Latest / The Issue at Hand by Madison Investments / Market Brief: Bond Market Takeaways from Jackson Hole
Transcript
- speaker-0: Welcome back to the issue at hand, Market Brief. I'm Chris Allemad and I'm joined by head of fixed income, Mike Sanders. We're recording this episode on Friday, august twenty eighth, hot off the heels of the Fed chair Kevin Warsh, speaking on the annual Jackson Hole Symposium. Well, that was a unique presser, Mike. So I guess let's get started. Were all of your questions answered, or how about you talk about what you were expecting versus what was actually said? Let's start there. speaker-1: Yeah, I mean, I think going into it, it was I think myself and other market participants wanted to understand maybe what the reaction function of the Fed ⁓ was gonna be in terms of changing rates, what mattered to them in some sort of a context. And I think broadly speaking, we got a little bit more information about the reaction function. I think Worsh's comments regarding inf the level of inflation, the components of inflation being above target. The labor side is okay, the the ⁓ inflation side is not okay. ⁓ I think, you know, overall it's definitely been interpreted as a hawkish statement in terms of really reinforcing the two percent price target for PCE and the commitment by the Fed to get there. speaker-0: I think it was pretty pretty interesting that he was very committed to saying that two percent and kind of re a re admitted this is what we're focused on. So I thought that was kind of cool. ⁓ what was I guess what are you seeing in the bond market right now? speaker-1: Yeah, it it you know going in, we thought if if it was a perceived hawkish meeting that the yield curve would flatten. That's exactly what we have going on right now. The front end, the two year is up seven, eight basis points, at least when we're talking right now. ⁓ the thirty year is actually down a little bit in terms of yield, the ten year is up a little bit, but not really moving that much. And so really what's going on in the bond market is you know, a higher probability of the Fed gonna move down the road. terms of hiking rates, which then should cool inflation and that's why the long end is is moving down and the front end's moving up. speaker-0: I think that totally makes sense. Well, going into this, as you said, it was I guess the bond market was a little volatile leading up to the speech, not just from investors trying to pinpoint the Fed net Fed's net's move, but we've also had the Treasury announce buyback plans of longer data maturities. We've renewed tariff threats, we've expanded sanctions related to the Iran war. I guess how do you think the Fed views some of these external pressures on the economy and interest rates? Or are they not even considering them? speaker-1: Well, I think they have to think about ⁓ I definitely think they wish they weren't happening. So it makes their job a little bit easier to get a clean look of what's going on in the inflation market and the labor market and and growth. Clearly it just enhances ⁓ some of the ⁓ issues and increases some of the issues that they have in terms of ⁓ fuel costs, oil and that kind of this inflation side, right? A little bit more interest rate volatility, a lot more cross currents going down in terms of what you're looking at in the Japanese bond market. You look at the where European yields are Heading. You there's a lot of ⁓ a lot of movement across the globe in terms of rates and currencies. And so I think just generally the Fed, you know, they they can only control what they can control, and that's you know, the front end of the yield curb and rally. And that did I did think it was an interesting statement by Walsh about the main policy tool that the Fed is going to use is the is the Fed funds rate. It's less balance sheet and maybe some of ⁓ speaker-0: I liked it too, yeah. speaker-1: And I wanna say other parts in the turn premium out the curve might be something that the Treasury will have to deal with the buy bond buybacks to increase liquidity out the curve, which most likely gets funded with T bill issuance or a pull down of the T GA facil of the T GA. ⁓ so I think the Feds and Warsh has kind of indicated this gonna stay in their lane a little bit more, I think. Focus on policy on the front end of the yield curve, and then maybe, you know. in discussion clearly with the Treasury about other parts of the curve ⁓ going forward. speaker-0: So given all that, I guess, Mike, has your view of the Fed's next move changed at all after the first hundred days of the new Fed chair? speaker-1: Yeah, it it it's after this meeting it's it's shifted a little bit. I think I was in our group was a little bit questioning the thought that the Fed would increase rates to fight supply side issues, ⁓ with AI spending and and energy prices going higher. I think after this meeting, ⁓ I think from our own probability distribution, probably shifting a little bit higher to the the Fed maybe hiking rates. ⁓ I don't know about the next meeting, but but by the end of the year I think it's definitely gone up. And, you know, with the movement in Treasuries ⁓ on the front end, Fed fund probabilities shifting, you know, kind of shifting ⁓ kind of towards what we were what we were thinking now as well. So I would say that it it has moved since the beginning of of Warsha's term to to after his you know his big speech today. speaker-0: I think that makes sense. I think you're also slightly making a case for active management. But all right, now I guess if I can ask a little bit of detail about duration, has this kind of changed your stance on where you think we should be positioned? speaker-1: Yeah, I I think that ⁓ you know the concept of pushing ⁓ out your duration and just trying to lock in these yields in the belly of the curb still makes some sense. You know, if the Fed is gonna raise rates sometime in the next three to six months, that's already kind of built into the market. Right. And so I think that that's getting reflected in the five year to seven year and you know where overall spreads are and where overall yields are versus where cash is today and where cash could go down the road if the Fed does raise rates. I still think that's a pretty good long term investment, especially you know, where real yields are ⁓ currently in that part of the curve. ⁓ yeah. So duration may maybe shifting a little bit longer after this. But but I would say ⁓ maybe pushing it out just a touch because ⁓ of Of maybe what the implications are for a slightly more hawkish Fed in terms of where longer turn interest rates may or may not go and you know, maybe capping the yields slightly given that even what the Treasury's been talking about. speaker-0: Makes sense. Well, thanks, Mike. I appreciate the take, and I think that's where we should probably end. So this was the issue at hand. Market brief following Fed chair Kevin Warsh's speech at the Jackson Hall Symposium. For more of our insights and additional disclosures, visit Madison Investments.com. Don't forget to subscribe and thanks for tuning in. Take care.