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Althea Spinozzi

lines on the record: 58
first: 2023-11-03
most recent: 2023-11-03
sittings or episodes: 1
sources: podcast

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“Absolutely. The higher the yield, the more attractive bonds are. But I want to keep flexible in case there is that tail event that inflation is not won over yet and that we might have central banks staying hawkish for longer.”
2023-11-03 · Forward Guidance · Althea Spinozzi on Stagflation, Term Premia, and Ultra Long-Duration Bonds · IDENTIFIED FROM THE TRANSCRIPT
“It and I'm just looking at the spread between 30 year treasuries and 10 year treasuries now it's not that that high but if it returned to something like 100 basis points you might get a little less bearish on it I imagine”
2023-11-03 · Forward Guidance · Althea Spinozzi on Stagflation, Term Premia, and Ultra Long-Duration Bonds · IDENTIFIED FROM THE TRANSCRIPT
“No, absolutely not. I mean, it's tempting. It's trading around 35 cents on the dollar. It's absolutely beautiful. But I feel like when I look at it like that, it looks like a directional bet. And it's a directional bet on interest rates. And we are not there. We are arriving there. But I think that it's something to look at more towards the end of the year. So December or the beginning of 2024.”
2023-11-03 · Forward Guidance · Althea Spinozzi on Stagflation, Term Premia, and Ultra Long-Duration Bonds · IDENTIFIED FROM THE TRANSCRIPT
“To build a barble in a portfolio, so buying the front part of the EN curve, which is basically almost risk-free, you need the interest rates to be hiked by 200 basis points to start to lose money on one year holding period and the 10 years. But still, if you look at longer maturities, my recommendation, it will be to look at those securities that offer sizable coupon so that you will still get that duration bet that many are after. But in case it doesn't get your way in the short term, you will still be able to benefit from a high coupon.”
2023-11-03 · Forward Guidance · Althea Spinozzi on Stagflation, Term Premia, and Ultra Long-Duration Bonds · IDENTIFIED FROM THE TRANSCRIPT
“But Jack, I have to correct you there. I'm Berenz ultralong maturities, so 20 years plus. The 10 years actually, I think, is a good buy. And the reason for that is that at the eel that he's offering now around 4.65%, it can provide upside in case we have a recession. But in case we don't have if we have yields rising further, let's say towards 6%, the kind of loss that one will have to incur will be minimal. Because if you look at one year holding period, if yields move by 100 basis points higher than the loss will be around, the total return will be around minus 2%. So the 10 years is a good buy and I think that what is interesting now is to be to”
2023-11-03 · Forward Guidance · Althea Spinozzi on Stagflation, Term Premia, and Ultra Long-Duration Bonds · IDENTIFIED FROM THE TRANSCRIPT
“Can stand that Europe, they junk to investment grade spread is around 500 business points. So they pay five full percentage point over investment grade that corporate bonds. And in Europe, junk corporate bonds are not as leveraged as in the US and they have better fundamentals. Everything comes back like to this risk, to this because also duration is part of risk and so forth. It brings back to the fact that what we see happening in the US is not normal. It means a repricing somehow risk needs to be repriced and is going to happen because credit is not at a fair price compared to the Risk that we are heading towards. At that point, it's key to see if these junk issures are going to be able to refinance their debt at current interest rates.”
2023-11-03 · Forward Guidance · Althea Spinozzi on Stagflation, Term Premia, and Ultra Long-Duration Bonds · IDENTIFIED FROM THE TRANSCRIPT
“About the corporate space, because we had a sensible repricing here in Europe that didn't happen in the US yet. And I'm talking about junk versus investment grade corporate bonds. When I look at junk in the US, they offer 3 percentage points above investment grade corporates in the US. So investment grade corporates trade around 6%, and that's an average in yield. The average yield of US junk bonds is around 9%, just 300 basis points. And 300 basis points is where they were trading before COVID. But at that point, interest rates were off what they are now in the US.”
