00:00Ella, all of the data that we've got in the last couple of weeks, it's painted a little
00:03bit of a mixed picture about the US, but nothing maybe too concerning. Have you seen any fragilities
00:09that worry you? I mean, obviously, the valuation level in certain asset classes is perhaps
00:18a bit of a concern for investors. But obviously, that hasn't stopped performance this year,
00:23which has been another pretty stellar year. I think more specifically to bonds, perhaps
00:28one thing to mention is the deterioration on the fiscal side for the US. Because of the
00:36tariff unwinds that we've seen this year, you're starting to see a deterioration of that fiscal
00:40picture actually comes through in the data. So for bond investors, that remains one of the areas to
00:46focus on. Yeah, Ben Emmons pointed out overnight that the debt clock is actually going to take
00:51over tomorrow morning around the market open to something like $40 trillion. And you know,
00:55it's extraordinarily concerning. Is 525 and change enough to reflect that?
01:03Well, I mean, we have cycles and structures in markets, I guess, cyclically speaking,
01:08the softer data and the better inflation numbers we've had recently should help a little bit to
01:12alleviate pressure on yields, certainly on the shorter maturity. So the two to five year
01:16part of the curve that we're alluding to further out in the curve, those concerns will continue to
01:21persist. But I think for the next, if you like, couple of quarters, you know, you actually have
01:26some support for bonds coming through, certainly when you put it against the much more expensive
01:31valuations that you see in certain areas in equities or in credit as well.
01:36Yeah. Now, Ella, we're seeing the two cents spread at about 52, 53 basis points and the 530s at about
01:4190 basis points. So we did see a little bit of steepening. Do you anticipate the curve will stay
01:45roughly this shape until we get more of a signal from the Fed as to what it's likely to do
01:50next?
01:53I mean, our anticipation is that the Fed will stay put, particularly given the mix of the data that
01:58we've had more recently. And of course, markets gave us quite a bit of financial conditions
02:03tightening into September. So alleviation there should help things. I think the Fed will have
02:09enough cover, at least temporarily to do so. Having said that, as I was referring earlier,
02:14the structural tailwind for CapEx and the AI trade, I guess, remains in play as does the sort of
02:21on-shoring of supply chains. So CapEx should stay in the pipeline for the foreseeable future. So I think
02:28that will keep pressure on the long end combined with this fiscal concerns that bond investors have
02:34as well. So all else equal, curves should stay steeper for the foreseeable future. Yes.
02:40Ella, will we hear anything at Jackson Hole this year? What are you anticipating we might
02:45hear from the Fed chair? Or will you stay away from anything that might be controversial?
02:53I mean, it's tricky because we have these working committees now at the Fed,
02:56these newly founded committees. So you will need to give them time to obviously come up with
03:02their studies. I would imagine a lot of chatter around the inflation mandate,
03:07but I suspect neutrality perhaps is the better expectation that might be coming forth. Certainly
03:14because, you know, I think we think of the Fed in vacuum with regards to what's happening on the
03:19fiscal side. I don't think we should. Certainly, I don't think they think in vacuum. So of course,
03:24they have an inflation mandate. They have a jobs mandate. But I do believe there's this third sort
03:28of silent mandate, which is a, you know, sort of a functioning bond market, certainly when it comes
03:33to the Treasury side. And so I think neutral perhaps is the best outcome that the Fed might,
03:39you know, hope for Jackson Hole.
03:41So we did see a couple of decent auctions last week that maybe went better than they might have gone.
03:48I'm sure there were a few jitters out there. There's going to be another one this week.
03:51We're also seeing plenty of appetite for, you know, AI debt, Ella. At what point,
03:57if at all, do we see some kind of buyer strike or just appetite wane?
04:04I mean, that's predicting a needle in a haystack. I think it's I will try to stay away from that.
04:10But look, I mean, there's enough premium built in curves for the cyclical picture we were describing
04:15earlier. So and, you know, of course, playing bonds from a sort of underweight certainly on the
04:20duration side has been a good position to have this year. We're actually starting to close a lot
04:26of that underweight. In fact, we've reduced some of it. We're still not close enough to neutral.
04:31But I'd say there's enough premium in the curves built here. As to when the buyer strike comes,
04:36it's very, very difficult thing to predict. You know, I think that's why you're getting the premium
04:40build up through the curves. You know, bond bond yields are moving in tandem. So it's across the world.
04:45It's not just in the US. And so there is this underlying current that we're referring to because
04:49of structural reasons. But cyclically speaking, I think there is a window here to own bonds
04:54over the next few quarters and mostly because of all this AI chatter that we have in the markets
04:58and this sort of jitters around us. It is worth buying some protection in a multi-asset portfolio
05:03from the bond side. I just want to clarify. At least temporarily.
05:07Yeah, absolutely. I want to clarify that when you say you're divesting some, what you mean is
05:10some of the AI theme and looking for maybe a little bit of relative underperformance of the US.
05:15Now, looking abroad, what looks attractive to you right now, given that we have a lot of
05:19central banks potentially starting to move?
05:26Well, I mean, I think it's a little, I mean, the ECB has been already on the game this year
05:31because
05:31they're very, very sensitive to the inflation mandate. I mean, they only have one mandate
05:35and like the Fed that has two, as we were saying. And so in that sense, ECB has already moved.
05:40The pressure structure is speaking are slightly lower on the European side. So I would actually say
05:45from a central bank policy stance, Europe looks a bit more interesting now in terms of owning assets,
05:51whether that's on the equity side, credit, or actually core bonds themselves. So I would say
05:56that makes sense. And perhaps the euro will play more of that counter-cyclical role itself
06:01going forward that the dollar has played in the past. The dollar is much more tied now to the fate
06:05of equities in the US and the current account deficit. So actually, you could have this optimal
06:10phase that probably began last year, early last year, continue and have some support for European
06:16assets, I would say, going forward. You can make the same case in certain pockets in Asia as well.
06:21We're seeing some of that come to life. You know, certainly we've seen it in the equity space.
06:25But there is an argument to be made there as well. EM is well owned now. So, you know, it
06:30looks,
06:31particularly the carry trade, but we continue to hold on to that because the structural tailwinds
06:35for a lot of those countries are supportive. You mentioned that the yen balance is untenable here.
06:41So what happens next? Is the Bank of Japan forced to move? Why haven't they done so yet?
06:49Well, I mean, timidity. If you've been dealing with four decades of deflation,
06:53it's a very, very scary proposition to shift into this new paradigm. Look, I think, I believe they will.
07:00Will they outpace market pricing? I don't think so. I don't think it's in their interest to do so.
07:06But certainly, as we were saying, untenable means, you know, if you do not control the pace of the
07:10dollar yen, let's say, for example, move on the upside here, you're opening quite a bit of momentum
07:16that investors can go for. So I think the noise and the actions we've seen over the last two to
07:21three
07:21weeks tell you that is not going to be the case going forward. So it's not to say that we
07:26cannot have a
07:26few more attempts to the upside. But the asymmetry starts to look interesting for yen. So for yen
07:31stronger, actually, going forward. So it's worth, you know, taking a stab at that in smaller positions
07:36to begin with. But I would say more likely than not that we see yen trade stronger over the next
07:4312
07:43months.
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