00:00Yeah, I think you're right to point out foreigners have been a big source of demand for the bond market.
00:05But I would say that's getting more and more of a statement of the past than a statement of the
00:09present.
00:09What's happening now is if you look at the countries, for example, Brazil, India, and China,
00:15these are three big buyers.
00:16If you look at official data, in the last 8 to 12 months post-Liberation Day, net sellers.
00:21Wow.
00:22If you look at even Europe, big countries in Europe who were net buyers before Liberation Day
00:27have slowed down their pace of purchases, what's happening now is very interesting.
00:32The net buyers overseas are mostly from financial centers.
00:37They are not the traditional yield-watching buyers who would just buy because these aren't X percent.
00:44These buyers are more sensitive.
00:46They care about relative value.
00:47They care about the macro environment.
00:50And the fact that financial centers now dominate these overseas flows tells me the bond market remains vulnerable.
00:57So you say here, which is kind of disquieting here, 5 percent, we're talking about the 30-year yield, 5
01:04percent is the new 4 percent?
01:06That's exactly right.
01:07And the question that remains is, is 6 percent going to turn out to be the 5 percent?
01:11Oh, boy.
01:12Because if you go back to 2023, what happened was we were struggling to break 4 percent of the 30
01:18-year bond yield.
01:19It took three or four tries.
01:21Once we broke through it, there was no stopping it.
01:24We landed directly at 5 percent.
01:27And what's fascinating is what it took to bring the bond yield back down was this coupon supply change from
01:36the U.S. Treasury back in November 2023.
01:39So 4 percent to 5 percent, the thing that changed the trajectory was coupon cuts.
01:44It's a very similar backdrop today.
01:46You have no anchor above 5 percent.
01:49Could we go from 5 percent to a much higher number?
01:51Yes.
01:52And the question is, is the U.S. Treasury put going to come back?
01:56Are they going to make changes to coupon supply?
01:59They can.
02:00The good news is they can.
02:02But if they do, then we might have some consolidation.
02:06I've got a new chairman of the Federal Reserve, and the guy, you know, he's got a tough place right
02:13now.
02:14He's in a tough spot.
02:14He's got a president that would like lower rates, yet the economics, the data is pushing rates higher.
02:21I mean, that's a tough spot to be in, I would think, for this new guy.
02:24Yeah.
02:24So what's interesting about that is I've always talked about there's a gap between what the market thinks the Fed
02:30will do and what the Fed should do.
02:32The will do is going to be priced in the front end.
02:35The should do will be priced in the long end.
02:37Right.
02:37So what happens is if you look at Japan, for example, Japan's on the path to hiking rates, and yet
02:43their long bond yields keep going up because the market's saying, yes, you are hiking rates, but the hikes are
02:50not enough given the inflation, given the economy.
02:53So it's very possible, even if the new Fed chair ends up delivering a hike or two, the bond market
02:59will still push the long bond higher in yield because that may not be enough.
03:03Can he tinker with his BNP Paribas just definitive here with a blistering note where 5% is the new
03:094%.
03:10Liz Goldenberg taught me to look at price.
03:13So I look at price from the end of February and the 30-year bond, longer duration.
03:18I got a 7%, 8% price decline.
03:21Does that hurt anybody?
03:23Or are we at a point where that's just ignored?
03:25Yes.
03:26I think that that's exactly why it's now in the hands of a more price-sensitive investor.
03:31That 8% price decline you talked about, Tom, is going to hurt people.
03:35They are thinking about whether this is a good investment now or not, but it also makes more sense in
03:40a world where relative value dominates.
03:43And one concern I have here is people are going to look at the bond yield and people are going
03:48to look at equities and say, okay, where is there more value?
03:51Like if you go back to 2023, what happened was higher bond yields became a hedge for the equity rally.
03:58That's another dynamic which is very crucial now where if people have had massive gains in equities, higher bond yields
04:06are going to be proved to a very effective hedge.
04:09I'm reading some research from your old colleagues at Morgan Stanley, and they're saying, yeah, I know the energy stuff
04:15is out there, and that's spooking people, but the underlying economic fundamentals are still strong.
04:20I mean, does that suggest that what we're seeing in the bond market is a little bit more technical, kind
04:26of driven by the higher energy prices, the uncertainty caused by the Iran war?
04:31So there is part of that.
04:33I think, end of the day, a strong economy means the Fed's not lowering rates and possibly hiking rates.
04:39Right.
04:39And bond yields are supposed to keep going up.
04:42So what are we doing at here in terms of duration here?
04:47How do you think about that?
04:47Yeah, so we are suggesting that investors continue to play for higher yields.
04:52You can also look at this in the form of what we call yield curve steepeners.
04:57So front-end yields will have a little bit more of a cushion because they might not go up as
05:02high, but the long one, no anchor, a price-sensitive demand base, and possibly a hedge-to-equities.
05:09All the reasons suggest that we're going well above 5%.
05:13One final question.
05:14I've got to be real short here.
05:16We're running out of time.
05:17What's the correlation right now of our global bond market?
05:21The log convexity in Japanese bonds is frightening.
05:25Are they linked together or are they each idiosyncratic?
05:28Yeah, great question.
05:29So I would say if you look at the bond market in Japan, look at the bond market in the
05:34UK, we could have actually been a lot higher already.
05:36The U.S. bond market is resisting the pressure from the Japanese upsurge and from the UK upsurge, but at
05:44some point that anchor comes loose, we're going higher.
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