00:00Well, I think this is an interesting environment where you look at the very front end of the curve and
00:04that one year forward, one year rate.
00:07So basically, the market's expectation of where that policy rate will be in a year's time is at the highest
00:13level it's been in the post-pandemic period.
00:15How many rate cuts? Rate rises up.
00:17So more than three additional hikes, a cumulative four hikes in this cycle.
00:23I think it stands out because this is actually a different environment than where we were in 2023.
00:29There's a lot of concerns about the stickiness of inflation here.
00:32But by most measures, inflation is actually, on a core basis, much lower than where it was in 2023.
00:38The unemployment rate is higher. Growth is not quite as strong.
00:41So I still think there's too much priced into the front end, which has driven that flattening in the curve
00:46that we see.
00:47Who buys our Treasury debt these days?
00:50I don't know. I mean, they can get some—anybody wants to step up and buy it, they're going to get
00:53some great yield here.
00:54Exactly. Well, I think part of the problem in the rates market right now and why I think that curve
01:00is too flat is that a lot of the structural buyers in the market have stepped away.
01:04And so that should justify more term premium at the back end of the curve.
01:08So if we don't get as much tightening that's priced in, we should still see the long-end yield staying
01:13fairly well anchored here.
01:15Foreign official investors, reserve managers, they've been stepping away from buying Treasuries.
01:20Banks aren't buying quite as much.
01:22Certainly the Fed has stepped back.
01:24And we have a lot of debt coming to the market and we need to find buyers.
01:28Is that crowding out thing from hyperscaler investment-grade debt?
01:32Is that a real thing?
01:33When I think of your market, the Treasury, nothing moves that thing.
01:37I mean, it's so big and so deep and liquid.
01:40Yeah, I think the answer to that question is a bit nuanced because we're not seeing a lot of evidence
01:45of necessarily this rotation out of Treasuries into credit,
01:49which I think comes to mind when we think about that crowding out.
01:52But I think the fact that we're having a lot of duration supply hit the market, that can still affect
01:57the level of yields and it can affect the yield curve
02:00because the rates market is really where participants manage their duration risk.
02:04To be clear, when you link in UBS economics with what you're doing in fixed income and strategy,
02:11you don't buy the narrative of the flattening 2-10 spread signaling a potential economic slowdown and recession.
02:20We're certainly not at that level in terms of where that curve is right now.
02:24I just needed to hear this so I could get through the week.
02:27I agree with you.
02:28I mean, the narrative is now, Paula.
02:30It used to be we read Fabozzi and just tried to think hard.
02:33Yep.
02:33Now we're living narratives.
02:34We're living stories.
02:36It's insane.
02:37Has the Fed – well, did Fed Chairman Warsh ever really risk losing credibility in the marketplace?
02:42And if so, has he gotten it back yet?
02:44I mean, talk to us about that.
02:45Sure.
02:46I think that narrative ran a bit too far in terms of the loss of Fed credibility really driving the
02:51move in yields.
02:52Certainly, we did see that bear steepening, the long end selling off coming out of that July press conference.
02:58So perhaps contributing on the margin.
03:00But you look at, for example, inflation markets, right?
03:04And there's no signs that the market's really concerned about an unanchoring of inflation expectations.
03:09So I think the move higher in yields that we've seen in recent months has been driven by many other
03:15factors aside from that Fed credibility question.
03:18I don't know.
03:19I'm not a bond person.
03:20I'm an equity person, which I say proudly.
03:24It seems like the bond market's already done the work of the Fed.
03:26I mean, I got the 10-year at 5%.
03:29We're there.
03:30I mean, why don't they just maybe one or two rate cuts and call it a day?
03:34Hikes.
03:34Yeah.
03:35Hikes.
03:35I'm sorry.
03:36Yeah.
03:36For sure.
03:37So I think in this economy, we sort of have a two-speed economy.
03:40There are certain segments of the economy that are certainly very rate sensitive.
03:44The housing market under pressure here.
03:47But the AI tech-driven kind of capex boom we have supporting growth here doesn't seem to be very rate
03:55sensitive.
03:55So I think what we're getting from the Fed is likely one or two more rate hikes, more from a
04:01risk management perspective.
04:03We have risks that inflation could move higher.
04:06Meanwhile, they see very little downside risk on the employment front, and therefore it makes sense to see some recalibration.
04:12Let's talk Phoebe White right now, and we'll try to translate it into the King's English.
04:17Figure five.
04:19SOFR, S-O-F-R, set 23 beeps higher following the hike to 3.85%, five beeps below IORB.
04:29Okay, fine.
04:30That's what the pros are reading.
04:31What our audience wants to know is what does the bond market signal about the equity market?
04:38Don't give me, well, it's not my terrain.
04:41From where you sit in fixed income land, what does it say about nominal GDP and the ability to generate
04:49revenue and earnings?
04:52So I've got a couple parts to that question.
04:54And when I sort of highlighted what's happening in funding markets here, there's really no concerns from sort of a
05:01plumbing financing perspective.
05:03And I think that's one of the key channels where we think about the link between the equity market and
05:08the fixed income market,
05:09that if we start to see more of a risk-off move, for example, we get some deleveraging from hedge
05:15funds and risk positions,
05:16that that can, you know, feed into both markets.
05:19But we're really not seeing any signs of stress in funding or plumbing.
05:23You know, we had the New York Fed's Treasury Market Structure Conference yesterday where this was a big focus.
05:30You know, a number of officials speaking about sort of the overall monetary policy framework.
05:35We're still operating in this ample reserves framework.
05:39There's really no signs of scarcity or financing issues at this point.
05:42Did you not off asleep after lunch at the New York Fed?
