00:00This really is more like what interest rates should be and what interest rates historically
00:04have been, right? So when you go back and you look at the forever history of interest rates
00:09and benchmark interest rates globally, they're usually between 3% and 6%, right? So we're still
00:14well within that range. We're just not used to it because we've had a whole generation of
00:18effectively zero interest rates, and that's just not the case anymore. Now, that being said, I do
00:23think, and Paul, I think this is to your comment about today's market move and certainly yesterday's
00:29eye-popping market move as well, is that sentiment is just so bad, right? People don't want to
00:34take a step in and buy this market yet because they don't know where it's going to end up.
00:40Now, there's some important technical levels that we can talk about, but at the end of the
00:44day, until everyone has some clarity as to what's going to go on with the war, will we
00:48have some type of fiscal restraint? All of these things, and I'm not only talking about
00:53the U.S., I'm talking about globally, you're likely to have some people who are going to
00:57be a little reluctant to buy government bonds. Absolutely. Until last week's rate hike, Ira,
01:02it was really questions about the Fed's independence and inflation credibility that drove this bond
01:07sell-off. This week, we have data on a hotter-than-expected U.S. economy that's sinking bonds. So talk
01:14about the confluence of factors that's driving rising yields. Well, it's still some of the Fed
01:19too, right? Now that we're out of the quiet period and after the Fed meeting last week,
01:23you now have members of the FOMC coming out and saying, hey, we haven't seen a lot of progress
01:28on inflation. Well, that sounds pretty hawkish. So, of course, you're going to have, you know,
01:32somewhat higher interest rates and thinking, you know, how high is the Federal Reserve going to
01:36increase interest rates to? Now, you know, the market now is pricing for 100 basis points of
01:41interest rate increases over the next year. Will those be realized? I think that, you know,
01:46there's obviously a lot that can go wrong, but you'd have to think that the market is going to remain
01:52on edge until we have answers to those questions. I think Kevin Warsh did regain some credibility,
01:57right, in the fact that he did hike. He did say, look, because inflation is not yet at our level,
02:03we're going to do what it takes to get inflation lower. So hiking gave them some credibility,
02:07but now they have to continue to maintain that credibility by actually following the market path,
02:13at least to some degree, without having any forward guidance.
02:16OK, also auctions are big news now, right? Because we had a five-year auction yesterday. It was the
02:21second worst ever by one measure. And I thought people liked the belly of the curve. We have a
02:26seven-year auction today at 1 p.m. And we know there's only going to be more debt issuance going
02:31forward, especially at the shorter end of the curve. So have U.S. Treasury auctions become kind of an event
02:36risk? Yeah, I think they, well, they are an event risk. And, you know, we always, we look at them
02:42every single time we have one of these auctions from the two-year to the 30-year, because they're
02:47usually pretty boring. But when they're not, they're really not, like yesterday's five-year
02:51auction. You know, what's interesting, Scarlett, is you mentioned that, you know, yes, we're issuing
02:55a lot of debt, but we haven't, we actually have not increased the amount of long-term debt that we've
03:00been issuing on a gross basis since 2023. So it's not like, it's not like there's a lot more debt
03:06being
03:06issued. And in fact, on a net basis, there's less being issued because, you know, a lot of this other
03:11debt has been rolled down. But what I think is important here is that people don't know what
03:17the end state of the Fed's actions are going to be and how high inflation can remain. So with those
03:24two factors in there, people just, you know, they didn't show up to the auction. Like you said,
03:29depending on how you cut it, it was the worst auction since either 2022 or 2020, but it was bad,
03:34right? It was, it was, we grade all of these auctions, and it had the lowest grade that a five
03:39-year
03:39auctions had since 2022. Wow. Look at you, tough grader out there, Ira. What can turn things
03:45around, Ira? I mean, if, what can turn things around here in terms of the sentiment that you
03:50were mentioning? Yeah, I think number one is there could be a recommitment from the Federal Reserve to
03:58actually squash interest rates. I still think there's a little bit of worry out there that they're
04:03not going to be able to get inflation down. And then secondly, you know, and this is kind of an
04:08interesting thing. I suspect that once we get over the election, people will, you know, look at some
04:13of the data and say, okay, what tends to happen with deficits when we have a split government?
04:18Because it does look like the Democrats are going to take at least one of the houses of Congress.
04:22And actually deficits get better when we have split governments. So we put out a note about that
04:26a couple of weeks ago, just noting how every single time we've had a split government, with the
04:31exception of COVID, right, that was, you know, very unusual situation. But outside of that one example,
04:36over the following couple of years, if with split governments, deficits go down. And I think an
04:42improving deficit, and then obviously, if we get a slower economy, you wind up with with yields going
04:47down. But look, I'm not I'm this isn't good for total returns for bonds. But I'm not panicked about
04:52the bond market. It's not like the it's not like we're where we've moved the market away from
04:58fundamentals, right? Fundamentally, we should be here because the growth is good and inflation is still,
05:02you know, tuition at two and a half or 3%. And so we're fairly priced on a fundamental basis.
05:09So you look at volatility in bonds, it's now at the highest since March, that's the move index.
05:14Do you think that the rising volatility is turning off investors who would ordinarily be drawn by
05:19by these big yields?
05:21Well, maybe a little bit. But, you know, generally speaking, you know, remember, the move index is
05:25short term volatility. When you look at longer term volatility, like one year, 10 year, which is where
05:30like mortgage investors and a lot of a lot of people, you know, kind of hedge their longer term
05:35risk, that hasn't risen nearly as much. It's risen, but not not nearly as much as as short term
05:41volatility has. And yeah, that's one of the reasons you're repricing, right? So when you
05:46see higher realized volatility, you have to price for higher higher bond yields just to compensate you
05:53for that excess volatility. So that is part of it. But it also, you know, that's a feedback loop,
05:59right, where you get more volatility, you get higher yields, you get higher yields.
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