2023-11-03 · Forward Guidance · Althea Spinozzi on Stagflation, Term Premia, and Ultra Long-Duration Bonds · IDENTIFIED FROM THE TRANSCRIPT
“The thing is that European investors have a lot of opportunities here in Europe. You see, if we look also at the 10-year bonds, it was trading negative for quite a bit. And now it's around 3%. And also there is a lot of scarcity of collateral. The German government cannot issue enough boons for how much is the demand out there. So, you know, European investors, yes, they buy US treasuries now, it's not convenient for them because of that interest rates discrepancy, like exactly what's happening with Japanese investors, but they have quite a broad, they have quite a wide range of opportunities. And here, Jack, I really think it's key to talk.”
2023-11-03 · Forward Guidance · Althea Spinozzi on Stagflation, Term Premia, and Ultra Long-Duration Bonds · IDENTIFIED FROM THE TRANSCRIPT
“And how does all of that, which you just explained, how does that impact Europeans, investors demand for U.S. treasuries? We talked about Japanese investors for US dollar treasuries. What about how do European investors thinking about allocating to buying US duration that are denominated in dollars?”
2023-11-03 · Forward Guidance · Althea Spinozzi on Stagflation, Term Premia, and Ultra Long-Duration Bonds · IDENTIFIED FROM THE TRANSCRIPT
“Would happen that they cannot really hike or tighten financial conditions further and the euro then will fall because compared to the dollar our expectations is for the Federal Reserve to stay on hold and remain more or less where they are. With a lower euro currency, they might be at risk to bring him back inflation. And that's the critical point. And that's the mistake also that we have seen in the 70s. that basically central banks thought that inflation was done, it was over, and they started to see how they could normalize the economy and then it rebounded again. And that might be the same risk that Europe is running at this moment. And we're talking about a countries, the European Union, that is much dependent on commodity prices. And it's buying all the commodities are trading in US dollars and not in Europe. So the euro currency,”
2023-11-03 · Forward Guidance · Althea Spinozzi on Stagflation, Term Premia, and Ultra Long-Duration Bonds · IDENTIFIED FROM THE TRANSCRIPT
“When the ECB hikes and cuts rates and create this program, it has to do it in a fairly way historically it never really tackled especially ETP spreads. Basically did it implicitly by creating these sort of programs APP and PEP program. When I talk about, it has to choose between the PTP boom spreads and the euro, it means that inflation is still high and if they choose to basically go and help growth in Europe and try to create a buffer and maintain that spread stable then”
2023-11-03 · Forward Guidance · Althea Spinozzi on Stagflation, Term Premia, and Ultra Long-Duration Bonds · IDENTIFIED FROM THE TRANSCRIPT
“In that case, it's much harder to do in the meaning that you see like when it's impossible to compare the European sovereign space with the US sovereign space because in Europe there is not a very liquid issuance of European bonds. Every country issue their own bonds. So we are talking about German bonds. That's the reference normally when you talk about European cost of funding. You talk about the German boons. And then you have obviously Italian BTPs, French Oats, Spanish bonos, and so forth.”
2023-11-03 · Forward Guidance · Althea Spinozzi on Stagflation, Term Premia, and Ultra Long-Duration Bonds · IDENTIFIED FROM THE TRANSCRIPT
“Okay, so you said the ECB could turn Dovish to protect that BTP spread to narrow it. But that would come at the expense of the euro. Tell me are you talking about balance sheet policy, QEQT, freight control, or rates? Because is there a potential they could keep rates high, relatively high where they are now, 4.5%, but target that spread and really police that spread to make sure that Italian bonds don't sell off drastically in the same way maybe when Silicon Valley Bank failed, the Federal Reserve initiated this policy bank term funding program. And because of that, they didn't need to cut rates. They could actually keep on hiking rates. So, you know, the idea that balance sheet policy and interest rate policy sometimes can go in different directions to maintain an overall stance.”
