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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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“Because GDP has its own flaws and the labor market has its own flaws, a single measures of whether the US economy is doing, I ask myself, what's the official body that determines whether the US is in a recession or not? It's the NDER. So let's go have a look at what the NBR is looking at to determine whether the US is in a recession or not. And it comes up that they're looking at seven different indicators. It's a very broad index that you can rebuild. They look at labor market, they look at services, they look at consumption, they look at manufacturing, they look at a bunch of stuff. So I just put them back up in an index. And right now, it's tracking the US economy to be growing below 1% real growth annualized. Is that a recession? No. Recession is below zero for a consistent period of time. Is that a strong economy? Not really. Potential growth in the US is 175%. So we are.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, I think that's the correct assessment that also professional investors do. They think in terms of capability. So they think in risk and reward. And so with the 475% starting yield on 30-year bonds, you ask yourself, okay, what is my negative tail? Like what can go really wrong, my 95% confidence interval, or my 5% tail really? So what can go really wrong that will make me lose money? In a big way that will make my risk reward negative. And really, you know, it's only about term premium here because if you look at the state and the direction of the labor market and inflation, it is hard to really paint the picture of accelerating growth and accelerating inflation. You have an economy which is decelerating. If you take the NBER gauge of growth in the US. So I reconstructed that index.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“What do you think is your sort of 95% confidence interval of the top in yields? And for example, the reason I ask is because if you think it's 100 more basis points, so now it's 4.7%. If you think the 10-year, there's a 95% chance that the peak in yields is going to be 5.7%. That's 100 basis points increase with the duration of, what, seven or eight years on the 10 year? I don't know, but that's an 8% loss, but then you're making more than that in two years. It's not super risky.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“More importantly, because term premium affects the long end of the curve more than it does the short end, which means also the reverberation on your P&L are going to be more negative. So you really have to ask yourself, how much do I think this time is different? Because that is the main determinant of the risk you have right now in buying long bonds at 475%.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“Growth and inflation are going to be back in Goldilocks, but maybe you're going to have periods of boom and bust of growth and inflation. There's going to be more volatility, in other words, around macrocycles. Term premium can't be negative anymore, Jack. If you as an investor have to choose between buying third-year bonds or rolling three-month t-bills, you actually want to be compensated, have positive term premium. You want to be slightly compensated for the riskier taking of the uncertainty ahead for the growth and inflation cycles. That is really the determinant that will drive your potential risk in being long bonds now. If the market thinks that the probability we are going back to the pre-pandemic environment is lower, term premium has to be higher to compensate you for that risk, which means bond yields will move higher and will move higher at the long end of the curve, which will hurt your...”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“Basically, the market was saying this is a very short term spike in growth and inflation. It's going to reverse away. We'll ignore it as a blip and will immediately go back to the previous assessment of the economy, which is disinflationary, Goldilocks, we grow 2%. Inflation is 1.5%. So bonds retain an incredible hedging property for portfolios in a disinflation. effect is draw down if credit draws down the Fed is going to pivot bonds will rally immediately right and so bonds have this nice property which means pension funds asset managers insurance companies banks they want bonds in their portfolio they're even happy to pay up for bonds to gather these coupons but also have this hedging property in portfolios if you move to a world which is more uncertain where you don't know whether”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“Third year bond yields rather than just buying three month T bills and rolling them for the next 30 years. So if I need to do fixed income, right, and I'm an investor, I can get exposure two ways. I can buy a 10-year bond, third year bond today, or I can take my three-month T-bills and roll them over every three months for the next 10 years or the next 30 years. The difference, well, interest rate risk by buying a 10-year bond or a third-year bond, I'm buying the ton of duration risk. And if I am wrong, I will lose a lot of money. So I have to face volatility.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, it's not too bad. But now, go and move that to the fact that if you price away cuts, let's say, from the very front end, you might add some more in 26, 27, 28. Let's say we square to a loss of two to three percent, basically in the first five year of that leg, roughly, make it 4%. You are basically getting paid back by the coupon you're locking in, right? Roughly, around, roughly around that. So what is the risk here? The risk in owning long bonds at these levels is not that the Fed's going to hike one time more or these hikes might these cuts might be pushed a little bit down the future. The real risk is called term premium. And term premium is effectively the uncertainty around the future growth and inflation that makes the investors being more wary into buying.