Yield curve

I mean, the truth of the matter is they got a lot of ground just to kind of catch up to what the market's done.

Because since the war began back at the 1st of March, the entire yield curve has shifted a full 1% higher.

while Fed funds, the only rate that the Fed controls, the overnight rate, has remained exactly the same.

So, I mean, you could argue, I mean, I'd be willing to listen to the argument that Fed could raise 50 or 75 basis points just in an effort to kind of catch up with the rest of the curve, which then leaves you thinking, well, then what difference does it make if we get a 25 basis point rate hike or 50? Why would that not even be priced in at this point? Which then opens the door to, you know, more dovish interpretations, perhaps, if nothing happens.

Takafumi, thank you.

You're already speaking to it and alluding to it, but I'm going to just ask explicitly then about the long end part of the yield curve.

So we've seen a global repricing of term premia globally, I would say, and I know our global fixed income strategists would say that.

How much of the Japan story right now is Japan specific factors versus something that's maybe a little bit more global and ubiquitous in nature across fixed income markets?

I'll say.

What, if any, avenues are there that can stabilize the yield curve and how screwed is Besson?

Warsh can buy a bunch of it.

where Congress can stop spending some of it.

We'll argue that this is one of the factors pressuring real yields higher and adding to the recent increase in term premium.

Term premium is up, that follows intuitively, and while the shape of the yield curve has flattened, not steepened as of late, the reality remains that investors need further compensation to go out the curve, and this is unlikely to change in the foreseeable future.

It does build a good case for ten-year yields testing five percent, and even for the long bond renewing its cheapening trend as the real economy and risk assets continue to perform well.

This suggests that the next big wild card will be whether or not stocks can survive a series of rate hikes that are designed to cool demand, put downward pressure on inflation, and presumably will lead to some recalibration of equity valuations, if nothing else.

And on the flip side of the bond bearish argument, even if we've seen ten and 30-year yields move back above levels that we saw immediately before Bessent announced larger buybacks, the Treasury Secretary can defend his decision to upsize bond repurchases by pointing to the outperformance of U.S. Treasuries versus most other major sovereign debt over the past several weeks.

Bessent can also point to the fact that ten and 30-year Treasury term premium has come down since the August 19 announcement of increased long end buybacks.

This term premium dynamic has been one of several key contributors to the sharp flattening of the yield curve over the past few weeks.

Obviously, the hawkish shift in Fed pricing and the surge in oil prices has contributed to the flattening pressure, but the market is also pricing in the structural implications of the expanded buyback program for the overall balance between supply and demand in the long end of the yield curve.

You were talking about the structural problems, the fiscal structural problems, and also some of the problems that Mr. Walsh faces, which is more affecting the short end, perhaps.

How have those two things over summer affected your views, perhaps, on the yield curve and where the value lies?

Well, it confirms and we remain convinced about the steepening of the curve.

Then the size of the movement is debatable, but when compared to the market, given our out-of-consensus call on the Fed, now the consensus aligns on the ECB, but still there back in July, we were...

You know, is it sustained? I don't know.

But man, I would not want to be dead long, the long end of the yield curve right now.

Not...

Not at all.