2023-11-03 · Forward Guidance · Althea Spinozzi on Stagflation, Term Premia, and Ultra Long-Duration Bonds · IDENTIFIED FROM THE TRANSCRIPT
“Italy, right? Like they purchased a huge amount of BDPs. If they haven't done quantitative tightening on that program because they know that once that day go to touch that program, that would be bearish for Italian BTPs. And they don't want to do that. And they kept it intact. They continually invest. But there is also some other ways to look at that. When you look at the PEP program, the average weighted maturity is around seven years. So it means that even if they would start to do quantitative tightening, they wouldn't have enough redemptions actually to lower the balance sheet because they are going to be like a few years away. So there is also not much reason to start that now.”
2023-11-03 · Forward Guidance · Althea Spinozzi on Stagflation, Term Premia, and Ultra Long-Duration Bonds · IDENTIFIED FROM THE TRANSCRIPT
“So, they are not really targeting. It's not like some sort of range-bound control. What they do is that they are doing quantitative tightening under one of the programs of the ECB, which is the APP program, which is the asset purchase program. But they left intact the PEP program, the pandemic emergency purchase program. The PEP program was started in 2020, and it was aimed at helping those countries that experienced the worst hit by the pandemic. So therefore,”
2023-11-03 · Forward Guidance · Althea Spinozzi on Stagflation, Term Premia, and Ultra Long-Duration Bonds · IDENTIFIED FROM THE TRANSCRIPT
“Absolutely. An analogy if the United States were not one nation, but it was a union like the European Union is, it would be like if the Federal Reserve Buying Texas municipal debt and in order to narrow the spread between Texas and California spread or between California and Texas. So that just for our American audience, that's a potential analogy. And then the European Central Bank, ECB, for a while was doing quantitative easing. Are they doing quantitative tightening now, but they're also doing spread control. So they're targeting that spread between the BTP Italian bonds and German Bundes. And yeah, how's that playing out?”
2023-11-03 · Forward Guidance · Althea Spinozzi on Stagflation, Term Premia, and Ultra Long-Duration Bonds · IDENTIFIED FROM THE TRANSCRIPT
“Is basically using the euro currency, but also a political problem domestically for Italy and for other countries that would see that spread widening because they will be like, hey, we are not here paying at the cost of other countries that have, you know, like they can finance themselves at half of the rates that we see here. So it's a huge problem and it brings a lot of questions in terms of political stability as well.”
2023-11-03 · Forward Guidance · Althea Spinozzi on Stagflation, Term Premia, and Ultra Long-Duration Bonds · IDENTIFIED FROM THE TRANSCRIPT
“And that's going to be supportive for the euro, but negative for the BDP, for the sovereign spreads in the euro area. Or otherwise, it goes to intervene on the BTP bond spread at the cost of the euro. And the thing is that it sounds like a no-brainer, but we have to believe that a wider BTP boon spread or other wider sovereign spreads in the European space, it's a political problem. It's a political problem because for the ECB, why the ECB would want wider spreads in specific countries of the ECB, of the European Union, right? It would want to tighten financial conditions equally all around the European space because everybody”
2023-11-03 · Forward Guidance · Althea Spinozzi on Stagflation, Term Premia, and Ultra Long-Duration Bonds · IDENTIFIED FROM THE TRANSCRIPT
“When we had periods of debt around 250 basis points. So the big point here, Jack, is that if we see a recession deepening in Europe, a stagflation deepening in Europe, it's almost impossible to expect that spread to be stable. It's actually more plausible for that spread to continue to widen. And that's going to be a problem for the ECB. And it's going to be even a bigger problem if that spread widens all of a sudden in the next few months when inflation is still well above target. Because at that point, what the ECB can do, it can either maintain okish, remain where it is or hike further.”
