00:00One of the reasons we see yields as, I would say, on the kind of the upper end of fair
00:04is we like to look at the 10-year as a combination of Fed expectations, inflation expectations, and what you
00:11need as term premium.
00:12So as an investor—
00:13What's term premium? Jargon alert!
00:15Jargon alert, yes.
00:16What you need is compensation to hold that 10-year for the next 10 years over the Fed funds rate.
00:21Now, we're thinking about 1.5% on kind of your neutral Fed funds rate, so your R-star.
00:27Again, a little jargon alert, but bear with me.
00:312% inflation target from the Fed, and then, of course, about 100 basis points or so of term premium.
00:37So 1.5 plus 2 plus 1.
00:40Correct.
00:40Nailed that policy.
00:43So that gets you to about 4.5%.
00:45You can add about a quarter to all of these things because there's a very significant amount of uncertainty to
00:51them.
00:51So I view that 4.5 to 5.25 range as relatively fair for the 10-year.
00:57We're trading at the upper end of that.
00:58Now, we've come off in the last couple of days.
01:00Obviously, oil has been a huge helper in that.
01:02But if we continue to trade towards the upper end, I do think that makes rates attractive from a longer
01:07-term standpoint.
01:08It's really just a function of getting in at the right levels.
01:11And I think that's the thing investors are most worried about.
01:14Everyone is talking about the valuations.
01:16The valuations are great.
01:17Nobody wants to be committed when we thought 4.5% was fair, 4.75 was fair, 5% was
01:23fair.
01:23Now, everybody's worried that rates are going to go to 5.25 or 5.5%.
01:27Is the Fed – how does the Fed think about that?
01:31I mean, how does the Fed think about that?
01:33The market has already moved pretty substantially over the last six months while the Fed has kind of stayed hands
01:39–
01:39Is he a vigilante?
01:41I don't know.
01:41He looks like one.
01:42He's got the spread going.
01:43I don't know.
01:44What's the Fed do here?
01:45I mean, they hiked once.
01:47Do they sit on the sidelines?
01:50We've got a couple more penciled in.
01:52They're thinking one more, potentially two, depending on which group at the FMC you are.
01:58We've got one penciled in for October, so relatively soon.
02:02We think they want to get another one.
02:03Before the election.
02:04Correct.
02:04We think they want to get another one under their belt, get those financial conditions tightening.
02:08And then one in January, as things really continue to go on, huge amount of uncertainty on that.
02:14They don't want to kill the economy.
02:16I think that's one of the narratives that I would push back on the most.
02:19There's folks out there saying they have to tighten until the economy is absolutely lying dead in a ditch.
02:24That is not their goal.
02:25Their goal is to tighten just enough to slow things down, but not enough to kill off the economy.
02:30That's a tough goal, right?
02:32Threaten that needle is really, really tough.
02:34We think they want to tighten up financial conditions.
02:36So how do they think about the tenure?
02:37In terms of financial conditions.
02:39There's a lot already priced in.
02:41Let it be priced in.
02:42Don't mess it up.
02:43Keep that forward guidance going, even though, you know, Chair Warsh has basically kind of disavowed forward guidance.
02:50Do they cut rates at some point in 2027?
02:54We don't think so.
02:55No.
02:55We think what it's going to be required is, yes, you want to kind of ratchet up slowly that Fed
03:00funds rate and keep it elevated for longer.
03:03We're in that new normal.
03:05You know, one of the things that I think was glossed over in the last FOMC meeting was they gradually
03:09raised the median dot on the long run rate to about one and a quarter percent in real terms or
03:14about 325.
03:17You know, if that continues to rise over the course of the next couple of meetings, it does suggest the
03:22Fed is thinking, you know, maybe there's an AI productivity boom coming.
03:26Maybe we just need higher interest rates as a baseline.
03:29We've got a wonderful setup here.
03:30We've got TD Securities, folks.
03:32This is Toronto Dominion with the best Maple Leaf.
03:36Are the Maple Leaf tickets, like, if they de minimis down to, like, near zero?
03:41Like, do you have to pay people to go?
03:42There's always demand for those.
03:44There's always demand for those, you hope.
03:46Toronto Dominion, we're going to go on to J.P. Morgan here in a moment.
03:49And between banks that are in Canada working in the United States or major U.S. banks, there's this raging
03:57question about hyperscaler debt crowding out full faith in credit, which is your world.
04:05Do you actually worry about the next Amazon tranche crowding out a T-bill auction?
04:11I don't buy it.
04:13Not a T-bill auction, but a potential 30-year.
04:15Really?
04:16You think Amazon, J.P. can sit there and pop another $20 billion and that's going to adjust full faith
04:23in credit 30-year?
04:24It's not so much adjusting full faith in credit.
04:26It's just the limited competition or the competition for a limited wallet in the long end of the curve.
04:32There's not that many buyers of 10, 20, 30-year debt.
04:35Once you get down to the bill space, bills are fine.
04:39That's why, you know, Scott Besson wants to continue to issue more and more T-bills, right?
04:44That's where the demand really is.
04:45In that 20- and 30-year space, we think there's a real chance that they may.
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