00:00We've seen through the month of September these yields climbing in many parts of the globe but you think we
00:05might be closer to the end of this move.
00:07What gives you that confidence? Well there's a lot of cross currents here. So you know there's there's the entire
00:12central bank I think credibility issue.
00:15Hopefully we do get that Fed rate hike. And I think if Chair Walsh can actually explain that this is
00:20a risk management hike that this is not you know the essentially a start of a hiking cycle.
00:25I think that helps. We get the BOJ. We're expecting a hike and we're expecting you know a sense that
00:30there'll be more hikes.
00:31So I think if the central bank credibility issue can be pushed to the side then what do we get
00:36around the supply.
00:38I think a lot of this is is supply driven. So you know if we get a sense of how
00:42much corporate supply is coming in if the Treasury can adjust some of its supply we do think that they're
00:47likely to adjust lower their long end supply.
00:49And then really it's oil. But you know I think nobody really has an insight how high oil can go.
00:55But this is a stagflationary shock and the fact that every other market now is paying attention gives us some
01:01comfort that the tightening in financial conditions will ultimately make people look at fundamentals and say if oil prices continue
01:08to rise, real rates continue to rise, that's going to have an impact on the economy.
01:12And as that starts to get priced and I think people will start to look at Treasuries as adding value.
01:17So I think we're nearing the end but what the catalyst is there's a bunch of things that have to
01:22happen.
01:22So I think you have to be really careful about stepping in you know sizing conviction levels are not that
01:27high.
01:28But I do think we're seeing you know back to say you know I would say late 2023 we saw
01:34something similar.
01:34I think when risk assets start to pay attention to the rate move when it's driven by the long end
01:40it's driven by real rates it does tend to say that we're nearing the end.
01:44Okay so you're looking for some sort of inflection point where bond markets stop being obsessed with inflation and start
01:49to think about growth and maybe then there is upside for bonds.
01:52But Priya you talked about how the Fed has a role to play here that the Fed chairman could come
01:57out and say look this isn't the start of a hiking cycle.
02:00Does his lack of willingness though to provide forward guidance would that give him the freedom to make that kind
02:06of comment.
02:07It is a really tricky time for Chair Walsh I mean he's he's facing a divided committee he's facing a
02:13stagflation shock which is essentially the nightmare for central banks.
02:16But I think when I when I hear you know and if I all we heard was June and July
02:20I might not have a lot of faith but we did get Jackson Hole.
02:24And while there wasn't forward guidance there was a sense of you know what is driving the Fed reaction function.
02:30So I do think that he's heard loud and clear from the bond market that giving us a sense of
02:36you know how many hikes what is the nature of this hike.
02:39Is it just that the inflation progress has stalled and the Fed wants to push back and prevent you know
02:45essentially inflation expectations from getting unanchored.
02:47I think a sense of not forward guidance but tell us what if they hike why are they hiking and
02:53then we'll have the dot plot.
02:55So even if Chair Walsh doesn't give a lot of forward guidance I think a sense of how high is
02:59that neutral rate the people who are looking for hikes how many hikes are they looking for.
03:03We'll be looking at that dot plot to get a sense of how many hikes and the market's already pricing
03:08in 100 basis points almost 100 basis points in total hikes.
03:11So I think if the dot plot suggests that that can actually you know help build some credibility give a
03:17sense to the market of how many hikes we might get.
03:19So I'm a little more hopeful that we'll get more from Chair Walsh than we did essentially in July.
03:26Okay I mean we yes but for now we've got the dot plot.
03:30We will see what happens as to whether we continue to keep that dot plot into the future Priya.
03:35You are looking for this turning point then where bond markets can start to focus on weaker growth.
03:39What do you think is going to drive that weaker growth then in the U.S. economy?
03:44Is it connected with the AI build out and any slowdown of the AI build out?
03:49So great question.
03:50I think the AI build out is a little less intrasensitive.
03:54So do I expect that just because real rates have risen as much that the AI build out slows down?
03:59Unlikely from an interest rate standpoint there's other issues you know whether it's regulation whether it's concern around AI safety.
04:05I think that might have an impact on the AI build out or at least the speed of the AI
04:10build out.
04:10But there are intrasensitive sectors of the economy and given that this move has been led by the long end.
04:16It's been led by real rates.
04:17I do see an impact potentially in housing, consumer durables.
04:22You know these are intrasensitive components of the economy as well as the wealth effect.
04:25If the stock market and we're seeing sort of you know one for one sort of correlation.