2023-11-03 · Forward Guidance · Althea Spinozzi on Stagflation, Term Premia, and Ultra Long-Duration Bonds · IDENTIFIED FROM THE TRANSCRIPT
“Probably because of the latter, because the economy is in a worse shape than the US. And realistically, there is that understanding that the ECB would not be able to do too much because there is a lot of differences between European countries in terms of cost of funding. And here I'm talking about sovereign spreads. The most known and popular sovereign spread out there is the BTP Bund spread, which is Italy, 10 years, minus 10 years German yields. And that has been quite a reference because if we look at historically from 2010 until today, whenever that spread was breaking above 200 business points and now it's at 190 business points, well, the ECB started to be alarmed and they started to”
2023-11-03 · Forward Guidance · Althea Spinozzi on Stagflation, Term Premia, and Ultra Long-Duration Bonds · IDENTIFIED FROM THE TRANSCRIPT
“They need to increase that balance sheet. So that's why they are decreasing in now and be very wrong to put a stop because the balance sheets is huge. It's just off just below 7 trillion. And at its peak, it hit $8 trillion. It definitely needs a reduction and I really hope for that quantitative tightening to continue or even accelerate at a certain point”
2023-11-03 · Forward Guidance · Althea Spinozzi on Stagflation, Term Premia, and Ultra Long-Duration Bonds · IDENTIFIED FROM THE TRANSCRIPT
“Sorry. Yes, I believe that is sustainable in the short term, in the midterm until something breaks. But then when something breaks, it can be smartly used to give a signal that the Federal Reserve is there to support the economy. And even if they don't do much, even though the Federal Reserve doesn't actively engage into quantitative easing, but it just adjusts the amount of bonds that is letting run off, then that could be still a bullish sign that could give like a constructive sign to the market. But let's not forget that the reason why the Federal Reserve is engaging in quantitative tightening is that it's forecasting that possibly there is going to be another downturn and they need the balance sheet.”
2023-11-03 · Forward Guidance · Althea Spinozzi on Stagflation, Term Premia, and Ultra Long-Duration Bonds · IDENTIFIED FROM THE TRANSCRIPT
“High inflation and high unemployment. And that brings us back in the 70s, early 90s. And in that period, what we have seen is several waves of stagflation. And those several waves of stagflation, would they really produce higher 10-year US treasury yields? So if that's what we are seeing today, there is that tin risk that instead”
2023-11-03 · Forward Guidance · Althea Spinozzi on Stagflation, Term Premia, and Ultra Long-Duration Bonds · IDENTIFIED FROM THE TRANSCRIPT
“Is a little bit off 200 basis points, but it's still in an alarming level and the inflation is not where the ECB wants it to be. And that's a huge problem. This kind of line of thought connects very well to what we have seen in the 70s and in the 80s. We believe that we are living through a stakflationary kind of environment here in Europe and also in the UK. We believe that we are going to see stagflation in the US as well at the beginning of next year. And what it is stagflation. Stagflation can be measured as a period of time where there is a sluggish growth or a recession.”
2023-11-03 · Forward Guidance · Althea Spinozzi on Stagflation, Term Premia, and Ultra Long-Duration Bonds · IDENTIFIED FROM THE TRANSCRIPT
“Be more cautious in that sense. But, Jack, there is no danger, at least I don't see danger for the Federal Reserve to cut anytime soon. Right now, the bond market expects interest rate cut to begin in June next year if the economy continues to strive, that might still be a little bit early if inflation doesn't decelerates to the pace that the Federal Reserve expects. The first central bank that is going to cut rates is going to definitely be the ECB. And here in Europe, we have a recession. There is Germany that is in a recession, the Netherlands in a recession. Italy entering in a recession. And we have the BTP boom spread now.”
2023-11-03 · Forward Guidance · Althea Spinozzi on Stagflation, Term Premia, and Ultra Long-Duration Bonds · IDENTIFIED FROM THE TRANSCRIPT
“Will be able to raise that money and then put invest it. This is not how they operate, obviously, but they can invest it short term at a much better rate. This is the take. But all other businesses are not able to do that. A lot of the other corporates are not able to do that. But it's just quite telling how the shape of the in curve can still provoke, you know, like a buoyant market, like a rally in risky assets. And that's exactly what we have seen throughout this year. It is when the ill curve steepens, especially bear steepens, as we have seen also lately, that we start to have problem. And probably that's why we have seen syndrome.”
