YouSaid · the spoken record

Lori Logan

lines on the record: 34
first: 2023-10-11
most recent: 2023-10-11
sittings or episodes: 1
sources: podcast

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“And a quarter percent without the funds rate coming down a lot more. For me, if placement of sovereign debt is a consideration, then the Fed should cut just for that reason. It's perfectly legitimate if inflation's at, say, three, three and a half percent, they can easily justify 4% funds rate that's stimulative for the economy, which is a good thing. By and large, the housing market, which has just come to a standstill, reemerges. And then, yeah, I can see the long bond rallying 100 basis points from where it is, absolutely. But absent the Fed cutting rates or ending QE, it's really hard for me to see the long end rallying. Of course, bad things happen in the world like what we witnessed over the weekend. Treasuries will have a flight to quality bid. But structural buyers do not emerge until the funds rate is lower.”
2023-10-11 · Goldman Sachs Exchanges · Implications of a higher-for-longer rate regime · IDENTIFIED FROM THE TRANSCRIPT
“A great question. For me, I can certainly see paths that lead to yields being materially lower than where they are. But then if the household's the buyer of sovereign debt going forward globally, is the household that excited about buying seven-year paper at 4% yield and taking the mark-to-market risk on that? To me, the GFC to the pandemic timeframe was the anomaly where inflation was for long stretches in that period, inflation was higher than where bond yields were, where we are now is much more normal. There's risk premium in the market. So can yields go back to four and a quarter percent? Absolutely. Do I see yields going back to 4, 4 and a quarter percent without the Fed reducing the funds rate so that a lot of the participants that we discussed, whether it's banks or insurance companies, or sovereign wealth funds, so that makes it easier for them to buy bonds with an upward sloping yield curve? Yeah. So like, I don't see yields going to 4.”
2023-10-11 · Goldman Sachs Exchanges · Implications of a higher-for-longer rate regime · IDENTIFIED FROM THE TRANSCRIPT
“hiking into slower growth when real rates are as high as they are. So my guess would be like between now and February, we're not seeing a hike. And then it's enormously difficult. Things would have to turn quite meaningfully for the Fed to hike between February and November. So most likely, I would say, yeah, where the hiking cycle is done.”
2023-10-11 · Goldman Sachs Exchanges · Implications of a higher-for-longer rate regime · IDENTIFIED FROM THE TRANSCRIPT
“So it's complicated because after the speeches by Lori Logan and Jefferson yesterday, the market took down the probability of a hike in the NOV meeting to about 20% from about 35%, which is just risk premium in the funds market. And then it gets complicated from there on out because you might get a government shutdown after that, in which case you're not getting a hike in December, let's say that happens. Is the Fed really going to hike going into an election cycle when inflation is materially lower, even if it re-emerges as of now it's materially lower than where the funds rate is? So it becomes challenging for the Fed to hike again. So my personal view right now is that at least in the near term, the Fed is certainly done with the hiking cycle. The sell-off in the long bond, the tightening in financial conditions, that's led to the combination of those things. I think the economy looks fairly tight. Also, Q4 growth is expected to be soggy. So one would really need to stretch one's imagination to think that the Fed will want to continue.”
2023-10-11 · Goldman Sachs Exchanges · Implications of a higher-for-longer rate regime · IDENTIFIED FROM THE TRANSCRIPT
“value to me in a world where there is the chance that inflation reemerges in a meaningful way, equities are much more immune to inflation than bonds are, and the excess government spending is going to the household, the boomers as they retire will be spenders, and they will be consuming. So as a consequence, equities by and large ought to be supported. So for me, the recent drawdown in equities was mainly driven by the velocity of the move. If we could say for certain that the Fed's done with the hiking cycle, I think equities would actually recover a lot more from where they are right now.”
2023-10-11 · Goldman Sachs Exchanges · Implications of a higher-for-longer rate regime · IDENTIFIED FROM THE TRANSCRIPT
“That's a great question. So, risk assets have taken on the chin. It's been rough for risk assets. It's difficult for me to disentangle how much of it is because of the velocity of the move and how much of it is because the discount rate is now higher. So future cash flows need to be discounted at a higher rate. And that makes owning risk a little more challenging. For me, I think there are different cross currents when it comes to broader risk profile. So for example, credit. In an inflationary world, credit should trade just fine, mainly because the debt burden decreases in real terms year after year. So credit has not been challenged this entire cycle, which makes a lot of sense to me. In terms of equities, I think to a certain extent, equities had ramped up a whole lot on the government spending, the fiscal, the combination of all of those things. There was a lot of euphoria and there is no easy way to put a price on growth stock. So for all of those reasons, equities continue to look like really good.”
