00:00We heard a lot of various things from Kevin Walsh there, but ultimately this meeting came down to two things.
00:06A unanimous decision to hike rates, more Fed officials seeing the potential for additional rate hikes,
00:12at least one more maybe potentially this year, not so much anything happening in 2027,
00:17and some modest revisions downward in some of the economic projections.
00:21Ken, was this pretty much what you expected?
00:24Yeah, I mean, the market was pricing in north of a 90% probability for a hike.
00:28So I think, you know, we were pretty positive that they were going to do something.
00:33But, you know, the long end of the curve, you saw a little bit of a rally as the announcement
00:38was made.
00:39And that's pretty much come off the 10-year now, basically slightly higher in yield where it started the day.
00:45The long bond was down about six, seven basis points. That's now about an inch, too.
00:48So I think the market thinks that they need to do more.
00:53If you look at the forward curve, the market thinks they could cut as much as three times through the
00:58next end of 2027.
01:00Hike, hike, yeah.
01:02Hike, yeah. Well, that's what I'm curious about, too.
01:04I mean, we're talking, at least if you believe the dot plot,
01:07basically a trajectory that takes us somewhere around 4.1% on the Fed funds rate.
01:11You have a two-year now trading at 4.7% and change, I believe.
01:15And that gets to this idea as to how much of the hard work is actually being done by the
01:21bond market rather than the Fed itself.
01:24Well, definitely a good amount of the work is being done by the bond market.
01:27And if you go back through history, the Fed usually follows the two-year.
01:31And the two-year is saying, we've got more work to do.
01:34And that's, you know, I think it's good in the sense that it gives investors attractive yields at the front
01:39end of the curve.
01:40We're not too excited to step into the long end.
01:42We think there's potentially more downside there.
01:44You've still got fiscal deficit issues.
01:46We're talking about sending $5,000 to everybody.
01:48I mean, there's issues at the long end, not just in the U.S. It's a global issue.
01:53And so we still like hugging that front end of the yield curve.
01:56Well, I'm curious.
01:57I mean, I understand what the two-year is saying.
01:59Let's just kind of go down, up the curve a little bit here.
02:03What does that 5% on the 10-year tell you right now?
02:07I know the moves today are basically nothing.
02:09But give me a sense of the elevation that we've seen in that 10-year yield and how much we
02:13should be paying attention to that.
02:15I think it can go higher.
02:16I mean, I think if you're in a world with higher inflation, I know somebody was just on earlier talking
02:21about how all this inflation is going to magically go away.
02:24Well, the CapEx is not ending for the hyperscalers and tech, the problems in the Middle East.
02:31You know, I doubt there's going to be a resolution there rapidly.
02:33So we're going to be in a world of, I think, elevated inflation for longer.
02:38And so I think you could see more hikes.
02:41And, you know, is 5% high enough for the 10-year?
02:45Is that enough term premium?
02:46So I think we're in a new trading range.
02:48I think the 5% was the ceiling of the old trading range.
02:51But I think in this new inflation regime, I wouldn't be surprised to maybe 5% is the middle of
02:57the ground and 475 is the lower end.
02:59And we can get up to 5.25 easily on the 10-year.
03:02I mean, I know in the past you've talked about this idea of kind of, you know, clipping coupons and
03:06not necessarily trying to make a really big duration call.
03:09But when you look at how far yields have come up, particularly on the long end, and just earlier today
03:14we had Bob Michael on Bloomberg Television over at J.P. Morgan,
03:17who was actually talking about how he has actually seen maximum pain out there for bonds and now seeing some
03:22opportunity to buy on the long end of the curve, primarily in the U.S., Japan, and in Australia.
03:28Are yields at the long end of the curve attractive enough to you where it would start to tantalize you
03:34to sort of go out there?
03:34I know you're more short-term, but give me a sense as to what makes it attractive to actually buy
03:39at 30-year or 20-years.
03:41Well, I'll just note that being on the short end has worked.
03:45That's been the top-performing part of the bond markets, being in shorter credit that has an attractive spread.
03:50It's either floating rate or it's kind of like in that two-year space.
03:53Look, obviously rates are higher.
03:56Obviously, they're more attractive than they were in the past, but you're still not talking about crazy high real yields
04:02at 5% with inflation, core PC up at 3.5% almost.
04:07So I think it's a little too early.
04:09I just don't think that you have tremendous amounts of upside.
04:13And I just think there's better places for investors to kind of put their capital if they want safety.
04:18I just don't think you need to have that long bond to hope that it goes up 10%, 50%
04:23if stocks go down.
04:24I mean, you just want something that doesn't go down when stocks go down.
04:27You don't really need an upside.
04:29Well, then give me a sense there where that kind of better risk-reward is than if it's not necessarily
04:33in the quote-unquote safety of treasuries.
04:35I mean, I know you dabble a lot in the mortgage market.
04:39We're talking about mortgage rates approaching 7%.
04:41I would think to a certain extent that would actually favor some of the agency mortgage bonds, given nobody in
04:47their right mind is going to be refinancing at these levels unless they have to.
04:52Yeah, I mean, it depends.
04:53If you look at the MBS index and you're a passive investor, you've got a lot of long-duration bonds
04:57in there.
04:57But if you're an active manager, you can buy short-duration agency mortgages, pick up – now it's widened.
05:04It's like 120 basis points over treasuries for kind of new production.
05:08Again, I know it's kind of boring, but us bond people, we're kind of boring.
05:12We're just trying not to lose you money.
05:13And the front end of the curve is higher now, and you can buy safe investment-grade – and I'm
05:19not talking like triple E minuses here.
05:20I'm talking triple A, double A, single A type securities, 120, 150, 175 over the curve.
05:27You know, it's not going to make you rich, but it's not going to lose you money.
05:31And even if spreads wide and it's short, it doesn't go down that much in price.
05:34So I think we like that defensive trade still.
05:37Again, it's boring.
05:38We've been pounding the table for it.
05:40It hasn't changed, but we're here to save you and not lose you money.
05:44And now you can earn a decent amount of rate of return to that front end of the curve.
05:49Yeah, well, and that's a good point, Ken.
05:51I am curious about just your thoughts generally on economic conditions and how that feeds into the credit picture and,
05:57more importantly, the health of some of these credit investments.
06:00I mean, the adjustments the Fed made on the summary of economic projections weren't really all that dramatic.
06:07I mean, basically, it seems like a little bit softer, but overall still decent economic growth and a relatively stable
06:12labor market.
06:15Look, growth is strong in the U.S.
06:18Earnings are coming strong on the investment grade side.
06:21Looks like there's no problems out there right now.
06:23Investment grade spreads are sub 80 still.
06:26As you go into the riskier parts of the market, levered loan market, high yield, bank loans, private credit, obviously
06:31there's some cracks.
06:33You know, software exposure in bank loans, for example.
06:35And the thing that's really on our minds is that there's a ton of issuance in the debt markets now,
06:41especially in the corporate space surrounding tech, AI, and data centers.
06:45It's becoming a larger part of the market.
06:48And a lot of investors passively invest into these corporate indices.
06:52And as more and more of these indices become tech and data center related, they're going to become more correlated
06:58in the stock market.
06:59Because, again, investors also passively invest in equities that are long tech.
07:03So something to really think about is if you're in kind of credit, you know, is that credit diversification from
07:09equities or are you just doubling down?
07:11You know, you're long meta and you're, you know, you're long fangs and meta.
07:15Nobody says fangs anymore, but let's just throw that out there for fun.
07:18You're long all this tech in your equity portfolio.
07:20Do you want to be long that in your credit portfolio as well?
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