00:00Help me understand the set up then in treasury markets, in government bond markets as we head towards the Fed
00:05mark,
00:05because I read lots of stories about, you know, max bearishness or lots of bearishness at least around treasury markets.
00:12And yet yields have pulled back from that 5 percent level now at the back under that at 4.99
00:17around there.
00:18And what is the set up then in terms of the sentiment in those markets going into the Fed?
00:25Traders are very bearish treasuries right along the curve.
00:28Short positionings are very large there. There's a couple of dynamics to this.
00:32I think one is that the underlying structural story, which is very slow moving, is the fiscal one that's not
00:39even been priced yet.
00:40And people kind of go, hey, look, there's not really any term premium in the curve.
00:44The move up in yields has been about growth and inflation.
00:46And if we're going to start getting concerned about fiscal, well, then you've got a tail risk of like supercharging
00:51the move higher in yields.
00:53So that's one angle. Then the next is going into the Fed.
00:56It's kind of like, well, look, the hike's almost fully priced.
01:01And therefore, if they deliver it, sure, you might get a little bit of flattening.
01:05But if they don't deliver a hike today, well, then you're going to get a complete panic in long end
01:10treasuries.
01:11So the risk reward seems good to kind of short treasuries from that kind of point of view.
01:15And then, of course, with energy prices so big, that means inflation is continuing to scare people.
01:21So that's the setup going to it. Now, I'm obviously on the in the other side.
01:24And I think that, you know, look, that the market's already very short.
01:28We've had a failed break through the five percent level.
01:32Sure. Energy prices are at the highs. That's my whole point.
01:35The risk premium is now priced in since Trump said the war would continue.
01:38And therefore, for the first time months, the risks are more finely balanced.
01:42And in fact, perhaps asymmetrically skewed to the downside.
01:45And I think when the Fed does deliver today, there will be a bit of flattening.
01:49And there's a lot of long term structural income seekers who have been holding off because of the recent panic
01:55in long end yields.
01:56When the if the Fed hikes then restores a little bit of credibility, at least for a month or so,
02:01you'll see people piling back into the long end.
02:04So you don't think we go back above you think it's a failed break when we're done with five percent
02:09that we stay below five percent.
02:12I mean, we're only one basis point away right now.
02:15But yeah, yes, ultimately, I think we do.
02:17Now, I should say the Fed will decide that.
02:20So we have the catalyst on the horizon.
02:23Of course, OK, oil prices might be might be very important as well.
02:27But the Fed should help long end yields come lower today.
02:30Now, if oil prices go another ten dollars higher, sure, we're going to go back above.
02:33But technically right now with a catalyst where we're expecting a hike, which should help long end yields come lower.
02:39Or, yeah, I think it's looking like a failed break through five percent.
02:44Mark, to get that to get that cap on yields or maybe yields low at the long end, do you
02:48need not just the hike, but also the communication to match that, that further hikes are in the pipeline?
02:52Or is a hike, maybe a dovish hike, is that is that enough?
02:56What is the mix that's needed?
03:00No, definitely.
03:02Look, the anticlimactic policy outcome is a hike today, you know, and that will just see a small bit of
03:08softening.
03:08We'll have more scrutiny on the SEP and the dot plot and the presser.
03:12Now, there may not be much forward guidance, but it's the justification for the move that happens that will be
03:17very interesting.
03:18And the tone of that and what comes with projections, I think that will support actually long end yields coming
03:23lower.
03:23But that's the bit that's really in play.
03:25And this is why I think it's an interesting setup.
03:27All right, up.
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