2023-10-11 · Goldman Sachs Exchanges · Implications of a higher-for-longer rate regime · IDENTIFIED FROM THE TRANSCRIPT
“So, there was definitely a flight to quality bade to the market when the market opened Sunday night on the back of everything that's going on in the Middle East. In addition, yesterday, Lori Logan from the Dallas Fed and Jefferson, vice chair of the FOMC, both spoke. The Fed is concerned about the velocity with which the long end sold off. And they basically, again, in Fed speak, it's difficult to read. But most market participants thought that they're not going to be hiking, at least in the November meeting. And to a certain extent, we might have seen the last hike or there's an increased likelihood that we've seen the last hike and the market priced that in addition to the flight equality with two treasury. So the combination of those things led to a 1012 basis point rally. And it's a little bit of a consolidation move right now for the market because the market sold off something like 75 basis points in a straight line. You had a bumper payroll print, market got spooked right after the payroll print. And then the Fed basically came out.”
2023-10-11 · Goldman Sachs Exchanges · Implications of a higher-for-longer rate regime · IDENTIFIED FROM THE TRANSCRIPT
“It was a little bit of a rude awakening for the market because everyone woke up and assumed that some of these constituents will continue to exhibit the same behavior that they had over the last 15 years. The reason the reaction was delayed in my mind is because in the first six months of the year you had the debt ceiling issue. So what was happening was as the Fed was doing QT and buying fewer bonds, the government was spending down its own account because it couldn't issue more debt. Then the debt ceiling got resolved and the government basically issued a lot of debt over a short period of time. Much of it was front-loaded, but still it issued a lot of debt. And then starting somewhere like end July, early August, you had the double effect of QT where the Fed's not buying and the government issuing more. And that's when everyone realized that basically no constituent was a material buyer of long data duration. And that's why the sell-off accelerated, then a Fed on.”
2023-10-11 · Goldman Sachs Exchanges · Implications of a higher-for-longer rate regime · IDENTIFIED FROM THE TRANSCRIPT
“But even though you've gone through this history, which makes a lot of sense, and you've talked that this bond sell-off really began early last year when the Fed started tightening to reign in inflation, ultimately we have seen it accelerate. I think for a long time the market didn't believe that long-in yields were going to remain higher. So what has changed, in your view, the market psychology at this point?”
2023-10-11 · Goldman Sachs Exchanges · Implications of a higher-for-longer rate regime · IDENTIFIED FROM THE TRANSCRIPT
“Save more as opposed to spend and buy bonds. The problem there is that the boomers that have been the dominant buyer of sovereignty duration, even pre-GFC, are actually in retirement at this point in time. The dependency ratio is going the wrong way. The worker is incentivized to basically continue to consume in this current world. At some point, at some level of yield, that will turn. And we don't know what that level of yield is. And that's what the market's trying to figure out.”
2023-10-11 · Goldman Sachs Exchanges · Implications of a higher-for-longer rate regime · IDENTIFIED FROM THE TRANSCRIPT
“There were other constituents that over the last 50 years, if you go back pre-GFC, the government was still able to place its debt, but that's because if you look at any other prior massive fiscal expansion that we witnessed, whether it was Reagan outspending the Russians, whether it was the great society, whether it was the Vietnam War, in each of those cases, someone was running a surplus outside of America. And as a store of value, they were buyers of sovereign bonds. In this world, the government's fiscal expansion isn't going towards any of those things. It's actually entitlement spending, a whole host of things that are going to the household. So the eventual buyer of these bonds necessarily will be the household because the wealth transfer that's occurring from the public side to the private side is basically from the government to the household, not from the government to a surplus domain that is exporting goods to America. So the question then becomes, when will the household be incentivized to basically”
2023-10-11 · Goldman Sachs Exchanges · Implications of a higher-for-longer rate regime · IDENTIFIED FROM THE TRANSCRIPT
“So you end up in a place Where you Many different constituents that wanted to buy sovereign bonds. To a place where none of these constituents want to buy sovereign bonds at all. And concurrently, The government's fiscal stance has expanded meaningfully on this side of the pandemic. So you've now got a fairly meaningful supply demand imbalance.”
