WEBVTT - Surveillance: BOJ Surprise with Lyngen 0:00:05.120 --> 0:00:09.200 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along 0:00:09.200 --> 0:00:13.200 with Jonathan Ferrell and Lisa Abramowitz. Daily we bring you 0:00:13.280 --> 0:00:18.600 insight from the best and economics, finance, investment, and international relations. 0:00:18.800 --> 0:00:23.840 To find Bloomberg Surveillance on Apple podcast, SoundCloud, Bloomberg dot Com, 0:00:23.920 --> 0:00:30.360 and of course on the Bloomberg terminal. We are thrilled 0:00:30.400 --> 0:00:32.000 at the quality of guests we have for you on 0:00:32.040 --> 0:00:35.720 this historic day. With the Bank of Japan capitulating towards 0:00:35.800 --> 0:00:39.120 a strategy like the Bank of England, the ECB and 0:00:39.159 --> 0:00:42.600 the Fed as well. Dominic Constant with us earlier, many 0:00:42.640 --> 0:00:45.080 people writing in an Hilarian in the nine o'clock hour, 0:00:45.200 --> 0:00:47.599 and now Ian Lincoln with us out of us right 0:00:47.680 --> 0:00:51.040 strategy at BEMO Capital Markets. The good news is he 0:00:51.120 --> 0:00:54.360 can't drust straight line. So Ben Jeffrey took the Technical 0:00:54.400 --> 0:00:58.600 Analysis award from Institutional Investor and his colleague Lincoln picked 0:00:58.640 --> 0:01:02.120 up all the other pieces economics and strategy in the 0:01:02.160 --> 0:01:04.840 fixed income space. Ian, what did you write this morning? 0:01:04.959 --> 0:01:09.200 First of all, congratulations on the I I love fest. Uh, 0:01:09.520 --> 0:01:12.399 you've wanted I think as many times is ed Hyman. 0:01:12.480 --> 0:01:14.600 And you're a little bit younger I want you to 0:01:14.760 --> 0:01:18.880 explain to us your first blush of this historic moment. Well, 0:01:18.920 --> 0:01:21.800 thanks for congratulations, Tom, I appreciate that. In terms of 0:01:21.840 --> 0:01:24.440 the Bank of Japan, I think the most surprising aspect 0:01:24.520 --> 0:01:28.280 of it from our perspective was, yes, the timing, but 0:01:28.440 --> 0:01:30.960 to some extent that they lasted this long. When we 0:01:31.000 --> 0:01:33.039 think about what the rest of the world has been 0:01:33.040 --> 0:01:37.320 engaged in over the course of it's been collective tightening, 0:01:37.600 --> 0:01:40.920 coincidence perhaps and not coordinated. But the thank the fact 0:01:40.920 --> 0:01:43.120 of the matter is that Bank of Japan is now engaged. 0:01:43.240 --> 0:01:46.600 I stole from the foreign exchange space being capital markets 0:01:46.600 --> 0:01:49.680 pretty darn good there as well. With Greg Anderson. You know, 0:01:49.680 --> 0:01:55.160 I I look at the sterilized nature of this. We're 0:01:55.200 --> 0:01:59.240 gonna make the move, but we're going to increase bond purchases. 0:01:59.600 --> 0:02:03.080 Twenty five explained that. But to us and what that 0:02:03.120 --> 0:02:06.280 means for global finance, I think that their decision to 0:02:06.480 --> 0:02:11.480 increase the bond purchases was them implicitly acknowledging that someone's 0:02:11.520 --> 0:02:14.240 going to try to push that fifty basis point upper 0:02:14.240 --> 0:02:16.560 bound and to do that, they're going to need to 0:02:16.560 --> 0:02:18.760 have the cash there to defend it. So that move 0:02:18.840 --> 0:02:20.920 was a bit more intuitive than I think that the 0:02:20.960 --> 0:02:23.799 headline might have otherwise implied. How sustainable do you think 0:02:23.840 --> 0:02:26.760 that says? So? I think that the Bank of Japan 0:02:26.840 --> 0:02:30.160 is going to run up against the reality of needing 0:02:30.200 --> 0:02:33.320 to be more aggressive than they have been as the 0:02:33.480 --> 0:02:36.840 two thousand and twenty three calendar unfolds. But I don't 0:02:36.840 --> 0:02:38.480 think it's going to be as quick as the market 0:02:38.480 --> 0:02:40.720 would like to see. We're hearing Jennie's out of the bottle. 0:02:40.880 --> 0:02:43.960 Jennie's out of the bottle. This gets tested, new confnant 0:02:44.000 --> 0:02:45.680 comes in, They're gonna have to make another move. How 0:02:45.720 --> 0:02:47.639 would you think about and new confin to come again? 