00:00We're going to dig into all of this with our macro roundtable. Nisha Patel is SMA fixed income
00:04portfolio manager at Parametric and Deirdre Dunn is head of global rates over at Citi.
00:10It feels like we're getting a repricing here. And I guess the question is, what scenario,
00:15Nisha, are investors repricing for? Yeah, so I think there's a few things here.
00:20We've come off of a Fed meeting where the market got a taste of not only a Fed rate hike,
00:26but it becoming very clear that the Fed is obviously concerned about inflation,
00:30but also the speed of how fast inflation is coming down. So there are going to be further rate hikes.
00:37And I think the recent PMI data, I think the continued energy price, you know, kind of being
00:43here at this point are raising the stakes of inflation and just really looking to bring that
00:48down. The other element here is just the uncertainty, right? So I think we talk about Fed credibility.
00:55There's still a lot of uncertainty in the market that when you put all this together,
00:59that's essentially kind of creating this unfortunate or perfect recipe for this massive
01:05upside in yields that we've seen in the market recently.
01:08Deirdre, what do you think? How much more does this sell off have to go?
01:11So I would agree. I think there is definitely room for it to go further.
01:16I would bifurcate the move we've seen into two parts. One would be sort of a repricing of
01:21fundamentals, whether that's the outlook on inflation, whether it's the reaction function
01:25of the Fed, which is, of course, much harder to predict in an era where they would not like to
01:30share information about that. And I think also whether it is a renewed focus on the outlook of
01:36fiscal supply that we see in many of our G10 sovereign countries. But there's also sort of the
01:42market reaction and market dynamics. And I would say, especially in the last week, as we've seen moves,
01:47there have been questions around flows going through with positioning being, positions being
01:54unwound, long term positions held being unwound. And there is a sort of market dynamic that can
01:59at times exacerbate or overstate the fundamental repricing that we've seen as well.
02:03I mean, the other thing we need to mention is that this is a global sell off. The U.S.
02:07is not in
02:08isolation. The average yield on government debt around the world is just shy of 4%, which is a high
02:13since 2007. So we're clearly at the end of a low rate era. Nisha, how would you characterize the
02:19moment that we're in? Are we in transition or has that transition already happened?
02:23I think a lot of this transition has happened. So I feel like, you know, towards year end,
02:29we're going to be at a critical point. And I almost think of it as this element of uncertainty,
02:33as I mentioned, that's being priced into the market. But post, let's say, midterm elections and
02:38towards year end, I'd like to think we'll be in an environment where some of that uncertainty could be
02:43taken out. Right. We have a few more knowns and less unknowns. Now, regardless of the outcome of
02:48midterm elections, it's going to be one thing that is going to be behind investors, a little bit more
02:52clarity on what the legislative and fiscal backdrop looks like any policy changes. We will have had
02:58one more Fed meeting behind us. Right. Perhaps more clarity and more credibility that the Fed can
03:04look to earn to earn the markets trust, essentially. Right. So perhaps there's more confidence there
03:09that, hey, the Fed is going to fight inflation. They have the tools to do it and they're willing
03:14to do whatever it takes. So I do feel like we are on, let's say, the tail end, if you
03:22will. I think
03:23we've seen a lot of this price action. And again, it's been a confluence of events that have taken
03:28us there. And I'm optimistic that I think a few of this more knowns that we'll get towards the year
03:33end will really help create clarity for investors and markets. It's a rate hike in October unknown,
03:39Deirdre. It's still pretty close call. I think we'll get some more data before then. I think we're
03:44pricing in, you know, 55, 60 percent chance. We'll get some more data before the meeting. So I would
03:49imagine that can change. It's certainly not a given. And I think it's something that the market will be
03:54watching very closely. So this week's five year auction, which was yesterday, was the second worst
03:59ever by one measure. I thought people liked the belly of the curve, but that didn't appear to be
04:04the case, at least yesterday. What does it mean, Deirdre, that only the two year and three year
04:08notes now have coupons below five percent? I think the rising rates overall are clearly a focus for
04:15cities, clients and for market participants across the board. I would be wary of reading too much into
04:21any one individual auction. I think we've seen, you know, something like of the last six 30 year
04:27auctions. The overall move of the market on the day has not reflected or has been sort of a
04:32counter indicator of interest actually in that auction. I think so. I would look much more in
04:37sort of aggregate at pricing. Higher yields are again in focus, getting a lot of press. It's not
04:43really a new issue. I wouldn't say the information that we have or the outlook that we have on supply
04:48has necessarily changed. And so it really was a known thing that's kind of just back in the forefront