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, yeah. So the first part of the curve goes between zero and two years. Then the second part goes between two and five. Okay. So in the zero to two years, you can't take off all the cuts. There will always be a little bit of insurance premium priced in markets. But say, Jack, that we cancel off another 25, 30, 40 basis point of cuts for the first part of the curve from zero to two years. If now we have 100 plus basis point of cuts priced in, say instead we make that only 50 basis points.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“Can you be more bearish than that? Yes, you can. There are still 50, 75 basis points of cuts price for next year. And say you get no cuts. Nothing. The Fed doesn't need to cut. You get no recession. Nothing. Same goes for 25. So you're taking off about 75, 100 basis point of cuts. And you are translating that into the curve. So you are basically in the first part on the curve, pushing those bond yields higher, right? Then let's say that by doing that, you're increasing the chances that something goes wrong at some point. So later on in 2526, you put up some cuts. Let's say that all in all, they're worth about 25, 30 basis points transferred in the first lead, right?”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“Cuts are now being taken off right gradually aligning with the dots of the Fed, then 25 sees more cuts. Also, those are being taken off basically, right? Aligning again back to the fed.plot. And after that, we have some gradual cuts. And then we basically stabilize around 4%. That's what the bond market is pricing today, which is basically in line with what the Fed is telling you, pretty much. Okay, good.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“So let's think of third year bond yields as the strip of all future Fed funds over the next 10 years. And then let's add a component called term premium. I think that's the easiest way to go around this. So 30-year bond yields are basically the reflection of what the Fed will be doing over the next 30 years. But then obviously the next five to 10 years are somehow in the prediction horizon. What comes after is uncertainty. And that's what the term premium really pays you for. But okay, let's first go to the first leg, right? So Fed funds are now 525. There is about a 50% chance the Fed will hike again to 5.5% according to market. It's about. There used to be a ton of cuts priced between that moment, December 23 and December 24.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“The carry is So the real locking are better, the portfolio hedge function of your bond lung is much better now. The potential reward can be extremely large. What about the risk? That's the other side. So we need to do some bone math together to figure out if you're buying 30-year thresholds at 475%, which I think is roughly where we are as we speak. How much money can you lose in this position?”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“Yes, definitely. So the starting point matters because it makes the risk reward more skewed in your favor. We also need to talk about can you still lose a lot of money in bonds by having them in your portfolio when we talk about risk reward, we're talking about the reward side now, so the entry level is good, the resilience locking are good, the potential drop in yields, especially if something goes wrong late cycle is very large from 4.7 you can drop quite a lot. So great, the reward looks good.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“The answer is, I think long term returns now are more attractive. Yeah. So if I look at the risk reward, the risk reward now is much better because you are later in the cycle and because the starting yield is better than before, which means the risk reward is really more in your favor. But making a thorough analysis of the cycle we are in, including the fiscal, including the macrolags, including the refinancing, means that I need to be wary of the fact that to get these big returns from bonds, it might take a little bit longer than I thought.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“So it takes a little bit longer than usual, I think, to get this return from bond market long, but when it does, it's going to be a very, very large and convex return.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“What's the Fed gonna do? Can power show up in January 2024 and say, sorry guys, we tightened too much. We're not going to stop tightening. We're going to reverse QT. We are actually probably thinking about cutting rates. Can you foresee himself having the credibility necessary with inflation still at 4% to show up and preemptively ease conditions? Or will it be a reactive reaction to something really going wrong? I think the hands are tied when it comes to proactively rescuing markets, which means bonds can only rally for last. So the sequence is equity markets go down, credit markets freeze, the situation becomes pretty scary, but core inflation is still too high, so it takes a while for Powell to really cave in. And when he does, then the bond market really is very, very hard, but it does so for life.