00:00Kelsey Barrow of J.P. Morgan Asset Management writing, we wonder if parts of the rates market are conflating a
00:05commodity-driven inflation shock with a broader inflationary backdrop, something that has not yet been borne out in the data.
00:12Kelsey joins us now for more. Kelsey, good morning. Good morning. Good to see you. We've experienced this a number
00:16of times. We've talked about it. We had a sell-off back in March. We had sell-offs under Secretary
00:21Yellen when she was running the Treasury. Bond market really tested her. How different is this one compared to those?
00:26It does feel somewhat different, particularly compared to last year at this time when we had the sell-off related
00:33to Liberation Day or even the sell-off in 2022 related to broad-based inflation, demand-led inflation.
00:41And I would say the big difference that I'm noticing are the flows. So if you look back at last
00:47year at this time, when fixed income returns turned negative, you started to see retail flows also turn negative.
00:55This year we're not seeing that. If anything, the demand for fixed income is accelerating at higher yield levels, particularly
01:03in credit and also outside of credit, for example, in emerging markets.
01:09Well, let's isolate one part of fixed income when we talk about Treasuries. Is that demand broadly even across the
01:15curve or specific segments of it?
01:17I think it depends on where you are and what you're looking to hedge and also where you're coming from.
01:24So, you know, a few years ago, it was all about talking about moving out of cash.
01:28And I still think looking at valuations relative to cash is an important way to anchor yourself in terms of
01:38the valuations of the fixed income market.
01:40So I look at the 10-year now and we're approaching 100 basis points of spread on the 10-year
01:46Treasury relative to the Fed funds rate.
01:49And that is a pretty important level historically in terms of when you're looking at forward returns for fixed income,
01:57the return profile does look a bit more favorable when you're at these wide of spreads and these steep of
02:05curves.
Comments