Ira, your interpretation of the combination of the inflation data and the GDP data.

Yeah, so I agree with you.

Krishnamamani, when I worked for him 20-odd years ago, used to say that the world's not real, it's nominal.

And you guys just had that great discussion about it.

And that's very true.

And when we think about 10-year bond yields, we start all of our analysis with, what do we think nominal GDP is going to be for the next two or three years? Because that kind of sets the baseline for where long-term interest rates are going to be.

And we're right there.

Who knows how that's impacting inflation? I mean, one could argue there's not much they can do here.

And all of these studies show that if the average investor in a mutual fund makes, uh, if the average mutual fund makes 10%, the average investor in that fund makes 7%, that's because they're trading in and out at the wrong times.

So some of the sectors that you like currently, right? You, you, you like, uh, staples, discretionary.

Interestingly, utilities.

And y- you know, utilities are one of those sleepy sectors that, you know, you think about buying for income and for dividends, not necessarily for, for growth.

So talk about why maybe you like some of these sectors more than others.

Mm-hmm.

Uh, you know, we've seen obviously a s- significant, like, you know, debt capital market activity with the AI spend and the like.

That can't last forever though, right? Like, so, so, so how do we think about the, the, maybe the profit mix for some of these financial institutions, particularly those that are, you know, reliant on their capital markets businesses?

I mean, you're laughing, but that basically sent global markets into a tailspin when he said that, right?

I...

B+ rated to, uh, triple B minus is quite a few notches upgrade, so you have to get your debt to, uh, y- you know, debt to interest coverage down.

Okay.

I mean, it's not unheard of, but it's, you know, it's difficult to come back from that, particularly if you have refinancings.

Now, y- you know, I'm not a CoreWeave expert by any stretch of the imagination.

You'd have to talk to Rob Shiffman-

So let's go straight to the point and ask you, what are you expecting from, from the Fed next week?

Yeah.

So, so this is gonna be the latest that we've written our Fed preview in years because of the timing of the, of the CPI report being this morning.

So, you know, to preview some of that, I mean, firstly, the market is, uh, certainly priced for the Federal Reserve to increase interest rates, ultimately seventy-five basis points between now and the middle of next year.

If they don't hike interest rates next week, that would be the big surprise, right? Just because of what's being priced into the market.

Um, you've had Kevin Warsh mention on several occasions that he wants the market to be a guide for what the Fed should be doing, and in-- So, so if they don't, then what happens to the Treasury market? Well, I think first, the, the front end of the yield curve probably rallies a little, but not very much, because if, if they don't go now, then the market will start to price that they go more and maybe a little bit faster later.

Um, that's first.

So, so Ira, I know that being a good strategist is not about sharing what we think they should do, but I'm curious, what do you think they should do?

What does that tell us about the state of this market and the technical factors that are pushing things higher?

Well, so keep in mind, like the U.S. sell-off in the rates market is not happening in a vacuum.

It is a global phenomenon where you have rates in Japan and Europe and England all going up significantly over the past couple of months.

And, you know, as part of that, the U.S. Treasury is going to have to compete with those to attract more investors.

Five percent isn't the end of the world.

You know, we were at five percent this cycle, right, this economic cycle.

That's right.

When we consider how the fiscal situation is factoring into what we're seeing in bond markets, is there a signal that Congress would be able to send around being serious about what the Treasury Secretary described recently as fiscal consolidation that might help move things along? Or do you actually have to see it in practice?

The latter one.

[laughs] It does not address the fundamentals one iota.

It, it really is, I think, an, uh, just an acknowledgement that, hey, yields are higher than we want it to be as an administration, and we only have a few tools that we can really use in the, particularly in the short term, in order to try to stop yields from moving significantly higher.

Um, and so, so they, they took their shot.

Now, what, what... you know, what's interesting about this whole thing is not so much that they did it, because actually we had thought that the, there was the possibility that this would happen, but it's that, like you said, they didn't do it at the quarterly refunding announcement two weeks ago.

