YouSaid · the spoken record

Kathy Jones

lines on the record: 69
first: 2023-12-12
most recent: 2023-12-12
sittings or episodes: 1
sources: podcast

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“Yeah, so the old models used to work. Nominal GDP growth, tenure yield, you know, they moved together. There was a range around it, obviously, during the early 80s when we had so much volatility. That range was pretty wide. And then we settled into the 90s when it attracted pretty well. And frankly, modeling tenure yields using nominal GDP growth and sticking in an assumption here or there and a bit of a lag. And you have a pretty decent model. That hasn't worked for a long time. And so we have not used nominal GDP per se as a strong factor in modeling 10-year yields. And the reason is it stopped orfinged that easy or that clear-cut. And we needed to take another look, especially once we went into zero.”
2023-12-12 · Forward Guidance · Kathy Jones: The Bull Case For Bonds, And The Need For “Caution” on Private Credit & Leveraged Loans · IDENTIFIED FROM THE TRANSCRIPT
“Right, but even if it's unlikely if there's a 8% chance that interest rates go to zero, that could significantly affect pricing. And I think I looked up the market terminal rate thinks that the lowest the Fed will go to is like 3.3%. So around there, and how does how do you arrive at that 3% figure, some folks say, oh, it's just nominal growth? What the tenure should be is it's always nominal growth. I have a little bit of a hard time with that given that GDP growth in 2021 was incredibly robust and off the charts double digits. And the 10 year was one and a half percent. How do you think about fundamental models about sort of the valuation of a 10-year relative to inflation and growth expectations, which I know is a pretty, it's pretty tough to model.”
2023-12-12 · Forward Guidance · Kathy Jones: The Bull Case For Bonds, And The Need For “Caution” on Private Credit & Leveraged Loans · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, our view is that it's not going to go back to quite as low as it was because nobody really knows what the natural rate is, the neutral rate is. We keep finding it and it keeps changing with every era. But seeing yields go down as far as they did in the last cycle seems unlikely to us. There are a lot of reasons for it to be somewhat higher. I think that the potential growth rate is probably higher than it was during, you know, the great financial crisis era, during the pandemic era, should be on the positive side. That being said, can the Fed end up lowering rates towards 3%? Sure, going down to two or even lower, that seems unlikely.”
2023-12-12 · Forward Guidance · Kathy Jones: The Bull Case For Bonds, And The Need For “Caution” on Private Credit & Leveraged Loans · IDENTIFIED FROM THE TRANSCRIPT
“How are you thinking about where the floor is on rates? Really, maybe there is no floor. I mean, in Europe and Japan, zero wasn't even a floor, but there's a so-called terminal rate about where the market thinks will be the highest or in this case the lowest rate. I guess we are at the terminal rate for the height, but in terms of the terminal rate for cuts, where do you think when the Federal Reserve is done cutting, what will that level be? And is that level higher or lower than the current market rate, which I can pull up right now, I guess?”
2023-12-12 · Forward Guidance · Kathy Jones: The Bull Case For Bonds, And The Need For “Caution” on Private Credit & Leveraged Loans · IDENTIFIED FROM THE TRANSCRIPT
“Not yet. I think that the volatility to some extent is reflecting the fact that the Fed leaves the door open to more tightening. We also have the shrinking liquidity to think about which can add to volatility. You know, the Treasury Market's not as liquid and easily trade. We get these outsized moves that come out of the blue from time to time. So liquidity is shrinking. We've got quantitative tightening, which the Fed thinks it can continue to do while it's changing course and lowering rates. I have my doubts as to whether that's going to happen or whether that even makes sense. But I think it is a potential source of volatility as well. So I think volatility can come down from sort of the peak levels that we hit last year, but I don't think it's returning to the kind of low levels we saw during the financial crisis or ZERP or even the 90s.”
2023-12-12 · Forward Guidance · Kathy Jones: The Bull Case For Bonds, And The Need For “Caution” on Private Credit & Leveraged Loans · IDENTIFIED FROM THE TRANSCRIPT
“Thanks. So the Fed has hinted that not only my cuts be on the way, but that hikes are probably over and the market is interpreting that as hikes are definitely over. Given that interest rates can only go one way up or down or stay the same, if up is off the table, does that mean that interest rate volatility is muted? And that's kind of a room to ride.”
2023-12-12 · Forward Guidance · Kathy Jones: The Bull Case For Bonds, And The Need For “Caution” on Private Credit & Leveraged Loans · IDENTIFIED FROM THE TRANSCRIPT
“I think it will go down. I think negative is a possibility, particularly if we hit a recession. It's really hard to forecast the term premium, right? It's sort of this, I look at it as a sort of catch-all for everything else we can't explain in the treasury market. But the move up in the term premium was certainly a significant contributing factor to the rise in rates that we saw earlier. So some declined the term premium would make sense. I think some of it reflects volatility and uncertainty about the path of short-term rates, right? And that is probably going to be with us in 2024. I don't think that volatility, that uncertainty generated by the Fed's reaction function is going to disappear. I think we're sort of saying Rocky Road. Rocky Road, lower yields, but Rocky Road in 2024 can't rule out a lot of bumpy.”
