00:00Cassie Barrow of J.P. Morgan Asset Management writing, the fall of 23 offers a useful template.
00:05Multiple factors were needed to turn the market around rather than just one silver bullet.
00:10Cassie joins us now for more. Cassie, good morning.
00:12Good morning.
00:13Just explore that period once again because it was around this time in 23 coming out of the summer into
00:18the fall
00:18where things started to get a little bit difficult for then Treasury Secretary Janet Yellen.
00:23Right. So that was a period of time where the 10-year Treasury yield breached 5%
00:28and then it subsequently reversed.
00:31And when you look back at that time, a lot of people are drawing parallels to the movements of the
00:38Treasury
00:39and how that influenced the bond market.
00:41So back then, Secretary Yellen at a refunding announcement, which I do want to highlight
00:47because what Secretary Besson did was not at a refunding announcement.
00:51That was a true surprise.
00:52But at a refunding announcement, Janet Yellen changed the path or the trajectory for issuance
00:58to lean less heavily on the long end.
01:01I think the big surprise, thinking back, was actually the 20-year auction,
01:05which they announced no increases to the 20-year issuance.
01:09And that was one of multiple factors that ultimately got the bond market to start to turn around.
01:16The other factors, though, were really important.
01:18The Fed speak was a big and dramatic shift.
01:22Actually, back in September, the dot plot was very hawkish.
01:27The data started to turn the other way.
01:30The Fed's communication had to shift pretty quickly.
01:33And then by the December dot plot, they had completely reversed all of the hawkishness that they had previously had.
01:40So just for me explaining that, I think you can tell that there are significant differences between then and now,
01:47particularly as it relates to the data.
01:49This is a very resilient economy.
01:52And for that reason, the fundamentals do suggest that yields need to be higher.
01:57So when we're talking about stabilization, we're not talking about 100 basis point move lower in yields.
02:03But I do think that we do have some of the ingredients coming together, and I say that tentatively, to
02:10start to see the stabilization.
02:11The announcements of the buybacks are one thing.
02:14I think some of the economic surprises, which have turned a little bit softer, again, from very lofty levels, is
02:22another.
02:23And now I do think that the third piece of that puzzle could be the Fed communication and really understanding
02:30how the Fed has reacted to the more recent data.
02:33Because if you look at the July FOMC minutes, which we got last week, those were all prior to some
02:40of the more recent data points that we've been seeing.
02:42Some of those would just come in a little bit more moderate, particularly on the inflation side.
02:47And when I look at the inflation markets, I actually see that the concern within the bond markets, to me,
02:55doesn't look like a bond market that's worried about overheating and runaway inflation.
02:59It really looks like a market that is trying to, in a fairly contained and gradual way, trying to price
03:07in higher term premium for more supply and some uncertainty as we head into the fall.
03:12So how much influence does the Fed have, then, on the long end of the curve?
03:15I don't think that they have a ton of influence, but they are one of the factors.
03:19And when I look back at where yields have gone this year and what the new information has been, to
03:25me, the new information is not really the deficit.
03:28I know that is the big headline because we got surpassed $40 trillion, right?
03:33But to me, the new information, 2026, one, it was the war and it was the rise in oil prices
03:40and the uncertainty that had on inflation.
03:43That is really still a big part of what's happening from a day to day.
03:48If you look at the correlation between the 10-year treasury yield and oil, they're still trading very much in
03:55lockstep.
03:56I mean, after the announcement of the buybacks, the next day, oil was up 2.5% and you saw
04:01yields higher.
04:02Today, yields are lower.
04:04Oil is also lower.
04:05So that's not a coincidence.
04:07But I also think that when you look at the other big thing that has changed is that we have
04:12new leadership at the Fed.
04:14And that is creating some uncertainty in the short term.
04:17And I think it's normal.
04:18It would happen regardless of who the Fed chair was going to be.
04:23But we've had a change of leadership at the Fed.
04:25And we're still trying to figure out how they're going to react.
04:27Well, let's say we do get some sense of how they're going to react or we get a sense of
04:31what Kevin Walsh's reaction function could be in his Friday speech.
04:36Would that make you want to buy 30-year treasuries more?
04:39I do think that it would be helpful if we understood his reaction function.
04:44I think one thing that is key is to understand how he thinks about the policy rate tool relative to
04:51his other tools like balance sheet.
04:53At the last press conference, he really kind of muddied the water in terms of what is their primary tool.
05:00If they're concerned about inflation, do they move the policy rate or do they look at other things?
05:06But I do think what is really important, I've been going around asking people, what is a good speech out
05:13of Jackson Hole on Friday, right?
05:14I think everybody agrees that they want something from Walsh.
05:19And they think that it's a really important moment from him.
05:22But when you start asking, okay, so what does that actually include to get that really important moment, the range
05:29of views is actually very wide.
05:31You have one camp that believes that the only way for him to really gain credibility is to sound very
05:36hawkish, is to hike rates.
05:39And that's the only way that you're going to get control of the long end.
05:42Then, and I'm in this other camp, I don't necessarily buy that argument.
05:47I think on the other hand, you don't need to be explicitly hawkish or explicitly dovish to be credible.
05:53What you do need to be credible is to tell people what data you're looking at
05:57and tell people, you know, what is important to you and how you're going to react in certain situations.
06:03But in the end, that's not going to change the data trajectory, the growth trajectory, or what's going on with
06:10oil.
06:10You know, those are out of the Fed's control.
06:12Just really quickly here, if you get a better sense of his reaction function, at what point do you see
06:17people flooding back?
06:18I mean, this is something we were talking about before.
06:20You said maybe it could cause that.
06:22Do you think on the margins that could reduce risk premia?
06:24I do, and, you know, there's a number of things that are coming up that I think the anticipation is
06:31actually worse than the reality.
06:32So, for example, the investment-grade market, expectations for September,
06:38the range of expectations is $175 billion in issuance next month to $250.
06:44That is a massive range.
06:47And I've talked to our credit portfolio managers, and they've said $250 billion is not really an issue for us,
06:54but we would like to know what we're going to prepare for.
06:57Are we preparing for $175, or are we preparing for $250?
07:00There is a possibility that we get into September, and actually, this demand goes fine.
07:06And then there is going to be a rush back into the market,
07:09because what we've seen is that while there's been record supply, there's also been record demand.
07:15If you look at high-grade flows, so retail demand for investment grade,
07:20that demand so far this year exceeds any full year back to 2010.
07:26So we are seeing that demand, and so if you start to see any stability, people are going to come
07:32back in.
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