04:55of investors' minds. That may be the case, but it increasingly feels like these auctions become
05:01kind of an event of their own. Nisha, do you think that they've become a potential event risk? Because
05:05there's only going to be more issuance going ahead. And I just think about the auction that we're going
05:10to get at 1 p.m. Eastern time today, a $44 billion seven year auction. It's possible it can become
05:15an
05:15event risk. But I think at some point, once yields are high enough, right, you hit a clearing point
05:21and an inflection point where ultimately you will have enough demand to satiate kind of these
05:26auctions and see these clear very differently than what we just saw. And I think to kind of take that
05:33further, Deidre mentioned higher yields. I think the biggest takeaway in this market is for clients
05:39that have been sitting in cash and, you know, we can it's going to be very hard to call the
05:44direction
05:44of rates where we essentially top out. But the biggest takeaway for fixed income investors is
05:49the inflection point is here, right, in many parts of the curve. So it's less about avoiding
05:55duration. It now is a question of, well, how much duration is an investor comfortable with and are
06:01you getting compensated for it? And I would argue that you're starting to see that, right? There's
06:06the income component that is becoming very attractive for these longer term investors, really anywhere
06:13across the curve. And I think that's kind of the silver lining that we're starting to see here. It's
06:18less about timing. And it's more about thinking about this of an entry point, especially if you're
06:22underweight fixed income and you're sitting on a lot of cash. Deirdre, what do you think?
06:28I would agree. I think I think we are starting to see some good interest from our clients across the
06:34board at Citi in terms of interest in the bond market. But I would also say that the, you know,
06:40sort of market functioning liquidity, the speed of the moves right now still is adding a bit of a
06:45liquidity risk premium on top of current market levels. That will probably persist a bit. And of
06:51course, we have to stay focused on what the broader economics are, fundamentals. You know, there's many
06:57other things in evolution right now in the market, whether it's looking at AI or looking at the
07:02performance of risk assets. I think to date, risk assets have weathered this rate rise decently well.
07:10But that's something that I think the bond market will continue to be very focused on.
07:13Yeah, we'll definitely be keeping an eye on that. I look at volatility measures like the
07:16move index, and I know it measures short term volatility, but it's at the highest since March.
07:20To what extent do you think rising volatility is turning off investors who would ordinarily be
07:26drawn to these rising yields? Deirdre? I think volatility contributes and, you know,
07:31appropriately should contribute to somewhat of an increase in risk premium. And I think that's what
07:37you're starting to see filter through. I think it's very reasonable that we would expect to see more
07:43volatility with just the uncertainty in the outlook and certainty in both the economic outlook, but
07:48also the central bank reaction function and some of the broader geopolitical and economic evolution,
07:55you know, phase that we're in. So I think it's relative. It's it's pretty reasonable that we see
08:00that. But I do think, as I said earlier, I think that the stress that we've seen in the market
08:06in terms
08:07of trying to find a clearing level in these past this past week or so is probably contributing as
08:11well. So, Nisha, everyone keeps talking about how this time around we've got higher starting yields
08:16than before. What does that mean for the return profile of bonds overall and for longer term
08:21allocations? Yeah, I think that's the key component here. So, you know, we've obviously talked about how
08:27the correlation between stocks and bonds has really broken down. Right. So in an environment where
08:32inflation remains higher, you have bonds and stocks moving the same direction, not ideal for an
08:38investor. I think where this is an inflection point is once you have starting yields that are,
08:44let's say, four percent, five percent, it helps provide a cushion. So to put it another way,
08:50right, rates would have to move, let's say, another 50 to 75 basis points right to the upside from where
08:57we
08:57are today. Right. Which is a massive move. And I'm just kind of broadly speaking in high quality
09:02markets before you're even negative in terms of return. Right. So you're getting compensated for
09:08that duration for that duration risk. And I think that is really kind of that higher kind of that
09:14higher starting yield. Now, if you have rates flatline, let's say sideways, marginally move lower,
09:20that higher starting yield is going to do a lot of the work of that return as well. And obviously,
09:25you can have you can benefit some price appreciation if rates do move down marginally
09:30from here. So biggest difference being many investors, fixing investors were burned from
09:35post-pandemic lower rate environment, us normalizing to higher yield environment. Right. That was a rapid
09:40move. Yeah. That was back when higher when starting yields were one percent. Right. Rates didn't have
09:45to move much before you're in the red. Yeah. Now it's a very different story.
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