2023-11-03 · Forward Guidance · Althea Spinozzi on Stagflation, Term Premia, and Ultra Long-Duration Bonds · IDENTIFIED FROM THE TRANSCRIPT
“And would they have sold that bond the 4% yielded this year or in 2020 in 2021? When they issued a long-term bond yielding 4%, would that have been this, you know, would that have been this year or in 2020?”
2023-11-03 · Forward Guidance · Althea Spinozzi on Stagflation, Term Premia, and Ultra Long-Duration Bonds · IDENTIFIED FROM THE TRANSCRIPT
“Space, it gave a kind of advantage for risky assets that are pricing on the long part of the incurve. You have companies like Apple that they can basically issue debt, 10 years debt at around, I don't know now, but 4%, 4.5%, and invest in the front end at the three-month TBL is at 5.3%.”
2023-11-03 · Forward Guidance · Althea Spinozzi on Stagflation, Term Premia, and Ultra Long-Duration Bonds · IDENTIFIED FROM THE TRANSCRIPT
“Continue to be sustained, then they can increase the runoff amount or actively sell the securities under their balance sheet. So it's a very powerful kind of tool. And so far, it has not really used to its force. Renault, what really central banks, especially the Federal Reserve, has been doing, is just hiking in the front end aggressively and hoping for inflation to adjust lower. And by doing that, it put a lot of pressure on those cash strapped kind of corporates that have maturities coming due soon, which are very little at this point because the wall of maturities is starting again in the second album of 2024 for the high”
2023-11-03 · Forward Guidance · Althea Spinozzi on Stagflation, Term Premia, and Ultra Long-Duration Bonds · IDENTIFIED FROM THE TRANSCRIPT
“Think right now it seems that quantitative tightening is a sustainable and Jack, it's very important to understand that now the Federal Reserve is not actively selling bonds under its balance sheet, is just letting runoff some of the maturities around 95 billion per month. So it's not really an active reduction of the balance sheet. It's not as aggressive. Before they go and they look at quantitative easing, they will probably tweak this kind of runoff if they need to, or otherwise, if they see the incurve to all flatten, as we have seen in these days. And therefore, I don't know, the 10 years going back to 4%. And that's not restrictive enough because inflation.”
2023-11-03 · Forward Guidance · Althea Spinozzi on Stagflation, Term Premia, and Ultra Long-Duration Bonds · IDENTIFIED FROM THE TRANSCRIPT
“You say so it's you know, there's so much collateral that is owned by the Federal Reserve, and now it's reducing its balance sheet, your quantitative tightening. Do you think that the Federal Reserve will return to quantitative easing? Is quantitative tightening sustainable? Can there be a bid for treasuries with the central bank not buying?”
2023-11-03 · Forward Guidance · Althea Spinozzi on Stagflation, Term Premia, and Ultra Long-Duration Bonds · IDENTIFIED FROM THE TRANSCRIPT
“When the two year goes down, it is likely that the 10 year, the 30 year will go down, but just not as much. So that will be a bull steepener. You know, in history, there are times when the short end goes down, the long end goes up, that that can be pretty topsy churvy and wild. But you're saying risk adjusted, the tier would go down. And now people say, oh, but you want that duration exposure. So by the 30 year on an unlevered basis. And if you're on for an unlevered basis, that's the, you know, that's where the most juice is the duration. But you would say, no, you would just want to do a levered two-year thing. Okay, so earlier you referenced quantitative easing at most of the Fed's quantitative easing was before they hiked rates.”