They did it kind of on a, you know, relatively illiquid midsummer day, right, instead of-

Hmm

...

Ira, what did we learn from Fed Chairman Warsh yesterday from his comments in Portugal at that conference?

So, first and foremost, Paul, he really does not want to give any forward guidance, right? He mentioned that a whole bunch of times to our former colleague, Sarah Eisen.

And, you know, I think Kevin Morse is trying to go back to the pre-Ben Bernanke days where Alan Greenspan spoke for the entire committee.

He was usually noncommittal.

And the few times that he was, he was very deliberate.

So like when he said, we're going to raise rates at a measured pace, for example, back in the early 2000s, that was a very Greenspanism and about as forward guidance-y as he ever got.

And I think Kevin Warsh would like to do that.

Is crude at all dictating the rates market or has that now faded as the Iran war turns into, you know, just never ending talks?

I mean, he wants a pure market reaction, but does this pure market reaction then become an input for the Fed?

Well, I disagree.

I mean, it always has been, right? The Fed has already taken into account what is the market pricing.

I think he thinks, and wrongly, and I disagree with him on this, the market has always, right, since I've been in this business since 1994, the market has always tried to anticipate what is the Federal Reserve going to do.

Now, you know, that changed a little bit with the more communication because now instead of the market waiting for a meeting or waiting for, you know, the H-4-1, look, I remember getting the H.4.1, that's the Fed's balance sheet, I used to get that off a fax machine so we could determine whether or not the Federal Reserve was easy or hawkish.

But we had to anticipate what the next move was going to be.

And that's always what the market is trying to do.

sorry that my mind is somewhere else.

Discuss the premium, the fancy stuff you guys work in every day.

day.[laughs] Yeah, so if you're talking about, uh, term premium, you know, basically the, the risk premium that you need to hold in order to...

Uh, or, or y- the, the extra yield you need in order to hold a bond for the long term, y- you know, that's actually been very stable for, um, for five years out to 30 years over the last couple of months.

It's, it's the two-year really that's been, uh, moving around quite a lot.

And initially that was because inflation expectations jumped much higher, and now it's really because the policy rate is now expected maybe to be increased, so basically the Fed hiking interest rates.

So, so that's where you get two-year yields up above 4% and, and the yield curve flattening a little bit.

Um, I, I think that's probably about done.

Do you, do you believe 4.2 percent's the peak?

For Chairman Warshaw, Ira Jersey, do you have an historic analog he can plug in, or is he in new territory?

[laughs] I think in many respects he's in new territory.

'Cause even though, uh, like, you could argue, and some people have argued, that we're, uh, we- we're moving toward a stagflationary-type environment because real growth should slow, um, given that you might have a lot more of people s- uh, spending having to go to, uh, to fuels and gasoline.

But then people then talk about electrification, and then y- you know, we're not talking about, you know, 10% inflation rates like we had back in the 1970s and early '80s.

We're talking more about, you know, 3 or 4% inflation, right? Which, um, historically speaking, when you go back even to, you know, earlier in my career, you go back 30 years when I started in this business, we, we were talking about, you know, 2.8%, 3% in, uh, PCE deflator.

That was fine and that was normal, right? So, um, so, so that is more sustainable, right? Inflation like we have today is somewhat more sustainable than inflation at 9 or 10%, like we had a few years ago, um, just because w- you know, h- at least over the last few years, you've seen wages growing at 4%, so that means you still had real wages going up.

Which is the reason why that personal income number, I, I think, is a little bit disturbing to me and I wanna dig into that a little bit more.

Mm-hmm

Do they just not focus on that at the moment?

Yeah, so the Fed's going to focus on how the international environment's going to affect the U.S. economy, right? And I think that when you think about higher oil prices, when you think about the fact that you've had now higher yields, in a way, the market's doing the Fed's job for it, right? It's tightening financial conditions at a time when the growth is okay, right? The growth isn't great.

