00:00You really entertained us last time you were on the program.
00:03You talked about Fed Chair Kevin Walsh not falling the bond.
00:05I want to pick out on the Fed piece of this,
00:08the influence they have over what we're seeing on the screen right now.
00:10How much of this is or isn't a Fed story?
00:13We think it's mostly a Fed story.
00:15Do you really? Just explain that.
00:16So when we have asked ourselves what is going on at the long end,
00:20we first start with the observation that the long end move
00:25has really been driven by the U.S.
00:27U.S. long end rates we were just using since towards the end of June
00:31have increased the most in the U.S. versus the rest of the world.
00:36We then ask ourselves, is it a real story or is it inflation break-evens?
00:41And it's almost all real.
00:43So then what is it that is driving real rates higher?
00:46Is it better growth expectations?
00:49Probably not because growth has softened a little bit
00:52and you actually see Bloomberg consensus forecasts come down in 27 and 28.
00:57Is it a issuance story?
01:00There's a lot of supply, both on the government side and on the IG side.
01:05Perhaps, but that issuance story, really over the last six weeks,
01:09we don't think it's changed that much.
01:10We've known that there would be a lot of Treasury and IG supply for a while
01:14and IGOAS is only about five or six basis points wider over that period.
01:19So it doesn't really seem like a supply shock story.
01:21So then what is it?
01:24We just chalk it up to elevated interest rate uncertainty.
01:27And that is consistent if you look at the shape of the implied vol surface from swaption prices.
01:34You do see a notable steepening of the implied vol surface.
01:39So if you look at one year, one year versus 10 year, 10 year, let's say,
01:42you see 10 year, 10 year rising much more than one year, one year.
01:46It's actually coming down because one year, one year, here's a dovish Fed.
01:49And to us, it's that steepening of the implied vol surface.
01:53It's greater uncertainty that is driving the move.
01:55And then if you look at when this steepening really got going, it was the July FOMC.
02:00It was that press conference from Fed Chair Warsh.
02:04And it was a market that has still not heard a credible plan.
02:09How will inflation get back to target?
02:12Will it just naturally fall and the Fed needs to do nothing?
02:16Or if it doesn't, what's the Fed going to do about it?
02:19That is still what the market, I think, is searching for.
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