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“Long and bond rates go higher, crude oil prices move higher, the private sector is taxed by all of that right when the labor market is lowing. A few months later this generates a crack somewhere, can be a credit markets, can be equity markets. The equity market drops 20, 30 percent. Let's assume we follow this pattern jack. And say we are at the end of the year, beginning of next year with the equity markets down 20%. But core inflation is still at four.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“The answer is not finished almost. So I think in a portfolio, they should always have a place. If you ask me whether I'm overweight, the answer is yes, I am overweight. Then the last part of the answer is what's the time horizon that you expect bonds to deliver a positive performance? And here I think you have to be a bit more patient than the past, really, because of two reasons. The first one is this macro lags we discussed might be a bit longer. So it might take a little bit longer for the economy to really weaken. But the second important thing is the Fed's hands are tied, Jack. Contrary to 2018, when core inflation was 2% and when the credit market froze, when equity markets drew down, and J. Powell, in January 2019, immediately thereafter made a speech that basically said, sorry guys, we tightened too much. Forget about it. We are stopping the tightening. We did enough. And a few months later, it was cutting rates. This time, he can't do it. So say you follow the normal sequencing. Late cycle bear steepening.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“Insurance, you actually get paid for the insurance. That's the positive real year you lock in. And on top of it, you buy at levels that will really provide you with a tailwind of returns if something goes wrong. So you're right. The starting point for 75% matters from a portfolio hedge perspective, bonds now look much more appealing than they were 12 months ago.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“Making your decision. Why would you have bonds in a portfolio is historically they serve as a hedge against risk assets drawdown in a disinflationary environment? So if you get this inflation back again and equities are drawing down and credits are drawing down and commodities are drawing down, bonds will normally be your diversifier in your portfolio. Now, if you want an insurance kind of trade in your portfolio, you want to have it at interest rates or at levels you lock in that are above inflation and that are acceptable for your long-term returns. And if you have 30-year treasury that's close to 5%, you are most likely above inflation. So real rates basically are positive. So you validate the first requirement. You have a portfolio hedge with a positive real return to start with. So you don't pay for the...”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“Correct. So you had the opposite situation, right? Price was validating an RDF that basically said the Fed can never hike if they hiked twice, but it's going to fall apart. B long bones, fade this hiking price in markets. What happened in 2022, the worst year on record, I think, for long end duration, right? And now you're having the opposite. The economy is weakening. Inflation is coming down. But the narrative is the opposite. The narrative is higher for longer. Prices are coming down. The price is validating the narrative. and you've been to it telling you that there is a 35 percent probability of a very small tail event which 10-year treasury yields are going to be higher than 5 percent in six months from now so that tells me is that sentiment is definitely bearish it isn't the only ingredient necessary to get a bond ready but obviously you have sentiment which is bearish you have bond yields that you need to consider as a starting bond right when”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“And so, why do I think that's relevant? It's because if I take the same poll back in 2021, when I asked the opposite question, late September of 2021, I asked people, well, the forward markets are crossing some hikes by the Fed in 2022, much less than realized, but some hikes were priced in. Let me ask you intuit, what is the probability that the Fed basically is going to make one or two hikes and anything is going to fall apart after that? There was a 10% probability price by markets and 40% of people on FinTwith told me as an answer to that poll that the Fed would harm the Ike once or twice. That was the math.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“The San Loff is validating this narrative. There is nothing that validates narrative more than price. They feed themselves very, very closely. You are getting now the tale of people that think that in six months from now, 10 year treasury bills are going to be above 5%. That's an event that if historical patterns would hold, would happen about 7% of the times, 35% of the people on FinTwit voted that that tail would realize.