00:00Ira, I want to come in, though, first with you, your read on what's happening in the U.S. rates
00:05market, in the global rates market, and how connected they really are, or not.
00:10Well, they're extremely connected, and I would say that one of the big reasons why we do have this rise
00:16in 30-year U.S. Treasuries is there's alternatives now for people to buy other bonds.
00:23So Japanese government bonds, when you hedge it back into certain currencies, winds up yielding more than U.S. Treasuries.
00:29So now the Treasury yields have to compete with yields from other countries.
00:34So that creates this very high correlation between a lot of the developed market government bonds.
00:40And a lot of the things that you just said, Carol, things like fiscal issues, not only here but abroad
00:45as well, right, in Japan, Germany, the U.K. in particular now,
00:49you wind up having this situation where people are worried about the long-term health of these developed bond markets,
00:55and that's all feeding in to this frenzy of, I'm not going to say it's long in selling,
01:00because I have yet to meet anyone and talk to anyone who's actually selling, but they're not necessarily buying,
01:06which means that, you know, the governments who are selling just have to attract people by issuing at higher yields.
01:12David, let's bring you in here. Do you want to build on that?
01:15Yeah, because interestingly, competition is coming also from the corporate side now.
01:20That's what's happening with the AI sort of financing wave, right?
01:24So we're seeing, like, a lot of corporates issuing tons of debt on the long end of the curve,
01:30so essentially long-term maturities, which is providing competition to the long end of the Treasury curve.
01:35Essentially, portfolio managers have more to choose from,
01:38and that leads to sometimes, you know, selling treasures to buy corporates.
01:41What's the comp in corporate bonds that we've seen like this? Is there a comp?
01:49I think it is unprecedented, quite frankly.
01:51Like, we are seeing, like, record levels in terms of issuance.
01:54Like, we are at $1.5 trillion only in the investment-grade market so far,
01:59and that's already, like, 30% more than last year.
02:03There's wide expectations of that.
02:0430% more than last year. Go ahead.
02:06There's wide expectations of, like, essentially record issuance levels this year,
02:11more than even in 2020 when rates were very low.
02:14So, yes, it's unprecedented.
02:16I don't know. You know, IRISO, all right, if they're not selling but they're not buying,
02:20that's still a problem.
02:22Yeah, it is, and I just want to go back to say that, you know,
02:25in terms of the long investment-grade corporate bonds, which, you know, are competing,
02:30and certainly the AI issuance and other long bond issuance is certainly competing at some level,
02:36and there are people who want to hedge their interest rate risk,
02:38so that is people, you know, selling long ultra-bond futures or shorting treasuries against it as well.
02:44We have seen, though, this type of issuance as terms of percentage of the market before.
02:48If you go back to the telecom boom in the late 90s, early 2000s,
02:53you saw a lot of long-term corporate bonds.
02:56I was a corporate bond strategist, you know, several decades ago now, I hate to say.
03:02We've all been doing this a long time, Ira.
03:04We get you. We get you.
03:06So when you have a lot of issuance, particularly when it changes quickly, right?
03:11So in terms of, you know, people, you know, selling a lot of five- and ten-year debt,
03:15and then suddenly they decide to go out the curve because they either have a funding need to go out
03:20that far,
03:21or they don't want to have a maturity wall in a couple of years, you know, that can change the
03:26tone, certainly.
03:28But when it comes to treasuries, it's, you know, it's not only AI, right?
03:31We have to make sure that we understand that there's a multitude of factors that are driving this
03:36that all happen to be coming together at the same time, including things like Kevin Warsh,
03:41you know, not necessarily having the confidence of the market.
03:44So that has to increase risk premia, and you've seen that throughout most of the treasury curve,
03:49in particular the ten- and thirty-year part of the curve, where you've seen those yields rise
03:53just on the back of, you know, people not knowing if the Fed's going to be able to, you know,
03:58control the economy the way it used to be.
03:59Ira, what do you blame the most? Is it Mr. Warsh? Is it the AI issuance?
04:04Is it, like, what do you blame the most here?
04:06There is no most.
04:07So it's a little bit of everything.