Like, it's very disjointed growth right now in terms of the consumer, and we know that, right? We call it the K-shaped economy.

So they will take into account what's going on in Europe, what's going on in the UK, what's going on in Japan.

These are our major trading partners, and these will have an effect on the U.S., right? We do export a lot.

We do have large trade balances, both positive and negative with some of these countries.

So all of that will be taken into account for sure.

What did you get from that? What was the takeaway for you?

What surprised you the most from yesterday's news conference?

That it was probably the least important of the 17 central bank meetings this week.

You know, the Bank of England meeting, obviously, is what's really roiled the rates market today.

Yeah.

So I don't know if it was surprising, but I think the clarity that, you know, Jay Powell said that he intends on staying on until Kevin Morse is confirmed by the Senate.

I think that that was something that, you know, most people we had speculated about.

But he can you know, the fact that he confirmed that, I think is.

Is the call there, Ira, that they held rates the same, but they said, hey, we'll raise them if inflation gets warranted?

W- are inflation-adjusted rates in the many spreads, are they indicating a new resilient inflation bet? [chuckles]

Uh, no, actually.

If you, if you look at inflation break-evens, you look at either, uh, s- uh, swaps based on CPI or, uh, or just the, the Treasury Inflation-Protected Securities market, all of those are saying that, you know, they think over the, the medium and longer term, uh, inflation's going to just, you know, kind of hover a little bit above 2%, two and a half percent-ish, uh, in terms of, of CPI.

And what that means is, generally speaking, uh, the core PC deflator and, and even the headline PC deflator, which is the, the Fed's preferred measure of, uh, uh, of inflation, that tends to be 25 to 50 basis points lower than CPI.

So, so if, if the market is correct, uh, you could actually see even more, uh, interest rate cuts this year.

And, and this is something we, we published a couple of weeks ago, noting that, that the, that the inflation, uh, the inflation market is currently saying, "Hey, we could have sub 2% CPI prints year on year in a year's time," and that suggests to us that maybe the Federal Reserve would be more than happy to cut another, you know, 75 to 100 basis points.

Historically, how has the Fed dealt with, uh, changes in, in, in the dollar as it thinks about its policy?

So the, the Fed chair will always tell you during its semi-annual, you know, he used to call it Humphrey Hawkins, but the semi-annual monetary policy testimony, that the dollar is the purview of the Treasury Department.

Ira, where do you think the Fed is these days in their thinking about this economy and where they need to go?

Yeah, they were all over the place.

So what you didn't mention, Paul, was that we had a ton of Fed speak last week, too, and we actually had even more this morning.

So you definitely have two camps that have been built in here, and one is the more dovish side of the aisle who think that, hey, we should be cutting interest rates at least a little bit.

You even had Williams, the president of the New York Fed, who's the vice chair of the FOMC, so presumably has a little bit more weight than the rank-and-file members.

But so he said that like, hey, we can go we don't have to go quickly, but we're going to ease.

So that suggests to me that maybe a January skip is perhaps the base case for now, but then more easing later.

Put together the division within the Fed and this timetable for new personnel at the FOMC and whether we should be paying attention to all this Fed speak.

What does it mean for a bond market to see our labor so beleaguered?

Well, I- I think the, th- you know, the- these revisions are very hard to forecast, I mean, by- by definition, um, because they- they cover such a long period of time.

Um, and, you know, but the fact that we had even slower, uh, employment growth than we thought, um, the- and- and had forecasted, clearly the market took that as bad for the economy, and that's the reason why you saw bond yields go from up a little bit in the front end to flat to maybe a little bit, uh, a little bit lower in the front end.

Um, im- importantly, I think here, it just shows that, uh, you know, the Federal Reserve has to take this into consideration when they deliberate next week what to do with interest rates, and it just solidifies even more that they're going to cut next week.

