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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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“Gender speaking. So when they come up with derivatives, interest rate swaps to try and hedge this position, they will look at this and they will look at mitigating the risk, basically, the resulting risk of these. And so you can't really focus on one item, which is the bond portfolio. You need to look at the entire balance sheet of a bank. This is something that struck me during the SBB crisis in March. So the story was, oh my God, banks are under trouble because interest rates are going up and interest rates going up is terrible because look at all these unrealized losses. So look at this portion of the balance sheet, 15% of the assets.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“Makes sense because the entire balance sheet of a bank needs to be considered. I said before, bonds represent about 10 to 15 percent of the entire balance sheet of a bank. What about the remaining 85%? The remaining 85% on the asset side is made by loans and mortgages and other assets which tend to be fixed in nature. And then you have to go and look at the liability side of the bank balance sheet. So they'll have long dated liabilities. They will issue bonds as well themselves, right? To fund, then they will have deposits. Those are more short data in nature, right? I mean, somehow they can fly away as we have seen with SBB. They can fly away very rapidly, but it depends on the nature and the composition of these deposits. So what I'm saying is that in a balance sheet of a bank, there are assets, liabilities, some of them are floating, some of them are fixed. The bank will have a net resulting interest rate risk from it. And generally, the business of a bank is to borrow short-term.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“You gotta take a demand as well for sure. So the pension fund makes a lot of sense to me because I remember in 2021 fundamentally a horrible environment for bonds and of course like most people I got pretty bearish on bonds and just after the you know in February but from February to September when you conducted the poll out there bonds actually rallied and of course once the price action happens there's always a narrative for it but the narrative was people stocks had outperformed bonds by so much in 2020 that they rebalanced out of stocks into bonds and that makes sense and that you know that has stocks have outperformed stocks of crush bonds this year and that that might that makes a lot of sense to me the leverage community I'll just quickly mention this so you may disagree borrowing money to buy bonds that carry trade is a negative carry trade right now but going back to the banks this is pretty pretty you know nerdy stuff but so a bank buys a 10 year treasury bond or a 30 year treasury bond and”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“Why I am putting out this for you is when I get asked about supply, it's a very easy thing to measure. What about demand?”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“On their balance sheet. So a higher level of bond yields attracts these investors, which anyway need treasuries to hedge their long dead liabilities because an insurance company has life insurances. Those are long duration liabilities. The pension fund will need to pay pension premiums in 40 years. That's a long dated liability. To match these long-dated liabilities, they need long dated assets in the first place. That's why they are in the business of swaps. buying long-dated treasuries, for example. So they are buyers anyway. They're sticky structural buyers. If bond yields are 5%, they can just buy those, meet their hedging requirements of long-dead liabilities, and on top, get closer to their target return without having to pile up in real estate or equities or private credit. That's very attractive for them. So are pension funds buying more? Maybe yes.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“To replace the treasures that are mature. What about the entire balance sheet? Is it shrinking or is it becoming bigger? And then I think you have a point because now it is shrinking. Deposits are flowing away from the banking system. You are going into money market funds or elsewhere. So that means that banks would have maybe organically less demand for treasuries. But I'm saying this because we need to ask ourselves, what about the buyers? Not only what about the seller of treasuries, what about the supply? That's easy to measure, but it locks the depth of the other analysis. What are pension funds doing? What are insurance companies doing? When they have a target return of five or seven percent. And in the past, they used to have to buy private equity or alternative assets or real estate to try and do these returns. Now they can just buy some treasuries or some investment great credit. And they'll pretty much hit their target return, effectively taking no equity or credit risk.