2023-12-12 · Forward Guidance · Kathy Jones: The Bull Case For Bonds, And The Need For “Caution” on Private Credit & Leveraged Loans · IDENTIFIED FROM THE TRANSCRIPT
“So, you know, not to get too far ahead of my skis, but if you think that the curve will stay inverted and you're bullish on the 10-year, not super bullish on the two-year, let's put it that way. Is it fair to say you think that the term premia will go down or return to being negative?”
2023-12-12 · Forward Guidance · Kathy Jones: The Bull Case For Bonds, And The Need For “Caution” on Private Credit & Leveraged Loans · IDENTIFIED FROM THE TRANSCRIPT
“Because we don't have any evidence that that's going to happen. So our base case scenario is that two year kind of sits here and trades in a range. 10-year, though, can continue to come down. Five-year tenure can continue to come down in expectation that the Fed will indeed lower rates over time. And that the longer they hold out at the short end, the more you get disinflation in the system that should be favorable for the five and ten year part of the curve. In other words, the tighter they are now, the more downside you have in inflation and growth, more risk you have of recession. And that should be good for the longer end of the curve.”
2023-12-12 · Forward Guidance · Kathy Jones: The Bull Case For Bonds, And The Need For “Caution” on Private Credit & Leveraged Loans · IDENTIFIED FROM THE TRANSCRIPT
“We think the inverted yield curve stays in play. So we're not seriously bearish on the two year in terms of, you know, But one thing that informs our forecast is this bed's reluctance to move quickly, their willingness to hold back. We've heard this over and over again from the Fed, even as they talk about the possibility of rate cuts, it's still very cautiously. And this is the, we don't want to be repeating the mistakes of the 70s argument. And so I think that while in previous cycles faster, deeper rate cuts would have been appropriate and reasonable to forecast, we specifically held back this time respecting the fact that everything we hear from the Fed is they don't want to do that. They may change their minds if things get really ugly, things start to accelerate to the downside. We hit some sort of a blip in the financial markets. I could see them moving faster and deeper, but we don't want to forecast.”
2023-12-12 · Forward Guidance · Kathy Jones: The Bull Case For Bonds, And The Need For “Caution” on Private Credit & Leveraged Loans · IDENTIFIED FROM THE TRANSCRIPT
“Right. So you and your team at Schwab are looking at the Federal Reserve to do maybe three cuts in 2024 as starting as early as June. The market is ahead of you thinking, you know, if that's not aggressive enough, the cuts could start as early as March. And there's small 14% probability, although the way these probabilities are calculated, who knows that according to the CME, the Fed could start as early as January. Needless to say, not my base case and certainly not your base case. But explain to me if your view on the short end of what the Federal Reserve is going to do over the next year or two years, if your view on the short end is you think rates will be higher than the market thinks, how then do you have a long view on duration? In other words, do you think that the two-year will go up? If you're sort of bearish on the two-year because you think the market is too aggressive in pricing in Fed cuts,”
2023-12-12 · Forward Guidance · Kathy Jones: The Bull Case For Bonds, And The Need For “Caution” on Private Credit & Leveraged Loans · IDENTIFIED FROM THE TRANSCRIPT
“We look for them to start cutting probably midyear around June and to cut three times 25 basis points each time. And that would be in response to slower growth, lower inflation, growing confidence that we're getting closer to the target rate. And if we hit a real bump in the road in terms of a mild recession, that might speed up, might accelerate a little bit. I think that this is a fed that's really reluctant to go too fast because they don't want to let inflation rebound.”
2023-12-12 · Forward Guidance · Kathy Jones: The Bull Case For Bonds, And The Need For “Caution” on Private Credit & Leveraged Loans · IDENTIFIED FROM THE TRANSCRIPT
“For consumers, for small businesses, and small businesses are responsible for most of the hiring that takes place in the United States, 75 to 80 percent of the hiring takes place at small businesses. So they're feeling the pinch in terms of credit availability or just the cost of credits really high, they're going to cut back on that hiring as well. They may not lay people off, but they certainly aren't going to add at the rate they were. So the demand side is slowing down. All the things that happen when monetary policy tightens are happening. And we think that that will continue to work its way through. As for the Fed, what does it require for them to cut rates? We do think they'll probably cut rates at some stage in 2024. We have not penciled in as rapid or early a pace of rate cuts as a lot of people have, or as if the markets currently pricing in.”