0:02:47.760 --> 0:02:51.359 Corronto exits, April happens, What does that look like? From 0:02:51.440 --> 0:02:55.560 what I understand, the front runner at the to replace 0:02:56.440 --> 0:02:59.880 for the Bank of Japan is very much in keeping 0:03:00.280 --> 0:03:03.680 with the overall mentality of Banka Japan. So I wouldn't 0:03:03.680 --> 0:03:06.679 expect any massive policy shifts. But even if that were 0:03:06.720 --> 0:03:09.960 the case, the groundwork has already been laid for a 0:03:10.000 --> 0:03:12.160 bit more of a hawkish move, and so I wouldn't 0:03:12.200 --> 0:03:15.600 be surprised to see out of negative rates sometime in 0:03:15.639 --> 0:03:17.840 the first half of the Bank of Japan. Your shop 0:03:17.880 --> 0:03:21.320 has the advantage of GALLO, and he's reporting into Greg Anderson, 0:03:21.320 --> 0:03:26.280 who's just flat out legendary in tertiary foreign exchange analysis. 0:03:26.560 --> 0:03:29.400 I don't know if you've spoken to Mr Anderson this morning, 0:03:29.800 --> 0:03:33.240 but the idea of a presumed glide path of strong 0:03:33.360 --> 0:03:38.280 yen from one fifty two modeling out even lower. Does 0:03:38.320 --> 0:03:40.920 he have a conviction that that glide path can sustain 0:03:41.280 --> 0:03:45.480 or is it overplayed? I think that his biggest takeaway 0:03:45.520 --> 0:03:50.560 is that momentum has shifted and that the progress toward 0:03:51.120 --> 0:03:54.600 the ultimate goal is going to be on autopilot to 0:03:54.640 --> 0:03:56.840 some extent. So I think there's a high conviction on 0:03:56.880 --> 0:04:00.440 the glidepath. Will they have the economic might, the animal 0:04:00.480 --> 0:04:04.240 spirit of nominal or inflation adjusted that dynamic of inflation 0:04:04.280 --> 0:04:07.360 of real g d P to allow for these trends 0:04:07.400 --> 0:04:12.119 to occur and the unwind of their debt ownership, well, 0:04:12.160 --> 0:04:15.080 I do think that the trajectory that's currently in place 0:04:15.120 --> 0:04:19.359 suggests that they'll be very little problem getting there, although 0:04:19.480 --> 0:04:22.360 ultimately we need to see how the first quarter shapes 0:04:22.480 --> 0:04:25.800 up in Japan. We need to see what the impact 0:04:25.880 --> 0:04:28.680 from a reversal of the end, if and when it 0:04:28.760 --> 0:04:32.520 eventually occurs, is going to be for inflation in Japan. 0:04:32.600 --> 0:04:34.920 Have you changed the treasury coll off the back of this, 0:04:35.040 --> 0:04:37.680 what does it make for the treasury market? We haven't 0:04:37.720 --> 0:04:39.839 changed your call. We still think ten year yields in 0:04:39.920 --> 0:04:43.360 two thousand twenty three three, I think that's a relatively 0:04:43.440 --> 0:04:47.040 benign forecast given where we are in the overall interest 0:04:47.120 --> 0:04:49.640 rate cycle. And the one thing that I would emphasize 0:04:49.640 --> 0:04:51.880 there is, at the end of the day, that's a 0:04:51.920 --> 0:04:56.320 FED credibility call because we have break evens compressing back 0:04:56.360 --> 0:04:58.719 to levels that were in place prior to the pandemic. 0:04:58.880 --> 0:05:01.040 And the biggest risk is that the FED, which we 0:05:01.080 --> 0:05:03.640 don't think they'll do this, but would be that the 0:05:03.640 --> 0:05:05.760 FED gave up the two percent target and we just 0:05:05.800 --> 0:05:07.360 don't see the path for them to do that. Well, 0:05:07.360 --> 0:05:09.880 that's a longer conversation for another time. So three on 0:05:10.040 --> 0:05:12.880 tens talk to me about where that is relative to 0:05:12.960 --> 0:05:15.240 fend funds and the front end of the curve. I 0:05:15.240 --> 0:05:17.799 think that the biggest surprise for two thousand and twenty 0:05:17.839 --> 0:05:21.200 three is going to be the fact that both two 0:05:21.240 --> 0:05:25.160 and ten year yields can trade well below effective FED funds. 