04:10And here's the thing, like, AI, the AI story wouldn't matter if you didn't have these other things going on,
04:16right?
04:16People would just be like, okay, it'd be worth ten or twelve basis points, right?
04:19It would be like a blip and a couple of days of reasonably sized moves.
04:23But the fact that you have now, you know, fears of the fiscal situation in the U.K.,
04:28you have fears about, you know, the BOJ raising rates even further
04:33and seeing their yields above four percent for the first time in decades as well, right?
04:38All of those things are feeding onto this, and then you add onto that the AI supply story,
04:43and it just makes it much worse.
04:44Hey, guys, I want to bring into the conversation Ed Yardeni and his team put out a research note.
04:49Of course, he coined the term bond vigilantes, and so we listened to what Mr. Yardeni has to say.
04:56He, in the note, it said, we aren't pushing the panic button.
04:59However, we are closely monitoring whether the bond vigilantes might do so.
05:03We are sticking with our view that the U.S. bond yield should continue to trade in a normal range
05:07of four to five percent
05:08without causing any adverse consequences for the economy and corporate earnings.
05:13Nevertheless, now that the yield is approaching the top of this range,
05:16we are monitoring the activities of the bond vigilantes more closely.
05:21We've been here, I feel like Davide, before.
05:23We've talked about the bond vigilantes.
05:25We all get crazy, and then we settle down.
05:28Is this just a case of watching, or are there signs that there is a problem,
05:32and worlds get ready for higher interest rate costs across the board?
05:35Well, I mean, like, the push-hiring sort of risk premiums is across the board.
05:40So in that sense, we're seeing bond vigilantes also in the corporate bond market,
05:44where essentially investors are asking for higher spreads and higher returns on corporate bonds.
05:50We're seeing investment-grade bonds basically trading at junk-level yields.
05:57So, yeah, the push-hire is across the board.
05:59That's a sign, right?
06:01Well, it's a sign of investors demanding more because they expect so much supply.
06:05Essentially, right?
06:06Yeah.
06:07I just can't help but turn back to the backdrop of the Fed.
06:12And, you know, Ira, you mentioned just kind of the confidence of the market in the new Fed share.
06:17Could you unpack that a little bit?
06:19Because, you know, I think a few of us have lived through a different Fed share changes.
06:24Why would this one be any different than the others?
06:27Well, I think because the change in communication wasn't incremental at all, right?
06:32It wasn't just a little bit of a slowdown.
06:33We're going to reduce the amount of forward guidance we give, and we're not going to, you know,
06:38we're going to give just a little bit less information in the statement.
06:40Look, the Fed's post-meeting statement went from about 400 words to 100 words in one meeting.
06:48But were they good words?
06:50100 good words?
06:53No.
06:54It doesn't say anything now, right?
06:56It has no forward guidance.
06:57It has no reason of expectation.
06:59And here's the thing.
07:00Like, Kevin Warsh, I think, so far, you know, kind of misread what the market wants and needs.
07:06And, you know, yes, he has the communications task force.
07:08I put out a big deep dive report on that yesterday where we're, you know, looking at all of the
07:13task forces.
07:14And the big one is communications because so far, Kevin Warsh hasn't given the market any indication of what's coming
07:21next
07:21or what will come next given any given economic outcome.
07:26So unless you do one of those two things, right, either give forward guidance or say, okay, here's the five
07:31things that might happen
07:32and we'll do, you know, this, that, or the other thing depending on which outcome occurs.
07:36He has to do one of those two things and he hasn't.
07:39So the market's confused and we price in higher risk premium like the other guests mentioned.
07:44Okay, so a lot of uncertainty about certainly the Fed chair.
07:46We need a little bit more specificity.
07:48One thing we know real quickly, 20 seconds to have a date.
07:50We're going to get more credit or bond issuance from all these hyperscalers and so on and so forth.
07:55It's going to keep coming.
07:56I mean, it's relentless, yes.
07:57And we're looking like, you know, $2 trillion over the next couple of years in terms of estimates.
08:02So, yes, just in the investment grade market.
08:04So it's a lot to come, yeah.
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