119 know that timing has been pushed out because the consumer 0:14:10.600 --> 0:14:13.719 who's got great balance sheet, has decided that even as 0:14:13.760 --> 0:14:17.240 they spent all their fiscal excess that they were given 0:14:17.640 --> 0:14:20.960 after COVID, they're deciding to leverage up even with interest 0:14:21.040 --> 0:14:22.640 rates as high as they are, but they can do 0:14:22.680 --> 0:14:24.720 that because of the balance sheet, So that kind of 0:14:24.720 --> 0:14:29.000 delays the impact of this super restrictiveness, which is kind 0:14:29.000 --> 0:14:30.680 of a bit of a conungrum for the Fed. 0:14:31.000 --> 0:14:31.520 So that's the. 0:14:31.600 --> 0:14:35.160 Price for longer, not higher for longer, but just longer. 0:14:35.280 --> 0:14:37.920 What is the cost did your own power of a 0:14:38.040 --> 0:14:40.040 longer strategy at these levels? 0:14:41.280 --> 0:14:44.400 Well, I think what's happened in the last couple of 0:14:44.400 --> 0:14:47.560 months really has been that the Fed has decided that, 0:14:47.600 --> 0:14:50.760 you know, because effectively they are super restrictive, they didn't 0:14:50.800 --> 0:14:53.560 want to keep on pushing up short rates, you know, 0:14:54.040 --> 0:14:56.920 don't not quickly go to six percent. So they've emphasized 0:14:56.920 --> 0:15:00.000 this idea that they're just going to hold at a high. 0:14:59.840 --> 0:15:01.920 Level for that much longer. 0:15:02.120 --> 0:15:05.680 But ironically that directly feeds into a sell off in 0:15:05.720 --> 0:15:09.200 the back end, the idea that what we call term premium, 0:15:09.320 --> 0:15:13.240 this risk premium that's short rates you end up being 0:15:13.320 --> 0:15:17.320 higher than the equivalent tenor of a longer dated treasury. 0:15:17.400 --> 0:15:20.280 That's term premium that gets priced into the market, which 0:15:20.320 --> 0:15:23.000 is why you've had this enormous sort of bare steepening 0:15:23.080 --> 0:15:25.760 going on with the tens going up to close to 0:15:25.800 --> 0:15:29.240 five percent thirties, nifiing the corter, et cetera. And in 0:15:29.240 --> 0:15:31.760 a way that that's not a bad thing if you 0:15:31.800 --> 0:15:34.720 want to slow the economy, but because that will undermine 0:15:34.760 --> 0:15:37.720 and is undermining risk assets, and it will help to 0:15:38.120 --> 0:15:39.840 tighten financial conditions overall. 0:15:40.080 --> 0:15:42.520 So that's the impact of what the Fed is doing. 0:15:42.960 --> 0:15:46.000 There is a risk though, that they run because you 0:15:46.040 --> 0:15:49.120 get people concerned about the as you mentioned earlier, the 0:15:49.440 --> 0:15:52.360 refinancing of the Treasury. You know, when they decide to 0:15:52.400 --> 0:15:54.920 issue longer dated debts that now it is coming in 0:15:54.960 --> 0:15:57.560 at much higher interest rates, and you start worrying about 0:15:57.560 --> 0:16:00.000 a vicious circle where if you can't reduce a debt 0:16:00.560 --> 0:16:03.840 so through spending cuts, well you've got another problem because 0:16:03.880 --> 0:16:06.480 your interest service costs are going up at the same time. 0:16:07.000 --> 0:16:09.240 And that's kind of get people worried about this idea 0:16:09.680 --> 0:16:12.480 that Treasury isn't going to be able to sustainably fund 0:16:12.560 --> 0:16:15.400 itself down the road, particularly when you get those sort 0:16:15.400 --> 0:16:17.440 of you know, bigger issues coming up, the structural issues 0:16:17.440 --> 0:16:19.880 coming up that will mean higher deficits. 