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“Now we're getting very technical, but my point is banks are price insensitive buyers of treasuries pretty much. So that means that whatever the level is, they have a certain amount of balance sheet capacity that they need to deploy in treasuries. They will buy with a certain maturity. And generally, they will buy five, seven years, 10 years treasuries. That's generally the sweet spot. And generally, they would hedge interest rate risk. That means that every year they will have about 15 to 20 percent of their treasury book coming due, maturing, right? So that means they have to reinvest those. They have this treasury maturing. They have to redeploy them in the market. They will just buy again more treasury bees and hedge the interest rate risk. This is the normal pattern. They are so-called regulatory driven price insensitive buyers. When you look at demand, you need to ask yourself, what are banks doing? Are more treasures maturing? Are they buying those treasures?”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“Payers of floating rate. They buy a bond, and that's when they receive fixed coupons onto hedge interest rate risk. You pay fixed coupons against those.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“No, that will be available for sale. In Europe, it's different, but in the US, there are special accounting rules that basically skew you towards hedging the service. But any prudent bank would hedge a very good portion of their treasuries that they buy. So that means that the yield at which they buy it doesn't really make a lot of difference. There are so-called price-insensitive buyers of treasuries. So they would buy because they need to have a certain portion of their balance sheet into liquid assets. And treasuries qualify as liquid assets and they make more money than reserves. So it's a good asset to have. They're super liquid that can be posted at the Fed, they can be posted in repo great. When they buy, generally they would hedge the interest rate risk. So whether they buy at 1% yield or at 5% yield, if they pay a swap against it, it doesn't really matter. If you're following me.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“Well, look, a few comments. The first is any prudent bank would buy most of their treasuries hedged from an interest rate perspective, so they will attach a swap to the treasuries they're buying.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“And sorry, also having you worked at a bank in this position that we're talking about, you know that when a bond yielding 1% that has a future return path that's very negative, it's not going to do well, a bank can buy that because they need to buy it for regulatory reasons or because the person doing it isn't going to get fired for buying it. Likewise, when bonds right now, I mean, let's just presume maybe it's not the case, but a 4.7% treasury yield, it's pretty good. Definitely a lot better than 1% can buy bonds when they're unattractive and they can be selling bonds or not buying bonds when they are attractive.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“They bought it all in 2020 and 2021. And this is anecdotal one data point, but it really speaks to, I mean, Bank of America owns over half a trillion dollars worth of treasuries and agency mortgage-backed securities. And that position, their lost position was over $100 billion unrealized, a lot of it unrealized. And now it's surely larger. I think a lot of banks are tapped out. Now, of course, banks are going to be buying, I mean, I'm sure today tens of billions of bonds were bought by banks or many billions of dollars of banks bought by banks. But I think that they bought a lot in 2020 and 2021 and their balance sheets are shrinking. So I don't know what how much capacity they have.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“Treasuries would generally represent half, at least half of this HQLA portfolio. So we're talking about six to seven percent of any US bank balance sheet and the aggregate balance sheet of U.S. banks is extremely large.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“Those are magnitude that goes between five and ten times the effects reserve managers in general. So banks are forced buyers of treasuries effectively because of regulation. They have to own a certain amount of their balance sheet into high quality liquid asset. That certain amount is roughly 12 to 15 percent of their balance sheet, so a significant amount and high quality liquid assets can be bank reserves at the Fed, treasuries, mortgage-backed situations, some corporate bonds as well, but we're talking about a minor percentage of those. So treasuries represent the biggest part of this significant pile of the balance sheet of US banks.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“One negative, which is global central banks foreign exchange reserve managers. They've been buying less treasuries. That's been going on for a couple of years now since the sanctions on Russia effectively. You have had central banks turning a bit more into gold on average, but a bit further away from treasuries than they were before. FX reserve managers are about a $12 trillion worse market. So it's not small. It's pretty significant. And about 60% of that is invested in treasuries. So you're talking a six to seven trillion worth stock buyer of treasuries over time, right? So they matter. They buy less, they matter. But I'm now saying supply and central banks affect reserve managers as buyers. Those are the two most commonly used references to talk about that. We are ignoring by far the largest buyers in the market. Banks, pension funds, insurance companies, asset managers.