00:00Stephanie, we want to start with that kind of notion. Again, 4.92% on the 10-year,
00:04getting close to that kind of whether it's psychological or means more 5% kind of number.
00:10How are you thinking about the macro and what this ultimately means for different asset classes
00:15and really allocating capital in what seems to be a, I don't know, ticking time bomb might be a
00:21little bit harsh, but it feels like the signs are all kind of flashing warning.
00:24Yeah. We're not so concerned about the increases that we've seen in long-term yields. I think the
00:30reasons why we're seeing this increase are really important. Some of the good reasons are that
00:35traders, markets are expecting that the U.S. economy is going to be growing more than it had
00:40been in the last two years because of AI. Yes, you have higher inflation. I think this new normal,
00:45that inflation is going to average above 2%, not below 2%. What is a bit worrying is if there is
00:50a bit of a term premium now ascribed to treasuries? And I think if we got a hike next week,
00:56that might help just to reestablish credibility in the Fed that they stand ready to combat higher
01:02inflation. So far this year, the Fed has already moved the goalpost back in an additional year to
01:08when they see 2% getting back to their 2% target. And that is really notable, right? They cannot
01:15just
01:15take for granted that inflation expectations are at 2%. They need to continue to justify those
01:21inflation expectations. And that may mean just getting started with rate hikes.
01:26Do we need to be even more forceful than that? I mean, unless we see something very soft in
01:31tomorrow's data, the Fed critically has to hike next week.
01:36So I will say this period that we're in right now is very different from the inflation episode that we
01:42saw
01:42during the pandemic, where the Fed was caught off sides and they were forced to then respond
01:47quite meaningfully, right? Because in today's economy, we don't see a lot of demand-side inflation.
01:53We see supply-side inflation. Rent is back above $100 a barrel, right? And that is going to have a
01:58lingering impact on inflation. But it's not being met with demand-side. So we don't think that we have
02:03a runaway inflation problem on our hands. Because of that, I think the Fed can start moving policy
02:08gradually higher. Maybe they're just getting back to that neutral rate, which is higher than it's been
02:13in the past, right? Without really soaking fears that, soaking fears that the Fed is embarking on a
02:19new rate-hiking regime. Because I don't think that we're there yet, but we want to make sure that the
02:23Fed's not getting off sides.
02:24One thing I feel like has been being talked more and more about is the federal outstanding debt.
02:28Topping $40 trillion, you look at it as a percentage of GDP north of 6%. How do you think through
02:34the
02:34issue of funding? And we've heard and seen Scott Besson be even more interventionalist. How is
02:39that impacting your expectation?
02:40The reality is the structural climb in deficits doesn't seem to be undoing anytime soon. You
02:46listen to politicians, right? Even this election season, and you're not hearing any proposals
02:52and getting those deficits down. In fact, quite the contrary, right? And that is going to have
02:58this structural impact and upward pressure on long yield. It's something we are always telling our
03:03clients about. There's a lot to do in fixed income, but of course, you do not want to be
03:07caught too far outside, too long on duration because of that. We will also say we would not
03:12hold our breath for much of a meaningful correction in those long-term yields because of treasury
03:18actions. I think what we've seen from Besson is also an acknowledgement that they have very
03:23limited amount of capability here in actually sustainably moving long-term yields lower because of
03:31the structural forces that are at play. But I'm just trying to think through large hyperscalers
03:35need to raise trillions of dollars to spend. They're competing with the U.S. government and
03:38governments around the world to try to raise capital through the fixed income product. How do you think
03:43about those conflicting forces if we are going to have Apple, Alphabet, all of these companies
03:47raising... I mean, Christine Lagarde said it. Exactly. Yeah. Yeah. I mean, all of this is adding more and more
03:52supply into the markets to digest. In a market of supply and demand, right, prices are going to clear
03:56higher. So that is another variable that is pushing long-term yields higher. We don't think
04:01it's going to be as, you know, a massive shock. You know, these are massive bond markets. There will
04:08be enough appetite to digest, I think, particularly given attractive yields, right, that you're getting
04:14not only in treasuries but also from these hyperscalers. There will be that demand. But as this
04:19issuance hits the markets, you're going to see some of those moments of digestion probably lead to
04:25spread widening and an increase in yields. We were speaking with Kristen Bitterly of
04:31Citi Wealth at Work earlier on and she said that there's a lot of cash on the sidelines.
04:35Now, that's not what the Bank of America poll a few weeks ago told us. It was like three and
04:38a
04:38half percent in cash or so. What are you seeing at JPMorgan Asset Management? How much is still in
04:43cash? How much is being recycled into cash, you know, profit-taking essentially? And what are
04:49clients going to do with it? We do think there's a lot of cash on the sidelines, which is an
04:53opportunity. Now, we don't think that all of that cash is going to come off. I mean, there are reasons
04:57why that cash is structural in nature. You just look at the economy where the K-shaped nature of
05:02it has only continued to exacerbate, right? So there's just more and more savings in this economy
05:06that are not being deployed. They're not being spent. But we do think particularly as, you know,
05:12some of this uncertainty begins to simmer down, we've gone through many waves of AI doom and gloom to AI
05:18enthusiasm. Maybe the pendulum is swinging back towards optimism in the second half of this year,
05:24perhaps. I think all of that can help. But also, I think a lot of clients are very cautious to
05:30putting
05:30more money onto risk right now, given how concentrated they are in this AI theme. I think the fact that
05:37fixed income as an asset class is growing in its attractiveness because of these higher yields
05:41could help move the dial a little bit and bringing some of that cash off the sidelines and putting it
05:46somewhere where clients are actually getting paid.
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