FidelityConnects: The Fed decision: Where yields and markets go next

 

 

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Hello, and welcome to Fidelity Connects.

 

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I'm Pamela Ritchie. The Federal Reserve held rates steady at its first

 

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meeting under new Chair Kevin Warsh but reinforced that the inflation

 

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fight isn't over and hikes are still on the table.

 

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Beyond the hold it's the message shift that matters the most.

 

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A higher for longer stance with the Fed offering less forward guidance.

 

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Our next guest says rates, not credit, are driving volatility for now.

 

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With yields doing the heavy lifting investors are getting paid to stay patient.

 

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Joining us here today to unpack what the Fed's rate decision signals for

 

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yields, credit and broader market dynamics is institutional portfolio

 

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manager Christine Thorpe. Hello, Christine.

 

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Great to see you. Thank you for joining us on what is a holiday in the US so I

 

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really appreciate this.

 

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Thanks, Pamela. I appreciate you having me on.

 

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It's a quiet day in the bond market so maybe that's the only sort of good

 

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piece. We're not taking you away from a screen in that particular way.

 

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We'll invite everyone to send questions in for Christine over the next half

 

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hour or so, do please do that.

 

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There are moving pieces with the Iran deal, with trade talks.

 

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We are going to zero in, though, on the new head of the Federal Reserve, Kevin

 

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Warsh, and dying to know what your particular perspective and take on

 

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his first meeting was. I mean, what did you think, first of all?

 

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Let's go there.

 

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All eyes on the FOMC this this week.

 

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You know, it's funny, I think heading into the meeting our expectation

 

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is that we would likely see more volatility around

 

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the meeting just because there were a lot of questions around what

 

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Chairman Warsh was going to say and how he was going communicate.

 

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We certainly saw a little pop in

 

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volatility as a result of that so we

 

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checked the box on that mark.

 

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Now, as you mentioned, Pamela, the Fed did hold

 

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rates steady and that's exactly what the market was expecting.

 

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I would say it was really that narrative around what he

 

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said that drove markets.

 

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The sentiment coming out of the meeting was certainly more hawkish

 

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than I think some folks were anticipating.

 

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We had nine members of the committee anticipate hiking

 

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rates at some point this year, whereas eight left rates

 

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unchanged, and we had one member that was in favour of

 

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a cut, or anticipated a cut later this year.

 

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Not surprisingly, Chairman Warsh declined to submit

 

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a dot for the dot plot, which, again, I

 

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think that was not a shock to anyone.

 

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Kevin Warsh did really emphasize during his press conference the

 

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committee's commitment to

 

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price stability just given inflation that's been

 

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continuing to run hot for the last five years.

 

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In his view housing has really been the one area of the market where

 

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rates have been restrictive. As he said he was really

 

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hard pressed to say the same thing about financial markets.

 

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Following the meeting we did see markets more aggressively price in

 

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rate hikes from the Fed.

 

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As of yesterday the market was pricing in about one rate cut through

 

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the September meeting. Those moves really

 

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did lead to short end yields

 

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moving higher. Now, at the same time we actually saw a rally

 

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at the long end of the curve, 30-year Treasuries rallied.

 

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We saw a fairly sizable curve flattening.

 

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If you take the difference between what 2-year Treasuries

 

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and 30-year Treasuries are yielding that curve flattened by

 

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about 15 basis points.

 

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I think that's really a reflection of the market digesting what Chairman

 

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Warsh said and believing that the Fed is credible on

 

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fighting inflation, which I take as a positive for Fed independence.

 

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We saw a little bit of term premium coming out of the long end

 

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given just some of that uncertainty moving down

 

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but I will say, Pamela, go ahead, please.

 

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I was just going to say do you think the market needed to see that?

 

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I mean, there seemed to be some of the messaging out of the administration

 

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and, as you mentioned, Fed credibility in terms of independence, perhaps

 

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the market need to see because the call from the administration has

 

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been very much lower rates, want lower rates.

 

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Kind of looking at inflation the market seemed to

 

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be happy that it was going to at least be tackled.

 

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I mean, would you put it that way?

 

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Yeah, I think that's absolutely fair, Pamela.