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“So the market is obvious as any market, it's a market of supply and demand pretty clear. The argument of supply is very easy to make because supply is immediately measurable. You can just go on the Treasury website and you can get a calendar of how many coupons are going to be issuing. And you can measure it. It's very simple. It's crystalline. So it's very often used as an argument to be long bond or short bond. Supply is picking up. Supply is going down, et cetera, et cetera. I think this is pretty superficial because it ignores the other side of the equation, which is demand. Probably with demand is much more difficult to measure Jack. And so right now in demand, we have”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“No. Insignificant in the big scheme of things So, I've been in bond markets, I've been a big institutional player, so I'm very familiar with the pattern of higher supply, lower supply, and what happens at options when there is a higher supply.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“And I think that on average, it's definitely someone who would sell bonds would think that way and someone who would buy bonds would think the opposite way. But how much of it is just the term premium going from negative to positive? And I guess the answer is, or what I'm trying to get at is just the huge amount of supply that government debt ceiling showdown earlier this year. Treasury was not refilling its coffers. It was very close to running out of money. Now it's issuing a huge amount of paper of treasury bonds. And particularly it's now issuing a lot of coupons. So it's been flooding the market with supply. And then we have long end going up. How much do you see a correlation between that?”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“Bear sipening means that this is sustained in the long end of the bone curve. So that means that more hikes today or less cuts or any way a tighter fab in 2023, 2024, 2025 is not going to lead to more cuts down the road. What this means is the bond market telling you, Mr. Fed, I believe you won't cut in 2024 and 2025, but I also don't think that this will translate into a weaker economy going forward. This is the bond market telling us that neutral rates are higher, that the economy can handle less cuts, that the economy wants a recession. The economy won't need all the cuts we thought, but that the economy can sustain this tighter-fed for longer. This is what a bear steepening really tells you.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“Which is exceptionally great. Yeah, it's really, really rare. So this was 2022, and now instead, look at the chart. What's happening is that the market is pricing a bit more of a hawkish fed in 2023, 2024, surprising the way cuts. So you have this delta being a little bit positive in the first part of the chart.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“And so the spread between the two year two-year tenure narrowed so much that they became negative and we have an inverted curve. And that's another thing now we have a bear steepener during an inverted curve, which is exceptionally rare.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“2022 So the curve was bare flattened. The front end was going up very, very rapidly in yields, but then five-year rates were going up less and 10-year rates were going up even less.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“The market immediately later on was pricing more cuts to go. So basically the idea was, yeah, you can hide now, Mr. Powell. I believe you're going to be hiking. You talk like you're Volcker, but as you hike now, I'll be pricing more cuts immediately thereafter. And so the curve bear flattened.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“Okay, so if we can pull up a chart here on the screen, it's pretty easy to visualize what a burst evening means, right? You have two curves here. Those are market implied Fed funds path. So this is what the market splicing Fed funds could be for the next 10 years, for example, right? You'll have a curve that is pre-bear steepening and a curve that is post-bear steepening. And in the bottom part of the chart, you have the delta. So what happens at each tenor during the bear steepening? It's pretty easy to understand that the front end of bond markets during the bear steepening price is a bit more heights, right? So maybe it can be 10 basis 0.15 basis point of more hikes or less cuts. That's the same story. So basically it moves up a tiny bit, right? But the difference”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“The yield curve becomes more upward sloping in net position. So it bears steepening is when there's a sell-off, bear markets, and long end yields rise more than short end yields rise. And then a bull steepening is when long end yields fall by less than short end yields fall. I think I said that correctly. Bull steepening is much more common than bear steepening. My reading of yield curve history is that it's bull steepening that precedes very dangerous scenarios, such as because the market's pricing in the Federal Reserve will cut and the central bank is going to cut when there's trouble in the economy. Bear steeping is much more rare. And we're having bear steeping right now. So I think you've been talking about how the bear steepener is rare and dangerous. And I obviously will agree it's just a factual that it is rare.