00:00It's been a while, a couple of weeks here, and I'm not sure what to make of it, whether we're just talking about a market trying to come to terms with whatever the reality is, whether we're seeing profit taking in equities.
00:10But when you look at what the bond market has done, or rather it hasn't done, I am curious as to what is actually being priced in, at least when it comes to treasuries.
00:18Great. Well, thanks for having me. Look, you're right. Of course, the bond market has operated in a bit of a vacuum for quite some time now.
00:25That vacuum is the lack of data. We're going to get a little bit more guidance as we go through the week.
00:32And I think the market is really, really waiting for that. The last data point the market really had were comments by the Fed chairman.
00:41It took the certainty of a cut in December off the table. It now becomes very data dependent.
00:47And the data that really matters is the labor market. And from that point of view, I think we will get some guidance as to what December might hold.
00:53I am curious, then. I mean, we talk about the next meeting just something like three weeks away here.
00:58I know the data coming out now is just very sort of bifurcated. And I mean, you have ADP numbers.
01:03You have obviously the delayed jobless claims numbers and the monthly government numbers.
01:08But they all do seem to point to deterioration in the labor market to some extent.
01:12Do you think Jay Powell might have been premature in his last press conference in saying that the Fed would basically be on pause for the December meeting?
01:20Well, I think the emphasis was much more on the fact that it was data dependent rather than on pause.
01:26I think the market had priced with some degree of certainty in December cut.
01:29And I think what the chairman tried to do was just to emphasize it's data dependent.
01:34We will get that data. Right now, the market price is a 40 percent chance of a cut.
01:38We'll see how that evolves. That's obviously the short end.
01:41There's obviously other pressures on the yield curve that are at play at the moment.
01:44Fiscal is part of that. Inflation is another part of that.
01:46So it's not just a labor market. There's a lot of data to work through.
01:50Absolutely. And Kay, I really want to take this conversation to the corporate credit market,
01:54because what we're seeing in the stock market, maybe you're starting to see it translate a little bit into the credit markets as well.
02:00Great story on the terminal talking about risk premiums on investment grade on junk bonds hovering near their highest levels in weeks.
02:07We're not talking panic levels or anything close.
02:09But I'm wondering if we could see those sort of measures of uncertainty start to build as the weeks progress.
02:16Well, we've seen a little bit of the beginning of that.
02:19I mean, put some context around it, like valuations have been tied, historically tied for quite some period of time.
02:26That's one part of the story.
02:28There's obviously a set of fundamentals that supported at least some degree of tightening.
02:32If you look at the corporate sector, particularly in the United States, it's been strong.
02:36It's not over leveraged as earnings growth.
02:39If you look outside of the United States, if you look at Europe, there's been fiscal expansion in Europe.
02:43So there are quite a number of good reasons for why spread should be tight.
02:48But they are at the all time tight level, which makes it very, very hard for fresh investors to come in and be very aggressive about the market.
02:55So if you see the volatility now in equities, clearly it will feed through a little bit into price action into the credit markets.
03:02That doesn't mean that the credit market is going to be under significant pressure permanently.
03:06Right. And I wonder what this means for borrowers.
03:09You mentioned this potential pressure when it comes to fresh investors.
03:12But you take a look at what happened with Amazon's $15 billion note sale yesterday.
03:17Originally, they garnered about $80 billion in orders.
03:20When what pricing was finally revealed, that figure fell closer to $47 billion.
03:25Still oversubscribed by quite a bit.
03:29But you think of all this fresh debt coming into the market.
03:32Could investors be a little bit choosier about what they actually bid on?
03:35I think what investors are learning, actually, at this point is that, you know, doing their homework and looking at the fundamentals is becoming increasingly important.
03:44We've had a flood of money coming into the market, new issues.
03:48They've all done very, very well.
03:50But with the pressure that is building in the market, investors are becoming much more discerning as to what they want to buy and where they want to put fresh money to work.
03:58And I think that's just another case of why, you know, you want to look a little bit more actively and dynamically at the risk that you're running within fixed income portfolios, actually.
04:07But I'm curious when you hear some of the comments from JP Morgan's vice chair about a reassessment of AI valuations.
04:13And obviously he's talking a little bit more about equity valuations.
04:15But given that we're starting to see those two worlds collide when it comes to AI and a lot of the borrowing, as Katie referred to, I'm just curious what a reassessment actually means.
04:26Are we talking about a meaningful correction of some kind or just the idea that investors will just hold back for until they get more clarity from these companies as to what the return on this investment is?
04:36Well, investors will look at what the potential downside is.
04:39And I think the downside can differ significantly depending on what names you look at.
04:43So if you if you do get issuance and it's backed by cash flow and cash generation, I think investors will look at that a little bit more positively than other types of issuance.
04:54So you get this at these kind of spread levels in the market, like the investor base becomes much more willing to separate between the different stories.
05:05And I think we're beginning to see that doesn't mean we're going to have a wholesale reevaluation of AI, particularly not in fixed income.
05:12But people are trying to figure out who the winners and losers might be over time.
05:18Yeah. OK, we have less than a minute left here, but I'm taking a look at the notes that you sent over to our producers.
05:23You mentioned that risks include AI related debt issuance.
05:26We're already talking about it. But just directly, what is the risk there?
05:30I think the risk is that like investors back a business model that they don't fully understand, that they back it at the wrong kind of spread levels where they don't get compensated for the downside.
05:42So, again, I think it's a it's a it's a new area.
05:45And I think investors have to become familiar with what they are buying.
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