 

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I think there was a lot of questions around are we gonna get

 

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the more hawkish Fed, more hawkish

 

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Kevin Warsh that we had when he was last a member of

 

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the committee, or are we going to get more of the dovish version that

 

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we'd seen through the lead up to his

 

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ascension into the chairman role.

 

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I would agree that the market certainly took

 

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it as a positive. That's why we saw, really,

 

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the long end of the curve rally just given the

 

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commitment he expressed to fighting inflation.

 

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I would say that was certainly a positive.

 

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Now, we have, I think, a change in how

 

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perhaps the Fed is going to communicate moving forward.

 

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We saw a little bit of that stemming from this meeting.

 

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That's not necessarily a bad thing but I think we

 

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could see a little bit more rate volatility as a result.

 

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I want to ask about the rate volatility but maybe let's go to the

 

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communications point you mentioned that he did not submit a dot, which is

 

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one form of communication.

 

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There are lots of other types of ones about preparing the

 

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market, making sure the market knows that it's probably going to be either a

 

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hike hold or a cut. Some would

 

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call it placating, others would say it's nice for the market not to get shocked

 

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along the way. How do you sort of go down there knowing

 

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that as you invest there may be some more surprises one

 

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way or the other? Do you prefer one version over the other?

 

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It's a good question. I don't honestly have a strong preference

 

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one way or the other. What I would say is I think it's healthy

 

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to reassess, what makes sense from a

 

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communication perspective. Some of the communication

 

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tools that we've all become accustomed to

 

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were put in place, for example, following the GFC

 

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when the Fed was really trying to convince the market that they were committed

 

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to quantitative easing and things like that.

 

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That's clearly not the environment that we're in today.

 

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I think fair, again, to take fresh eyes and look

 

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at what makes sense and what's most efficient from a

 

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market perspective. I do think that the Chairman was pretty clear.

 

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He's really looking for the markets to

 

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react to real time data, assess what is

 

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credible rather than trying to look at that data and

 

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determine how is the Fed going to react to that.

 

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It's certainly a shift but, again, I don't think that's necessarily a

 

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bad thing. Let's ee how this continues to play out.

 

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The data itself, some will say certain things like non-farm payrolls or

 

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other types of data that go into making lots of decisions for investors,

 

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from your perspective but also for the Fed, some of it's smoothed

 

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to make it less volatile throughout a year, for instance.

 

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Do you think, again, that's a version of not so

 

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much placating the market but just making things more digestible for a market?

 

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Does the market need that, for example?

 

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I think we all have new tools at our

 

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disposal. We have new ways of looking at data.

 

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If you look at the non-farm payroll print it

 

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has been a really noisy source of information

 

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when you look at how revisions typically trend.

 

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That's why it's funny, we've actually used our own

 

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proprietary employment data at Fidelity pretty extensively.

 

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It's around 13% of payrolls in the US in

 

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terms of back office record keeping.

 

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We've been looking at that data to give us better real time trends

 

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into the overall state of the labour market.

 

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I think that's what the Chairman's trying to get at, are there other

 

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sources the Fed should be considering, more

 

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real time, less, perhaps, emphasis on

 

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survey data, things like that.

 

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I put that in the bucket of it makes sense to re-examine that.

 

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That's going to be certainly the work of the data source task force

 

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which was one of five task force that Kevin Warsh announced

 

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at his press conference. Again, we're going to

 

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see how this all progresses.

 

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Certainly that's something we'll be following closely.

 

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One of the other things to be tackled, it sounds like, or at least

 

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was a noisy discussion, I don't know, mostly last year it seems, is

 

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3% the new 2%, do we need inflation to come down to 2%, is that absolutely

 

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necessary? Maybe this is a discussion that sort of blows up every few years and

 

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this discussion is had. Will that be a focus

 

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as well whether inflation absolutely needs to come down and stay

 

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at 2% or not?

 

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We didn't get too many details in terms of exactly what the

 

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task force on inflation is going to be looking at.

 

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I think that's all certainly fair.

 

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Kevin Warsh did affirm that right now the 2%

 

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target on inflation remains the committee's target and what

 

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they are working towards.

 

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I wouldn't necessarily anticipate a change to that in the near term.

 

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All these committees have a

 

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timeline of wrapping up their work by year end.

 

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We'll see if that's the case. Hopefully,

 

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it may not be too much longer before we get a little bit more insights into

 

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that piece of it.