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“Pretty hard to beat if I look at all the global macro hedge funds, my clients, but also you can just check any index at the others, global macro hedge funds. This year, they are anywhere between minus two and plus 2%. It's been a pretty difficult year for global macro hedge funds. Cash is returning over five. That makes the hard off for any investment you consider pretty difficult to beat.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“Meanwhile, UUP, like the UUP ETF is basically an ETF that gets you to borrow, implicitly borrow Euro, yen, whatever it's in the DXY, and buy dollars with it. So that gets you really exposed to the FX position, to the dollar. I think the dollar has rallied a lot now. So again, the risk reward of that decision isn't as good as it was three months ago. But I'm mentioning it because the dollar is a good diversifier in a macro portfolio. Right now, I think just cash at 525% gets you rate of return, which is”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“Look for a US investor, this is interesting because if you just buy TBLs, you are not getting exposure to an active long dollar position. You're getting cash. You're getting paid risk-free in your base currency 525%. And if the dollar appreciates against the euro, are you making money? No. It's just long TBLs.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“Exactly like in late 2018, it's a good asset to have. And guys, I mean, dollar cash risk free, it's 5.25%. So that's not too bad.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“We have $12 trillion of dollar denominated debt issued outside the United States. I mean, if interest rates move higher and the Fed is tightening, the Fed is removing liquidity from the system, it's going to be increasingly hard for a Brazilian corporate, a Chinese corporate to easily refinance those dollar-denominated liabilities. So that's going to lead to an aggressive bid for spot dollars to be able really to refinance these liabilities. It's basically a deleveraging mechanism once debt and leveraging dollar becomes more expensive and the economy is slowing down at the same time, the dollar will get stronger because people will rush to it in order to get their hands on dollars they need to refinance their dollar liabilities. It's like a deflating deleveraging balloon that also helps the dollar being supported. So I think the dollar in general is a good diversifier to have in the portfolio in this part of the cycle.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“Well, I think a couple of reasons. The first is if we are in a fight to apply higher for longer in all bond markets in the world, because that's happening. Also European bond markets are applying the very same playbook. The European curve has been very steepening as well over the last two months, right? But if you are in a fight to apply higher for longer, which is the economy, which is the best equipped to sustain that higher for longer, fundamentally, that's the United States, amongst developed markets. So that means that The curve can bear steep and more aggressive in the US. So interest rate differentials would normally favor the dollar. So the dollar performs well. And also it's a positive carry trade, right? If you're long the dollar and short the Japanese yen and short the euro, you are earning carry to ride this bear steepening trend, which is dominated by the US in the first place. And second, the world is leveraged in dollars. The world is a place where”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“Well, of course, if we get a proper drawdown, a proper credit stress, exactly like at the end of 2018, I mean, Apple drew down 25% in six weeks. They're not going to be immune. But I think, again, risk reward, things small caps and European equities are looking particularly vulnerable. If you're looking for places to belong to offset that short, well, as I said, the dollar is a great diversifier in a balanced macro portfolio. Have a look at the last one to two months. Bonds are going down, stocks are going down. Commodities ex oil are also going down. Oil is doing okay. So good diversifier. The other clear diversifier is the dollar. The dollar has been performing extremely well against the euro and the Japanese yen, which account for 75% of DXY anyway. And why is that?”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“That has a disproportionately big impact on Europe compared to the US, for example. And then I look at the Eurostocks. And then I look at equity markets and credit spreads in Europe. Pretty much relaxed. Europe was one of the darling of the value story that basically was rampant between April and August, where you had Japanese value stocks and equity markets. That means the performance over the last year or year today still looks pretty rosy against the backdrop I just discussed, which I think is actually pretty negative. So in a macro portfolio, I would really be more conservative when it comes to developed market equities, UK, Europe, that are not the US and in the US particularly small cap companies, I think are really vulnerable now.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“You have more floating rate obligations from the private sector. That means you're feeling already the tightening more. Refinancing cliffs are coming fast and furious compared to anywhere else you look at. So the higher interest rates that 425% corporate borrowing rate we discussed instead of the one and a half corporates are used to in Europe is coming to bite now in the next six to nine months. So you can't kick the can down the road as a corporate anymore. You have to decide. Your budget gets more allocated to paying your bills when it comes to interest rate expenses. It means you have to hire less or even fire some more people. And that process happens now. It can't be delayed anymore. Fourth, oil prices. Europe is a net energy importer. So when you get these oil prices and this gasoline spreads and you get price at the pump for European consumers being much higher.