YouSaid · the spoken record

Jay Barry

lines on the record: 25
first: 2023-10-11
most recent: 2023-10-11
sittings or episodes: 1
sources: podcast

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“The last three months, we think that's probably past its peak, and that the journey from 3% annualized inflation to 2% is going to take some time. So the Fed's probably done tightening, but we think the Fed's also on hold for the next 10 or 11 months or so, all the while QT is still going on in the background. So I think we can historically go back and look at the end of Fed tightening periods as being very positive for yields peaking and coming back down. But I think these are the reasons a Fed on hold for longer while balance sheet policy is still kind of sitting in the background working and not just in the US but globally too because the ECB and the Bank of England are doing QT and one would think that the Bank of Japan might have to defend its purchases or its YCC target less forcefully as well. This is something that's going to keep rates elevated for a longer period of time.”
2023-10-11 · Odd Lots · JPMorgan's Jay Barry on the Big Selloff in Bonds · IDENTIFIED FROM THE TRANSCRIPT · source
“I think there's a lot of humility there because if we had sat here nine to ten months ago and talked about the outlook for 2023, we would not have pegged 10-year yield sitting at 462 like they are right now. But as I think ahead and I look into the end of this year, in 2024, let's think about the economy. And again, we're not in the recessionary camp, but we see, and we forecast growth moving below trend under the weight of the shift in policy rates that we've had, but also because there's other incremental factors with higher energy prices, with the beginning of student loan repayments coming back to think that growth will be slower next year than it was this year. We think Fed policy is likely at a standing point with respect to policy rates, that it's on hold, which is typically something over a longer period of time that's been supportive of yields stabilizing. And we think inflation is coming down, but coming down very slowly. So we've had a very strong disinflationary impulse.”
2023-10-11 · Odd Lots · JPMorgan's Jay Barry on the Big Selloff in Bonds · IDENTIFIED FROM THE TRANSCRIPT · source
“And in duration terms, we think we're running about 2.3 trillion in 10 year treasury equivalents this year. We're probably going to issue about 3 trillion in 10-year equivalents next year. So it's a 35% increase in duration supply into next year. And I think it matters because deficits as a share of GDP are larger now with the economy sitting above trend and growth and the unemployment rate sitting well below 4% that I think just in the background, there's concerns that when there's a downturn, how big will these deficits be?”
2023-10-11 · Odd Lots · JPMorgan's Jay Barry on the Big Selloff in Bonds · IDENTIFIED FROM THE TRANSCRIPT · source
“But I think maybe the fact that it was like, you know, the whites of the treasury's eyes and actually seeing it mattered, but it's large. And I think we think coupon issuance in treasuries is going to double next year from this year.”
2023-10-11 · Odd Lots · JPMorgan's Jay Barry on the Big Selloff in Bonds · IDENTIFIED FROM THE TRANSCRIPT · source
“And maybe you can say incrementally the last couple months because yields have risen, the expectations over interest expense at the federal level are higher, thus even adding to that pressure. But I think people look at the treasury's quarterly refunding announcement on August 1st as being a seminal driver there, where the Treasury made and announced a series of pretty large increases to coupon auction sizes, the first since the pandemic era and sort of foreshadowed to the bond community that these were likely to continue for a number of quarters at a time. That's been on our minds for some time. Like our issuance forecast for some time have been calling for a pretty sharp increase.”
2023-10-11 · Odd Lots · JPMorgan's Jay Barry on the Big Selloff in Bonds · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, I mean, I think supply matters in the context of that demand that we were just talking about. And there's a big shift that's happening. But to your point, I haven't learned anything incrementally new over the past six weeks or so that I didn't know a few months ago. And I think we've known that deficits over the next 10 years are expected to be wide for some time.”
2023-10-11 · Odd Lots · JPMorgan's Jay Barry on the Big Selloff in Bonds · IDENTIFIED FROM THE TRANSCRIPT · source
“Joe, I haven't had as many conversations about deficits and treasury supply over my, I think, most of my career as versus what I've had the last couple of months. It's hit a fever pitch.”
2023-10-11 · Odd Lots · JPMorgan's Jay Barry on the Big Selloff in Bonds · IDENTIFIED FROM THE TRANSCRIPT · source
“So I think you should be able to look through them, but for more active managers who are managing versus a benchmark, I mean, we can look at series of returns on a weekly or a monthly basis and see how those various funds are doing relative to their peers. So I think, you know, there is some psychology to not deviate too far away from more average excess returns are headed. And I think that's important because excess returns over and above index, which index being negative for the last three years, excess returns for the asset manager community have been on the average pretty challenging the last couple of years. So I think there is a degree of sensitivity there. So I think that's sort of an impactful story there, which means that there is some sort of psychology, particularly as the fundamentals are shifting to kind of neutralize your positions more quickly, even though you may be able to look through it. And then there's a separate story about flows, which is over and above the existing stock of AUM, you've got that you probably need to see return stabilized before you see incremental inflows from investors.”
2023-10-11 · Odd Lots · JPMorgan's Jay Barry on the Big Selloff in Bonds · IDENTIFIED FROM THE TRANSCRIPT · source
“And their fixed income asset allocation has been rising for the past decade plus. I think they had an existential moment back in 2011-12 when funded ratios were well under 100% and their fixed income asset allocation was only something like 35% for managing a longer duration liability. But it's now over 50%. And one would think that there's probably more room for demand there. But again, I think the nature and speed of these moves mean that most active investors who have, I think, more leniency before they add duration are sitting back waiting to see sort of Val received first.”
2023-10-11 · Odd Lots · JPMorgan's Jay Barry on the Big Selloff in Bonds · IDENTIFIED FROM THE TRANSCRIPT · source
“Year. So, perversely, I think it's a little bit of like a chicken and egg. You need the attractive yields, but you need stable returns as well. And we haven't gotten that yet with the speed of the backup. But it's been talked about a lot. I think the others that we've looked to in the past are the U.S. pension fund community defined benefit in nature. And that's a $3.5 trillion universe, an AUM. Their funded ratios are above 100% really sustainably for the first time since the financial crisis.”
2023-10-11 · Odd Lots · JPMorgan's Jay Barry on the Big Selloff in Bonds · IDENTIFIED FROM THE TRANSCRIPT · source
“I think that's a great question. And I mean, bonds are an investment alternative that are viable for the first time in 15 or 16 years here, right? I mean, you talked about it about the opening treasury yields hitting, you know, pre-GFC highs across the curve. Aggregate fixed income yields for like an aggregate fixed income bond index are probably still close to 6% right now. And so I think that's a viable investment alternative just for a broadly diversified portfolio. So I think that means there's probably a pool of asset managers that could have demand for bonds over time. But I think that's only one piece of the puzzle because it takes a very attractive yield level, which we've got, but also it takes sort of more stable returns. And you started to see that at the beginning of the year, when yield started to stabilize, infunds, inflows, excuse me, into bond funds started to accelerate. But that sort of petered back when volatility began to pick up. And because now year to date, we've got fixed income returns negative for the third consecutive.”
2023-10-11 · Odd Lots · JPMorgan's Jay Barry on the Big Selloff in Bonds · IDENTIFIED FROM THE TRANSCRIPT · source
“Thinking in the next move is going on hold, which would be the precursor to rates moving lower. And our survey back in July and August was as long as it had been in over a decade. And it gave you a signal that over the next five to six weeks, there could be some risk that rates move higher on a systematic basis. And that's what we've had. Now walk that forward in our latest survey, which is about a week old right now, is back at its most neutral level since April. So I get the sense that perhaps part of this move over and above the fundamentals could be investors reassessing those duration positions as we've priced higher for longer, or you talk about the supply dynamic here at work, maybe that's in the background against the backdrop of large deficits. But I think sentiment is a really large driver over shorter periods of time.”
2023-10-11 · Odd Lots · JPMorgan's Jay Barry on the Big Selloff in Bonds · IDENTIFIED FROM THE TRANSCRIPT · source
“I'm glad you asked that, Joe, because I think it can be really influential over shorter periods of time, say four to six weeks. So there's a host of metrics that we like to watch from the CFTC's data on sort of speculative positioning and interest rate futures to some more empirical models that sort of track the performance of hedge funds and asset managers. But my favorite, and it's very close to my heart because it's been something I've been working with for like more than two decades, is our weekly JPMorgan Treasury client survey. It's a bit of a misnomer because it's really our duration survey of the aggregate exposure of our rates franchise. And every week we ask the same number of clients in our franchise whether they're long, neutral, or short duration, either outright or relative to benchmark. And we found that when that measure sort of moves very sharply away from average levels, it can have a mean reverting effect on yield the opposite direction. So you talk about sentiment. I think everyone through the spring and summer was trying to handicap when the Fed would be done raising rates.”
2023-10-11 · Odd Lots · JPMorgan's Jay Barry on the Big Selloff in Bonds · IDENTIFIED FROM THE TRANSCRIPT · source
“Are sampled over a period of declining rates that they attribute a lot more to changes in policy expectations than term premium. So it turns they can be less sort of influential or less, I think, insightful. They're still very valuable, just less insightful at these turns. And then there's finally more empirical ways to measure it too, because they're survey-based measures of where economists expect policy rates to be, like the survey professional forecasters. Survey of primary dealers where you can observe where economists think policy rates will be over the next five to ten years, and you can compare them to 10 year rates to get a sense of the extra compensation that's required.”
2023-10-11 · Odd Lots · JPMorgan's Jay Barry on the Big Selloff in Bonds · IDENTIFIED FROM THE TRANSCRIPT · source
“Made sure I googled it before I came up. No. But I think there's a number of ways to look at it. And I think we can start and just talk about our fair value framework. And I think we can say everything outside of these fundamental drivers, one might possibly attribute the term premium that in the absence of being able to explain with growth and inflation and Fed policy expectations that that's a driver there. There's also a series of very widely watched academic models. There's the ACM model from the New York Fed, the Kim Wright model that the Federal Reserve Board in DC watches, which are a series of, I think, no arbitrage term structure models, which are kind of mean reverting in nature. And those were sitting relatively low until recently, and they actually would attribute most of the sell-off over the past six weeks to term premium. You know, I think we've done a paper on this, and we think that there's some idiosyncrasies with the way that these models are constructed because they”
2023-10-11 · Odd Lots · JPMorgan's Jay Barry on the Big Selloff in Bonds · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, so the term premium, and you're right, it's nebulous term, I think, is the extra compensation required for investors to buy longer duration assets.”
2023-10-11 · Odd Lots · JPMorgan's Jay Barry on the Big Selloff in Bonds · IDENTIFIED FROM THE TRANSCRIPT · source
“And then the final piece of the puzzle is the Fed. And I think we lose this that even though we're coming to the end of the Fed policy rate tightening cycle where we think it's actually concluded, balance sheet policy is operating in the background. And just as the BOJ Joe was really important at the end of July, I think Chair Powell's comments at the July press conference were as equally important because a reporter asked him about whether the Fed could continue to do QT while it actually lowers interest rates as inflation comes down next year. And he made the point that you'd be normalizing both. The policy levers may be in opposition, but you're normalizing the balance sheet as you're normalizing rates. And I think the extended runway for QT matters because we found over a longer period of time the Fed's stock of holdings matters for yield levels.”
2023-10-11 · Odd Lots · JPMorgan's Jay Barry on the Big Selloff in Bonds · IDENTIFIED FROM THE TRANSCRIPT · source
“Appreciably from here, and we're not in the dellarization camp, but the dollar share of those reserves have been on a downward trend as central banks globally have been diversifying. So it's just saying that if that was a tailwind for rates for the better part of the first half of this last 20 years, it's not there. The second one, and this was more local or the U.S. banks, where they bought about three-quarters of a trillion of treasuries over 2020 and 2021 when supply was heavy, largely due to the fact that deposit growth outstripped loan growth. And now we know deposits have stopped coming down like they did in the spring, but they're not growing. And I think one would think even as deposit growth picks up that banks after what's happened here might generally speaking bias their purchases shorter along the yield curve, which with less duration risk.”
2023-10-11 · Odd Lots · JPMorgan's Jay Barry on the Big Selloff in Bonds · IDENTIFIED FROM THE TRANSCRIPT · source
“I think it's an important driver over a longer period of time. Like, it's hard to say, and Tracy, you said this before whether it's the proximate cause of the sell-off, but I think in the background, it's something that's contributing to what's going on. Because to us at JPMorgan, we look at three sets of buyers who have been the main price in sensitive sources of demand for the better part of the past two decades at various points. And you talk about the foreign demand story. I mean, we know that FX reserves peaked about seven or eight years ago. The dollar share of those reserves have been coming down. But there was a point in time at the beginning of the century where FX reserves were growing so rapidly and the share of those reserves held in dollars were so rapidly that the deposit of that savings into the US I think was something that kept long-term rates low. And you remember Chair Greenspan talking about this and the conundrum in 2005 about why long-term rates were not rising even as the Fed was tightening. So that's a key driver right there. And we look at it. FX reserves we don't really expect to grow.”
2023-10-11 · Odd Lots · JPMorgan's Jay Barry on the Big Selloff in Bonds · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, Joe, in late July, the Bank of Japan basically allowed JGBs in the tenure sector to trade even wider around its sort of plus or minus 50 basis point target and effectively kind of gave you notice that at some point it was getting closer to completely removing that YC.”
2023-10-11 · Odd Lots · JPMorgan's Jay Barry on the Big Selloff in Bonds · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, I mean, I think pre 2020, we just briefly talked about one of those factors low and negative policy rates elsewhere meant that even as the US was increasing rates during the 2015 through 2018 cycle, that was something that helped anchor long-term yields at lower levels. And you could see the influence there when you talk about the hedge yield pickup for U.S. bonds versus most foreign currency pairs. And that has since, of course, eroded because basically every major developed market central bank has been increasing policy rates at a rapid rate, and the last of which that's out there, the Bank of Japan, we think at some point, will completely lose its YCC band and will at some point exit negative interest rate policy next year. So that was an important factor, which we now don't have as a factor in the model.”
2023-10-11 · Odd Lots · JPMorgan's Jay Barry on the Big Selloff in Bonds · IDENTIFIED FROM THE TRANSCRIPT · source
“Really, since the spring of 2020, too. So I think we take notice of that because it's hard to say. I think we've all been pretty humbled to the fact that the economy's been resilient, it's been tough to call, but we have to have something that sort of centers like where should rates be and how far have they gone? And this was at least a flag to us that they've gone too far.”
2023-10-11 · Odd Lots · JPMorgan's Jay Barry on the Big Selloff in Bonds · IDENTIFIED FROM THE TRANSCRIPT · source
“So you've talked about the fair value model. I think that's a key input to what we do because we try to identify Been the largest Over time Over 10 or 15 years. We've got To factors that are In the Fed policy, growth, and inflation expectations being the three key drivers, like the triumvirate, so to speak. And then other factors which at various points over the last 10 to 15 years have been important and less important. I mean, there was a time when with policy rates at zero and negative territory globally, we had the share of the bond universe that was trading at a negative yield globally because policy rates being anchored at very low levels helped anchor US rates lower. And that was important, but less important right now. So that starts. And if we have a sort of centering universe about where we think Fed policy, growth, and inflation are headed, that's a starting point. And you're right. Like when we adjusted for those factors, there was a point last week where it looked like we were trading about 35 or 40 basis points too high where you're talking about standard deviations before. That was something like a two and a half standard deviation move relative to fair value in our framework and one which we hadn't seen since this time last fall after the UK LDI crisis.”
2023-10-11 · Odd Lots · JPMorgan's Jay Barry on the Big Selloff in Bonds · IDENTIFIED FROM THE TRANSCRIPT · source
“Basis point change in Policy expectat To sort of change Term yields by about Like every Long term yields So, yeah, the You go out, the term structure. Idiosyncrat”
2023-10-11 · Odd Lots · JPMorgan's Jay Barry on the Big Selloff in Bonds · IDENTIFIED FROM THE TRANSCRIPT · source
“Since September And growth. Been pretty stable Has been rising. And we Head Inflation Market Break even By about Points over the past six weeks.”
2023-10-11 · Odd Lots · JPMorgan's Jay Barry on the Big Selloff in Bonds · IDENTIFIED FROM THE TRANSCRIPT · source