 

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Your colleague, Jurrien Timmer, sometimes will point to the discussion of

 

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... which is exactly what Kevin Warsh was looking at, maybe the Fed holds

 

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too many bonds. It goes into the quantitative easing and tightening

 

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question and where those, perhaps, should be held

 

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on a different balance sheet somehow.

 

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Can you just sketch for everyone sort of what that looks like and one

 

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of the options of how that could ... we've heard it could go onto the Treasury

 

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balance sheet, for instance.

 

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That's also going to be looked at.

 

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What do we need to know as an investor to understand that

 

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discussion?

 

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I do think that's one thing we knew about Kevin Warsh coming

 

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into the chairmanship is that he is in favour of

 

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a smaller balance sheet.

 

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To your point, Pamela, perhaps that takes different forms.

 

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I do think he has committed to

 

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if the Fed's balance sheet is going to be smaller moving forward

 

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the anticipation is it would be done in a gradual fashion,

 

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particularly if

 

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he is focused on once we have better

 

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news on inflation more of an easing

 

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policy, would not want to do it in a way that conflicts

 

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with that type of stance.

 

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I think, again, a lot of questions there but we know that's

 

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being carved out for the task force to look at.

 

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I think we'll continue to pay close attention to that.

 

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I think the other interesting question about Kevin Warsh is the

 

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Fed has obviously gotten into the habit of using the balance

 

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sheet pretty extensively during a crisis.

 

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I think that the larger question is if we do hit some type of speed

 

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bump where traditionally the Fed has intervened, would that

 

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be less likely under the current leadership?

 

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Again, hard to answer that right now but I do think that's

 

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one of the larger open questions.

 

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It seems to be a larger open question for, really, every so-called developed

 

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economy around the world that did pour money into the economy during COVID

 

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and then had to figure out how to sop it up and maybe

 

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not do that again.

 

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There does seem to be broad question about that.

 

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It's interesting. Let's go into what happens when

 

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there are things that happened outside of what we can see and model and

 

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test for in the markets, and ultimately the opportunities that that provides

 

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for bond investors, for you.

 

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The rate story seems to be one that you'll follow very carefully.

 

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What sort of opportunities lie on either side of watching the rate story and

 

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maybe the volatility therein for you as you look for investments to

 

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dig into?

 

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We've had a view for a while now, Pamela, I think we've been talking

 

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about, from our perspective,

 

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US Treasuries have really offered and have some

 

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of the most attractive risk-reward profiles when we look

 

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across the fixed income landscape.

 

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All-in yields continue to be

 

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really attractive from our perspective.

 

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We're still very elevated.

 

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If you look at the yield on the ag, for example, we're

 

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at 4 3/4% through yesterday, that's still

 

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really high versus where we've been historically

 

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if you look back over the last 20 years.

 

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Rates are something that we still really like.

 

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When we see volatility that's an opportunity for us

 

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to think about adding a little duration depending on the direction.

 

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We take the 10-year Treasury, for much of the last,

 

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call it 18 months or so we've been in that range of sort of trading between

 

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4 and 4 1/2% roughly.

 

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Periods where we've gotten closer to the top end of the range or have even

 

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moved past that as we saw back in May, those have been

 

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opportunities for us to add a little bit of duration.

 

15:43.342 --> 15:47.379

Certainly, as we get closer to the middle of the range

 

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or down towards the bottom I would anticipate those are

 

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times where duration may not be as attractive and you could

 

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see us taking that off.

 

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Those are the types of things that we've been leaning into.

 

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I'd say away from rates, credit spreads continue to be extremely

 

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resilient so we really haven't seen much of an opportunity to

 

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add a lot of exposure to those types of sectors.

 

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When you take us inside the positioning that you have right now,

 

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sort of the strategy itself, I think it's for a long time been largely

 

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Treasuries, and it is that interesting yield that you're talking about right

 

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there that's going on, spread out a bit and tell us a bit more about the

 

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positioning strategy that you have right now.

 

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Within our multi-sector offering our biggest allocation is

 

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to US Treasuries.

 

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As I said ,the yields are attractive but that also gives us a lot of liquidity

 

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that we'll be able to deploy when and if

 

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credit spreads move wider.

