USTs to Rally on Shutdown Until Friday's CPI: 3-Minute MLIV

Watch USTs to Rally on Shutdown Until Friday's CPI: 3-Minute MLIV - Bloomberg on Dailymotion

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00:00Skylar, we've seen the 10-year push through that 4% level. We're at 3.97% right now.

00:06Shutdowns can be good for treasuries. What are we expecting to see? What are you watching for

00:10next when it comes to treasury markets? Yeah, absolutely. So what you've seen over the past

00:14few months is the rally in treasuries has largely been because you've priced in more Fed easing.

00:19I think also it's very true that the U.S. government bond market has returned as the safe

00:23haven of choice. From here, though, I think there's still room to rally. And the reason I say that is

00:28if you think about your 10-year, it's essentially just what you expect from Fed funds over the next

00:3210 years plus some kind of term premium. Now, the market expects we're going to cut twice this year

00:37and then get to a 3% terminal rate. If you compound those forwards and add a 60 basis point premium,

00:43that gets you to a 3.7% 10-year. So there is still room. Okay. But we're also doing this in a vacuum

00:49at the moment. No data. We're slightly, therefore, searching around for clues as to what is going on.

00:55Maybe we'll get some from the earnings story. But we're going to get some definitely on Friday.

01:00Are we just waiting for the CPI number? It does very much feel like that. What I will say is

01:05generally market reactions to shutdowns is that it's very muted. And the reason behind that is that

01:10there's not usually a huge economic impact. So, yes, people don't get paid, but they get back pay

01:15eventually. So it's an issue around consumption timing. The one thing that differs there slightly is

01:19you do get a bid for treasuries because it's some kind of insurance as risks are tilted firmly to the

01:25downside. Now, I think the longer the shutdown goes on, the more you have risks to growth. Because

01:30if you think about COVID, if you go two months without having a haircut, you don't then go,

01:35I need two haircuts now that things are returning to normal. There's also a confidence issue. You also

01:42have spillovers into contract workers. And those contract workers don't get back pay. And the longest

01:48shutdown we've had has been 35 days. And it was a partial shutdown. We're going into week four. And this

01:53is a full shutdown. So I think certainly risks to growth are tilted to the downside. And so then

01:59risk to bonds are tilted to the upside from that. But as you say, inflation data is on Friday. And

02:05that valuation I was talking about is based on the Fed funds path. So if you have a sharply higher Fed

02:10funds path, then it becomes much harder to justify a rally. Well, Skylar, just give us kind of maybe a

02:16floor and what that looks like when it comes to yields, because we have had guests on this program as

02:20recently as yesterday, talking to us about the risk of a 10 year going to 4748. We're at 397 right now

02:27on the 10 year. Give us a floor. Yeah, I mean, I'm not sure that really is the floor. It very much

02:32depends on how economic data evolves and inflation. Personally, I'm very worried about inflation in the

02:37U.S. because we're not getting the data coming in. You haven't had it reflected in markets. But I think

02:43because you have tariff level inflation, you have immigration pressure inflation, you're seeing

02:48inflationary pressures that are just delayed rather than avoided altogether. So I think certainly

02:53the floor is maybe higher than what the market assesses on that 10 year. Certainly something

02:57we're going to keep a very, very close eye on and whether or not you see a very quick bounce

03:00back. Bloomberg MLive's Skylar Montgomery-Koning joining us this morning. Get more up to date

03:04analysis from her and the team. MLIV Go is the function on your Bloomberg terminals.