2023-11-03 · Forward Guidance · Althea Spinozzi on Stagflation, Term Premia, and Ultra Long-Duration Bonds · IDENTIFIED FROM THE TRANSCRIPT
“Is a point that you're raising there that is quite important the shape of the young curve, right? If we have expectations, you know, like there is a lot of people out there saying, oh, yes, the Federal Reserve now is dovish. Let's buy risk. Let's buy long-term bonds. Let's buy If we have the expectations that the Federal Service done with the hiking cycle and therefore it will start to cut rates, that would imply that the EL curve would steepen. And how investors would position for that. They would buy the front part and they would sell the long part. Regardless of how the steepening is, bearish, bullish, it doesn't matter. So what does that do? It puts even more pressure on the long part of the L curve.”
2023-11-03 · Forward Guidance · Althea Spinozzi on Stagflation, Term Premia, and Ultra Long-Duration Bonds · IDENTIFIED FROM THE TRANSCRIPT
“Makes sense because a Japanese investor buying a 10 year, they're buying a duration instrument on the long end and they're funding it with short term. So it's the same way a leverage investor now borrowing overnight money to buy a tenure. It's just very unattractive.”
2023-11-03 · Forward Guidance · Althea Spinozzi on Stagflation, Term Premia, and Ultra Long-Duration Bonds · IDENTIFIED FROM THE TRANSCRIPT
“It is that shape of the yield curve interest differentials, but also that shape of the yield curve, that is why the hedging cost is so expensive. In other words, if the US curve was more upward sloping, would the hedging cost be lower and it might be more attractive for Japanese investors?”
2023-11-03 · Forward Guidance · Althea Spinozzi on Stagflation, Term Premia, and Ultra Long-Duration Bonds · IDENTIFIED FROM THE TRANSCRIPT
“There is a lot on the table. The politicians, obviously, if we are starting to see a slowdown of the economy, we'll try to steer money selectively in order to help certain sectors of the economy. And realistically, there is not going to be austerity until interest rates are going to be so high that that's going to be a problem to raise debt. It's going to be a huge problem. This fiscal spending is not going to go away that easily. And that supports the economy and ultimately supports yields, higher yields.”
2023-11-03 · Forward Guidance · Althea Spinozzi on Stagflation, Term Premia, and Ultra Long-Duration Bonds · IDENTIFIED FROM THE TRANSCRIPT
“Unconventional ways. But I think it's very important to understand that the situation we are in now is because of fiscal spending. We have fiscal spending has been the reason why the Federal Service has been able to hike by 500 basis points and nothing is broken yet. I don't see anybody screaming in the stock market yet. And that has been all because of this huge programs that the US government have been applying. And realistically, that's not going to change in the foreseeable future. In 2024, we have a US election.”
2023-11-03 · Forward Guidance · Althea Spinozzi on Stagflation, Term Premia, and Ultra Long-Duration Bonds · IDENTIFIED FROM THE TRANSCRIPT
“It's all about interest rate differentials, right? And that's why it's expensive now, because in the US, there is a huge difference in yield compared to Japan. And the same is in Europe. So it all comes down to that. And there is nothing really that the US Treasury can do about that. What can the U.S. Treasury can do or the Federal Reserve can do is try to resume quantitative easing, which is quite far-fetched, you know, like if they really want to boost the demand for US treasuries, they can do that. And that would suppress yields. But there is no willingness to do that in the foreseeable future because inflation is still double as much. Or rather, they have to try to get into some”
2023-11-03 · Forward Guidance · Althea Spinozzi on Stagflation, Term Premia, and Ultra Long-Duration Bonds · IDENTIFIED FROM THE TRANSCRIPT
“Forecast a scenario where the hedging costs of. Converting dollar risk into back into the Japanese yen might decline. You said a hedged pickup for a Japanese investor of US treasuries is not 4.6%. Negative 1%. Why is it so expensive? Does it have something to do with the yield curve? And might that change where actually, oh, aha, finally they are treasuries are attractive to Japanese investors because the hedging costs have gone down. Because I know there have been times in the past when treasury yields were much, much lower when Japanese investors, it was actually very attractive for them to buy, right?”