04:31So if interest rates continue to rise and the equity market starts to struggle some of that wealth effect that's
04:36propelling consumption in the upper part of the K.
04:39I think that can start to come off.
04:41So whether it's consumer spending the consumers dealing with higher oil prices and if the equity market starts to struggle.
04:47I think you could see some impact on the consumer and then we look at these interest sensitive sectors.
04:52It's just it does take a while but markets are forward looking.
04:55So the market might start to say this is a stagflationary shock.
04:59Where's the growth impact?
05:00And I think you know we'll be looking for sort of any data point that suggests that interest rates are
05:05starting to have an impact.
05:08And Priya, looking at the global narrative here and the way the global rates have been rising through the month
05:13of September, where looks interesting to you?
05:16If we're not quite at the turning point in the U.S. yet, where might we be closer to a
05:21turning point?
05:22Sure.
05:22So we're looking at Japan with a lot of interest because a lot of the Japanese move has been this
05:27idea that the BOJ might be behind the curve.
05:29I think if we get a sense at the meeting this week that they hike and then they're suggesting that
05:34they want to get back on the curve or be ahead of the curve, I think Japan could look interesting.
05:39Europe is much more sensitive to what's happening in gas prices, oil prices.
05:44So I think owning parts of European bond markets might be interesting as well.
05:48So I'm glad you brought that up because you can start to like duration and then you can have better
05:52risk reward outside of the U.S.
05:55where you don't have this AI supply narrative that's building.
05:58So, you know, we do think that European rates, U.K. rates, growth data is particularly weak, as well as
06:05Japan.
06:05I think it may be interesting to own duration outside of the U.S. for now.
06:11And what about corporate credit, Priya?
06:13Of course, there's been a lot of focus on issuance.
06:15I wonder in other parts of corporate credit, though, whether we need to focus on refinancing walls and a maturity
06:22wall.
06:23I was told earlier this morning 2028-29 is where we need to watch for that.
06:27What are you thinking about corporate credit?
06:29So we like corporate credit.
06:31I mean, it comes down to fundamentals and technicals and valuations.
06:35Ultimately, that's how we think about corporate credit.
06:37I think fundamentals are very strong.
06:39You look at company balance sheets.
06:41You look at earnings.
06:42I mean, companies have done the right thing.
06:44They haven't levered up that much.
06:45So fundamentals are strong.
06:48Technicals, you talked about supply.
06:49There's a lot of supply, but we look at the demand side and people are looking at high quality all
06:54-in yields that, you know, 6%, 7%.
06:57That starts to look really attractive.
06:59So we're seeing significant inflows.
07:01Now, spreads are tight, but for good reason.
07:04So I think, you know, we do definitely have to do the credit work.
07:07Dispersion is picking up.
07:08But in general, I would say investment-grade corporate, high-quality, high-yield corporate, securitized credit, there's a lot of
07:15opportunities to pick up these high all-in yields.
07:19And that's why we're seeing that demand come in.
07:21So I think corporate credit is where I think we're using a lot of our risk budget, adding carry to
07:26portfolios, you know, making sure that we own these good companies.
07:30But I do think that supply is being met by a lot of demand right now.
07:34So we like corporate credit, you know, across the board.
07:37Okay. And if dispersion, though, is increasing, as you say, Priya, where are you concerned that companies could get into
07:45trouble?
07:45Is it software or is it more complicated?
07:47Well, I wouldn't say that there's one sector as a whole.
07:51If there's companies where, you know, covenants are getting a little weaker, we'd rather stay away.
07:56You know, I think, you know, this is not the time when you're late in the credit cycle to be
08:02going down in credit.
08:03So we'd rather move portfolios up in credit.
08:05And there's a lot of opportunity.
08:07I mean, a lot of the data center deals that are not in the index, this is where active management
08:11can come in.
08:12We find better opportunities there than owning sometimes the unsecured debt of the same hyperscaler.
08:18So I think this is where the credit work and making sure that, you know, we're not looking at companies
08:24which might be increasing, you know, leverage here or that might have a maturity wall.
08:29But I wouldn't say it's a sector as a whole.
08:32We do like technology now.
08:34There's a lot more supply.
08:35Spreads are wider.
08:36But I think there's a lot of opportunities within banks, within bank hybrids, et cetera.
08:40So I would say across the board, but just being very careful with companies that might be weakening some of
08:46their covenants.
08:47Investors.
08:47any kind of things you can do when you look
08:47at risk, things.
08:48Look, you can't put it back-
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