 

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If you look at history we know at some point that opportunity will

 

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come, where we'll be able to add a lot more risk to the portfolio.

 

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For now we think it makes sense to be really patient

 

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and pretty well diversified.

 

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We've been really cautious on investment grade

 

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great corporates. Those spreads are really priced at, basically,

 

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they're all-time tights.

 

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We saw a little bit of movement wider in March around the

 

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Iranian conflict but but since then we've continued to march

 

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tighter. With spreads being

 

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priced that tightly they're basically priced for perfection, a

 

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lot easier to see a scenario where they move significantly wider from here

 

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than tighter.

 

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We like to lean into really great security selection opportunities that

 

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our research team can find but overall I'd say there's not a big

 

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beta opportunity.

 

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The same goes for high yield corporates, for example.

 

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If we take the low investment grade sectors high yields continue

 

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to do really well.

 

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That sector is up close to 2% through yesterday

 

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year-to-date.

 

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Those spreads being as tight as they are I would say not a lot of

 

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room to run further from here but certainly, again, we

 

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think there's there's good opportunities under the hood for

 

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security selection, maybe some sector, our rotation

 

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within that band. Overall, I would say

 

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risk is pretty towards the low end of our portfolio,

 

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still outyielding the benchmark by, call it 80 basis

 

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points or so, but we would love to be able to add risk

 

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at some point, we just haven't seen that opportunity yet.

 

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On the landscape, when we spoke in March

 

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the war in Iran had been going on for a few weeks at that

 

19:02.107 --> 19:06.178

time. A lot of questions about, again, whether higher oil prices or

 

19:06.178 --> 19:09.348

something within there would provide an opportunity.

 

19:09.348 --> 19:12.117

As you say, markets have been pretty resilient.

 

19:12.117 --> 19:15.954

Do we now ... which looks like we're fairly close to the end of that, I mean,

 

19:15.954 --> 19:18.824

we don't really know, there could be a lot of volatility from here still ...

 

19:18.824 --> 19:22.861

do we go back to the story that was earlier in the year, at the beginning of

 

19:22.861 --> 19:26.632

the year, which is very much the discussion of AI issuance, is there a little

 

19:26.632 --> 19:30.769

too much? The market actually seems to be fine gobbling it all up right now

 

19:30.769 --> 19:34.606

but there's a question mark of where if there's a tipping point or if there

 

19:34.606 --> 19:38.810

isn't. How do you look at that risk opportunity right

 

19:38.810 --> 19:42.381

now in markets?

 

19:42.381 --> 19:46.552

I think you're right. I do think that story remains very much in

 

19:46.552 --> 19:48.654

focus.

 

19:48.654 --> 19:52.758

There's just such a massive CapEx spending

 

19:52.758 --> 19:57.329

cycle right now that we're seeing from all these hyperscalers, a

 

19:57.329 --> 20:01.900

lot of it is getting funded through the debt markets and they're

 

20:01.900 --> 20:07.206

issuing debt in a variety of different formats and structures, some

 

20:07.206 --> 20:11.610

in the investment grade bonds universe, some in

 

20:11.643 --> 20:15.981

a securitized format, they're issuing across tenors in various

 

20:15.981 --> 20:17.816

currencies, things like that.

 

20:17.816 --> 20:22.120

They are really trying to fund quite a bit of that

 

20:22.120 --> 20:26.692

through our markets.

 

20:26.692 --> 20:31.530

These deals are coming at an incredibly tight level.

 

20:31.530 --> 20:36.001

Nvidia, for example, just issued 20 billion in

 

20:36.001 --> 20:38.537

investment grade bonds this week.

 

20:38.537 --> 20:42.741

Now, 20 billion is a number that sounds incredibly large,

 

20:42.741 --> 20:47.346

and probably in all normal markets it would be considered that, but that's

 

20:47.346 --> 20:51.183

not even the largest deal that we've seen so far this year.

 

20:51.183 --> 20:55.487

Amazon priced a $37 billion deal back

 

20:55.487 --> 20:59.992

in March. Right now there's been a ton of

 

20:59.992 --> 21:03.996

demand for this issuance

 

21:03.996 --> 21:09.768

so deals are really getting done without issue.

