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Alfonso Peccatiello

lines on the record: 140
first: 2023-10-03
most recent: 2023-10-03
sittings or episodes: 1
sources: podcast

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“It's on the macrocompass.com, and I really hope this course will help people understand the mechanics behind stuff like ill curb inversion. So in the course we discussed about bear sipping and bull flattening and bull steepening, what do they mean? How do they relate to the growth cycle? What happens if growth is accelerating and you're having the bulls flattening? Which sectors of the eel curve are you supposed to look at? All of this is finally, I hope, explaining a very comprehensible way. And that's what I wanted to achieve through this bond market course.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“Well, I want to as well give people a 20% off only to the first 50 people that will go and use a discount code macro20 and they can find the course on the macrocompass.com. We can also put a link maybe. So the first 50 people that bike will get a 20% off.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“What we just talked about. So look, I've been in bond markets professionally as an institutional player and it always bugged me that it's a kind of a secretive market. It's full of jargon and technicalities and people get lost and they're confused. They understand it's important, but they're scared of it because of these jurgen and technicalities. So I said to myself, well, this has to end. And how am I going to fix it? I made a bond market course. And the bond market course basically has the aim of unpacking all this jargon and technicalities and making it comprehensible for people, for return investors, for people that are listening so they can get the weapons to really understand what's going on in bond markets, which will also help them understand how to position their portfolios, what to do with equities, what to do with other assets they have.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“Unlike in America. So banks are a huge source of credit for the Eurozone. And then corporates would say, look, I have 10 banks lined up. I am going to decide the terms. And the terms are going to be saying that this is covenant of light. So if my leverage goes above a certain ratio, I don't have a penalty. No penalty. Scrap that out. I mean, you have to lend to me whatever. These are the conditions I decide. And banks didn't really have an alternative if they wanted to generate margin and be competitive. They had to lend. So they took more risks. So it's not a lot about interest rate risk and hedging that matters, but credit quality can't be hedged or backed up by central banks. And that's what worries me the most when it comes to banking system right now.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“With negative interest rates, you were bleeding money literally as a European bank, you couldn't charge your depositors negative interest rates. So you were charging them zero and you were paying to the ECB negative 50 basis points. So you understand that's not really viable. You were looking to produce any asset check at any yield that was acceptable. Corporates at some point had a great price in power over banks. They would show up and they would say. Looking for funds. I have 10 other banks lined up. And in the European world, bank lending represents a huge portion of credit creation. Unlike an”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“Very bad late cycle, and there I'm not sure that European banks are doing better than US banks because the credit quality of this European borrowers in general, as we discussed because of the refinancing cliffs, isn't looking particularly good. And also because of negative interest rates in Europe, negative interest rates. European banks were forced to take more credit risk over the last three five years. They went into more leveraged loans, leveraged real estate business, CLOs, other types of more aggressive lending, covenant light loans. So basically, I'm not going to say my own experience, but back when I was in the European banking industry,”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“ECB could do the same, okay? And if it's pension funds with the same problem, they could set up a special vehicle where even a pension fund can post their treasury set the Fed or their boons at the ECB. When it comes to collateral value of bonds, the central bank can always try to fix that. And generally they're effective in doing that. When it comes to credit quality, if the commercial real estate sector, if the housing market, if credit quality is deteriorating, the credit quality of the asset side of the loan book of a bank, the ECB can't do anything about it. They can't say to a European bank, ah, your real estate mark to market of your loan book is down by 20%. Don't worry, I unilaterally decided housing prices are 20% higher, so you're done. That doesn't happen. So it's the credit deterioration, really, that it's banks.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“The other story is credit because banks can go under pressure late cycle. People look at this interest rate sensitivity, but really what happens is that the credit quality of their asset book deteriorates, that's the biggest risk. Because the Fed basically said, hey, I'm going to subsidize all your interest rate losses. If you didn't hedge, you can post the trash you said me at the BTFP. They trade at 50 cents. I don't care to me they're worth 100.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“Yes, because of tighter regulation in Europe, because of the nature of the market, I think European banks are the median European bank is less at risk from higher interest rates than it is the median US bank.