0:05:25.200 --> 0:05:29.279 We've already seen that start that typically doesn't occur until 0:05:29.360 --> 0:05:32.400 we're later into the cycle and the FED has reached 0:05:32.480 --> 0:05:34.279 terminal and terminal has been in place for a while, 0:05:34.600 --> 0:05:36.680 so we actually don't see any rate cuts in two 0:05:36.720 --> 0:05:40.000 thousand and twenty three, but we see deeper inversion of 0:05:40.160 --> 0:05:43.640 funds versus twos and funds versus tens. Did you just 0:05:43.720 --> 0:05:46.840 say that the terminal rate is wherever it is in 0:05:46.880 --> 0:05:50.160 both twos and tens will be below that price up 0:05:50.320 --> 0:05:53.240 yield down? Absolutely, that's what's in place right now. And 0:05:53.279 --> 0:05:55.160 you also you also implied it could be as much 0:05:55.160 --> 0:05:58.080 as two basis points, and it historically has precisely. So 0:05:58.160 --> 0:06:01.440 what's your path, what your outlier on where the tenure 0:06:01.520 --> 0:06:05.400 yield could be? So if I'm wrong, I'm wrong in 0:06:05.560 --> 0:06:09.440 one of two ways. One is I have underestimated the 0:06:09.440 --> 0:06:14.760 Fed's ability to keep policy on hold well into two 0:06:14.839 --> 0:06:17.400 thousand and twenty four. We're assuming they make it through 0:06:17.440 --> 0:06:20.560 twenty three twenty four. They needed to adjust and they 0:06:20.560 --> 0:06:23.640 started laying the groundwork for that. That would imply that 0:06:23.680 --> 0:06:26.919 there could be more upside, obviously in the front end 0:06:26.960 --> 0:06:29.719 of the curve. The flip side being that we've underestimated 0:06:29.760 --> 0:06:32.159 the extent of the recession that we might see, we're 0:06:32.200 --> 0:06:35.320 looking for a more pedestrian, benign version of soft landing. 0:06:35.480 --> 0:06:37.120 But if we got that wrong, then you could see 0:06:37.160 --> 0:06:40.760 to handle on tenure yields relatively easily. And I think 0:06:40.760 --> 0:06:43.680 you're brilliant. I've never seen someone so calmly explained something 0:06:44.000 --> 0:06:48.120 that is actually a monster coldeerious, a serious, serious cold 0:06:48.520 --> 0:06:50.920 and in sub common bat explaining, you know. And and 0:06:51.279 --> 0:06:53.799 I had the great joy of knowing Fred we Gold 0:06:53.800 --> 0:06:56.200 when he was at Bloomberg and of course at the 0:06:56.240 --> 0:06:59.080 Walsters Journal. And these beauty contests are not a small 0:06:59.120 --> 0:07:02.320 matter in stitutional investor in the Wall Street Journal U 0:07:02.440 --> 0:07:05.160 the way they do the equity market contest, this is 0:07:05.200 --> 0:07:07.359 really really hard. And part of it is not only 0:07:07.440 --> 0:07:10.720 making a call. It's a delivery in Lincoln, does it? 0:07:10.880 --> 0:07:12.920 I believe it's in English? Is what we call it 0:07:16.640 --> 0:07:29.400 capital markets. Our team has been working since one am 0:07:29.480 --> 0:07:31.760 on this in London, in New York, and we are 0:07:31.920 --> 0:07:35.280 thrilled for Global Wall Street now to bring you Dominic Constant. 0:07:35.320 --> 0:07:39.000 He's head of macro strategy at the Japanese bank Missooo. 0:07:39.240 --> 0:07:41.920 He is at Missooi America's I want to make clear 0:07:42.000 --> 0:07:45.280 that he is not speaking for the management of Missooo 0:07:45.720 --> 0:07:48.360 Bank that would be inappropriate for those of you in 0:07:48.360 --> 0:07:52.480 the United States. Missooo is nine roll up of three 0:07:52.480 --> 0:07:58.200 banking giants in Japan. Missoo translate as golden ears of rice, 0:07:58.680 --> 0:08:02.120 and all ears at Missoo Tokyo are attuned to the 0:08:02.160 --> 0:08:05.840 monetary policy of their Japan. Dr Constant, thank you so 0:08:05.960 --> 0:08:10.080 much for being with us today, Dominique. It's just as 0:08:10.120 --> 0:08:14.400 simple as this. Given the zombie nature of the Japanese 0:08:14.400 --> 0:08:19.880 economy for twenty years, the dearth of nominal GDP, the 0:08:20.000 --> 0:08:25.160 bouts of disinflation and outright deflation. How constrained is this 0:08:25.280 --> 0:08:29.080 Bank of Japan forward? How many degrees of freedom have 0:08:29.240 --> 0:08:33.920 they lost in the lost decade? Well, I mean they 0:08:33.920 --> 0:08:37.800 