00:00I want to start on the Besant dare to the market.
00:03I'm the House now.
00:04You can bet against me if you want.
00:05He claims he has asymmetric information on government policy plans.
00:09The markets have not challenged him when it comes to the yen, yet at least,
00:12but they are testing his attempts to push down U.S. rates.
00:15Has the market successfully called his bluff?
00:17Mike?
00:18Yeah, I think they have.
00:19I mean, you know, the government and Besant are pretty impotent
00:24in terms of the size of the Treasury market and what they can ultimately do.
00:27I mean, the best that, you know, Besant can really do is signal
00:30and hope that the market kind of takes the signal and runs with it.
00:33But from a practical standpoint, you know, at the end of the day, growth, inflation,
00:38they're going to matter a lot more than anything that the Treasury Department does.
00:42So, listen, I think we've seen this now twice, and he's failed both times.
00:47So the House is losing.
00:48The House is losing.
00:49Kay, what does it mean for the next long-end operation?
00:53I mean, so I think the first thing is if you're going to taunt the bond vigilantes,
00:57you've got to come in with a big number, and that big number's got to start with a T, not
01:01a B.
01:01Okay.
01:02I think if you look at the type of intervention we've seen, not just from Besant, but around the world,
01:08I think the evidence would suggest that these types of moves can influence the shape of the curve,
01:14but not necessarily the absolute level of where rates are.
01:18I think exactly as Mike said, it's going to be a function of what growth is doing.
01:22It's going to be a function of what inflation is doing.
01:24And I would add one more thing to that, which is what issuance is doing.
01:28So does it matter what Besant says and does if you've got an environment where global rates are just moving
01:34higher
01:34and don't show any signs of slowing?
01:36I think we need to, if we go back to the beginning of the program, you had a great chart
01:40on crude,
01:41and you said this is what the market's watching today and this week.
01:44It's longer term than that, Scarlett.
01:45If you look at the relationship between crude oil prices and Treasury prices, it's got a correlation of about 0
01:52.9%.
01:53So I'm guessing that when you woke up this morning and decided to wear red, you saw that the crude
01:59prices were higher
02:00and knew that we were going to see softness in the bond market and perhaps some softness in the equity
02:05market as well.
02:05So, unfortunately, it's really just that simple.
02:08And whatever Treasury Secretary Terry says, the market's really focused on what crude prices are doing,
02:15and that's really what's driving things here.
02:17That's the immediate catalyst, certainly.
02:18Exactly.
02:19Of course, we had the 10-year auction yesterday, $39 billion.
02:22It went pretty well, drew the highest yield since 2007.
02:24Demand was pretty strong.
02:25How does that set us up for not just the 30-year auction today but going forward?
02:30I mean, if it's all about issuance, there's a lot of issuance coming.
02:32There's a lot of issuance coming, I think.
02:35Right now, there clearly are buyers out there, right?
02:38We saw that with the 10-year.
02:39You look at 30-year yields, 30-year yields haven't really moved that much after you've had this initial run
02:44towards 530 in that range.
02:47I think you could still sustain some buyers in the auction.
02:51But I do worry that if the Fed isn't aggressive enough, if inflation comes back too strong,
02:58if nominal growth is rocking out there, then if the Fed doesn't do its job,
03:03if the Fed doesn't hike once, twice, three times over the next quarter or two,
03:08then you could have a Liz Truss moment.
03:10And that's what I worry about, where you really get buyers' balk.
03:13You get the Baden vigilantes come out, and you get a huge sell-off in the long end of the
03:17curve.
03:17I don't think we're there yet.
03:18I don't know if we will get to that point.
03:20I hope we won't.
03:22I think we are going to hike next week, and that will help a little bit.
03:27But that's the big risk outstanding.
03:29What do you think about a Liz Truss moment?
03:31I think we're pretty far from a Liz Truss moment.
03:34And I think one of the important things to look at is the level of demand that we've seen,
03:37whether we're looking at flows into our ETFs that we continue to see very strong.
03:42But also, look, everyone's talking about the supply, the issuance that we've seen,
03:45not only from the Treasury, but also in the investment-grade bond market.
03:49I think the investment-grade bond markets, Parks, has priced something like $65 billion
03:54in the first two-and-a-half days this week.
03:57Those deals are three-plus times oversubscribed with relatively modest new-issue concessions.
04:03So I think we're all focused on, wow, crude's rising higher, rates are rising higher.