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“For example, right? And so you would expect that more people as we get closer to a weaker economy, a weaker labor market would attach a premium, an insurance premium basically to the tail that protects the portfolio. So they would expect bonds to basically attach a higher probability to bonds being lower in yields in that tail because maybe they expect a recession to come. But because they don't expect the recession to come anymore and because the narrative and the sentiment”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, I mean, the way I see it is you make a poll and you tell people here is the most likely answer. And then here are the tales. So bon boss, bone bears, please show up to the party. Yeah, I want to measure how many bone bears and bone bulls do we have, at least in terms of sentiment. How do you feel about being a bone bull or a bone bear? It's basically a narrative check. It's a sentiment check. One caveat here to understand is that bones are generally a portfolio hedge. especially in these inflationary environments, effectiveness are drawing down, bonds would normally serve as an”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“When you asked this poll, it was two weeks ago on the 22nd of September when it was at 4.45%. It's higher now. A door number two was the sort of right in the middle thing where if historical patterns hold, things don't crash and it's not a tail risk scenario. But door number one and door number three was at below 3.75, so a huge rallying bond or above 5%, a huge self in bonds. And actually it actually has so happened that since then we have had a huge self in bonds, but that's kind of irrelevant to the sentiment.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“So, I think we should pull a Twitter poll that I made because I think here it fits pretty well. Let's look at the poll first, okay? So I asked Twitter, FinTech, where do they think 10-year bond yields are going to be in six months from now, I think, equals the question. And you had three answers, three answers possible. The first one was basically the body of the distribution, the more likely outcome. So I took basically 30 basis points up and down on 10-year treasury yields. That's a normal range of volatility for this kind of instrument in this kind of period. That was one option. And I think it was 10-year treasury in between 430 and 490, something along his lines.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“As an outcome, but because the economy could handle it basically, you had a bear steepening of the curve. This was September to October and November 2018. And then in December, we found out the economy couldn't handle it. The credit market froze, high yield issuance was nowhere to be seen, Apple drew down 25% in six weeks. And that was basically a miniature version of what I think the bond market is trying to do today, what the Federal Reserve is telling us today. that higher for longer, the economy can handle it, the bond market is testing it, crude oil prices are testing it, and I don't think this time will be different in the end.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“As the Fed wanted them to slow it. And so Powell had a famous speech where he said, I think we're far off neutral rates. And what that meant is that what the Fed thought it was a tight policy wasn't really tight because if mutual rate is higher, they'll need to tighten more in order to be really applying pressure on the economy. So the bond market went into a bear steepening. It took front-end rates higher, priced more hikes by the Fed, but also because the Fed thought and was sending the message that the economy could handle more, that nutrient rates were higher, more hikes in the next six to nine months weren't translating into more damage and more cuts further. So the curve wasn't inverting as a result, but instead more hikes coming now could be held by the economy over time. So you didn't need to pricing more cuts.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“In September 2018, just to bring ourselves to the closest period where something like this was happening at a lower scale, but it was happening, let me bring you back to that period. It's not a long time ago. So it's easy to really feel it again. Trump had cut taxes in 2017, and the reverberation of that fiscal tailwind was still going through the economy for the first half of 2018. So the US economy was doing pretty okay. Core inflation, that's the main difference, was only 2%, but the labor market was tight, and so the Federal Reserve thought, well, let me preemptively hide crates a bit further just to make sure that we don't get a overheated labor market on top of an already 2% inflation. And so by September, Powell was hiking. We were doing quantitative tightening, but by September 2018, the economy wasn't slowing enough.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“Yes, until you actually need to refinance the moment that the refinancing bill comes due, then you have to face the reality of much higher interest rates. So then for basically the first half of this year, you had the fiscal tailwinds and the fact that the refinancing cliffs were really non-existent in the United States were very, very small. And that has explained, I think, why the direction of travel has been correct. Yes, tightening is working. The labor market is lowing. Core inflation is lowing. But it is doing that at a very moderate pace. And why the macro acts in this part of the cycle might actually be more on the long side than on the short side. It's because the refinancing cliffs really are coming to only gradually in the”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“Floating rate, borrowing both from households and from corporates is very limited in the United States. And also the refinancing cliffs were pushed out into the future because corporates borrowed for a very long period fixed during the pandemic. They took advantage of very low interest rate and the same did households with mortgages. So that means the refinancing cliffs are pushed down in the future. Floating mortgages and floating corporate borrowing doesn't really exist in the US. It's very small, so you don't feel the heat very, very quickly.