00:00I think the good news is we have some clarity.
00:02Yeah.
00:03July was quite confusing.
00:04We have some clarity.
00:05This is a Fed that's ready to hike and fight inflation
00:09and get it back to a 2% target that we all felt was unachievable.
00:14So clearly they're focused on that target.
00:16So there is some clarity.
00:17But what does that mean for bonds?
00:19Well, it does mean that bond yields will gradually march higher in this environment.
00:25We have more hikes coming.
00:27The market is price-free hikes.
00:29That's more aggressive than what the Fed is saying.
00:31But they are talking the hawkish talk.
00:34When you have a hawkish Fed, bonds are unloved.
00:38They've already been unloved for a while, though.
00:40So how much further?
00:43What changed yesterday in terms of the order of magnitude that we're thinking about?
00:46Yields have gone up.
00:48We've got a 7% mortgage rate in the United States, 10 years at 5%.
00:50We've already moved a lot.
00:52He wanted that to happen.
00:54How much more incrementally do we need to see on top of what we've already got?
00:58Well, the key thing at the moment is that the 5% level matters.
01:02And it's helpful to see a little bit of a pullback.
01:06And that pullback is because there's clarity and credibility being restored.
01:10Now, for yields to move higher from here, it depends on what happens to the oil price and how strong
01:16growth is in the U.S.
01:18And so if we continue to have very strong U.S. growth, inflation not coming down, then that will send
01:26a signal to the market that the Fed needs to do a lot more.
01:29So you're absolutely right.
01:30The pace of higher yields is likely to be moderated because the Fed is fighting inflation right now.
01:38But if they're right and we have solid growth, then actually we should get a higher yield.
01:44OK, so that's interesting.
01:45So lots of people talked about how maybe yields were being driven up by the growth story, but that was
01:50sort of drowned out by a lot of nervousness about Fed credibility and inflation.
01:55Are we now then moving to a place, Remy, where we still get higher yields but for good reason or
02:01the balance of causation is more about the good than the bad in the future?
02:05I think so.
02:06And I think that this is what WASH was really focused on delivering yesterday, to really install that credibility and
02:13that confidence.
02:14Now, we think that where we are right now at 5%, yes, perhaps the market got ahead of itself by
02:21pricing that concern.
02:22So there is positioning is extremely short.
02:26So yields should come down just to reflect that confidence.
02:30But if we look beyond a short time horizon, if the Fed is right and U.S. growth is as
02:36strong as it is, those yields can march higher.
02:39So you don't think the Fed is going to be effective enough on inflation then?
02:42Is that also part of the analysis?
02:45Well, I think the concern we have, well, not a concern.
02:48It's a good thing.
02:49We think that U.S. growth is pretty solid here.
02:52And as a result, you will need, the key is that higher nominal growth.
02:58So it's not all energy prices anymore?
03:00It's not all energy prices.
03:01I mean, Walsh did mention that the labor market is balanced.
03:04It's okay.
03:05But the growth, the underlying drivers of U.S. growth is solid.
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