2023-12-12 · Forward Guidance · Kathy Jones: The Bull Case For Bonds, And The Need For “Caution” on Private Credit & Leveraged Loans · IDENTIFIED FROM THE TRANSCRIPT
“We're seeing loosening in the labor market with job growth slowing down, wage growth slowing down. So the demand side in the service sector is easing, service sector ISM starting to look a little bit softer. So we think that we are on our way to achieving that 2% inflation over time. It's not going to happen tomorrow. But we've gone from 7% to 3.5% pretty quickly. I think we can go from 3.5 to 2.5 in 2024. And that brings yields down. So the main driver to us is the slowing in inflation, which does go hand in hand with a slower growth economy. It doesn't necessarily require a recession. I wouldn't rule it out simply because there's a lot of tightening in the system. So we've had the Fed rate hikes. We still have quantitative tightening taking place. We're seeing bank lending standards tighten up and it's much more difficult and expensive to get credit.”
2023-12-12 · Forward Guidance · Kathy Jones: The Bull Case For Bonds, And The Need For “Caution” on Private Credit & Leveraged Loans · IDENTIFIED FROM THE TRANSCRIPT
“I think that our outlook is basically that inflation continues to fall. It's already fallen quite a bit. What we've seen is, say, the personal consumption expenditures number, that's a benchmark measure that the Fed uses. Year over year on a holistic basis, it's down to 3%. X food and energy, the core reading is down to 3.5%. And that's been a consistent decline from the peak. I mean, it's down by over half, reversing much of what that spike in inflation occurred. And we expect that trend to continue. We continue to see softness in a lot of the leading indicators that would suggest inflation comes down if you look at energy prices, wholesale goods in general on the good side, very soft, import prices, negative for eight months in a row.”
2023-12-12 · Forward Guidance · Kathy Jones: The Bull Case For Bonds, And The Need For “Caution” on Private Credit & Leveraged Loans · IDENTIFIED FROM THE TRANSCRIPT
“And what will be the fundamental driver if your bowl case on, let's say, interest rates plays out? Is it going to be slowing inflation falling inflation? Will it be a recession? Does one or both of those things have to happen? Federal Reserve rate cuts. Will the Federal Reserve be willing or able to cut interest rates if there is no recession? It was somewhat of an open question a few months ago. I think now the Fed has made a little more clear that they would consider doing that.”
2023-12-12 · Forward Guidance · Kathy Jones: The Bull Case For Bonds, And The Need For “Caution” on Private Credit & Leveraged Loans · IDENTIFIED FROM THE TRANSCRIPT
“Meaning something similar to the ag around six is a reasonable place to be. And no one's going to pick the highs and the lows in the market. But assuming you're in fixed income to generate income over the long term, we think intermediate term right here and high quality fixed income makes a lot of sense for most investors.”
2023-12-12 · Forward Guidance · Kathy Jones: The Bull Case For Bonds, And The Need For “Caution” on Private Credit & Leveraged Loans · IDENTIFIED FROM THE TRANSCRIPT
“Or back really to a slower growth environment that jobs numbers are indicating, you know, things are slowing down in the labor market, which is kind of the last shoot at drop. Inflation numbers have come down. So we've pretty much now taken out that whole move up from September to October. November is kind of corrected almost all of it. In terms of how much interest rate risk it takes, we've been advocates of adding duration for people who are sitting in cash and a whole lot of people have been sitting in cash or very short-term instruments. We've been suggesting adding duration kind of gradually as yields went up on the idea that the Fed is going to do what it takes to bring inflation down and that'll bring down long-term rates. And we continue to hold to that the issue we face now is yields have come back so fast that I think it's hard to catch up. We still think intermediate term duration.”
2023-12-12 · Forward Guidance · Kathy Jones: The Bull Case For Bonds, And The Need For “Caution” on Private Credit & Leveraged Loans · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, thanks for having me, Jack. I think in my mind, what happened in the fall from October, September to October when yields surged, we had a pretty strong third quarter GDP growth. We were seeing a lot of indications that the economy was resilient and rebounding and really taking off and that economic surprise index really surged and it changed expectations about how strong the economy is. Earlier in the year we were talking about recession. By the third quarter, we're talking about, oh my gosh, five percent growth. And then, of course, that shifted expectations about what the Fed would do and other central banks. There was some narrative around treasury supply, et cetera. But I think the main driver was really the surprisingly strong burst of growth that we had yields up. And then all of a sudden, it was sort of like, oh, that was just a.”
2023-12-12 · Forward Guidance · Kathy Jones: The Bull Case For Bonds, And The Need For “Caution” on Private Credit & Leveraged Loans · IDENTIFIED FROM THE TRANSCRIPT