2023-10-11 · Goldman Sachs Exchanges · Implications of a higher-for-longer rate regime · IDENTIFIED FROM THE TRANSCRIPT
“The boom is right now, they are in the early 60s. They are entering retirement, some of them have entered, a lot of them will be entering over the next couple of years. When they enter retirement, their bid for the long bond isn't there anymore. Where we sit today The funds rate is higher The yield on the five year note as a consequence, banks aren't incentivized to lever up and buy five-year notes. They lose money on it.”
2023-10-11 · Goldman Sachs Exchanges · Implications of a higher-for-longer rate regime · IDENTIFIED FROM THE TRANSCRIPT
“Long dated treasuries. Justified it with deposit beta modeling and any number of other things hedging their liability exposure. But by and large, it was a massively positive carry trade that worked well in risk-off environments. Is a win It was insurance companies, which is also a very big thing to actually pull apart In 2012, the boomers were in the early 50s. They'd just gone through a big credit shock. They were preparing for retirement Was the whole savings glut argument. They wanted to buy duration, they wanted to save for retirement. And that led to less consumption Anemic growth But also a very big bid. To the long end of the US rates curve.”
2023-10-11 · Goldman Sachs Exchanges · Implications of a higher-for-longer rate regime · IDENTIFIED FROM THE TRANSCRIPT
“So as the US government was fiscally expanding, the buyers of that duration were central banks, the Fed, in the case of the US. Brick and mortar banks were buying because cost of funds were zero And they could buy five year treasuries with a 2% yield. Banks can lever up Give Seven to one They're making 14% pre tax returns that hits their hurdle rate. They were buyers of duration for that reason.”
2023-10-11 · Goldman Sachs Exchanges · Implications of a higher-for-longer rate regime · IDENTIFIED FROM THE TRANSCRIPT
“And a big reason for that is that the government is 25% of the economy today. The net position of the US government every year It expands by six to seven percent. Primary deficits are over 4%, and this is a global phenomenon. It's not just the US European domains Our running primary deficits of 3% to 4% now, they used to run primary deficits of 1.5 to 2%. Had a holiday in terms of the primary deficit. So as the market's basically gotten more comfortable with the idea, That higher yields can be sustained for longer, the long end of the curve sold off And it's had very little sponsorship from institutional money. And to understand that, I think it makes sense to look at the last decade, the time from the GFC. To the pandemic In that time frame, the US government expanded fiscal year by a lot. The rest of the world did not.”
2023-10-11 · Goldman Sachs Exchanges · Implications of a higher-for-longer rate regime · IDENTIFIED FROM THE TRANSCRIPT
“In terms of the broad sell off that we witnessed, it's accelerated in the last couple of months, but realistically speaking, the sell-off started when the Fed started hiking. The difference is when the Fed's hiking the front end of the curve, the front end sold off 500 basis points, but the back end was still very, very low in terms of yield. What's happened since then is as the Feds continued on with QT and the economy hasn't really rolled over, lots of people expected that the economy would roll over even when the Fed got to 300 basis points. let alone 537 basis points, which is where we are right now. The funds As that didn't happen, People started to ask questions like, why exactly wasn't the economy rolling over? We always assumed that this was a super leverage economy.”
2023-10-11 · Goldman Sachs Exchanges · Implications of a higher-for-longer rate regime · IDENTIFIED FROM THE TRANSCRIPT
“Seven years that could support higher rain rates in the economy. So there are these risk factors out there that give you this distribution. But if I had to pick modal value, I would say our current year and forecast 4.25% is a pretty good one.”
2023-10-11 · Goldman Sachs Exchanges · Implications of a higher-for-longer rate regime · IDENTIFIED FROM THE TRANSCRIPT
“We don't have this recession which isn't in our mode of forecast from our economists, you could see tenure yields settle around our year end forecast, so 0.25%. That's a fair value estimate as well. So that's roughly where I would expect yields to settle over a longer period of time. There are probably some risks in the other direction as well. I mentioned if there was a recession, we were head lower because then investors would question whether we are in fact higher for longer regime. So you could see that reset lower. The other side of the story is if the economy is indeed resilient, you could actually see maybe inflation being a little sticky earlier than we think. And perhaps that would lead to an upward repricing in yields. And the second, which is somewhat more speculative, is the potential for generative AI, boost potential growth, at least temporarily, for a period of five to six.”
