00:00One of my favorite sayings, my favorite quotes is Albert Einstein.
00:04He says the definition of insanity is trying the same thing over and over again
00:07and expecting a different result.
00:09That's kind of the situation that President Macron is in right now.
00:12He keeps trying to couple together a new cabinet with various prime ministers.
00:17It's not working.
00:19If he attempts once again to put in and appoint a new prime minister
00:23or to keep Le Corneau in place, is that going to be satisfactory to market investors?
00:27Well, first of all, thanks for having me back.
00:30When I was last here, it was just after the last prime minister's resignation,
00:34and we talked about what would come next as a short administration.
00:37I didn't think it would be that short.
00:39That being said, going forward, I think here we are in the same place.
00:45The timeline here is a lot tighter because there's a deadline to pass the October budget.
00:51So I think in this occasion, we might move towards a different regime.
00:56So under the French law, they can trigger Article 47.
01:00Under the douze and provisoire, which is a provisional 12th,
01:03effectively, that means the budget is frozen for next year.
01:07They can't adopt any fiscal measures to cut the budget,
01:12but it allows the government to continue to operate,
01:16and that allows them to avoid early elections.
01:18Okay.
01:19And what would fixed income investors do with that backdrop?
01:23At 87 basis points, are you adequately pricing for that risk?
01:27I don't believe so.
01:28I think we still continue to leak wider until this is resolved.
01:32The move yesterday was significant,
01:35but still we're not at a point where the markets are forcing a different outcome.
01:40So do I think he's going to try again?
01:42It appears he will try.
01:45The first option that he had is resignation.
01:50I don't believe that's happening.
01:52So he will do what he can first to try and avoid snap elections.
01:55Let me just ask you from a deficit standpoint.
01:58The reason we're here is because these prime ministers are trying to put through
02:02fiscal consolidation measures that are non-palatable to the other groups
02:07and other members in the parliament.
02:09There's no one group that has an overall majority.
02:12So they have to build together support for these fiscal packages.
02:16And I think what we've realized throughout the course of the year
02:19is that they've perhaps been too ambitious in terms of how much fiscal consolidation can get done.
02:23They were targeting 4.6% budget deficit.
02:26It will probably end up closer to 5%.
02:28Is 5% an acceptable number to the market?
02:32I'm just trying to get a feel for at what point fixed income investors
02:35will really punish France on its fiscal slippage.
02:38If they were able to pass 5%, the market would feel instant relief.
02:44So at the moment, it's about getting a budget passed.
02:47The issue is that they need to work with either the left or the right.
02:53The right would naturally be the right side to help with budget deficits.
02:57But Marine Le Pen's party, as you said earlier, smells blood and is looking for a way to force elections
03:05and to continue to build on the gains that they had last year.
03:08So they're not going to help him at all.
03:10And then the socialists on the left are not in favor of these budget cuts at all.
03:15Okay, let's switch over and talk about JGBs as well because we had a huge, again, repricing steepening of the yield curve yesterday.
03:23Is that overdone, particularly because LDP, similar to the situation in France, they don't have an overall majority.
03:31They're going to have to get buy-in from other parties.
03:34That's exactly right.
03:34I would say in Japan, we'd be a bit more constructive.
03:37The moves yesterday were definitely very outsized.
03:40You know, you don't want to go in on a day after a big election like that and fade on the first day.
03:46But as you said, she doesn't have a majority in the LDP.
03:50She also has had to rely on more fiscally conservative factions within the LDP.
03:56Former Prime Minister Aso is now the vice president of the LDP.
03:59So there's a clear acceptance that she doesn't have the ability to really have that much to maneuver on the fiscal side.
04:07And similarly, with the Bank of Japan, you're dealing with a 3% inflation rate.
04:12So they're not going to be able to delay rate hikes that long.
04:16There's an inflation problem that needs to be dealt with.
04:19So I don't believe there will be as much monetary and fiscal loosening as the markets initially expected.
04:24Is there a trade to be done, though?
04:26Would you take the other side of the steepening?
04:27Sure, yeah.
04:28I think, you know, we favor steepeners across the board, really, except for Japan.
04:33Japan is the only market where there's actually a rate hiking policy, a rate hiking cycle at the moment.
04:39And also, the curve is already extremely steep.
04:43So, you know, we always quote the 30-year yield at, you know, 330, which is higher now than Germany, despite base rates at 50 basis points and boons at 2%.
04:52Yeah.
04:52But also, there's a big dislocation further out the curve in the 35-year sector where you have bonds yielding close to 5%.
04:59So that is an incredibly steep curve.
05:01At some point, you have to fade that.
05:03What does that do for real money demand for U.S. treasuries?
05:06If you have, you know, the appeal of investing in local GDBs at close to 3.5% yield, does it make investing in treasuries less attractive?
05:15Should you be thinking about that as a fixed-income investor?
05:17Completely.
05:18I'm surprised it hasn't happened yet, to be honest.
05:21So, with, you know, Japan has been a big buyer of treasuries and still owns a lot of treasuries.
05:27When you have these attractive yields in your home market, it makes perfect sense to start repatriating and investing back in your home market.
05:34I'm surprised it hasn't happened yet, but that is something definitely worth keeping an eye on.
05:36Well, that's why you bring it up on Horizons.
05:38I'm surprised it hasn't happened yet, but that's why you bring it up on Horizons.
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