 

21:09.768 --> 21:13.739

I think at some point you could see the

 

21:13.739 --> 21:18.043

market potentially blink and maybe be a little bit less reticent

 

21:18.043 --> 21:22.381

to digest all of this supply, which I

 

21:22.381 --> 21:26.418

don't anticipate letting up in the near term.

 

21:26.418 --> 21:30.756

From our perspective, we've been really selective, passing

 

21:30.756 --> 21:34.493

on, I would say, a lot more than we're participating in.

 

21:34.493 --> 21:39.064

At some point we could get a bite at the apple

 

21:39.064 --> 21:43.035

if spreads do move wider but right now that's just not what we're

 

21:43.035 --> 21:47.072

seeing. We're still very much underweight the technology

 

21:47.072 --> 21:51.176

sector as a whole. Now, there's a lot more upside, I would say,

 

21:51.176 --> 21:55.314

for these names in the equity markets than there is in bond markets

 

21:55.314 --> 21:59.718

so it's not to say that we think there's huge amount of

 

21:59.718 --> 22:05.023

issues when we look across these various companies, it's just what

 

22:05.023 --> 22:08.927

valuations they tap in the bond markets and whether we think that makes sense

 

22:08.927 --> 22:10.529

from our perspective.

 

22:10.529 --> 22:14.466

Related, again, a story that was more of a sort of end of last year

 

22:14.466 --> 22:17.869

into the beginning of this year and then we all got a little bit distracted, or

 

22:17.869 --> 22:22.374

some of us got a little distracted by other things, was the software story

 

22:22.374 --> 22:26.545

to the extent that private credit had been making sure

 

22:26.545 --> 22:30.549

that software hit the levels that it did, and then the disruption of AI

 

22:30.549 --> 22:34.786

within software companies came through and upended equities,

 

22:34.786 --> 22:38.757

but also the story in the bond markets was there and it was tough for

 

22:38.757 --> 22:41.993

private debt investors to sort of ...

 

22:41.993 --> 22:43.862

arguably, tougher for them to navigate.

 

22:43.862 --> 22:47.866

I wonder if you can just comment on that, where it is and ultimately sort of

 

22:47.866 --> 22:52.504

the public versus private story there.

 

22:52.504 --> 22:56.608

I would say where software was a bigger

 

22:56.608 --> 23:00.645

part of sort of public fixed income was really in the

 

23:00.645 --> 23:03.548

leveraged loan or broadly syndicate loan market.

 

23:03.548 --> 23:08.687

It's just a bigger percentage of the index relative

 

23:08.687 --> 23:12.657

to high yield corporates, for example, or what we have in

 

23:12.657 --> 23:15.327

investment grade corporates as well.

 

23:15.327 --> 23:21.533

Certainly, that was driving a lot of the underperformance in that

 

23:21.533 --> 23:25.404

asset class earlier in the year.

 

23:25.404 --> 23:28.740

We've certainly seen a little bit of a rebound.

 

23:28.740 --> 23:32.844

I don't think software is necessarily out of the woods.

 

23:32.844 --> 23:36.882

There's probably still a lot to be shaken out in terms of who's going to do

 

23:36.882 --> 23:39.484

well, who's not going to do well.

 

23:39.484 --> 23:43.789

I do think that's where a good research organization

 

23:43.789 --> 23:46.992

that active management matters.

 

23:46.992 --> 23:51.196

If you have a really strong analyst team like we do

 

23:51.196 --> 23:55.867

you can, hopefully, avoid more of the losers and

 

23:55.867 --> 23:58.303

really focus on some of the winners.

 

23:58.303 --> 24:02.607

Our teams have done really well this year, actually, being

 

24:02.607 --> 24:07.579

underweight or avoiding software even prior to the sell-off

 

24:07.579 --> 24:10.615

so, again, I think that's where that active management...

 

24:10.615 --> 24:14.619

That's the ticket.  It's not that you see things coming but you

 

24:14.619 --> 24:18.990

have a greater view on where things could go ultimately

 

24:18.990 --> 24:20.258

on [crosstalk].

 

24:20.258 --> 24:24.429

I think that's true. We have terrific partnership

 

24:24.429 --> 24:28.400

across ... it's not just the fixed income analysts but they're

 

24:28.400 --> 24:32.671

working with their analysts in the equity division

 

24:32.671 --> 24:36.708

as well. Just really broad perspectives but also

 

24:36.708 --> 24:39.778

the ability to go deep on all these credits as well.