are clearly constrained in terms of the idea that they're 0:08:37.800 --> 0:08:40.840 gets a sort of normalized, you know policy in any 0:08:40.840 --> 0:08:43.640 way that we've seen it elsewhere. UM. But I think 0:08:43.679 --> 0:08:47.760 the time complearly the the the idea of the UH, 0:08:48.880 --> 0:08:51.680 the targeting the tenure yield and having negative interest rates, 0:08:51.840 --> 0:08:54.680 those those days are numbers. The market is now pricing 0:08:54.720 --> 0:08:57.840 for positive interest rates next year. UH. And this is 0:08:57.960 --> 0:09:01.000 basically is letting the genie out for the bottle. UH. 0:09:01.040 --> 0:09:04.079 And I think it's something that we all expected, but 0:09:04.160 --> 0:09:07.280 the timing was obviously unexpected. I mean, the bj could 0:09:07.320 --> 0:09:09.480 have done this earlier than the year, when the end 0:09:09.600 --> 0:09:11.640 was under a lot of pressure. That was the obvious 0:09:11.640 --> 0:09:13.680 time to do it. I mean we were pricing for 0:09:13.960 --> 0:09:17.559 positive rate hikes or positive rates I should say, at 0:09:17.559 --> 0:09:20.280 the front end back in June of this year. So 0:09:20.400 --> 0:09:22.800 the idea is that they brought this forward. They're doing 0:09:22.840 --> 0:09:26.520 it before Corona is obviously stepping down. I guess there 0:09:26.559 --> 0:09:30.079 there's certain reasons why they're bringing it forward, um related 0:09:30.160 --> 0:09:33.200 to the fact that perhaps they see an opportunity to 0:09:33.280 --> 0:09:35.840 do it now, better to do that before the Fed 0:09:35.960 --> 0:09:39.560 is actually reversing course on their own rates past, perhaps 0:09:39.800 --> 0:09:42.160 as as priced by the market. I think that's that's 0:09:42.160 --> 0:09:45.000 a logic behind some of this decision to go earlier. 0:09:45.200 --> 0:09:48.600 If there is a bet of disinflation, two bouts of 0:09:48.720 --> 0:09:52.720 US inflation, is stasistics better even in the United Kingdom, 0:09:52.760 --> 0:09:56.160 a little bit of a whisper of better inflation. Is 0:09:56.200 --> 0:09:58.560 this a bet by the Bank of Japan at three 0:09:58.600 --> 0:10:03.920 point seven percent nationwide CPI can come in. I think 0:10:03.920 --> 0:10:06.160 that's that's very interesting. I mean, basically, you know, we 0:10:06.200 --> 0:10:09.679 are seeing Japanese inflation rising now is going to be 0:10:09.760 --> 0:10:14.720 around four percent. The focus on the inflation from our 0:10:15.080 --> 0:10:17.600 you know, from our Japanese colleague has been really around 0:10:17.600 --> 0:10:20.880 the wage side to it. So the large wage negotiations 0:10:21.160 --> 0:10:23.920 start taking place really in spring next year, so that 0:10:24.280 --> 0:10:26.960 some of the logic called delaying any move was to 0:10:27.120 --> 0:10:29.840 see kind of how those wage negotiations lets go. Because 0:10:30.280 --> 0:10:32.520 the inflation you're seeing now in Japan is really very 0:10:32.600 --> 0:10:35.280 much important from the you know, the weakness in the 0:10:35.520 --> 0:10:38.320 end uh and uh. And it's the extent that that 0:10:38.400 --> 0:10:41.680 becomes self fulfilling because say, wages are allowed to rise. 0:10:41.800 --> 0:10:45.240 That's the big uncertainty. So my guess is UH, one 0:10:45.320 --> 0:10:48.040 read from the decision to move earlier is there are 0:10:48.040 --> 0:10:51.440 clearly is against be an expectation now that you are 0:10:51.480 --> 0:10:55.400 going to see some wage growth finally, some decent wage growth, 0:10:55.559 --> 0:10:59.000 at least in line perhaps with inflation exactly the doctor 0:10:59.040 --> 0:11:05.200 Coustom you've written must read essays unquantitative easing and quantitative tightening. 