Latest / The Issue at Hand by Madison Investments / Market Brief: What’s Really Driving the 10-Year Treasury?
Transcript
- speaker-0: I think I had too much coffee today. I think that's what it is. speaker-1: Yeah, I speaker-0: And what's funny, I literally my coffee cup is I've only had literally like a couple of sips of it. Welcome back to the issue at hand. I'm Chris Alemon and I'm joined here by Mike Sanders, fresh off his fishing trip in the Great White North in Canada. How you doing man? How was it? speaker-1: It was good. It was good. Didn't get hooked by any of my kids, so that was a positive. speaker-0: That's always a winner. I that was one of my my traumatic stories when I was six years old, is having a treble hook in my thumb. So I appreciate that. speaker-1: Yeah. I lucked out. speaker-0: Well, all right, let's get started. In this episode, what I wanted to discuss with you was I think what investors are looking at was the recent jump in treasury rates, but specifically what's been driving it. I know everybody's been talking about it. There's a lot of things kinda out there, and I want to talk about the factors that are going into it. And one thing that I'm personally curious about, ⁓ that I hope you touch on is gonna be oil. Not only, I guess, at the pump, what I think most people are concerned about, but also the refining, how like I guess diminished global refining capacity is led. to the price increases of things we never think about fertilizer, petrochemicals, polymers, aviation, logistics, stuff like that, stuff that we don't normally talk about. And I I'm curious about that one now. I know oil is only part of the story, so I think one of the things that I'd like you to start with is let's let's take a step back and go to the basics. How does one go about, I guess how do you go about determining where the tenure treasury should be? speaker-1: Yeah, good question. I mean, it's i there's a lot of items that go into kind of where a tenure treasury should be, right? It's growth and inflation at a basic level. So expected economic growth is kind of where inflation is. You can also add in, you know, s items you hear about like term premium. You think about where f near term Fed funds policy rates might be going. You have fiscal issues as well, foreign demand. So it's a little bit of everything, but you know, at certain points in time, ⁓ you know, maybe. one item might be ⁓ more important than others. And I think, you know, recently we have seen the uptick in oil and that's definitely helped push rates higher as inflation expectations has risen, ⁓ have risen and ⁓ you know, it's definitely moving the market. speaker-0: Well, you brought in something about the Fed and, you know, what they're kind of looking for. And I know on some of these things we discuss what their mandate is is to keep inflation down. And we've heard the press conferences, we've heard the tough talk on inflation, but I guess relating to this, what are they doing to address it? And does your formula that you kind of just laid out, does that still fit today? speaker-1: Yeah, they didn't do anything to address it yesterday, which was the interesting ⁓ the interesting ⁓ outcome of that meeting. Not that we expected them, I guess, to to hike, but Walsh definitely has you know, has shifted a little bit, it seems like, in terms of how hawkish he is about getting inflation down. And so, you know, what's been happening in the near term is with respect to Fed ⁓ policy and how that's impacting the back end is that ⁓ you know, hikes were priced in and it seemed to be that ⁓ Warsh was a little bit less willing to hike, at least that's what the perception is right now. Yep. And therefore inflation, the inflation side and fighting the inflation on the longer run, ⁓ that that thought was reduced. And so the market started to call as bluff. And that's why you saw like the thirty year treasury was how it's been since like two thousand and eight, over five point two percent. And that's you know, a lot of it has to do if you're a long term bondholder, you don't like inflation. And it Any sort of hesitancy by the Fed it's gonna cause issues. speaker-0: I I have a feeling that any word that's gonna be coming out is gonna be highly scrutinized now because we're not getting as much information. So yeah, that makes sense. I guess the other thing that I had touched on briefly in the intro was oil and how it's impacted, I guess, on the ten year treasury or even the thirty year all treasury yields. But how interrelated, I guess, is the price of oil to the recent movement? speaker-1: Yeah, I mean it definitely matters. But also matters about kind of the refined products that you that you had mentioned as well. So it's one part of the equation when you think about trying to explain the movements in the tenure. And you're getting this interesting interaction between a new Fed share, higher energy prices, the inflation target of two percent PCE core has not been achieved for a long time. And so ⁓ it's definitely getting focused on a lot. in the context of where we have been and where we probably are gonna go in the near term in terms of inflation and how serious Warshes and ⁓ the FOMC to fight it. speaker-0: Well, I think that's an important thing that you mentioned though, is that it is one thing. So even if oil goes up or down, it's still one thing of many things to be considered and so it's not gonna be tied to it. But I guess in your opinion, what is the potential catalyst that we can get maybe these n the treasury rates down a little bit, specifically the ten year down? speaker-1: Yeah, I mean it any sort of, you know, reduction in what's going on in the Middle East will definitely help. You know, lower oil prices will definitely cause ⁓ treasury yields to fall. I think any sort of commentary from Fed officials over the coming weeks to talk about inflation, talk about, you know, the commitment to it, ⁓ you know, what they're thinking in terms of hikes, I think all of that more hawkish Commentary from the Fed will also be a big indicator. So if I was gonna try to figure out, you know, sitting in a chair of of what items would be most important, I think oil in the Middle East, ⁓ Fed officials talking being more hawkish and yeah, maybe less so fiscal policy at the moment. That's not gonna change very quickly, but longer run it's gonna really, really speaker-0: No, that's an important point. And I think one of the last things I wanted to touch on was when we talked about the tenure and we talked about the movements, et cetera, we also want to discuss, is it even fairly valued? Do you think that it's fairly valued where the tenure is currently? And if not, if so, are there other opportunities that you're looking at along the curve that you see as more valuable? speaker-1: Yeah, I think, you know, it's always tough to say fair value. I'm pretty sure cheap. I think if you look at positioning across the curve, I do think that, you know, there's a lot of uncertainty out the curve given all the items that we've discussed. And I do think the belly of the yield curve, which, you know, generally is that two to six, two to seven year part of the curve. If you think about if you're a bond investor and you want to earn some income but maybe reduce the possibility of price impacts, you might have With longer bonds, ⁓ that'd be a great spot to t to invest and kind of wait to see what happens off the curves. speaker-0: Well then I guess if I can recap kind of what I'm hearing is that when yields move higher or lower, don't always assume it's one thing. Don't always assume it's either inflation or just Fed policy or just oil. There's always more to it. And I think the second thing that I think it's important for everybody to understand here is also I think I gathered that yield curve positioning matters. And I I I want you to touch on that a little bit more. speaker-1: Yeah, you know the highest yield doesn't necessarily mean it's the best investment, right? There's reasons that yields go higher, if you will, and there's reasons that parts of the yield curve are higher than where they are shorter in duration if you're shorter maturity. So positioning really, really matters. ⁓ you know, if you were owning a lot of thirty year bonds recently, you know, you've taken a a price hit to it because of kind of all the items that we've discussed. Well, shorter maturity bonds like the five year have gone down, but not nearly to the extent. So It really does matter positioning across the curve and buying the highest yield I think gets investors sometimes into trouble ⁓ in the sh in different periods of time. speaker-0: Yeah, I think it's one of those things, don't always just stretch, make sure you know where you own and make sure you know where position you're comfortable with. So I think that's a I think it's an important point to hit, and I think it's the point where we should, you know, close it out here. So if you can access if you want to access additional information and disclosures about the issue at hand, please visit Madison Investments.com. And if you like what you're hearing, don't forget to click subscribe. Thank you and take care.