00:00We knew that these yields were going to rise. I mean, no one had given me, frankly, a good idea
00:05of why they would stop rising. And then you see it above 5% and your heart sinks a little
00:09bit.
00:10Like, what would stop this rise? Well, I think there's a confidence of a lot of points. I think
00:14the key one is that the biggest buyer of Treasury used to be the Fed. So before the COVID crisis,
00:21we were roughly $4 trillion of Fed balance sheet. We peaked at $9 trillion in 2022. And now we are
00:26roughly at $6.75. So they reduced the balance sheet by $2.2 trillion. In addition to that,
00:31you have obviously the deficit, $5.8 trillion. You have $2 trillion of debt service now.
00:36But I think there's also an interesting point, which is the Fed chair whole of mayors problem,
00:42which is that the Fed, through forward guidance, was essentially telling the market where it saw
00:46interest rates. Then the market priced that expectation. And when the Fed looks at the
00:50market, it was literally looking at itself, hence the blind leading the blind. So this is creating
00:55more uncertainty and additional term premium. And add to that, Japan, China, reducing their
01:01balance, their Treasury exposure as well. So one of the key points, I think, is the Drucker-Miller
01:06point on let the bond market speak. And it is simply reflecting stronger nominal GDP growth.
01:13So if you...
01:14I mean, if it goes to 5.5, if it goes to 6, I mean, what else does it break
01:18in the markets?
01:19This is a good point. I think if you look at nominal GDP, we are less than 2%
01:24real GDP growth. And then you have 3% inflation. So fair value for Treasury should be around,
01:29let's say, 5.5 if you add term premium. So if it goes to, let's say, 5.5, 6, and
01:34growth
01:34doesn't pick up, because it's there simply reflecting higher nominal GDP, then you can
01:39sort of break the whole economics of AI debt, CapEx, for example, because you can see the
01:46older book coverage ratio was five times in February, and now it's going down to two times.
01:51So investors are becoming more price sensitive to fuel the AI CapEx cycle.
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