0:11:05.880 --> 0:11:08.440 And then there's a government with fifty to eight percent 0:11:08.600 --> 0:11:13.600 ownership of domestic bonds, a government looking at a fiction 0:11:13.679 --> 0:11:16.400 of a debt to GDP ratio out near two D 0:11:16.600 --> 0:11:20.360 thirty two and fifty. Do you have a confidence that 0:11:20.480 --> 0:11:26.319 Japan can unwind those two extreme positions. Yeah, I mean, 0:11:26.320 --> 0:11:28.200 to be honest, we do. I mean and and and 0:11:28.640 --> 0:11:30.960 the reason the reason it's obviously if there was a 0:11:31.000 --> 0:11:35.600 really a shock uh widening in the band or you 0:11:35.720 --> 0:11:37.840 get just getting rid of the band and allowing as 0:11:37.880 --> 0:11:40.040 ort of free fall in the in the market, then 0:11:40.200 --> 0:11:42.840 then obviously that would have raised concerns, uh, you know, 0:11:42.920 --> 0:11:45.480 for for the you know, the debt holdings of Japanese 0:11:45.480 --> 0:11:48.640 financial institutions and how well hedged they've been. I think 0:11:48.720 --> 0:11:51.080 over the course of this year probably hedging has been 0:11:51.200 --> 0:11:54.679 actually you know, put in place quite actively. We also 0:11:54.760 --> 0:11:56.760 know that, for example, in the throne bond holding, the 0:11:57.240 --> 0:12:01.200 Japanese institutions have been very cautious around the interests that 0:12:01.280 --> 0:12:03.679 the increased in interest rates globally. So I think the 0:12:03.800 --> 0:12:06.839 concern around sort of financial stability related to a sort 0:12:06.880 --> 0:12:10.280 of shock move in interest rates has has diminished in 0:12:10.320 --> 0:12:12.280 recent months. And the fact that you know, they are 0:12:12.320 --> 0:12:14.320 only moving twenty five days points and it's not a 0:12:14.440 --> 0:12:16.839 you know, it's not massive, and the back end has 0:12:16.840 --> 0:12:20.040 obviously moved a lot before anyway, So I think that perspective, 0:12:20.160 --> 0:12:23.320 you know, um, you know, there's relatively more comfort uh 0:12:23.640 --> 0:12:27.160 from you know, from this unwind and constitive uh easing. 0:12:27.400 --> 0:12:31.400 I think that the issue fundamentally though for Japanese finance institutions, 0:12:31.400 --> 0:12:33.160 because they need to obviously get their sort of loan 0:12:33.240 --> 0:12:36.800 deposit ratios are back in order and sort of reduced 0:12:36.800 --> 0:12:39.720 their alliance on g GB holdings as as a large 0:12:39.760 --> 0:12:42.319 part of their the assets side of their balance sheets. 0:12:42.320 --> 0:12:44.760 And you know, that's going to take a long time. Uh. 0:12:44.800 --> 0:12:47.080 And I think you know, you know, I I think, 0:12:47.559 --> 0:12:50.320 you know, normalizing interest rates at the front end in 0:12:50.320 --> 0:12:53.760 a sustainable way because inflation is higher and nominal growth 0:12:53.840 --> 0:12:56.640 is basically more sustainably higher, that's gonna be the way 0:12:56.640 --> 0:12:59.800 in which the Japanese banks will restructure their balance sheets 0:12:59.800 --> 0:13:01.640 going board. It's going to take a while. You know, 0:13:01.679 --> 0:13:03.400 we're not going you know, we're not having a massive 0:13:03.520 --> 0:13:06.439 rise in interest rate. I think fair value and JGBS, 0:13:06.480 --> 0:13:09.280 according to our JGB structs, is around teenty five based 0:13:09.280 --> 0:13:11.520 points in ten years. So you know, you've basically done 0:13:11.559 --> 0:13:14.200 half of that move basically by today, and and no 0:13:14.280 --> 0:13:16.920 doubt we'll you know, get the other half in due course, 0:13:17.280 --> 0:13:19.400 but probably not not until that the bj A has 0:13:19.400 --> 0:13:21.760 actually lifted the overnight race as well. There will be 0:13:21.800 --> 0:13:23.800 a lot of people waking up this morning thinking, well, 0:13:23.800 --> 0:13:25.760 what does this mean for me? Why should I care? 0:13:26.080 --> 0:13:30.439 Don What does this mean for global markets outside of Japan? Well, 0:13:30.840 --> 0:13:32.920 I mean that's really important, and and you know we 0:13:32.960 --> 0:13:35.000 all had that thought is like oh my god, you 0:13:35.040 --> 0:13:37.040 know sort of what what does what sense is actually 0:13:37.040 --> 0:13:41.000 need global ones? The first thing that obviously occurs to 0:13:41.640 --> 0:13:44.040 a lot of people is that we've already sold off 0:13:44.080 --> 0:13:49.280 global bonds massively without the Japanese markets really being that involved. 