00:00You think about the news of what we're getting today when it comes to the reopening of the Strait of
00:04Hormuz. We already knew this was a very headline sensitive
00:08market at the moment. But I mean what do you make of these most recent headlines and how it translates
00:14through translates through into the fixed income market.
00:17Sure Katie you know the move that we're seeing in the rates market the rally that we have at the
00:21belly of the curve the curve steepening that we're
00:24seeing is all very consistent with what we would expect in this in this environment. What we've been saying from
00:29a rates perspective is that we are really
00:31price takers on the oil front and rates and oil are really some of the two asset classes that haven't
00:37been able to fully reprice what we saw since the start of the
00:40conflict. So we are long rates and kind of given what Mike was just referring to in terms of the
00:45consumer backdrop still seeing a lot of K-shaped
00:47nature to the U.S. economy. We think that top income cohort more likely to be able to weather this
00:53big uptick.
00:54that we're seeing in oil prices here. And we're worried about the bottom part of of that K. Our economists
00:59are still calling for two
01:00more cuts this year. We still like being long front end belly of the curve and like curb steepeners here.
01:06Well show come in on that point.
01:07I mean you think about where the Fed is going to go. There's a lot of disagreement to that point.
01:14And I wonder you know when you put together
01:15the latest headlines what you're seeing when it comes to the economic fundamentals here. Where does that leave you. Well
01:22I think you know just a
01:23couple of points there. I think when we think about the the economic backdrop this year we think we will
01:29see you know weakening in the U.S. labor market. You know the U.S. labor market remains pretty concentrated
01:36in
01:36just a couple of areas creating jobs. But you know you get below the surface there we think there's there's
01:41more underlying weakness that over the course of the year will play out and we'll see that softening in
01:47the unemployment rate that creates a little bit of a backdrop for for the Fed to ease. I think on
01:52inflation you know take away the oil shock for for just a minute. Inflation you know core inflation in
01:59the U.S. and a lot of the internal dynamics there they have been pretty well behaved. And you know
02:04we
02:04think we are we are even with this oil shock still on track for core inflation to be kind of
02:11declining
02:11towards the end of this year and be within sort of eyesight of of the Fed's target. So if things
02:18play
02:19out as we expect which is a little bit weaker growth as coupled with inflation that is more
02:24visibly returning to the Fed's target. We also you know as Megan mentioned we're also in the camp that
02:29the Fed will be easing this year. It doesn't sound like the it's not the narrative today but that's
02:34where you know we think the Fed will end up going. And then you know the last thing I'll just
02:39say is
02:39near term you know next week's going to be pretty interesting. We're going to hear from Kevin Warsh
02:44and you know how he sort of describes thinking about the the looking through of energy price
02:51increases how he describes core inflation. That's going to be another important data point. And we
02:56think he'll be putting together a message that if things play out as he expects the Fed will be
03:02delivering a couple of eases by the end of this year. And Megan I'd love to bring you in on
03:08that point.
03:09I mean you think about the fact that we are going to hear from Kevin Warsh still a lot of
03:13questions
03:14over how he gets confirmed but at least we'll hear from the man himself. How will you be listening to
03:20that. I mean what sort of signs will you be on the lookout for. Yeah I mean as hopeful as
03:25I am Katie
03:26that we're going to get something more significant from Warsh on the monetary policy front. I would advise
03:33against really taking too much of a signal from this yet. He's not in the seat yet. He's still got
03:38to
03:38got to play his his political cards close to the vest. What we may hear a little bit more about
03:43from him
03:43is how we think about Fed balance sheet which has been a growing important topic in light of what we're
03:49hearing from a liquidity reg development front. Warsh has been historically quite hawkish on Fed balance sheet.
03:55In our view really the only way that that the Fed can get balance sheet much lower from here is
04:00if we
04:00change bank rules if we allow banks to use discount window more more regularly. That really is the only
04:07way that we can see the Fed turn around and and do QT. Maybe we'll hear more from Warsh on
04:13on the
04:14balance sheet I imagine then than what we'll see from from a rate policy decision. That's a really good
04:19point. I mean you think about when his name was first when Trump officially came out and nominated
04:24him. Certainly that was a big part of the conversation. And obviously it's early days. But Ashok I mean you
04:30think about the balance sheet. We pay a lot of attention to that one lever and that is the rates
04:35lever. But I mean
04:37talk us through how you're thinking about how Warsh might approach the balance sheet. Of course he's just one of
04:43many
04:43when it comes to the Federal Reserve but still his views matter. Yeah I think the Warsh message on the
04:50balance sheet would be in an ideal world the balance sheet would be smaller and would be exclusively or
04:57almost exclusively focused on treasuries. But I think that statement will come with a recognition that
05:03just with where you know the repo facilities and how they're functioning and the liquidity in the short-term
05:08market and how that interacts with a lot of bank regulations the balance sheet really can't go down a
05:13whole lot from here near term without some changes to other policies. And I would expect these signals that the
05:19Fed will work with you know Treasury and other institutions to to affect that. So I think it'll be more
05:25of a desire
05:25message than a practical message of any change coming soon. And Ashoka I would also like to get your thoughts
05:31on the yield
05:32curve because you know Megan mentioned it in the context of what we might get from the Federal Reserve. And
05:36it feels like a yield curve
05:38steepening. I mean that has been the call for several years now for various regions reasons. And it seems like
05:44it always
05:44tends to break hearts. And I wonder how you're thinking about it you know as we get deeper into 2026.
05:50Yeah I think the curve
05:52can from these levels can steepen some more. You know the bond market the Fed's only priced it's not even
05:56priced for one
05:57ease this year. We're priced for about 50 percent chance of one ease by the end of the year. So
06:04you know as easing expectations come back in
06:06that should really help the two to five year point curve steepens. But I don't think it's going to be
06:11the
06:11dramatic steepening that we've seen over the last couple of years. Steepening bias but more range bound
06:16than the dramatic moves like that we saw last year. And Megan I am curious you know I'm taking a
06:21look at
06:22your notes and it seems like the belly of the curve is where you like to be. And I mean
06:26duration has been
06:27out of favor for so long. There's so many cross currents right now. I understand the logic why a lot
06:33of folks
06:34wouldn't be looking at it right now. But I mean what are some of the ingredients that you would want
06:37to see
06:38come together that might have you considering edging out a little bit. Edging out further on the curve
06:43Katie you know to me is really a question about the supply demand balance that we have in the treasury
06:48market right now. Actually just at the start of the program we had the release of treasuries were funding
06:53questionnaire to primary dealers. That's going to be moving into focus since the February funding deficit
06:58risk have only gone up. So we are more worried about the back end of the curve. We were hopeful
07:04headed into the
07:05February funding that we would get some signal from treasury that they're looking at reducing auction
07:10sizes out there given the fact that the deficit picture looked a little bit better. There were plenty of arguments
07:15that treasury could have leaned on to make the affordability case in terms of bringing down longer term borrowing
07:20costs though it really doesn't seem like this is on the agenda list for treasury right now. And the question
07:27now
07:28really has become when is treasury going to be growing auction sizes. And I think that's going to be a
07:34big
07:34question at the May refunding meeting that we may begin to get some color on and everyone in the market
07:40is
07:40going to begin to focus more on a lot of these risks which we see mounting given given the conflict
07:45and where we've
07:46been and just even interest rate levels over the past month and a half.
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