00:00Greg Peters of PGM joins us now for more. Greg, good morning.
00:03Good morning.
00:03Payne. We're back to talking about Payne. I haven't talked about that for a number of years.
00:07And this started with the Chicago Fed President, Austin Galsby.
00:09Do you think they're willing to put this economy through Payne to get inflation back to target?
00:13Well, they're talking about Payne. I haven't seen any Payne as of yet.
00:16It's kind of interesting that since the Fed meeting last week, you know, although narrow, financial conditions have improved.
00:24So, you know, you haven't seen any true impact on rate hikes.
00:29And, you know, what I think continues to confound investors is how can, you know, 10-year be at just
00:36called 5% and equity investors just continue to kind of look right through it.
00:41And I think the answer is the underlying growth is quite good, right?
00:46So for all this focus on what the Fed's doing, where back-end rates are trading, fundamentals are pretty good.
00:53And that is a key driver of why rates are where they are.
00:57And I think we forgot that because post-GFC, we've, you know, been in a different world.
01:02And the Fed will keep pushing.
01:03And I just wonder what the yield curve started to signal here.
01:06So the whole curve shifted higher, but the shape of the curve is changing.
01:09Two's out to 10s, two's out to 30s, much flatter through the month so far.
01:12What do you think that's the signal of?
01:14Yeah, I mean, I've been calling for a curve steepener for, you know, years now.
01:19So I've thrown in the towel.
01:21So I do think we're in a flattening bias.
01:23But I don't think it's portending, like, I know where you're kind of going with this.
01:26Is this portending, like, OK, are we hiking into a recession, which is what the yield curve ultimately kind of
01:32tells you?
01:32Used to.
01:33Used to, that's right.
01:34I don't know if that's precisely the case here.
01:39I just think it's the front end being more responsive to Fed policy and the back end is just a
01:47little too blasé about certain factors.
01:49So you think that the wrongly priced one is the long end, not the front end, that maybe people have
01:55priced in an appropriate number of rate hikes,
01:57but people haven't priced in how much further inflation, growth, term premia could potentially push 10- and 30-year
02:04bonds.
02:04That's right.
02:05And I think that's been a persistent issue, right?
02:07If you look at kind of this market, investors have been really hesitant to bite down on this higher inflation
02:15narrative, this higher growth narrative, this idea of term premia being higher, right?
02:21So, yeah, I think we're in this kind of recency bias world post-GFC where investors just haven't really accepted
02:30the realities of the world that we're in,
02:32which look very different today than, you know, five years ago, for example.
02:36So, yeah, so if there's marginally mispricing, I think it's in the back end.
02:40The front end is much cleaner because you can just kind of see right through to the rate path, potentially
02:45at least.
02:46Well, this is a fascinating factor because if you do have an ongoing sell-off in the long end of
02:51the yield curve,
02:52at what point does that constrain some of the spending ambitions by the hyperscalers to limit issuance?
02:57Or do you just see ongoing widening in spreads that really challenges the credit segment?
03:03I think the challenge for the Fed and the markets more broadly is that you have, you know, that spend
03:10that's literally interest rate insensitive.
03:14So they're going to continue to issue.
03:16The way I always phrase it is I think Elon Musk is playing a different game.
03:20He doesn't care that interest rates are 200 basis points higher.
03:24He wants to colonize Mars.
03:26So bond people don't matter in that equation.
03:29And then you have the, sadly, Lisa, the sovereign side, they have to issue regardless, too.
03:37So you have these two large pockets of issuance that really is insensitive to the level of rates they have
03:44to issue or they need to issue regardless.
03:46I think that's a huge factor.
03:48And most importantly, it's just beginning, right?
03:52So we're talking about this AI build-out, you know, not to use kind of a baseball analogy, but, you
03:57know, we're in like the second inning, right?
03:59So this is just going to continue, continue, continue.
04:01And then you think about the sovereign bond side.
04:04The U.S. in particular, we've had this issuance lull this year.
04:08That starts to pick up into next year.
04:11So that's another kind of factor.
04:13So I firmly believe in this crowding out effect.
04:18And I think it's important to remind ourselves that we're just in the early throes of it.
04:24It hasn't even started yet.
04:26Can you take us inside PGM?
04:27You, Robert Tip, Mike Collins at the time did some great work when we were talking about the complete opposite,
04:32this whole bond market upside down, yields plunging, negative rates over in Europe.
04:37Internally, what kind of yields are you thinking about getting back up to?
04:41What kind of numbers do we need to start thinking about more?
04:45Yeah, so it's a good question.
04:46But the world has changed.
04:47I think that's the key here.
04:50And you think about it just from an investment-grade corporate issuance standpoint, right?
04:54So for the previous, it's called five, seven years, we were in a net negative issuance pattern.
04:59So that all else equal helped constrain yields, pull down spreads, and alike.
05:05Now it's the opposite.
05:06Now we have a net positive.
05:08So that supply picture is very, very different.
05:11Consequently, you know, we look at kind of the potential for yields, and we just see it higher, not lower,
05:17right?
05:18I think the question you have to ask yourself is, what would drive interest rates lower?
05:24And, you know, maybe it's a lack of imagination.
05:27But the only thing that I can really come to is a good old-fashioned recession.
05:32And that's not how you want to get there.
05:346% tenure?
05:35Come on.
05:35Is that realistic?
05:36It's like dancing around.
05:37Yeah, come on.
05:37Is it 6% or is it 5.5?
05:40No, look, I think 6% is a lot.
05:42But I think like 5.5% is infinitely doable.
05:48Okay.
05:49It's only 50 basis points away on 10s.
05:51Greg Peters of PGM.
05:52Greg, thank you.