0:13:49.520 --> 0:13:52.960 So the old days, when Japan would move aggressively, it 0:13:53.000 --> 0:13:55.200 was often seen as a bit of a harbinger for 0:13:55.600 --> 0:13:58.079 a global bond sell off, and that was all related 0:13:58.120 --> 0:14:00.600 to things like the yen you know, repatriot Asian trade, 0:14:00.720 --> 0:14:04.120 which related to a Japanese holdings of foreign bonds that 0:14:04.200 --> 0:14:07.359 they basically needed to bring back because they were less attractive. 0:14:07.760 --> 0:14:10.960 They're heading costs that kind of undermined their attractives, etcetera. 0:14:11.440 --> 0:14:14.199 And so that was always concerned. What we've seen really 0:14:14.240 --> 0:14:17.840 this year is the marginal flows in Japan have obviously 0:14:17.880 --> 0:14:21.320 been zero actually negative. Maybe next sellers of global bonds 0:14:21.760 --> 0:14:26.040 quite know, quite impressively, so um and um. That's partly 0:14:26.080 --> 0:14:29.440 because as the bond market has sold off globally with 0:14:30.160 --> 0:14:34.360 the ECB and the Fed raising rates and relatively aggressively. Uh, 0:14:34.400 --> 0:14:36.560 you know, it doesn't it's not attractive for them to 0:14:36.600 --> 0:14:40.840 be overseas. So my guess is that the impact basically 0:14:40.960 --> 0:14:43.440 is gonna be somewhat much more muted now and so 0:14:43.480 --> 0:14:45.280 far that's already been the case. And it's just that, 0:14:45.440 --> 0:14:48.560 you know, these guys have not been exposed as as 0:14:48.600 --> 0:14:50.920 as they might have been in previous titles. So yes, 0:14:50.960 --> 0:14:53.880 it's a it's a it's a small negative called global bonds. 0:14:54.000 --> 0:14:55.760 But it shouldn't see you know, we shouldn't see a 0:14:55.840 --> 0:14:58.080 sort of you know, a kind of collapse in bond 0:14:58.080 --> 0:15:00.840 markets higher you know, yields higher, uh, you know, on 0:15:00.840 --> 0:15:03.760 the back of this normanization. That would be my my 0:15:03.760 --> 0:15:06.160 my initial taken were going back ten years when we 0:15:06.240 --> 0:15:09.080 used to look at that data for Japanese investors and 0:15:09.120 --> 0:15:11.400 where their money was going, how many bunds they've bought 0:15:11.520 --> 0:15:15.400 a board. Are we looking at that every month again? Yeah? 0:15:15.560 --> 0:15:17.040 I mean we can do, but I mean they've been 0:15:17.080 --> 0:15:20.000 really flat line now for for a while certainly this year, 0:15:20.080 --> 0:15:22.080 so we can definitely sort of look at that. I mean, 0:15:22.080 --> 0:15:24.360 there are there are important I think that you know, 0:15:24.360 --> 0:15:26.760 there are there are important things also consider. I mean, 0:15:26.800 --> 0:15:31.720 the the attractiveness of UM, the JGB market relative to uh, 0:15:31.760 --> 0:15:34.800 you know, treasuries UM, you know, on a hedge basis 0:15:34.920 --> 0:15:36.880 is still quite you know, it's still quite impressive. So 0:15:36.880 --> 0:15:39.680 I think we know, basically the Japanese investors have are 0:15:39.720 --> 0:15:42.520 being encouraged to sort of stay at home relatively speaking, 0:15:42.720 --> 0:15:44.400 which is one of the reasons why you could argue 0:15:44.440 --> 0:15:47.400 that b O J can have a fairly orderly exit 0:15:47.480 --> 0:15:50.200 at this stage because you know, jgbs are you know, 0:15:50.600 --> 0:15:54.080 attractive and now even more attractive, so so you know, yeah, 0:15:54.120 --> 0:15:55.480 I mean I think we can definitely sort of look 0:15:55.560 --> 0:15:57.360 at that data but in the back, but I don't 0:15:57.360 --> 0:15:59.880 think it's the same, you know, with a slightly different world, 0:16:00.480 --> 0:16:03.080 partly because of the you know, the different speed with 0:16:03.120 --> 0:16:06.600 which these central banks have been moving. Without a doubt, Donic, 0:16:06.760 --> 0:16:10.160 this was awesome thanks to us today, Dominic Constant of Missouri, 0:16:10.320 --> 0:16:16.920 just have wonderful line. We've got a fantastic guest around 0:16:16.960 --> 0:16:18.520 the table with us this morning. Happy to say that 0:16:18.560 --> 0:16:21.680 Cassy Barrow of JP Morkan Asset Management joined US fixed 0:16:21.680 --> 0:16:24.120 income portfolio manager. Cassy kind of go to that question. 