00:00So I'm really worried that what we're seeing in the equity market is going to accelerate.
00:04We haven't seen a breakout of yields to these levels in quite some time.
00:08And that 5% level for the long bond, that matters, and it has in the past for equities.
00:12So I'm keeping an eye on what happens in the stock market today, frankly.
00:17What is pushing rates higher?
00:19Again, you mentioned the third year at 5.10%.
00:23That really gets people's attention.
00:25The 10-year at 4.55%, that breaks out a little bit.
00:27What's going on there?
00:28Well, I think we're still trading the conflict in the Middle East.
00:32We're still worried about the energy complex.
00:35We're coming off of a series of inflation prints that have demonstrated that we're already starting to see some pass
00:41through to core.
00:42There were a few technical adjustments from the BLS that propped up the core numbers.
00:46So we weren't particularly surprised or worried.
00:49But the market clearly is.
00:50And we just went through the 10- and 30-year auctions.
00:53And so they're still in the process of being redistributed.
00:56And as we have seen in the run-up to pretty much every weekend, we're worried about the event risk
01:02of those two days in the Middle East.
01:04Because, frankly, anything can happen.
01:05You don't want to hold a risk position over the weekend?
01:07Exactly.
01:09I mean, this is telling me – I'm an equity guy, so I try to stay away from the bond
01:13market.
01:13But when I see rates move higher like this, that just shows me angst in the marketplace.
01:18And I guess the angst is more persistent, more stickier inflation.
01:23Is that what we're seeing?
01:24I think that's part of it.
01:25There's also a fiscal concern.
01:27So the inflation argument is fed into by the notion that the labor market remains on solid footing.
01:34We had a higher-than-expected but still low initial jobless claims number.
01:39Inflation is moving along fine, but not to levels that are troubling yet.
01:44If the unemployment rate had been materially higher or we hadn't had strong payrolls, I think we'd be in a
01:50much different macro environment.
01:52Ian Lingen with us, BMO Capital Markets.
01:54He's taken every trophy there is in fixed income.
01:56It's a note, dense and extremely red on the morning hours.
02:01Get that from the Bank of Montreal BMO Capital Markets, BMO Capital Markets.
02:07So I look at the real yield.
02:08There's a number of ways to look at this.
02:10I've seen a leap here from a 190 out to a 2.04.
02:14I've got some history at 2.11.
02:17What are the ramifications if the 10-year real yield breaks out the new territory?
02:22Well, I think that it depends on how that occurs.
02:26If it occurs with a compression of break-evens because inflation expectations have moderated, then I think that the real
02:33economy can absorb that.
02:35It's a more buoyant economy, productivity, innovation than that.
02:39But if it's a flip side and you see widening of break-evens and higher real rates, that is a
02:45vote of non-confidence of the Treasuries as an asset class.
02:48Nicely explained.
02:49Now, you're a grizzled pro at this.
02:50He's got three Bloombergs.
02:51You should see it.
02:52I know.
02:52I mean, Trois-Rivere darkens when he tunes in his Bloomberg.
02:58Okay.
02:58So you've got a bond market complexity.
03:02And the answer is there have to be trip points.
03:05What's the Ian Lingen trip point?
03:07Is it the 5-year yield, the 10-year yield?
03:09Is it something esoteric?
03:11Well, I think that the world looks at 10-year yields.
03:15I look at the 2-year yield as nothing more than reflection of near-term monetary policy expectations.
03:21And so anytime we're over 4% in this environment, that means that we're really contemplating rate hikes, which I
03:27don't think should be on the table.
03:28The long bond is more of an inflation story.
03:31And as we see, 5-handle on the 30-year is troubling for a lot of different asset classes.
03:36So I do think that the shape of the curve is going to be the story to follow this year.
03:42Kevin Warsh can be stepping into the big chair at the Fed.
03:47That's going to be a little uncomfortable given some of the data we're seeing here.
03:50I mean, what do you think the messaging that's going to come out of this new Fed chair will be,
03:55should be?
03:56Because we're going to hear from him in the next few days probably.
03:58So he has been given a very difficult Fed to take over at the moment.
04:03Powell's still going to be in the room.
04:05He's coming in with three dissents against some of the language within the statement.
04:10It's interesting that the dissents were against the language and not against the move itself, as is typically the case.
04:15I suspect that he's going to have a very hard time building consensus over the summer to do anything outside
04:22of potentially scale back some of the forward guidance.
04:26Normally, I would say one of his objectives is to talk less in terms of being a Fed leader.
04:33And that could mean at some point reducing the SEPs or the dot plot.
04:38But I don't think anything's happening this year.
04:39I mentioned this earlier.
04:40Governor Myron on yesterday, Farrell grilled him.
04:42I thought John did a great job on the interview.
04:46And the distinction there is the inflation not so much a one-off, but is it various supply-side, even
04:53demand-side shocks?
04:54Or is there a fiscal persistency finally to it?
04:58How do you parse that when you look at the dynamics of the Ian Lingen bond market?
05:04It does feel as though forward inflation expectations are moving higher for the average consumer and the average household.
05:12And that's what the Fed needs to worry about.
05:13Because you can drill down into CPI and you can see that in April, core goods were effectively flat.
05:19And that's what everyone was worried about last year, the tariff pass-through.
05:22So we're beyond the tariff story.
05:24But now we're worried about airfares, energy prices flowing through to products at the end of the day.
05:31But that takes months to actually see.
05:33Zero Edge had a nice summary of a Goldman Sachs note where they triangle it out to a 4.60
05:39% 10-year yield being important.
05:41Do you have in your head that trip point on the 10-year where things change for the stock market?
05:48I would say that we're right up against it.
05:50I would say 4.75%, but right now we're just chopping around in a range that is reasonably well-defined.
05:57And again, the level of conviction that is in this market is so low right now.
06:02When we talk to clients and make the rounds, people just don't know in fixed income space.
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