And I suspect that it might actually give some of the people who are on the fence about w- the timing of cuts to not only cut in September but also do a string of cuts-

How much of this was totally baked in to the point where a 50 basis point rate cut is something that, um, is now becoming more of the default scenario?

Y- yeah, well, uh, you know, I don't think that the Fed's going to go 50, and the market's not fully priced for that, not even 50% priced for a 50 basis point rate cut.

Um, at least it wasn't when I, well, walked in here.

How much of this was totally baked in to the point where a 50 basis point rate cut is something that is now becoming more of the default scenario?

Yeah, well, I don't think that the Fed's going to go 50, and the market's not fully priced for that, not even 50% priced for a 50 basis point rate cut.

At least it wasn't when I walked in here.

I haven't checked in the last two minutes.

But I doubt that it's really changed.

And one of the big reasons for that is there still is this inflation overhang, right? The fear about tariffs maybe still adding to some inflation.

We haven't seen all of it.

Was that placing too much importance on it?

How much of this was totally baked in to the point where a 50 basis point rate cut is something that is now becoming more of the default scenario?

Yeah, well, I don't think that the Fed's going to go 50, and the market's not fully priced for that, not even 50% priced for a 50 basis point rate cut.

At least it wasn't when I walked in here.

I haven't checked in the last two minutes.

But I doubt that it's really changed.

And one of the big reasons for that is, there still is this inflation overhang, right? The fear about tariffs may be still adding to some inflation.

We haven't seen all of it.

Was that placing too much importance on

Here's Ira Jersey.

What's interesting is that we're priced now for a September rate cut and a December rate cut.

My, my feeling is, is that once the Fed starts to move, they're gonna move and, and keep going.

Uh, they're not gonna skip a meeting just at random.

So, so I think that if they do cut in September, they'll also go in October and then December.

Now, will they go more than, say, another, uh, you know, four cuts and, and cut 100 basis points or will they cut more than that? Still an open question.

I suspect that ultimately, they will cut below 3%.

Wow.

Right.

Uh, but you will see probably, uh, real yields move a little bit lower.

Um, but, but it'll be, move lower in a, in a what we call a bull steepening.

So you'll see short term, like five-year and two-year TIPS yields probably fall much more quickly than, than 10-year yields.

Because the longer term real yields are affected not only by, uh, by monetary policy, but also by expectations of supply, right? What is, uh, what is the deficit gonna be at? And, you know, so far, we haven't seriously addressed deficits and we're still gonna have $2 trillion more of treasuries a year from now than we have today, and that's going to continue to, to prop up long term real yields.

Do you think that's how the market's interpreting it, Ira?

Yeah, so the market's almost fully priced for a September rate cut.

What, what's interesting is that we're priced now for a September rate cut and a December rate cut.

How did this shape your view moving forward? Did you immediately have to write a report? Did you and your team really were surprised and had to reshape or re-angle your outlook?

Yeah, it was, I mean, I guess a little bit.

You know, the consensus for the unemployment rate was for it to go up a tenth, instead it went down a tenth, and I think that that was the single biggest surprise.

You know, we don't, our colleagues over at Bloomberg Economics, they own that unemployment call, But I think it didn't really reshape our views very much at all because we've been suggesting that we'll continue to kind of muddle along with okay employment situation with this overhang of tariffs, keeping the Fed on hold probably until at least the October meeting, which happens in very late October.

So we're looking at the fourth quarter in our view before the Federal Reserve makes any moves at all or we'll get enough data.

I think the market is more sensitive to data now, thinking that, oh, they're going to change on a dime.

One bad data print means that the Federal Reserve may go or not.

What's the view there?

Yeah, yeah.

And I would, I would still, I would still argue that there's still not credit risk, uh, more than a couple of basis points that's embedded in the, the current yield of say, the 10 year treasury.

Then 10 year treasuries, uh, the, again, the way that I look at it, it have to be somewhere around nominal GDP growth, right? So basically at the trajectory of what is the growth rate of the country in the longer run, and that's what the market is going to spit out, plus or minus, like you said, some kind of liquidity or either premium or discount.