0:16:24.160 --> 0:16:26.120 I think they go to question in the morning. Is 0:16:26.160 --> 0:16:29.240 it a step towards so called normalization or just resetting 0:16:29.240 --> 0:16:31.680 the policy stance for something more sustainable. Which one is it? 0:16:32.160 --> 0:16:35.000 So we did feel that the Bank of Japan's policy 0:16:35.240 --> 0:16:39.080 was unsustainable. It was time for a move by them. 0:16:39.680 --> 0:16:41.960 We think that it was important that they did it now. 0:16:42.400 --> 0:16:45.840 They could have waited until January, but they didn't. And 0:16:45.920 --> 0:16:49.200 so what we see is a policy rate or a 0:16:49.240 --> 0:16:52.440 ten year yield around of fifty basis points is actually 0:16:52.480 --> 0:16:55.360 fairly consistent with the ten ure yield that that we 0:16:55.440 --> 0:16:58.120 have right now. So we don't necessarily think that this 0:16:58.200 --> 0:17:00.920 is a huge story for the treasury market. Where we 0:17:00.960 --> 0:17:03.880 are expecting to see a lot of flows is in Europe, 0:17:03.920 --> 0:17:08.320 So we do expect European bonds to sell off on this. 0:17:08.840 --> 0:17:11.159 That's where you're going to get that repatriation trade from 0:17:11.160 --> 0:17:13.639 the carriage. So this is the Japanese demand that you 0:17:13.640 --> 0:17:15.520 think is going to wind the Japanese demand that was 0:17:15.560 --> 0:17:18.199 going into European bond markets. Is that a problem for 0:17:18.200 --> 0:17:20.440 buttons A problem for the Italian bond market. Where is 0:17:20.480 --> 0:17:23.399 it the bigger problem? Well, I think in general we've 0:17:23.400 --> 0:17:26.080 seen upward pressure and yields across Europe. And I think 0:17:26.080 --> 0:17:29.320 it's really interesting that you had the Fed try to 0:17:29.440 --> 0:17:33.080 be as hawkish as it possibly could last week and 0:17:33.119 --> 0:17:36.439 they weren't able to tighten financial conditions. And finally you 0:17:36.480 --> 0:17:37.800 have the E c B and the b O G, 0:17:38.160 --> 0:17:40.760 B O J come to the rescue and get financial 0:17:40.760 --> 0:17:44.680 conditions to tighten. The Fed is not going at it alone. Um. 0:17:44.720 --> 0:17:47.640 I think that that is actually a positive for bond 0:17:47.680 --> 0:17:51.359 investors next year because global inflation is going to come 0:17:51.359 --> 0:17:55.400 down and we're seeing these yield rises as an opportunity 0:17:55.480 --> 0:17:59.800 to buy bonds and to leg into long duration positions. 0:18:00.080 --> 0:18:03.720 Have the great fortune of sitting across a desk from 0:18:03.760 --> 0:18:07.680 a guy who I think saw the financing World War One. 0:18:07.760 --> 0:18:11.160 But Michael, I mean, it's just it's amazing what you're dealing. 0:18:11.200 --> 0:18:13.880 It was both a compliment and wasn't it was. We're 0:18:13.880 --> 0:18:19.040 working on thank you. The bottom line is everybody watching 0:18:19.040 --> 0:18:23.679 and listening. He's seen a minus thirteen percent Bloomberg total return. 0:18:23.840 --> 0:18:28.200 It is now negative six percent annualized two years now 0:18:28.280 --> 0:18:32.080 six percent down six percent down? How long does it 0:18:32.119 --> 0:18:34.879 take for me to get back to even if I'm 0:18:34.960 --> 0:18:37.680 running an adult bond portfolio? Do you and Bob look 0:18:37.720 --> 0:18:41.080 at it is a two year exercise? Or dare I say? 0:18:41.240 --> 0:18:44.119 Is it a five year exercise? Right? So, I think 0:18:44.160 --> 0:18:47.640 the question you're asking is very important because we talk 0:18:47.680 --> 0:18:49.920 a lot about what's going to happen in the next 0:18:49.960 --> 0:18:53.359 one week, two weeks, three months. But when you look 0:18:53.400 --> 0:18:56.040 at a let's just say twelve month horizon and what 0:18:56.160 --> 0:18:59.840 you can potentially get from a bond portfolio over the 0:18:59.840 --> 0:19:02.400 next twelve months, Let's just look at the global aggregate. 