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“Last stress test showed that the median European bank would lose about 5 to 7 percent of their capital if interest rates moved higher by 100 to 100 basis points. They have moved higher than that. So European banks have taken a hit on their capital, which is fine, but also they're making more money because they can lend at much higher interest rates and deposit rates in Europe are relatively sticky. They're going up, but not by a lot. For instance, in Europe, we don't have a money market industry. It's not like Af can take money out of a bank and invest in a money market fund. There is no money market fund industry in Europe. So every jurisdiction is really different.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“So, I mean, the stress testing for small U.S. banks is ridiculous. I mean, it's just ridiculous. But even for large banks, JP Morgan isn't forced to report that figure that I mentioned before. They do it anyway, but they aren't forced to do that. In Europe, you are forced. Every bank has to stress test their interest rate risk on the entire balance sheet. They have to tell the ECB, I'm going to lose 5% of capital, seven, ten, twenty.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“So, the European Central Bank stress test is, is that a word? Does a stress test on the interest rate risk that European banks are running at an overall balance sheet level? So European banks are forced to report what is the net impact on their capital”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“Yeah. Do you think that our European banks better suited for what's to come than US banks because they have shorter duration assets? So there actually will have lower mark-to-market losses, even if they're not marking it because it's whole to maturity.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“Everywhere. This is bound to make some serious damage somewhere. I can get my hands on where. It's often where you expected the beast, to be honest.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“So, if it happens in Europe, but it's systemically important, so it happens, I don't know, European real estate or in some place, which is a large market cap, which has reverberation into pension funds investments, and it has several connections around the world, it might be big enough to scare markets systemically and not only European markets. So I don't know where it happens, but the usual suspects are highly leveraged business models, places with high refinancing cliffs coming. But again, because we are testing really the waters everywhere in the world, every bond market, basically almost every bond market is bare steeping. We're applying the same narrative everywhere, including in countries and in jurisdictions that are more vulnerable because maybe they have a higher floating rate, private sector borrowing market. Maybe they have more refinancing cliffs. Maybe they have other reasons. You're applying the same pattern.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“Which is incredible for like a few hours, you know, that's what I mean. The market went into a higher chance of a cut than a hike. That's how much we freaked out, okay?”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“And I actually think I could be wrong, but that it was so bad the surge in the rally in rates, and it was a very crowded trade shorting rates beforehand, that the March meeting was priced as probably going to stay flat, but there's a more likely chance of a cut than a hike, which that's jeff.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“Yes, it was in March. So at the peak of the March panic, the bond market was rising to 50% chance that Paul would cut rates by June, July, past June, July. Okay. Yeah. So this was the level of stress in markets caused by hindsight, a few banks being rhymed like cowboys.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“The market freaked out on some small banks being run like cowboys. With hindsight, that is what happened. The market at some point was pricing the Fed to cut rates, I repeat, the market was pricing the Fed to cut rates this summer, this past summer. So we're pricing a higher 50% chance that Powell would cut rates this summer. This was the level of how much markets freaked out.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“It's a situation where you have a very high amount of refinancing thefts coming, you have oil prices that are making it tougher on European consumers. You start already from recessionary starting points check. I have to think that Europe is a very vulnerable place. Now, don't get me wrong, it might happen that we get it somewhere in Australia. I have no idea, but looking at the information I have today, I think Europe and the UK look particularly vulnerable to some credit events somewhere. And you might be asking yourself as a US listener maybe, do I care about it? Well”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“Think my it's always very hard to pinboard these things because they tend to happen where you least expect them, right? And I don't know why, but my gut feeling goes towards somewhere in Europe. I think the level of borrowing rates is something that in Europe we are completely not used to.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“So, what do you think is what's going to break if in 2018 it was the high-yield bond market, if in March 2020 it was everything, if in 2008 it was the banking system, what do you think is going to break? And might it be, you know, rather than having black and white thinking, something's either going to break or everything's going to be fine and dandy, we can have something in the middle of it didn't shatter, but it's not looking great. And the Fed needs to intervene. And they're not going to cut 500 basis points. They only cut 100.