 

24:39.778 --> 24:42.147

That's been hugely beneficial.

 

24:42.147 --> 24:47.819

I want to ask just a little bit about the story of trade broadly.

 

24:47.819 --> 24:51.857

We're a bit consumed with it in Canada because it's affecting

 

24:51.857 --> 24:53.692

a lot of things.

 

24:53.692 --> 24:58.029

I'm curious from a credit market perspective, from the fixed income

 

24:58.029 --> 25:02.200

market side of things, is trade disrupting, creating, again,

 

25:02.200 --> 25:04.669

opportunities potentially? Is it seen as a threat, a risk?

 

25:04.669 --> 25:09.074

How does it get priced in and discussed across mostly

 

25:09.074 --> 25:12.911

US bond markets?

 

25:12.911 --> 25:17.115

I think, honestly, the bigger topic related to

 

25:17.115 --> 25:21.119

trade and I would say tariffs has just been what

 

25:21.119 --> 25:25.457

is the impact on the inflation front?

 

25:25.457 --> 25:29.494

We did see a bit of a pickup from the tariff

 

25:29.494 --> 25:31.396

impact on good prices.

 

25:31.396 --> 25:35.534

That seems to be a little bit more muted

 

25:35.534 --> 25:39.604

so perhaps not as much of a factor when

 

25:39.604 --> 25:44.142

we look at the path for inflation moving forward.

 

25:44.142 --> 25:48.313

Certainly, there's plenty of other factors like the AI

 

25:48.313 --> 25:52.384

CapEx spending we were just talking about that I think could keep inflation

 

25:52.384 --> 25:55.487

perhaps stickier for a little while longer.

 

25:55.487 --> 25:57.422

That's really what we've been focused on.

 

25:57.422 --> 26:01.526

Our analysts did a terrific job, particularly at the outset when

 

26:01.526 --> 26:05.497

we were seeing all these tariff announcements coming through, in

 

26:05.497 --> 26:09.601

terms of understanding, again, what are the impacts

 

26:09.601 --> 26:13.405

to the companies we're investing in.

 

26:13.405 --> 26:17.442

I would say overall the impacts have been fairly

 

26:17.442 --> 26:21.813

benign. I attribute some of that to just how strong

 

26:21.813 --> 26:24.849

the backdrop has been in the US.

 

26:24.849 --> 26:29.387

Corporate earnings continue to be incredibly robust.

 

26:29.387 --> 26:31.723

The labour market seems to have stabilized.

 

26:31.723 --> 26:35.193

Consumers are certainly spending.

 

26:35.193 --> 26:39.831

They might even get a little bit more reprieve from prices

 

26:39.831 --> 26:42.601

they're paying at the pump.

 

26:42.601 --> 26:46.705

I would just say the overall fundamental backdrop continues

 

26:46.705 --> 26:48.239

to be really strong.

 

26:48.239 --> 26:52.210

I wonder if, just as sort of a final question, looking broadly, it's

 

26:52.210 --> 26:56.014

been central bank week around the world, lots of central banks making

 

26:56.014 --> 26:58.183

decisions, commentary and so on.

 

26:58.183 --> 27:02.187

We have the Bank of Japan saying that they might have

 

27:02.187 --> 27:04.289

to deal with their weak currency.

 

27:04.289 --> 27:06.992

Some are asking whether they already have tried to deal with their weak

 

27:06.992 --> 27:11.496

currency. In the UK there's been an election that could lead to

 

27:11.496 --> 27:15.800

government changes and bond market is responding

 

27:15.800 --> 27:17.669

there, it's a bit of a sell-off.

 

27:17.669 --> 27:21.773

Is it fair to say that most governments are dealing with the question of

 

27:21.773 --> 27:24.743

hikes and if and when that needs to happen?

 

27:24.743 --> 27:28.947

How do you sort of put the US in relation to some of the other government

 

27:28.947 --> 27:34.719

stories that are going on around the world right now in bond markets?