0:19:02.440 --> 0:19:05.359 For example, the yield is around five percent on a 0:19:05.600 --> 0:19:08.919 US dollar hedge basis and if you have let's just 0:19:08.960 --> 0:19:13.280 say a modest fifty basis point rally and yields over 0:19:13.320 --> 0:19:15.919 the course of the next year, you're getting high single 0:19:15.960 --> 0:19:19.399 digit returns on that portfolio next year. So that is 0:19:19.440 --> 0:19:22.440 why kind of across the board you're hearing people say 0:19:22.760 --> 0:19:24.760 not just bonds are back, but as we like to say, 0:19:24.840 --> 0:19:28.440 fixed incomes fashionable again, fixed in comes fashionable home. Would 0:19:28.440 --> 0:19:31.640 you make of that? I'm here in the equity guys 0:19:31.720 --> 0:19:34.879 talk at fixed in come along. Yeah, yeah, I'll go 0:19:35.000 --> 0:19:38.160 with that. You know, you see it behaviorally and culturally. Folks, 0:19:38.160 --> 0:19:40.280 when you're walking down the street in New York, that's 0:19:40.320 --> 0:19:43.680 like eighteen months to get my portfolio back to zero, 0:19:43.800 --> 0:19:45.199 is what I'm looking at. Where do you do that 0:19:45.240 --> 0:19:47.600 across the continuum? Do you use full faith and credit? 0:19:47.680 --> 0:19:49.439 Is that I G value or do you have to 0:19:49.440 --> 0:19:51.880 go to the land of Brammo and distressed. We are 0:19:51.960 --> 0:19:55.120 sticking with high quality UM that has Did you see 0:19:55.160 --> 0:19:58.679 the TV show Brammo Barrow? It would be just it 0:19:58.680 --> 0:20:01.160 would be just with the oil all of LASA back 0:20:01.160 --> 0:20:03.000 in the day. Yeah, but Brim o'bara would be a 0:20:03.040 --> 0:20:06.320 great one hour fixed income distressed at you know, be 0:20:06.320 --> 0:20:09.000 a great show. Okay, it would be good. Excuse me, 0:20:09.040 --> 0:20:12.280 I interrupted. Absolutely, I'm just letting to carry on the 0:20:12.680 --> 0:20:16.960 right to ignore it. So we are focusing on high 0:20:17.040 --> 0:20:19.800 quality UM. You know, when when we look across the 0:20:19.840 --> 0:20:23.480 opportunity set, with risk free rates significantly higher, you don't 0:20:23.560 --> 0:20:26.879 have to extend into those sectors UM to get the 0:20:26.920 --> 0:20:29.640 yield that you want to. So UM, we're thinking about 0:20:29.680 --> 0:20:33.160 agency mortgages, We're thinking about investment grade credit, We're thinking 0:20:33.200 --> 0:20:36.840 about securitized credit that's higher up in the capital structure. Okay, 0:20:36.840 --> 0:20:39.560 I haven't answer this question. I think in like seventeen years, 0:20:39.680 --> 0:20:43.480 what does issuance do? What does i G quality do? 0:20:43.480 --> 0:20:45.960 Do they mean all the CFOs were down, we could 0:20:46.000 --> 0:20:49.439 low yields the loving it? How do they reset? And 0:20:49.480 --> 0:20:53.680 will JP Morgan see issuance in the next twelve months? 0:20:54.080 --> 0:20:56.000 So they are going to have to continue to issue, 0:20:56.080 --> 0:20:59.719 but generally banks have to or banks as well as 0:20:59.760 --> 0:21:02.760 the most of the i G universe have termed out 0:21:02.840 --> 0:21:06.439 their balance sheets and they've made themselves put themselves in 0:21:06.480 --> 0:21:11.000 a very good position high cash balances. Uh, they've extended 0:21:11.000 --> 0:21:13.560 out that debt um and they've put themselves in a 0:21:13.600 --> 0:21:17.120 position where going into an expected recession, we've we've never 0:21:17.119 --> 0:21:19.520 seen corporate fundamentals to be better. Can I finish on 0:21:19.520 --> 0:21:21.640 the yold code then? Because when I said lost spike 0:21:21.680 --> 0:21:23.840 to Bob, he thinks we're gonna get some real spread 0:21:23.840 --> 0:21:26.560 widening in a recession on high yield. Can we finish that? 0:21:26.600 --> 0:21:29.920 What are your thoughts on that? Now? We are still 0:21:29.920 --> 0:21:34.400 expecting that spreads are going to continue to widen here, 0:21:34.480 --> 0:21:37.560