2023-11-03 · Forward Guidance · Althea Spinozzi on Stagflation, Term Premia, and Ultra Long-Duration Bonds · IDENTIFIED FROM THE TRANSCRIPT
“Is all about timing. It means that maybe that kind of drop in indirect bidders is going to come at a later point. We expect the Banco Japan to normalize monetary policies throughout 2024 is not going to be one meeting task is going to take a lot of adjustments because they are normally very cautious. But while they do that, they will gradually decrease the demand for US treasuries and also European sovereigns”
2023-11-03 · Forward Guidance · Althea Spinozzi on Stagflation, Term Premia, and Ultra Long-Duration Bonds · IDENTIFIED FROM THE TRANSCRIPT
“That are minus 1% in the US. But there is the expectations of 10 years JGB, Japanese government bonds, yields to continue to rise and to break above 1%. So if that's the expectations, what we are expecting there is a bear market. What I'm trying to get to is that the dynamic is not that straightforward. As we are seeing yields rising in Japan, the Japanese JGBs will get more attractive. But while they rise, demand will still not be there. It will take a while to play out. And that's quite telling because in the past month, we have seen some sort of demand drop from Indirect bidders which are normally foreign investors. But the drop has not been substantial and probably the reason for that is that there was the expectation that ILs in Japan would move or are moving much higher in the midterm.”
2023-11-03 · Forward Guidance · Althea Spinozzi on Stagflation, Term Premia, and Ultra Long-Duration Bonds · IDENTIFIED FROM THE TRANSCRIPT
“Absolutely. So, the way it works is that foreign investors typically hedge against their current risk on a three months forward. So that position needs to continuously to be rolled. And right now, would this hedging cost is showing is that investors will have to deal with a yield on 10-year US treasuries of minus 1%. It's similar for euro investors. There is a catch, though, Jack. When we look at Bank of Japan, and we all, everybody talks about yields rising in Japan, of course, you know, if you want to invest into long-term sovereign bonds, it makes sense that Japanese investors invest at home at 0.9%.”
2023-11-03 · Forward Guidance · Althea Spinozzi on Stagflation, Term Premia, and Ultra Long-Duration Bonds · IDENTIFIED FROM THE TRANSCRIPT
“Click the link in the description of today's episode to get started. Thanks, let's get back to the interview. Could you speak a little bit about the foreign demand for U.S. treasuries, Europe and Japan, mainly? One might think, oh, Japanese investors, they can buy a 10-year Japanese government bond, JGB at less than 1%, or they can get that nice juicy 4.6% yield on the 10-year treasury. It's a bargain. Tell us why it's a little bit more complicated than that regarding the hedging cost of hedging dollars into yen and why actually if you take into account that it actually might not be attractive, it might be very unattractive for Japanese investors to buy treasuries.”
2023-11-03 · Forward Guidance · Althea Spinozzi on Stagflation, Term Premia, and Ultra Long-Duration Bonds · IDENTIFIED FROM THE TRANSCRIPT
“That has not been a massive reprisement. When I look at the three month sulfur curve, I still see the expectations from markets that interest rates are not going to fall below 4%. And therefore, if interest rates in the long run, in the next 10 years, are not going to fall below 4%, the 10-year U.S. Treasury has to reprise above this level. And historically, the 10 years U.S. Treasury was pricing between 100 and 150 basis points over the Fed fund rate. So that means that the fair value on 10-year U.S. treasuries is around five and five and a half percent. We need bond future to drop much further and to show maybe that interest rates in the next 10 years are going to drop to 3% or lower in order to have 10 years yields trading more or less where they are now.”
2023-11-03 · Forward Guidance · Althea Spinozzi on Stagflation, Term Premia, and Ultra Long-Duration Bonds · IDENTIFIED FROM THE TRANSCRIPT
“Now they are much lower. And if they stay that low, they need to do something. It might not be interest rate hikes. They still have quantitative tightening and they might want to resteepen that yield curve. And even if they don't want to resteep in that yield curve, the kind of movement in place that was in the past few weeks is going to resume and continue. You see, Jack, I think that I read a lot of news between yesterday and today and almost everybody was talking about the fact that now the market is positioning for rate cuts. That's not true. The two-year U.S. treasuries is still trading around 5%. Yes, it fell to 4.9%, but if you look at it in a graph, it has been around 5% for the last three months.”