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“In October 22 and October 2023. So that's the last fiscal year, which just exhausts as we speak. And the second has been that the length of the macros mostly and really depend on when is the effect of higher interest rate going to be felt by the economy. And that is when refinancing comes due. When the refinancing bill comes due. There are two channels really. When you feel the heat of higher interest rates as the private sector. The first is if you have floating rate financing, then you're going to feel it pretty much immediately, right? Because you're financing this linked to floating rates. And so if the Fed hikes, you're going to feed it straight away. The second is how much refinance do you actually need to do over, say, the next 12 months? And the U.S. economy was very shielded from both perspectives because the”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“We are now in the month 1516. So we are working towards the median time when history would say now you should start feeling really the hit from the tightening financial conditions, the ill-curved inversion, et cetera, et cetera. Have we felt the hit so far a bit, one would say the labor market is much slower than it was at the beginning of the year, core inflation is slowing down, the housing market has decelerated. But is this really pain if measured against how much tightening the Fed has done? Well, the magnitude has been pretty disappointing, right? has been catching a lot of people by surprise. So why is that? I mean, one should always take new information coming in and assess where do we stand in the microcycle. And I think it's basically two reasons. One is that the fiscal spending has been outsized by any historical standard for this part in the cycle, especially”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“The big answer is no, this time isn't different. There are many nuances to discuss though. So the thing that has taken me off guard and with hindsight, it's simple now because with hindsight, everything is easy, right? is basically that the macro lags which normally apply between ill curve inversion or the first federal reserve hike and the pain being felt in the real economy and in markets has a median time lag so let's say this macro lag is a median time of about 16 to 18 months this is the median the short side of it is about 12 the long side of it is 24 to 27 months now when it's the starting date the starting date is about may june 2022 this is when the hill curve inverted consists So for the first time in Stadium Bert had ever since basically. So if we start counting from, let's say, May 2022”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“Freeze and an equity market drawdown in 2018, November, December, that led to the Powell pivot. So often, this time isn't different, but the bond markets likes to test the hypothesis-late cycle.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“Why don't we raise long and bond yields? Why don't we make the cost of financing much more expensive throughout the curve? Why don't we normalize term premium? In other words, they tighten the screw really on the economy by raising long-term interest rates and they in this way test whether this hypothesis is really true. If this is true that this time is different, then nothing bad is going to happen, Jack, because all of a sudden we can handle 5% interest rates for long. The stock market's going to be doing fine. The economy is going to be doing fine. Problem is that every time in the past, late cycle, we tested the hypothesis that this time is different. September 2018, late 2007, late 2000, it ended up that this time wasn't different. Either we had a labor market recession in 2001, we had the great financial crisis in 2008, and we had basically a credit market.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“Being short risk assets and being long, the long end part of the bond market, and then this insurance doesn't pay off because there is no recession, you can only keep it for as long on your books until you are forced to give it up. And while you give it up as well, the narrative changes. And that's what we're seeing today. The narrative morphs into, oh, if we didn't get the recession so far, we are never going to get one. This time is different. The economy can handle 5% interest rates. The Federal Reserve starts to tell you the same. They change their dots. They don't raise the neutral rate, but they basically do that by saying, wow, we'll have to take inflation adjusted Fed funds to plus 1.5% for three years to go. They start going really big in the higher for longer camp. And so the narrative changes and bond markets start to believe that narrative and test it. So they go and they say,”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT
“I think we're watching what the bond market likes to do late cycle. This is not the first time you get this bear steepening, which we're going to talk about, late in the cycle. Also oil prices, I think, are testing the economy and this idea that the economy is resilient. This time is different, that we can handle higher oil prices, that the economy can work and function with 5% interest rates, well, you get this theory tested, I think, through bond markets and through oil prices. And this is a thing that tends to happen late in the cycle mechanically because people who were invested in insurance trades, in recessionary trades. So they were short energy, they were into the long end of the bond markets. They were long bonds. They have to give up at some point their insurance because there is no recession. If for six or nine months you're spending insurance premium.”
2023-10-03 · Forward Guidance · The Great Bond Bear Steepening | Alfonso Peccatiello · IDENTIFIED FROM THE TRANSCRIPT