00:00Is the labor market just OK? I think that's a fair assessment. So essentially the payrolls report I don't want
00:07to put too much weight on it as it relates to the path for the Fed this year. I think
00:12that the jobs report had implications for the probability of July. But if you look at the market pricing for
00:19the end of the year it hasn't really changed. The market is still pricing a rate hike. And the reason
00:25is is because I think a lot of the decision around
00:29hike or hold is ultimately going to come down to the inflation data rather than the labor market data. Now
00:36our view is that you will be able to see enough sequential improvement in inflation to keep the Fed on
00:43hold. But again you know it's kind of like a jump ball right now as you described. There's people on
00:49one side that are expecting hikes by the end of the year and then people on the other side that
00:53are still expecting cuts. And when I think about it this may really be what Chair Warsh was looking
00:59for all along which is have a view on the data and let that data inform where the Fed should
01:06be. I hear from you base case hold for this year. Is that fair? Yep. How does that inform your
01:10approach to fixed income this morning? So you know when I look at this market I see a market where
01:17all in yields are attractive. We're continuing to see a lot of flows into fixed income. And this is a
01:24market where you want to have carry in your portfolio.
01:27And that is going to benefit you. So we talk a lot in fixed income about fixed income protecting you
01:34in terms of a recession, in terms of the downside risk. We're not really thinking about that environment right now.
01:41What we're thinking about is an environment where yields are range bound and what you're collecting is actually the carry.
01:48And that carry can actually be very powerful.
01:50And what we want to continue to underwrite as we go through the year is the credit side of the
01:57story. So do the credit fundamentals continue to suggest that we can be comfortable investing in investment grade and in
02:05high yield?
02:06And so far, you know, the fundamentals have really been quite strong, even with concerns about increase in issuance. When
02:14I look at the range for the IG spread for the index, it's been in a five basis point range
02:21for nearly 60 days.
02:22So despite the fact that we are having record issuance and that issuance is coming from a new sector of
02:29the market, particularly AI and the data build out, you know, things are being well absorbed.
02:34On that point. So with that all that IQ issuance, especially from the hyperscalers and at the long end as
02:40well, is that going to crowd out the long end?
02:43And does that basically keep 10 year governments and the long end of treasuries just under a little bit more
02:47pressure than they would have done?
02:49That's an interesting point. And I would say in terms of things that can keep some upward pressure on long
02:56end of the U.S. yields,
02:57it's not just the credit supply in the U.S., but it's actually Japan this morning reaching new record highs
03:05in terms of yields there.
03:06But I would say what we're seeing is the price discovery is a little bit more tricky on the long
03:12end of the curve, particularly for hyperscalers.
03:15And if there was an area where I think that there is still kind of room to fully understand where
03:22pricing should be,
03:23it would be where should those 10s, 30s credit curves spreads really be for some of the hyperscaler names.
03:30But when I think about it more broadly, you know, what we're seeing is that these names are generally being
03:37well absorbed into the market.
03:40And, you know, when we look at the fundamentals, demand for compute is expected to exceed supply for at least
03:46the next two years.
03:47So there's a very long runway for them.
03:49Let's go back to the Fed and data dependency for a moment.
03:52So if we're moving away from a world of forward guidance, what does that mean for volatility around earning around
03:57economic releases,
03:59around the FOMC dates and just the impact that can have both on different parts of fixed income, whether it's
04:04government or credit?
04:05So I think volatility may be higher, but, you know, I don't want to put too much emphasis on that
04:10because I actually think we've been moving away from forward guidance for quite some time now.
04:16So this is really more an evolution than a revolution.
04:19And we've been kind of peeling back the layers of that onion.
04:22As the Fed has gotten further away from the zero lower bound.
04:26And so essentially we were already operating in a generally data dependent framework, one where the Fed couldn't give a
04:35lot of guidance because we're around neutral.
04:38And the next move from here is a little bit more uncertain.
04:41And so, yeah, I mean, is the data important?
04:45Absolutely.
04:46You know, I think about CPI coming up July 14th.
04:49I think that's going to be really important for the market.
04:53But, you know, this is the way that the Fed has been trending in terms of their, you know, strategic
04:59goals for a while.
05:00And interestingly, it's not just the Fed.
05:03We're actually starting to see other central banks kind of all have very similar messages.
05:07So last week in Cintra, I thought it was interesting the phrase that Lagarde used, which is we're moving from
05:13forward guidance to framework guidance, which I thought was kind of clever.
05:17I think the challenge is, particularly for Chair Warsh, is we don't really know what that framework is yet.
05:22I think the ECB is looking increasingly confused after making what looks like a policy error in the last month,
05:27aren't they?
05:28Yeah, I mean, the data is looking softer there.
05:31We're already starting to see some downside surprises to inflation, both in Europe, also in emerging markets.
05:37You know, and that's why we do see value across a number of the different government bond markets is because
05:44some of these some of these central banks have hiked rates or they've talked very hawkish hawkishly.
05:50Even as we've really taken some of the inflation pressure off because of lower oil, the central banks are still
05:58staying fairly conservative.
05:59The markets are keeping some of that term premium in.
06:02But ultimately, we may not need to deliver all those rate hikes that are priced.
06:07So whether it be the ECB or some of the emerging markets that we follow, like Mexico or India, you
06:12know, there's some value in those curves that we're looking at right now.
Comments