2023-11-03 · Forward Guidance · Althea Spinozzi on Stagflation, Term Premia, and Ultra Long-Duration Bonds · IDENTIFIED FROM THE TRANSCRIPT
“And all these players said they are price sensitive players and they want to see a fair price on their US treasury bonds. So next week, refunding of 10 years and 30 years bonds, we are going to see that players that need to secure a yield for this kind of issuances. And it will be interesting to see if they want to have the 10-year US treasuries at 4.6% instead of close to 5. And the reason for that is that yesterday at the FOMC meeting, yes, it sounded dovish, but what Powell said is that they might not hike only on the basis of long-term meals to remain high. So he was talking about eels around 5%.”
2023-11-03 · Forward Guidance · Althea Spinozzi on Stagflation, Term Premia, and Ultra Long-Duration Bonds · IDENTIFIED FROM THE TRANSCRIPT
“Critical area for the passage of commodities. And therefore, if something happens over there, we cannot exclude that commodity prices will start to increase. We have seen already oil going from 80 to 90, right? So definitely that can be a resurgence. What really I need these things to be fixed Another thing that we would need to have fixed is the demand, right? Because I said the Federal Reserve US commercial banks, you know, there were somewhat price insensitive buyers of US treasuries. What we are left with, we are real money, we have pension funds, asset management, we have investors that are buying U.S.”
2023-11-03 · Forward Guidance · Althea Spinozzi on Stagflation, Term Premia, and Ultra Long-Duration Bonds · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, I think that that point is going to arrive when there is a clear understanding that inflation is under control and is going to revert to the 2% target. Right now, like I said before, we are still double the Federal Reserve target. And there is a lot of things happening at geopolitical risk. We were talking about the war in Ukraine one year ago, and now we're talking about a war in Israel while the war in Ukraine is still going. And a war means, after all, more fiscal spending and therefore more US Treasury insurance war means some sort of inflationary kind of push because that is a”
2023-11-03 · Forward Guidance · Althea Spinozzi on Stagflation, Term Premia, and Ultra Long-Duration Bonds · IDENTIFIED FROM THE TRANSCRIPT
“Just hone in on the demand points. We've got foreign buyers who sometimes they want the dollar risk, other times they need to hedge that risk. You've got the private banking system who bought a lot of treasuries in 2020 and 2021, and they're somewhat non-economic buyers. You've got the hedge community levered investment. You've got the Fed. They're not there anymore. They're net sellers. They're rolling off their balance sheet. Who is going to be the marginal buyer of treasuries? And at what point do you think, okay, there's so much bad news, but that bad news is priced in that 10-year note, you know, that that is so high.”
2023-11-03 · Forward Guidance · Althea Spinozzi on Stagflation, Term Premia, and Ultra Long-Duration Bonds · IDENTIFIED FROM THE TRANSCRIPT
“So it means that that investment might be worthless in the next few months or year. And there is much better opportunities out there. So when I look at US treasuries and not only also corporate investment grade bonds, there is bonds with 10 to 15 years maturities that they provide a coupon between 6 and 7 percent. They still give investors some sort of duration risk and not as excessively as that U.S. Treasury's 2050 with 1% coupon, but they still do and they pay a coupon that it's quite sizable. And that implies that if that trade goes against you, investor can still sit on that. Receive 6 to 7% per year in coupon and wait for that kind of scenario so the Federal Reserve aggressively cutting rates to materialize. But until that doesn't happen, it doesn't make sense to amass on High modified duration bonds.”
2023-11-03 · Forward Guidance · Althea Spinozzi on Stagflation, Term Premia, and Ultra Long-Duration Bonds · IDENTIFIED FROM THE TRANSCRIPT