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“Interest rates are going higher. So that means your starting point in buying bonds is higher yields. That means the chance you get to generate a sharp drop in yields and therefore very high returns is actually higher. So it might take longer. And because the Fed's ends are tied by high inflation, it might get some orders for the Fed to cave into pressure. But we're basically exerting more pressure on the economy, more pressure on markets right late in the cycle. And we are providing investors with a higher bond yield as an entry for their portfolio edge, which means that I don't know if in the next three or six or nine months there is a higher chance something goes wrong with the higher entry in bond yields, which makes your bond position more likely to generate outsized returns over the next 12 months.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“So look, the story is this is happening late cycle. It's dangerous. It's rare. It increases the chance that something goes wrong somewhere, be it in the economy, be it in a leveraged business model, in credit, in housing, I don't know where, but it increases the chances that something was wrong.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“What do you think happens if the last time this occurred was 1981? I think in October, I think it was during a recession. And pretty soon thereafter, I mean, I think this last time this signal occurred in 1981, it was pretty close to the all-time high in interest rates since like 2000 BC in modern-day Iraq. So with the sample size of one, that looks pretty bullish for bots. Sample size of one.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“Fed on paws, caught in fishing coming down, growth coming down, and still the market was pushing for bear steepening. It took a few months until some cracks starting to occur, right? There was late 2007, early 2008. So this bears deepening late in the cycle is really, really rare, but also more dangerous because the economy isn't fundamentally justifying bear steeping. It's actually proving the opposite. But the narrative of wanting to push higher for longer, of people getting tired of waiting for this whole recession. Get surprised into the bear stickling of the curve while the economy is slowing down. It's a double whemmy negative for risk assets and it increases the chance that something goes wrong. That's why I call it a rare and also a pretty dangerous occurrence”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“Declare wasn't inverted was enough to freeze the credit markets in November and then the equity markets in December. In 2007, you had the longest Fed POS on record between April 2006, if my memory doesn't play games with me, and December 27th. So it was a long, long pause, but come about late summer 2007. It was 13, 14 months off. 525% Fed funds.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“So then Now we're looking at the other side of the bear steepening, which is really rare, and it's happening while nominal growth is trending down. So, what that means is the market is pushing this higher for longer narrative. It's getting priced into a bear steepening, but the fundamentals are not justifying the bear steepening. Nominal growth is trending down. So late cycle, not early cycle, but late cycle bear steepening is very rare and very dangerous because you're passing through more tightening through the economy at a time when the economy is slowing down. So the combination is generally very toxic. And this combination has happened only a few times, really, generally lasts not a lot, maybe a few months at best in 2018, a couple of months of mild burst deepening while the economy was decelerating.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“And so, yeah, bear steepening often occurs right at the beginning of a new economic cycle, right after the Federal Reserve has cut. So then the long end sells off, and that's, boom, it's Goldilocks. 2009, 2021.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“Do you remember what happened to stock market? Going through the roof and only, I think that was the period when the Russell was outperforming the Nasdaq because you had nominal growth, as you will see in the chart trending to the upside extremely rapidly you had fiscal stimulus reopenings all at once. The curve was bear steepening, but the economy was showing you that a bear steepening was fundamentally justified. And so the stock market was doing great.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“Bear steepening per se is not an issue for markets and the economy if nominal growth is healthy and rising. Why? Because fundamentals are showing you that the economy can end with it. You have this narrative, higher for longer, bear steepening is happening. But if nominal growth is trending up, Jack, and we can put up the chart that shows the bear steepening in 2021. Do you remember when Biden won the Georgia elections? Do you remember that? So that cementified Biden's Senate majority. And that basically led people to think, oh, the fiscal stimulus we're doing now is going to be done forever or almost. And so the curve bears deepened.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, Volker. This is really aggressive. And this is So, in 2018, we had a miniature version of what we are having today, right? So we started from a curve which was first mildly murdered, then not in murder, then the bear sipling was relatively mild, but it occurred. The level of interest rates was also lower as this was happening. Today, it's so long steroids, right? You start from an inverted deal curve and the bear's tipping is much more aggressive. The rate of change is super, super hard. And so basically the way you need to look at bear stiffening is the following. It's very rare and it's telling you that higher rates over the next one to two years are not going to lead to more cuts down the road. That the economy can take it. It's higher for longer. It's sustainable. It's fine.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“This is historic. And I had a, you know, I'm sure a bias of I was, I wanted to look for patterns going through the data, but I looked through the data and I set up some rules and I don't think we've had this kind of flavor since 1981. Yeah.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, well, you said you can make a case why it's good in a long term portfolio. I would say if bonds sell off the 30 year goes to 5.25%, you wouldn't have been proven wrong on the long-term portfolio. I'm a young person and people who are watching us who are young people, you definitely should be massively overweight equities. And I don't know if bonds should play a role at all if you're my age. I'm not going to say what my age is. But bonds at 4.75% and the slowdown has not occurred yet. I mean, you know. tactically it's getting a little a little interesting. I want let's all right we still got to deliver on the the bear steepening nerd because this is exceptionally rare where bear steepening is occurring during an inverted yield curve 20 to 2018 scenario you said wasn't during an inverted curve and the bear steepening it was it was pretty pretty mild i think you know it was a 17 basis points in like 30 days”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“He doesn't get so down, but he doesn't get it. So, no position instead puts you in a great position because you can assess incoming data in a more rational way and make this risk-reward assessment better. And at the end, this is a game where you need to accept you're going to be wrong very often. I am wrong a lot of times. And, you know, just recognize your bias and be humble. And we talked about rates at 475%. Rationally, I can make a story for which Ian's at 475% from a risk reward perspective, they deserve a solid position in a long-term portfolio. Might be that in six months, I'm proven wrong. So I need to be able to also cater for that outcome. And that is very hard for a lot of people.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“And also, my experience talked me that one of the best ways to do that is tactically speaking, very often do not have a position. People inch, they find this very hard, but no position is a great position because it reduces your bias massively. When you have a position on, you'll find yourself more likely to read material that validates your position, right? Read people agree with that, you comment them on Twitter, yeah, and I agree with you.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“Again, this is with the set of information that we have today. And we discussed about the risk and the reward of the trade and the best you can do is keep yourself grounded, analyze the data, hopefully without a bias, which is impossible because any of us has biases. It's in the human nature to be tilted towards a certain outcome. You know, it's a bias. The important part is to recognize them, is to say, okay, well, I'm biased to be a long-term bond bull. I am biased to be a guy that thinks that the US will always dominate an emerging market equities are irrelevant. They don't matter. Whatever is your bias, okay? You think gold is going to go to $3,000. Whatever is your bias. Important part is to recognize it because you often are going to get tilted to that. And instead, you're supposed to be able to analyze new incoming data from a relatively rational standpoint. And my mentor.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, and I know a few people, and I'm sure you know people who manage money for emerging market clients. And I think some of them, I'm just making this assumption, but they're looking at 4.5, 4.7% treasury yields dollar denominated as just a huge win, like a total layup. So you're right about, I mean, it's more attractive. 4.5 is more attractive than 3.5.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“Yep. You can do that. The reality is that conditions are always changing, and that's the beauty of this and also what makes it very hard is to be humble enough as an investor to understand that. Conditions have prevailed in the past and that have led to a certain market reaction might not repeat again. You might have the same conditions and a different market reaction. So you always need to be humble and flexible. And I think that's a very difficult skill to have as an investor, but it's one of the most important ones.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“I haven't looked into Agency MBS for a while. I used to look at it when I was at my job and now doing broader macro. That's become a very niche niche, niche asset. So I don't have an answer for you, but in general, your take is correct on the fact that Many things are really conditional on the path that markets are taking. I mean, you can backtest a strategy that says, hey, I'm going to buy protection for my equity portfolio only when the VIX is below 12 and realized bold is below 10 and the curve is this shape or that shape, you can backtest all of this and you go in the past and you create a strategy that with hindsight looks like an exceptional tail risk strategy.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“Non linear way that I don't know if one thing, for example, is like agency mortgage-backed security spreads are insanely high and they have positive convexity now, which I don't know if they've ever had. They're supposed to have negative convexity. So I'm like, you know, I'm obviously not an institutional investor, but if I were, I would be loading up on it. So I'm like, why are people not buying this incredibly cheap asset relative to treasuries?”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“Right. With the benefit of hindsight, again, a surge in interest rates of 525 basis points, no one was properly hedged. I mean, I think JP Morgan did a phenomenal job compared to a lot of other banks. And some banks have good models where they basically, their cost of deposits is still zero. But in the same way, like if your portfolio, if you were burning, you know, if 30% of your portfolio, your 70% stocks, 30% VIX futures, long term, that is a horrible, you're way overhead. You're going to be losing burning premium every time. But if you did that in February of 2020, obviously you're a genius. So, oh, no, everyone who did things professionally and buy the book and they only owned 50 basis points worth of VIX futures, they look like they were bad. So I think, yeah, I think the huge interest rate risk shock has affected bank balance sheets in a”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“Position to judge whether any bank is doing that correctly. We saw that some banks are doing that very poorly, that's for sure.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“I think that is correct as an assessment That will probably require them to do some more derivatives hedging. I mean, as you said, most of this is assumptions. It's like, okay, what is the prepayment that is going to get done on these mortgage-backed securities? Well, it's generally depends on interest rates, right? I mean, if interest rates are coming down very aggressively, more people will repay. This will shorten the duration of this mortgage-backed securities. What if interest rates go up all of a sudden? You have to change your assumptions. On the deposit side, it's even more volatile. How do you know what is your average lifespan of your deposits? Is it one year, three year, four, five years? How often do people roll their deposits? All of these are assumptions, right? Which are baked into the cake, good risk management from banks generally requires the ability to adapt, understand the convexity of these assumptions when they can go wrong, when they can go right, and adapt and do risk management flexibly.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“Has happened previously. A lot of assumptions that just did not play out to be. So I would say the US banking system, I'd say I'm actually kind of a little bit more constructive on the credit. I think a lot of credit is performing. But when it comes to there's a duration problem within the banking sector and that that was front and center with Silicon Valley Bank. So I think the US banking system is a lot more long duration than they have been historically, I would say.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“Loans would stay on their books. I think a mortgage-backed security index or ETF had a duration as low as three or even two in 2020. Obviously, it's different in Europe where you worked for, I'm sure. And now that duration is seven. CPR is like conditional prepayment rates were at 40%. They bottomed in March of 2023, interestingly, when SVV failed and they owned a lot of mortgages at three. So a lot of assumptions, oh, we can make variable rate loans. And so we're very asset sensitive. We're going to make money when interest rates rise because we'll make money at all these higher loan yields and our interest costs are going to interest costs are going to win very low as they did from 2015 to 2018 when it was a very slow hiking cycle. This was a very dramatic hiking cycle. So I think there were professional people who made based on historical track records.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“Okay, so I've got a lot to get off my chest, and I want to preamble by saying this, you have real world experience in this rather niche of the financial world. And there are a lot of financial experts on TV and who are not on TV who don't have that experience. And I certainly do not have that experience. But I have digged into this a little bit. And I think that this modeling assumptions, the modeling of interest rate risk on the asset side, on the liability side, it depends on a whole series of assumptions which may or may not be true. And you have to say, what is it? These implied assumptions, how do they compare to what actually happened over the past two or three years? So you said that 50% is the securities books for treasuries on the asset side, but also it's a lot of loans and a lot of U.S. huge mortgage industry. And when those mortgages were made or refied, refinanced in 2020, there was assumptions about how long those”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“Yes, that would take 5% hit. So when you look at that, you understand that banks that do proper risk management. Not all of them do, but banks that do proper interest rate risk management won't really get affected much. And coming back to the bond part, it's a bit of the same story, right? They will look at their bond portfolio. They will hedge most of the interest rate risk. If they don't, it's because it's offsetting interest rate risk somewhere else.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“Assessment of what is the interest rate sensitivity of their entire balance sheet. So they take their assets, they take their liabilities, they take their interest rate hedging instruments, their derivatives, they put them all up together and they say, what happens to my capital if interest rates go up by 200 basis points? And the answer for JP Morgan was, yeah, my capital gets a little bit of, it gets hurt, right? a little bit. And so, you know, my capital will go down by 5%. The entire capital of JP Morgan will take the 5% hit. That's it.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“We were discussing the real question Is this a systemic crisis or is this limited to some banks that are runboys which don't do any risk management, et cetera, or is this a problem for JK Morgan? This was really the existential question back in March. People were focusing on a 15% of the balance sheet asset side. They were forgetting the remaining 85% of the asset and 100% of the liabilities as well because interest rate risk is”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT