YouSaid · the spoken record

Johnny Fine

lines on the record: 25
first: 2025-01-21
most recent: 2025-01-21
sittings or episodes: 1
sources: podcast

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“Mean you can't ask an economist and a banker a speed round question without getting a two minute answer. So I'll do my best. So I think the following. I think that the markets fear that the neutral rate of interest is higher than anyone thought it was 12 months ago. I think that's overblown. I think the market is underestimating the potential fiscal responsibility, both in terms of income as well as spending from the next administration. And I think the market is overestimating the impact on inflation from tariffs that will be implemented under the next administration overall. I think all of those things together make me a bond bull for the year.”
2025-01-21 · Goldman Sachs Exchanges · Navigating the volatility in global bond markets · IDENTIFIED FROM THE TRANSCRIPT
“There are some maybe headline inflationary effects that might give volatility to inflation releases over the year, particularly in the UK. But as long as we're seeing that progress in underlying inflation moving lower, as long as we're seeing the evidence that those second round effects that central banks were so worried about are something we shouldn't fear for 2025 and beyond, we do think that this gradual cutting cycle will soothe bond markets and see rates a little bit lower. As always though, we're of course watching the data like a hawk and in particular some of these inflation releases”
2025-01-21 · Goldman Sachs Exchanges · Navigating the volatility in global bond markets · IDENTIFIED FROM THE TRANSCRIPT
“Do you think they're moving lower? We're forecasting 4.35% on the US 10-year yield, 4% in gilt yields, which is a long way below current levels. And 1.9% in European yields. Now, of course, that forecast depends on the relative growth in inflation trajectories continuing to show, at first point, divergence. So we're expecting weaker growth outcomes in the UK and the European economy versus the US. But we're expecting underlying inflation progress across all three. And that really does remain the key.”
2025-01-21 · Goldman Sachs Exchanges · Navigating the volatility in global bond markets · IDENTIFIED FROM THE TRANSCRIPT
“Probably tells you that at least the question is being asked is the size of the move in U.S. yields now compatible with very high growth expectations in the US. Our analysis suggests the move has probably not been big enough to be self-correcting just yet. But I think that that is looking a little clearer in some of these other economies where the fundamentals are less strong, that maybe these yield moves, at least from that spillover that we're seeing from the US are becoming counterproductive. I do think that the UK has really been one of the best exponents of the spillover effects from higher US yields and a higher duration or term premium in global curves. And the reason I would say that the UK is a twin deficit economy. It borrows from the rest of the world. It has a fiscal deficit. And as a result, it probably should be a relatively high beta expression.”
2025-01-21 · Goldman Sachs Exchanges · Navigating the volatility in global bond markets · IDENTIFIED FROM THE TRANSCRIPT
“Where we need to ask the question Is the yield move we're seeing across global bond markets appropriate for all these economies or is it really an issue of having to live with the higher yields that are being generated by the US economy? And so we've seen rate spreads widen, particularly between the US and Europe. That seems to us to be fundamentally justified, but it may well be the case that we see this yield move start to decouple or look a little bit stretched to get some of those growth fundamentals in the other economies. Now, in the US itself, I think that we are particularly since the December Fed meeting seeing a slightly less favorable response in risk assets to the move higher in yields. And of course, the response to the US CPI relief was quite telling in that regard. Now that”
2025-01-21 · Goldman Sachs Exchanges · Navigating the volatility in global bond markets · IDENTIFIED FROM THE TRANSCRIPT
“Well, I think that we spend a lot of time talking about the fundamental justification for higher yields and the improved prospects for the U.S. economy that was being embedded into that yield move. And I think that's a really great contrast to make against the rest of the world where it's not as obvious at all that either there is the support for that higher yield view in the growth data. If we think from Europe to China to the UK, growth data has been anemic. And although you've seen maybe a slower than expected decline in inflation, it still looks like inflation is on a downward trajectory in those economies. And yet what you have seen is that yields have been dragged higher as a result of the US move. So I really do think that the story between the US economy and the rest of the world remains quite a divergent one. And we're in perhaps not for the first time a situation.”
2025-01-21 · Goldman Sachs Exchanges · Navigating the volatility in global bond markets · IDENTIFIED FROM THE TRANSCRIPT
“As opposed to getting all my financing done in one fell swoop, and they'll average in by either issuing debt a couple times as opposed to once, or they'll use some interest rate derivatives to help manage that risk.”
2025-01-21 · Goldman Sachs Exchanges · Navigating the volatility in global bond markets · IDENTIFIED FROM THE TRANSCRIPT
“Even with higher inputs for cost of capital. So that means that there's continuing demand to issue. Corporate debt's been a pretty busy start to the year. We'll kind of really have a better picture of that post-corporate earnings as we get into the bulk of the first quarter. But for many, it's business as usual. Now look at the same time. I think where we are, especially compared to a year ago, when we had elevated yields but are sharply inverted yield curve, we now have a positively sloped yield curve. So it is cheaper to issue shorter dated debt than it is to issue longer dated debt. I'd expect some corporates to avail themselves of that lower financing cost, especially those who were very responsible in the low yield environment and really termed out their capital structures. There'll be others, I think, that will look at the financing environment and saying, sure, that's the cost of doing business, but maybe I'll average in over the course of the year.”
2025-01-21 · Goldman Sachs Exchanges · Navigating the volatility in global bond markets · IDENTIFIED FROM THE TRANSCRIPT
“On the investing side of the equation in the business that I traffic in day to day, which is corporate debt, investors love these high yields. By definition, great risk adjusted returns available for their portfolios. And that's been in part something that's kept credit spreads at what are now very close to multi-decade tights. From a corporate issuer's perspective, those who think about debt issuance cost on a fixed rate cost of debt basis, they're continuing to grapple with the same issues that's really been present for a couple of years now, albeit having made peace with the fact that we're not going back to a zero interest rate environment and a 2% 30-year anytime soon. And so the good news is that for the most part, earnings are outstripping any impact from this increased interest expense, and growth opportunities are creating investment opportunities for our corporate clients that are hurdling.”
2025-01-21 · Goldman Sachs Exchanges · Navigating the volatility in global bond markets · IDENTIFIED FROM THE TRANSCRIPT
“Do we get a set of tariff announcements and then think that that is it? Or does it increase uncertainty further down the line about more to come? All of those sorts of things probably need to be weighed up. But as it stands, we are relatively optimistic that outside of the categories directly affected by tariffs, we are going to see those second round effects remain quite low and that monetary policy is probably got to be anchored on that underlying inflation dynamic that we still are pretty optimistic about.”
2025-01-21 · Goldman Sachs Exchanges · Navigating the volatility in global bond markets · IDENTIFIED FROM THE TRANSCRIPT
“Or temporary supply side shock, or some one off price change, does that affect behavior in the rest of the economy by raising inflation expectations, raising wage demands that then seed that inflation shock propagate through the rest of the economy? Now, the good news, I think, now is that the fears around those second round effects are subsiding. And I think that that is true across many economies. And in the US in particular, if you look at things like Wage pressures, measures of inflation expectations. Outside of a particular survey we got on the University of Michigan release, they have generally been quite benign and suggest that the risk of those second round effects are pretty limited. Now, of course, it will depend on the uncertainty around tariff policy. One of the aspects that I think is still unclear is...”
2025-01-21 · Goldman Sachs Exchanges · Navigating the volatility in global bond markets · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, I think it's a great question because ultimately we've had a similar debate before if we go all the way back to the 2021-2022 inflation episode, which not in full, but at least partially was driven by some temporary supply-side distortions that, of course, was infamously leading to the description of transitory. Now, it is right that a one-off change in the price level, in theory, you should be able to look through such a change. But what is really key is do you see second round effects where that initial surge in inflation maybe for a single”
2025-01-21 · Goldman Sachs Exchanges · Navigating the volatility in global bond markets · IDENTIFIED FROM THE TRANSCRIPT
“Some more anchoring or medium term relief for yields. But of course, until we get through some of the early phases of this administration, we learn a little bit more about upcoming policies. we're probably still going to find the data points quite volatile.”
2025-01-21 · Goldman Sachs Exchanges · Navigating the volatility in global bond markets · IDENTIFIED FROM THE TRANSCRIPT
“Is very well taken. The market, I think, so far has concentrated, at least in the US outlook, on the inflationary consequences of tariffs rather than necessarily the growth impact. I think that that probably is not quite true in the rest of the world, where, as we might speak about later, there's been a much less rosy or optimistic repricing of growth, say, in Europe or China over the last couple of months. But it does mean that that uncertainty until it resolves is probably going to keep the volatility around the data prints relatively high. Now, on the data path we're expecting, there won't be renewed inflation pressures coming out of, say, the labor market or forward inflation expectations outside of potential tariff-affected categories. We are expecting inflation to continue to moderate in an underlying sense and ultimately that provides”
2025-01-21 · Goldman Sachs Exchanges · Navigating the volatility in global bond markets · IDENTIFIED FROM THE TRANSCRIPT
“I do think that really does speak to the uncertainty that Johnny mentioned earlier. The market has gotten a little more nervous about the inflation trajectory. And so the incoming data that we got in the US, quite a modest downside surprise to inflation, but nonetheless enough to see yields correct fairly substantially lower. It was, of course, reinforced. We had a move in UK CPI where arguably, you know, maybe the stakes were a little bit higher given inflationary concerns there. That was also a downside surprise that offered some calm to the market. But I think what that is telling you is that the inflation data still really does loom large. And so, of course, incoming prints are going to matter a lot. I think that when you think about the Fed's perspective, there remains uncertainty about the inflationary impact of the various policies of the new administration, tariffs being a good example of that. Johnny's point.”
2025-01-21 · Goldman Sachs Exchanges · Navigating the volatility in global bond markets · IDENTIFIED FROM THE TRANSCRIPT
“Not going to the term markets, not going to 10 and 30 year Treasury notes and bonds. And so de facto, there wasn't the pressure on the long end of the curve last year. Some of the incoming members of the administration have been quite vocal about this not being the appropriate financing strategy that they would like to see play out. wanting to have a longer duration average issuance pattern and strategy and people have started to kind of think about well maybe that means that this mix of bills versus bonds is going to shift under the next administration Scott Bessant the incoming Secretary of Treasury confirmed has been outspoken on this point the incoming CEA chair Stephen Myron has been very vocal about how in effect the last administration followed what he calls an activist treasury issuance”
2025-01-21 · Goldman Sachs Exchanges · Navigating the volatility in global bond markets · IDENTIFIED FROM THE TRANSCRIPT
“Market started to say maybe that R squared, which people have previously thought was around about 3%, might actually be nearer 4%, which means that we're therefore much nearer the end of the cutting cycle than anyone had thought previously. I think that's probably not the right interpretation for the market to have. But to me, that's been in part a significant driver of some of this volatility. And the one aspect that you touched upon in your original question that we haven't really responded to is the technical pressure of the supply of treasuries that might come to market. And I think this will be really interesting under the next administration. One thing that was notable about the funding strategy of Treasury, particularly in 2024, was that a lot of the issuance was in the bills market in the very short duration markets overall that were going to money market funds and therefore”
2025-01-21 · Goldman Sachs Exchanges · Navigating the volatility in global bond markets · IDENTIFIED FROM THE TRANSCRIPT
“Degree. And so the narrative started to shift towards US economy can do pretty well in a higher yield environment, even on a sustainable basis. And then what changed from there was with the activity levels remaining robust and with, as I said, the kind of the disinflationary indicators starting to slow and it becoming clearer that we'd get to the Fed's 2% inflation target more slowly, markets started to really ask the question as to how restrictive really is monetary policy. And so no one really knows what this thing is. We call R squared, which is the neutral rate of interest above which there should be contractual.”
2025-01-21 · Goldman Sachs Exchanges · Navigating the volatility in global bond markets · IDENTIFIED FROM THE TRANSCRIPT
“Point in time. But if we take a step back and we think about market expectations, which have driven a lot of this, as you have said, and Georgia has said, it's been, from my perspective at least, very volatile in the sense that last year at one point the market was pricing seven cuts. Now they're, as you just said, there is a meaningful probability being priced into the market of hikes. Obviously, the data has changed, but even before the election, it just felt that the market was particularly sensitive and particularly volatile. Is that true or is that just my impression? No, it's very, very real. And I think a lot of what's rooted in that is when we got to the peak of the hiking cycle, there was the expectation that there would be a real bite taken out of economic activity. The transmission mechanisms of higher interest costs for consumers, higher funding costs for corporates, the consequent impact on economic activity. And it didn't really happen to a meaningful”
2025-01-21 · Goldman Sachs Exchanges · Navigating the volatility in global bond markets · IDENTIFIED FROM THE TRANSCRIPT
“comes to the fear point is that they're pressing some of these outcomes to worst. They're pricing some of the outcomes from a tariff perspective to worst. They're pricing some of the outcomes from a labor market tightness, deportation, impact on labor input costs, et cetera, et cetera, to worst. And they're pricing some of the fiscal imbalances to worst as well. And as a result of that, that created, I think, the backdrop for this significant run-up in yields and increase in treasury volatility. So that's kind of how I think about it. Fundamentals, uncertainty, and some real fear leading to what I think has been some inefficiencies in how the market's price term yields. Right. And so turb premium, by the way, is just what investors demand for holding the risk of sovereign bonds. Further out the curve. Yeah, exactly. Above and beyond what might be thought to be the fundamental value of the yield curve at that.”
2025-01-21 · Goldman Sachs Exchanges · Navigating the volatility in global bond markets · IDENTIFIED FROM THE TRANSCRIPT
“And uncertainty that was in there. There's a lot of uncertainty, I think, as well with respect to government policy. The reality is that under the next administration, we know what the direction of travel is for things that impact rate markets, fiscal policy, trade policy, immigration policy, government efficiency as well. We know what the direction of travel is. We don't know how far away the destination is, and we don't know how fast the car is driving towards that destination Eden. That won't be clear for several weeks and months. So that uncertainty has embedded itself in a much higher term premium than we're used to seeing in treasury yields. In fact, I think we're at the highest level of term premium for over 10 years, or certainly since 2015, in 10-year treasury is at around about 60 basis points. Now, one thing I think that the market is doing with this uncertainty”
2025-01-21 · Goldman Sachs Exchanges · Navigating the volatility in global bond markets · IDENTIFIED FROM THE TRANSCRIPT
“Of short term rates for the Fed. So coming into the payrolls report, markets priced in just over one cut for the remainder of 2025 is a little bit more than that now. But it was really just kind of one cut thereabouts. And as David Miracle and other people in the research group frequently remind me, the expected path of rates is really a probability weighted average. And when you kind of think about where we'd gotten to, if you have one cut that's priced in by the end of the year, That could be if you have like a two person survey, it could be one person saying, I think there's going to be two cuts and one person saying I think there are going to be no cuts and therefore the probability weighted average is one. If you looked at all the data and volatility as to where things stood, there was actually a 35% probability that over the course of the next 12 months the short-term rates would be high, i.e. the Fed would be hiking. That seems a little unusual. It didn't really seem to square with the data, but there was obviously a lot of fear.”
2025-01-21 · Goldman Sachs Exchanges · Navigating the volatility in global bond markets · IDENTIFIED FROM THE TRANSCRIPT
“Is that what you're seeing just this sense that there's a digestion problem brewing in the bond market? I think it's a combination of things. And I think those things are all rooted in fundamentals, at least in the near term. Uncertainty and fear. And the fundamentals in the near term are what's the data telling us. So obviously it's very unusual. We began a cutting cycle in September and 10-year yields are almost 100 basis points higher than they were than when the Fed started. That wasn't on anyone's bingo card coming into 2025, or certainly the back end of last year. But the fundamentals, as George mentioned, have been good. Growth dynamics have been good. The labor market has been strong and robust. And economic data has been leaning towards more inflationary as opposed to disinflationary, and that has changed the narrative around the past.”
2025-01-21 · Goldman Sachs Exchanges · Navigating the volatility in global bond markets · IDENTIFIED FROM THE TRANSCRIPT
“Up bond yields across the curve. And I think what is really important to note and really important when we think about the interaction across global bond markets is it's not just been a change in the policy path for yields and particularly in the US. It's also been an increase in bond risk premium. And the way that we would think about that is we know that deficits are large. There is a lot of supply of sovereign bonds coming to market. That is much easier to digest if inflation is low, growth is slowing and central banks are cutting. When you see expectations going in the other direction, actually what we are seeing is the market demand additional risk premium in the curve. So we see this simultaneous increase in rate expectations, but also bond risk premium in the major bond markets.”
2025-01-21 · Goldman Sachs Exchanges · Navigating the volatility in global bond markets · IDENTIFIED FROM THE TRANSCRIPT
“Basis points higher at the 10 year point on the curve, a similar move in the UK, maybe about half that in European yields. And all of that is really, I think, due to a revision of expectations on growth, on inflation, and on the monetary policy path that is expected, particularly from the Fed. Now, part of that is because the US data set has been better. You've seen improvement in things like the labor market where there was some source of concern if we go back to the September period. We've also seen the Fed revise its view of inflation. It did that at the December meeting, leading to a revision of expectations of just how much the Fed could be cutting interest rates. And of course, after the US election, we had a fairly substantial pricing of US growth stronger across US macro assets. And so all of that has pushed”
2025-01-21 · Goldman Sachs Exchanges · Navigating the volatility in global bond markets · IDENTIFIED FROM THE TRANSCRIPT