2023-10-11 · Goldman Sachs Exchanges · Implications of a higher-for-longer rate regime · IDENTIFIED FROM THE TRANSCRIPT
“The two things we'd be looking out for one is a patch of soft data that would bring many investors back. Into worrying about a recession, which they just until recently were worried about. And two, you could see other markets like equity markets spring under the wake of higher rates, and that could also lead to a correction in yields. Now, in terms of demand, I've been asked why there is this air pocket in demand that is pushing yields higher. And the general phrase I hear often is that I'd rather chase a rally than catch a falling knife. What that means to me is that you could see wild sweats on the way up, but you could equally see a sharp reversal once you get either that soft economic data or you see equity markets frank.”
2023-10-11 · Goldman Sachs Exchanges · Implications of a higher-for-longer rate regime · IDENTIFIED FROM THE TRANSCRIPT
“So, end of this year, our forecast is 4.25% for 10 year treasury use. We actually see the same level end of next year, but the path is not one of just being stagnant. We think there's some variation, some ups and downs along this path, but it so happens that our focus for both those years are 4.25%. Both, I should say, lower than current levels.”
2023-10-11 · Goldman Sachs Exchanges · Implications of a higher-for-longer rate regime · IDENTIFIED FROM THE TRANSCRIPT
“And so might have been upon the Fed to actually do a bit more at the front end. Now that the long end has caught up, it is helpful in the sense that they may have to do less, but they can make too much of a good thing. To the extent you see the sell-offs continue, you may actually heighten financial conditions too much. And certainly that is probably not something the Fed wants either. The problem, of course, is unlike the front end, which the Fed controls directly, the Fed doesn't really control the long end, that is still the market price. And so it doesn't quite have the same degree of control in how financial conditions are affected by these moves in long-head rate. So while it can hope that the move is going to stall out, if this were to continue another 50 or 100 basis point, I think that could end up being problematic rather than a good thing.”
2023-10-11 · Goldman Sachs Exchanges · Implications of a higher-for-longer rate regime · IDENTIFIED FROM THE TRANSCRIPT
“So science, this is not unwelcome news. So, purely investors for a long time believing or rather disbelieving the Fed in its eye of a longer message meant that the loan didn't quite participate with the Fed type.”
2023-10-11 · Goldman Sachs Exchanges · Implications of a higher-for-longer rate regime · IDENTIFIED FROM THE TRANSCRIPT
“And so is this all good news for the Fed, the market's finally getting the message that rates need to stay higher to rein in inflation and solve this problem for them? And then what does it really mean for their next move?”
2023-10-11 · Goldman Sachs Exchanges · Implications of a higher-for-longer rate regime · IDENTIFIED FROM THE TRANSCRIPT
“Entirely possible that remains to be seen. So far, the US consumer and economy, as you said, have been remarkably resilient to interest rate increases. Now, if you go by historical experience, this rise in interest rates should both directly and indirectly contribute to tightening financial conditions, indirectly because it might push equities lower, strengthen the dollar, and so on. Our economists have a rule of thumb that says that if you have a one percentage point tightening in financial conditions, that roughly tightens growth by one percentage point over the next year or so. And it's hard to measure how much tightening you've had because it depends on the starting point. But let's say we add about a 50 basis point or so tightening in financial conditions. That should be about a half percentage point on driving US growth over the next year.”
2023-10-11 · Goldman Sachs Exchanges · Implications of a higher-for-longer rate regime · IDENTIFIED FROM THE TRANSCRIPT
“And so, as you said, we've seen bond yields basically reacting to the resiliency in the U.S. economy and the Fed adopting this message that you're going to have to see rates higher for longer, the market internalizing that. But what's the risk that we see this higher for longer rate environment then start to actually weigh on economic growth? We've talked a lot about consumer resiliency. Will we see economic spillovers from these higher rates?”
2023-10-11 · Goldman Sachs Exchanges · Implications of a higher-for-longer rate regime · IDENTIFIED FROM THE TRANSCRIPT
“Debt sustainability issues have come back to the fore. And really, the question is whether the current levels of real rates is something that is compatible with the sustainable trajectory. Clearly, markets are questioning that. And so I think this is going to play out differently in each region. And that will depend on where they are and their growth and business cycle”
2023-10-11 · Goldman Sachs Exchanges · Implications of a higher-for-longer rate regime · IDENTIFIED FROM THE TRANSCRIPT
“So you're seeing a sell off in sympathy with US long and yields. Now, what is the impact of this move? I think it could vary by region. So let's take Europe, for example. As I said, Europe does have a weaker growth outlook in the near term. And the rise in long and yields is the tightening of financial conditions. You don't want necessarily tighter financial conditions if you're already starting from a weaker place. For a place like the US, where we've been growing above potential, it perhaps can weather this rise or tightening of financial conditions better and easier than a place like Europe where you already had very low growth rates. And so the sort of sell-off and the accompanying financial condition tightening may be unwelcome. And just to elaborate on that a bit, one instance where you see that show up clearly is in the case of Italy.”
2023-10-11 · Goldman Sachs Exchanges · Implications of a higher-for-longer rate regime · IDENTIFIED FROM THE TRANSCRIPT
“And for one negative rates, so there has really been a regime shift there as well. The last leg is, what's in question? Clearly, growth data in Europe has been a bit weaker. So it's unclear if we get that final leg of reprices that we're seeing in the US play out in Europe. There have been some spinovers, I should say, from US loan in yields to global long-in yields. The question is whether it will stick as readily there as it might in the US.”
2023-10-11 · Goldman Sachs Exchanges · Implications of a higher-for-longer rate regime · IDENTIFIED FROM THE TRANSCRIPT
“I think it's a global phenomena, but in the US, you see to a greater extent, partly because the US economy so far at least has shown greater signs of resilience, meaning you could see the US economy with the Fed having more aggressively than many of these central banks still outperform these other economies. So the economic response is giving a signal to investors as to how much of a rate level shift each particular economy prepare. And given that the US economy appears the most robust, you see a larger shift happening here. But remember, even in Europe, just last cycle, we were talking about Japanification.”
2023-10-11 · Goldman Sachs Exchanges · Implications of a higher-for-longer rate regime · IDENTIFIED FROM THE TRANSCRIPT
“Our view here is that we are currently oversaw. Our fair value measure here is closer to around 4.3%. And so clearly by that metric, we have overshot. Nevertheless, having said that, when rates break out of an old regime into a new regime, it's not the case that you move from the old regime to the center point of the new range. Markets are going to try to seal their way to what level of yields the economy can sustain or other markets can sustain. And so I would not rule out that you see an extension of the sell-off. However, and this is an important caveat, I think that the sell-off would not stake, meaning to the extent you see further sell-off from here, you increase the risk of a sharper reversal in these yields.”
2023-10-11 · Goldman Sachs Exchanges · Implications of a higher-for-longer rate regime · IDENTIFIED FROM THE TRANSCRIPT
“High growth rate support higher rates. And second, if the supply of debt combined with the lack of eager buyers could push up yields, it could be the market clearing levels should be higher. Now, I should say we're skeptical on both counts on these latter two points. And there's a variety of reasons which we can discuss. But of course, if a sufficiently large number of investors believe this, the bond vigilante narrative that you may have heard of could take four decades for a while.”
2023-10-11 · Goldman Sachs Exchanges · Implications of a higher-for-longer rate regime · IDENTIFIED FROM THE TRANSCRIPT
“I'd say there's a confluence of reasons. Now, if you go back a few months, most investors were expecting a recession by the end of this year. Growth data or summer suggested that that was extremely unlikely. So the first phase of the sell-off you've seen in bond yields is simply an upward growth re-rating and declining recession odds. The second phase, which we've seen over the last two months, was really about investors internalizing the Fed's higher for longer message. Now, it seems to have broken through. We had thought that investors might take some time to come to this conclusion, but it's happened a bit faster than what we thought they might take. Finally, I think many investors believe this repricing is because of the unsustainable fiscal trajectory. Now, with the US looking set to run large deficits for the foreseeable future, there could be two ways rates are pressured higher. First, fiscal expenditures are stimulative, then you could see”
2023-10-11 · Goldman Sachs Exchanges · Implications of a higher-for-longer rate regime · IDENTIFIED FROM THE TRANSCRIPT
“Markets are going to try to seal their way to what level of yields the economy can sustain or other markets can sustain. And so I would not rule out that you see an extension of the sell-off. However, I think that the sell-off would not stake, meaning to the extent you see further sell-off from here, you increase the risk of a sharper reversal in these yields.”
2023-10-11 · Goldman Sachs Exchanges · Implications of a higher-for-longer rate regime · IDENTIFIED FROM THE TRANSCRIPT