04:08Yes, rates have backed up almost 50 basis points in the last three months,
04:11but there's demand that's coming in to meet that for the yield that we see in fixed income.
04:16So it's a confluence of factors that are taking place.
04:18I'm glad you bring up ETFs because Treasuries have not delivered positive annual total returns
04:22for investors if you use the IEF ETF as a proxy for the 10-year.
04:26So far this year, they're down about 1.92%.
04:29They fell in 2024, 2022, not good, 2021 as well.
04:33Do you think 2026 is shaping up to be a down year for Treasuries total return, Mike?
04:38Absolutely.
04:39Yeah, I think it's going to definitely be a down year for Treasuries.
04:42We're seeing time and time again that the way to think about investing in fixed income is changing.
04:46You know, it's not the traditional 60-40 or the traditional, you know, global indices outstanding
04:51where, you know, you've got 25% in corporates and 45% in Treasuries and so on and so forth.
04:57I think investors are realizing post-2022 really that you have to invest a different way in fixed income.
05:03ETFs actually provide a really efficient way to do that and allow both retail and institutional investors
05:09access to the market and markets that maybe they didn't have access to before like floating rate
05:15debt, CLOs, securitized products.
05:18There are a lot of other options today in the fixed income world that don't offer a lot of rate
05:22risk
05:23for just this type of situation where Treasuries will probably have a negative total return this year.
05:27So I think for us, the message is, you know, you need to think a little bit differently.
05:32There's still a real solid place for fixed income investing,
05:35but you have to invest in the right areas of fixed income, low duration, floating rate, things of that nature.
05:40Okay.
05:40I think the world's a very different place than it was in 2021, 2022.
05:44You go back in 10-year Treasuries and that, you know, we had sub-2% yields.
05:49And in that environment, bonds weren't offering the income that retirees, that clients are really looking for.
05:55We're looking at a very different market environment here with 6%, 7% yields.
05:58Now, yes, obviously at this point this year, we've seen losses in the Treasury market,
06:03but the Treasury market's only one component of the bond market, as Mike has noted.
06:09You know, you've got still positive returns in high yields, still positive returns in the levered loans.
06:14So I think it's less about yes or no on bonds and more about active management to find the opportunities
06:20and the yield for clients in bonds.
06:22How are you hedging against rising bond yields?
06:24What's the way to do it right now, Kay?
06:25Yeah, so I run Core Plus strategies, and those are obviously benchmark versus the ag.
06:30So in terms of duration, we've been relatively neutral to the duration.
06:34If you went back six months ago, I was longer duration because I didn't expect this type of energy shock
06:38that we've seen.
06:39But we're more neutral on duration, which is protecting us somewhat on it.
06:44And instead, we're finding opportunities in higher-yielding aspects of the investment-grade corporate market,
06:49the high-yield market, and the securitized credit market.
06:51I want to go back to the problem at hand here, which is bringing yields down requires a lot of
06:56difficult decisions
06:57that no one seems willing to make right now.
07:00And, you know, growing our way out of it will take a lot of time.
07:03So what we'll definitely get in the meantime is a lot of short-term measures.
07:07Having said that, what is the fastest way, Mike and then Kay, to get long-term yields down that hasn't
07:12been tried already?
07:14You're not going to like my answer.
07:15The market's not going to like my answer.
07:17I had a friend at a previous shop who said he'd be the most vindictive central banker ever.
07:22And I kind of, like, side with him.
07:24I would crush the economy.
07:26You know, I don't think – I think you need a good old-fashioned toe-curling recession to mop up
07:30all the excess liquidity over the last 15 years.
07:33You need to create demand destruction.
07:36I know this is not popular.
07:37I know.
07:38But I think ultimately that's what this country needs.
07:40I think it's going to happen at some point.
07:42I think what we've seen is that despite what governments try to do and central bankers try to do, they
07:49just keep adding fuel to the fire.
07:50And there's nothing like a good old-fashioned slowdown or recession to slow things.
07:55Okay.
07:55I might have not been quite as draconian on that.
07:58I think that you can get a bond market rally if one of three things improves.
08:03And that's going to be your declines.
08:05Yes.
08:06If you get a slowdown in growth, then you will absolutely see a rally in yields.
08:10If you get a slowdown in issuance, that's been a weight on the treasury market as well as on the
08:15investment-grade corporate market.
08:16And the third one, which is where we started the program, is inflation.
08:19If we see signs that inflation really is slowing back in line with the Fed's target, then that, I think,
08:25also would give some comfort to a bond market.
08:27All right.
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