0:16:20.040 --> 0:16:22.840 There's always been a sort of uncomfortable tension, especially now 0:16:22.840 --> 0:16:25.680 between the Treasury Department and the Federal Reserve, especially because 0:16:25.720 --> 0:16:29.000 the Treasury Department is helmed by the one and only 0:16:29.080 --> 0:16:31.160 Janet Yellen who used to head the FED. 0:16:31.360 --> 0:16:32.840 How much is a treasure you're going to. 0:16:32.760 --> 0:16:35.480 Try to game out the market and kind of give 0:16:35.480 --> 0:16:38.720 a helping hand to the Fed by not concentrating some 0:16:38.800 --> 0:16:41.640 of those debt sales in the longer end, sell tea 0:16:41.680 --> 0:16:45.400 bills and hold a pad and wait for things to normalize. 0:16:46.720 --> 0:16:49.680 Well, I mean, it's obviously a great question and issue. 0:16:49.720 --> 0:16:53.120 I mean, strictly speaking, I don't think Treasury really should 0:16:53.200 --> 0:16:56.640 gain things too much. You know, they're not really traders 0:16:56.640 --> 0:16:59.040 as such, and if they were, then you know, maybe 0:16:59.040 --> 0:17:02.080 God help us. I mean, the idea I think is is, 0:17:02.520 --> 0:17:06.080 you know, you do have rollover risk, so you know, 0:17:06.119 --> 0:17:09.359 no one really knows how quickly long term rates might 0:17:09.520 --> 0:17:12.399 might reverse, even if we go into some slowing you know, 0:17:12.400 --> 0:17:15.000 where is this sort of mutual rate It might you know, 0:17:15.119 --> 0:17:18.600 might be higher and maybe ten years trading around you know, five. 0:17:18.400 --> 0:17:19.879 Percent is the sort of new norm. 0:17:20.160 --> 0:17:22.560 So I think it wouldn't be appropriate for the Treasury 0:17:22.680 --> 0:17:24.960 to really try and game the markets or a near 0:17:25.040 --> 0:17:27.920 term and sort of second guests that short term rates 0:17:27.960 --> 0:17:30.000 are going to come crashing down and they'll be able 0:17:30.040 --> 0:17:34.800 to refinance themselves down the road by extending maturity later. 0:17:35.040 --> 0:17:37.480 So I think they'll they'll probably extend the duration. I 0:17:37.520 --> 0:17:40.480 think the estimates are kind of you know, you know, 0:17:40.480 --> 0:17:43.280 seem about right, this sort of one hundred and fourteen 0:17:43.320 --> 0:17:45.800 billion and putting it in coupons. And because of the 0:17:46.000 --> 0:17:47.840 announcement we had earlier in the week, they can cut 0:17:47.880 --> 0:17:52.280 bill supply bits. So that's our expectation and no gaining 0:17:52.320 --> 0:17:52.560 of it. 0:17:52.640 --> 0:17:54.440 Basically, a lot of people expect this to be a 0:17:54.480 --> 0:17:57.639 boring meeting, sibad or Jappa calling it a placeholder, Steven 0:17:57.720 --> 0:18:00.080 Linder saying, how many ways can you say we'll see? 0:18:00.160 --> 0:18:01.919 I mean, this is basically going to be a holding 0:18:02.000 --> 0:18:04.679 kind of pattern. And yet we see a dissonance growing 0:18:04.800 --> 0:18:09.680 where the market sees and escalating's chance of excelling, reaccelerating inflation. 0:18:10.160 --> 0:18:12.639 At the same time that the Feds kind of seeming. 0:18:12.280 --> 0:18:14.720 To subtly agree with Janet Yella and saying that yields 0:18:14.720 --> 0:18:15.680 are going to go back down. 0:18:16.160 --> 0:18:17.879 Do you think they're going to bridge that gap today? 0:18:19.040 --> 0:18:20.760 Well, they could do. I mean they've always got the 0:18:20.800 --> 0:18:22.000 option to. I mean that there are a couple of 0:18:22.040 --> 0:18:24.439 interesting things going on. I mean, obviously this sell off 0:18:24.480 --> 0:18:26.879 in the long end is very interesting, and I think 0:18:26.920 --> 0:18:31.520 they can definitely address that in the conference call and 0:18:31.600 --> 0:18:33.560 basically say that's doing some of the work for them 0:18:33.680 --> 0:18:36.360 and be a bit more optimistic. They can also be actually, 0:18:36.560 --> 0:18:38.679 even though inflation has been a bit sticky on the 0:18:38.760 --> 0:18:41.280