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“About 7 to 8 percent of your entire refinancing to come do, Europe has double the amount coming due in the first half of 2024. So as a recap, you have a place where you start from basically from a recession as your starting point already, or extremely weak growth to start with.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“So I had a look at different jurisdictions. You ask Canada, UK, Europe, Australia, and I looked at their corporate borrowing market. And I looked at how much of that corporate borrowing was coming due for refinancing in 2023, in the first half of 2024, second half, and then in 2025 and 2026. Now, the refinancing cliffs are getting more acute wherever you look at in 2024, 2025, and 2026. So gradually tighter, higher for longer, tighter policy is going to hurt a larger portion of the private sector over time as refinancing cliffs come due, refinancing bills comes due, more corporates will feel the heat over time. But in Europe, this process isn't gradual, Jack. It's much more sudden. So you can see from the chart, while in general in six months of the year, you would expect...”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“Germany is already in a recession, broadly speaking. Yes, my manufacturing is dead, but that's the case for a year and a half or two. Services are PMIs are also consistent with the recession right now in Germany. Not a very deep one, but given the fact that the macro legs are about to kick in faster and you start from a point where Germany is already in a recession, I think the outlook isn't particularly rosy. And if you look at other countries as well and you inculvate everything into a Eurozone services PMI kind of gauge to get you an idea of where is the Eurozone economy overall, it's basically flirting already as we speak with the recession. So your starting point is pretty weak and much weaker than the United States. And the vulnerabilities are much more evident, both for the floating rate part, but also most importantly, and we should put up a chart now for the refining cliff story.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“Counters in particular, there is quite a lot of the mortgage market which is floating. That means the ECB rates are getting transferred now, Jack, not in 12 months, not in two years when households need to refinance. It's now. They're already feeling it. So a lot of your disposable income gets basically taken away by a higher mortgage installment that you're forced to pay now.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“There is a chapter where we can pull it up. It's ridiculous one and a half percent fixed borrowing for 10 years for a BBB rated corporate. A lot of business models look great if you apply that cost of borrowing, right? You want to know today what that rate is? 425%. It's triple. It's literally triple. So the increase in cost of borrowing has been massive. That's a result both of the European Central Bank moving from negative rates to 4% deposit rates and also credit spreads being a bit wider in Europe. They were really compressed because of ongoing big quantitative easing that we had between 2014 and 2019. Now they've widened up a bit. So that change in corporate borrowing in Europe is really, really aggressive. On top of it, the European private sector borrowing structure is more tilted towards floating rates. In certain jurisdictions, especially Northern Europe, in the both”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“And refinancing cliffs, mostly, right? So Europe, European corporates, BBB rated, so low investment grade, European corporates could borrow for 10 years fixed in the years of QE between 2014 and 2019 and an only in interest rates of 1.5%.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“There is also a chart we can put up that Chinese tenor of the high yield issuance, which is not necessarily a reflection of the Russell, but high yield is below investment grade rated, it's lower quality companies. They have actually lowered the duration of their borrowing rather than increased them. So they're actually choosing to effectively shorten the duration of their borrowing. They haven't really gotten a lot of tailwinds from lengthening their borrowing window like Amazon did, for example. So they're facing a very nasty situation and I think it's one of the macro tales I want to apply. The other vulnerability is really, I think, in Europe. Because if we look at Europe, and let's go back and discuss the macro lags, right? I mean, they depended on a couple of things. Floating rate obligations, mortgages and corporate borrowing.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“And they had a shorter duration of liabilities. The US compared to Europe had very long duration, but it was Amazon, I remember this headline, Bloomer headline of 2020, issued a 40-year bond. A lot of the not so high quality companies in the Russell, they didn't issue a 40-year bond. They borrowed from banks or they had a floating rate obligation, so they're much more exposed to higher interest rates.