Now, I would argue that with treasuries, to Josh's point right there, is that markets that have deep liquid funding markets, deep liquid derivatives markets, in order for someone to hedge that risk, you tend to get better outcomes and lower yields because of that.

So, uh, you know, we did a study, I actually, um, whe- when I was back at Credit Suisse, I did something actually for the, for a World Bank study about what is liquidity in a, just about every single OECD government bond market in the, in the world.

Okay.

... where we actually grade these from D to A+, uh, plus.

And, you know, we, we, we look at a variety of the bidding metrics in order to do that and, and how they compare to recent history.

Is that really a far out there outlier of an opinion? Is he auditioning for President Trump's pick for the next Fed? What

do you make of it? So it's possible that he's auditioning to be the Fed chair.

You know, and he'd be an interesting choice because he is kind of a, yes, he's on the dovish side, but he's also a mainstream kind of Fed thinker in general.

Now, the fact that he's dovish is because of his view of the economy and the outlook.

The thing that Governor Waller has brought up is, look, we need to do things in advance because of the long lags that monetary policy takes to affect things.

It winds up being six months to 18 months before an interest rate cut, one interest rate cut, much less several.

actually filter through the overall economy.

I mean, how do you think the Fed's thinking about tariffs, thinking about possible inflation? Because, again, we just really haven't seen it yet.

So walk me through what you're expecting then for Friday and how we're positioned in the market, because honestly, it's been pretty calm the last two days.

Well, so one of the things that we've noted, and I was talking to our derivative strategist, Tanvir Sandhu, just this morning, and he noted that for long end, right, so we've had this lot of angst with what's going on in the 30-year debt and even 10-year debt because of the fiscal situation and the fact that we're not really paying down deficits very much.

that people are long puts, right? So people have gotten out of the money puts on long bonds.

So therefore, it might be more difficult for the long end to sell off just because people are appropriately hedged.

But I do think that there's a lot of people who are kind of waiting and seeing what the economic outcome is going to be.

But that being said, there are people who think are nibbling at the edges, particularly when you get up to that 5% level in 30-year bonds because liability-driven investors, so insurance companies, pension funds, and a few others, they're really interested in treasuries at 5%.

So I think that's another reason why you keep on seeing a bid every time we kind of get above that 5% level on the long bond.

How does it look to you?

Ira, just simple, into June, is you and your team right? Do you have like a theme, or are you as confused as everyone else?

Yeah.

Well, I think the theme is confusion.

And, you know, certainly we're going to continue to probably have these headlines, right? Like we're trying to and the market is trying to find where the end game is likely to be in terms of all of these policy actions that the president's doing.

And, of course, when you have court decisions that seem to, you know, are going to might force the president to backtrack and some of these tariffs unwind because there's an overreach of executive orders.

That, again, puts another layer of confusion into things.

So I think what that means is that you're not necessarily going to see a whole lot of directional moves in the rates market in particular.

How's your market kind of digesting this?

are you as confused as everyone else?

(laughs) Yeah, uh, uh, well, I think the theme is confusion.

Uh, and, and certainly, um, that we're gonna continue to probably have these headlines, right? Like, uh, we're tr- trying to, and the market is trying to find where the endgame is likely to be in terms of all of these policy actions that the President's doing.

And of course when you have court decisions that seem to, you know, uh, f- are gonna m- might force the President to backtrack and, and some of these tariffs unwind because, um, uh, there's an overreach of executive, uh, orders, that again puts another layer of confusion into things.

So, um, so, so I think what, what that means is that you're not necessarily gonna see a whole lot of, um, uh, directional moves in the rates market, in particular, right? So the Treasury market, um, w- will probably just be kind of range bound.

But you're gonna see a lot of volatility within that range.

And that, that's certainly what you've seen the last two months.

Yep.