 

27:34.719 --> 27:38.957

I think you're absolutely right that everyone has been grappling with

 

27:38.957 --> 27:42.961

the higher energy prices and the pass through

 

27:42.961 --> 27:46.898

to inflation so not a surprise that we've seen

 

27:46.898 --> 27:51.236

a little bit, perhaps, more of a hawkish tilt out

 

27:51.236 --> 27:55.373

of some of these central banks. It felt like, perhaps, the Fed

 

27:55.373 --> 27:58.476

was catching up a little but this week.

 

27:58.476 --> 28:02.514

Now, I do think there's a lot of factors at play

 

28:02.514 --> 28:06.818

here. We're also seeing a lot of central banks

 

28:06.818 --> 28:08.753

keep rates on hold.

 

28:08.753 --> 28:12.757

That's probably where I would say for many of them that's the

 

28:12.757 --> 28:17.629

base case, but the data is changing quickly.

 

28:17.629 --> 28:22.300

We've got a lot of questions about the reopening of the Strait of Hormuz, what

 

28:22.300 --> 28:26.337

exactly is going to be the impact on energy prices.

 

28:26.337 --> 28:30.275

Again, this is where I think it's really hard to make predictions further out

 

28:30.275 --> 28:33.712

and I think a lot of these central banks are going to continue to stay pretty

 

28:33.712 --> 28:35.413

data dependent.

 

28:35.413 --> 28:39.484

Just remake for us, a couple of minutes left, the case for bonds.

 

28:39.484 --> 28:43.955

There's been lots of other discussions of other types of stabilizing

 

28:43.955 --> 28:47.959

forms of investing within one's portfolio.

 

28:47.959 --> 28:52.931

Bonds do what they're meant to do at the moments that they're meant to do it.

 

28:52.931 --> 28:57.602

What's the case of bonds at this moment, would you say?

 

28:57.602 --> 29:01.806

I think number one is that, excuse me, that income

 

29:01.806 --> 29:05.844

generation piece of it which, you know, I think when we talk about

 

29:05.844 --> 29:11.483

how high yields are that remains really attractive.

 

29:11.483 --> 29:14.586

That just provides a lot of cushion.

 

29:14.586 --> 29:18.623

Even if we get some type of price volatility as markets are

 

29:18.623 --> 29:23.928

trying to digest how central banks are going to respond that higher

 

29:23.928 --> 29:29.367

yields does provide some offset from that perspective.

 

29:29.367 --> 29:33.605

You're right, the diversification piece I think is alive and

 

29:33.605 --> 29:37.942

well. If, for example, central banks

 

29:37.942 --> 29:42.247

overtighten, if they overreact to

 

29:42.247 --> 29:46.451

higher oil prices that could ultimately

 

29:46.451 --> 29:50.955

be less constructive for economies and, perhaps,

 

29:50.955 --> 29:55.059

could lead to a situation where they may need to cut.

 

29:55.059 --> 29:59.798

In those types of environments if we get a slowdown in growth that's

 

29:59.798 --> 30:05.537

really where bonds are going to serve as a nice ballast in portfolios.

 

30:05.537 --> 30:10.074

The offset to that is if we do get a lot of higher inflation

 

30:10.074 --> 30:15.380

then the Fed's got to really reset rates higher significantly.

 

30:15.380 --> 30:20.218

In those environments where inflation and the Fed reaction is the main driver

 

30:20.218 --> 30:22.220

perhaps bonds are less of a diversifier.

 

30:22.220 --> 30:26.257

Overall, I think investors really care

 

30:26.257 --> 30:30.295

about bonds as being important when there's a

 

30:30.295 --> 30:34.465

need for downside protection, when the economy stumbles,

 

30:34.465 --> 30:38.603

things like that. Certainly, a lot of benefits

 

30:38.603 --> 30:42.574

to a diversified portfolio in terms of holding

 

30:42.574 --> 30:46.211

bonds to service that offset.

 

30:46.211 --> 30:50.181

It's such a delight to speak with you. You bring us such

 

30:50.181 --> 30:54.152

depth of knowledge into the economy and how all of these pieces fit

 

30:54.152 --> 30:56.921

together. Truly the rate story has been fascinating this week.

 

30:56.921 --> 30:59.090

Thank you for joining us here on Friday to close out the week.

 

30:59.090 --> 31:01.192

Christine Thorpe.

 

31:01.192 --> 31:02.327

Thanks for having me.

 

31:02.327 --> 31:06.264

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31:06.264 --> 31:10.401

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