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“The first half of 2021, reopenings, fiscal stimulus, nominal growth from the roof, borrowing rates still very low. We talked about 30-year rates being below 2% back then. In that environment, Russell does pretty well. But now reverse the environment today, and you have nominal growth trending down below potential and trending down, and the cost of leverage is damn elevated in the United States, but everywhere else in the world. So this combination is pretty toxic for small cap, often unprofitable.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“The Russell 2000 really needs two things to do really well strong nominal growth, trending higher, and possibly low cost of capital at the same time. So low interest rates. When you get a combination of both, the Russell goes to the roof because the tailwinds of nominal growth transfer into higher earnings for companies that are normally unprofitable. So they benefit a lot from that. And on top of it, their cost of capital comes down because interest rates are low. And so their leverage is really not a problem anymore. It actually even becomes a tillwave.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“For sure. SP 500, you know, it's got very high quality comp, obviously, it's got some not quality companies, but it's got some very high quality companies and, you know, people post a chart of, I'm sure you've seen this, like the Nasdaq, which has NVIDIA and Apple, Microsoft relative to the Russell 2000. And they say, oh, this ratio is at a 20-year low. It's like, yeah, well, a lot of the companies in the Russell 2000 are crappy. And a lot of the companies in the Nasdaq are superb. Crap. So people you should adjust for that.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“I would say that the highest conviction macro tilt that I have right now is not necessarily to be long bonds, but it's to be short certain equities. For certain equities, I mean European equities and small cap US equities. Those are the two sectors or two countries where I feel the most comfortable being short. So let's start from the US small cap. You're looking at companies that have a high leverage, a 5x net debt to EBITDA ratio on average for US small caps. You're looking at companies that are unprofitable for the most. And you're looking at”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“So, if you think about the tilts that you want to apply to a well-balanced portfolio, you have in a well-balanced portfolio you have several assets. And I'm going to disappoint a few people, but they're not only U.S. bonds and U.S. stocks. If you want to have a truly diversified macro portfolio, you need to have internationally diversified equities. You need to have bonds, and then you need to have commodities. And then you need to have the dollar as well, which is a very underappreciated asset, but it serves as a good hedge for certain macro periods. So now if you look at those four assets right now and you want to apply macro tills to your portfolio, right? You want to say, where am I supposed to be a bit more long or a bit more short than my normal allocation?”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“That will be the moment that gets you closer to the peak in the odds. But as my mentor used to say, peaks and bottoms are for fools and liars. So it's very hard for me to say where the pick will be, but an assessment of risk reward where we stand today, I agree with you, should make you more bullish bonds than somebody was nine or 12 months ago.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“And because we have demographics, which is changing, all of this goes into the uncertainty part. And that's really term premium. And that's really what can drive your negative risk there. Now, term premium was deeply negative, and it's now back into a positive environment. So it's just mildly positive. Can it be more positive than that? Yes, it can. How meaningfully positive? Well, it will just depend from the narrative. And the longer actually check, the longer it takes for a recession to unfold, the more likely is that more people will be thinking this time is different. And as they keep thinking that, the term premium moves a little bit higher, price is validated in the narrative, bond yields are moving higher, or really this time is different. You get the front page of the economy is telling you this time is different or something along these lines.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“So indeed, so that's the other thing. If you look at core inflation, it's annualizing at around 3.5% plus just below 1% growth. It makes you nominal still above 4%. And nominal above four is not recessionary. To get recessions generate, you need to get nominal trending below two and going down. The direction of travel, though, is definitely for a weaker economy. So you are looking at that. And you are looking at the front end of the bond market basically aligning with the fat dots. So you are not going to get a lot of headwinds from the cycle. You can only get a lot of headwinds from the term premium, from the uncertainty about the future, from whether people think that inflation is going to remain sticky over time and it's going to be volatile and growth cycles are going to be more boom and bust because we're going to use the fiscal lever much more aggressively.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT