Alexis Moore (9:33)

I think it was a lot for Namuz Bush, but I think that people are wide awake. I hope I'm awake. I think you're sleepy, though.

Jack Howe (9:41)

I did just have a big egg sandwich. I went double egg, and that gets heavy. All right, we'll be right back with my conversation with John Hill at Barclays.

Ridgeline Representative (9:53)

Wall Street's had to go through big changes over the years before to play with data. You had to go to someone else, manipulate it, ask them for more data. The speed of Ridgeline helps me do that in one place, at one time, in one moment. Ridgeline is a cumulative advantage.

Jack Howe (10:10)

Welcome back. The amuse bouche is out of the way as Alexis put it, did I pronounce that correctly?

Alexis Moore (10:17)

I guess.

Jack Howe (10:17)

What is the difference between, first of all, I forget what's at a moose bouche and what's the difference between that and an appetizer?

Alexis Moore (10:24)

You know what? I thought that they're the same thing. I've been using it as if they're the same thing. So we're gonna say that they're the same thing and the listeners can correct us if we're wrong.

Jack Howe (10:34)

To lower mortgage rates. Think Treasuries. That's the kind of report headline that really gets my amuse. Booshed. I said something dirty by accident, didn't I? That happens when I try to speak French, that happens. That title comes from a recent paper by John Hill. He's the head of US Inflation market strategy at Barclays. I spoke with him recently about mortgages, bond yields, inflation, the Fed and more. Let's hear part of that conversation.

John Hill (11:01)

Now as a general theme, the administration wants to improve sentiment going into midterms, right? We're going to have this very consequential midterm election. Household sentiment's very weak. Affordability is at the absolute top of their priority list. They've made a variety of announcements about this. This can include the 10% cap on credit card fees. But a huge component of the affordability challenge is housing and shelter. And so there's a question of what can we do on housing overall, first and second before the midterms. Because really the medium to longer term solution to all of this is we need more supply, we need more housing supply. We've under constructed homes in the US especially since 2008 and we need to build that. It's very hard to build that by the midterms. So instead what are things that they can do that have a more immediate effect? And that's where these recent announcements come in. And, and the big one that got a lot of attention last week is that the President announced that he wants the housing agencies, Fannie and Freddie to buy $200 billion worth of mortgage backed securities. The goal of that is you drive the price up, you lower the yield on these mbs and therefore that passes through to lower mortgage rates directionally. Perfectly correct. The problem goes in the nuance in that, you know, there are a variety of things and first, some version of this idea has been percolating for months. So we've already seen the market begin to price this possibility starting as early as August, September last year. And so mortgage spreads to us Treasuries, basically that extra yield that you get on MBS versus Treasuries are already quite low. They're quite tight. And so if you go ahead and you buy all this mbs, fine, you can tighten it further. But we're talking a number of basis points, not a number of percentage points here.

Jack Howe (12:58)

We should point out for anyone who, who hears this, who doesn't know mbs, mortgage backed securities, bundles of mortgages that have been turned into investments.

John Hill (13:05)

Yes, exactly correct. It's kind of the bedrock of a lot of the housing finance and will pass through to lower mortgage rates. But if the administration wants to get the average 30 year fixed rate from just over 6% down to something that's really going to improve affordability and sentiment, it's not going from 6.3 to 6.2, it's going from 6.3 to 4 or something of that ballpark.

Jack Howe (13:28)

That would be an eye catching number. But you, but to your earlier point, Treasuries are supposed to be about the safest thing out there. So you should get a little more yield for buying just about anything else, including mortgage backed securities. But if the spread between the two is now so squished, I guess your larger point is it's hard to bring down mortgage rates without doing something about treasury yields. Have I got that right? And what can be done about treasury yields?

John Hill (13:55)

I think this is going to be one of the most consequential topics in 2026. I know it's early, probably that's going to change, but the stage very much feels set for the administration wants to get mortgage rates down. To do that they need to get treasury yields down. And so what can they do? You know, in the extreme you could have some really blue sky ideas, think like yield curve control and stuff like that that we've seen in Japan where basically the government doesn't allow interest rates to go above a certain rate. That would be an absolute extreme example. We're not expecting that. Instead there are other things that they can do that seem more pragmatic and more possible. And I guess I would bucket them into three categories. First is a regulatory side. Second is supply. Third is demand. So the regulatory side is basically, you know, after 2008 and in subsequent years there's been all of these capital rules on what you need in order to hold some types of securities. You could tweak those to make Treasuries more attractive. By making Treasuries more attractive, they'd go up in price and therefore the yield would go down.

Jack Howe (15:02)

Just for folks who are hearing this, and if in case they're a little bit lost. When we're talking about Treasuries, the types that we're talking about are maybe going out, let's say 10 years. So we're not talking about short term interest rates. And as you buy Treasuries, if you get the price to go up, the yield on them comes down. That's just the math of how they work. So if you come up with a way to make them more attractive or more appealing to buyers, you can bring yields down. That's what you're talking about here.

John Hill (15:26)

Yeah, that's exactly right. And you can kind of do that with a regulatory channel. And that's already been happening. These type of regulatory adjustments take a long time. They can be huge amounts of money at stake, but it's not the kind of thing that's easy to rush before the midterms. Right. And this is already in the price, this is already expected. So the regulatory channel, check that box and that it is happening and it's already in the price. So this gives us to supply and demand. The US treasury can't tell people what to buy. Right. What it can do is try to create a market structure that's more valuable or it can buy back its own debt. And that's, it's a little bit cute. But in essence, the treasury is sitting on a lot of money in its own account. It can take that money and buy outstanding Treasuries, reduce the public supply, and that should have the effect of raising the price, lowering the yield. That's what they call their buyback program. They're already doing this.

Jack Howe (16:23)

And this is because if someone out there is wondering, doesn't the Fed control interest rates? It's because the Fed sets short term interest rates. But whatever they say in the short term yields, that doesn't necessarily transmit to those longer issues. It might not affect 10 year yields, or 10 year yields might move the opposite way the Fed would like. So sometimes you have to do some twisting and some massaging to try to get the longer part of the yield curve to act the way you want. Have I got that right?

John Hill (16:51)

Yeah, that's exactly right. The Fed controls, by and large overnight interest rates. And then, you know, one of the best approximations say for 10 year treasuries is the expected average of those overnight rates over the next 10 years. So it's that path of Fed policy. That's why everyone likes to talk about is the Fed going to hike, is the Fed going to cut? It really does matter for 10 year yields. But it's not the only thing that's going on. Supply matters, distribution of risk matters, demand matters, all these other factors. But the treasury through a buyback program could put its thumb on that scale a little bit and try to influence 10 year treasuries lower, thereby reducing treasury yields. If treasury yields themselves are falling, then mortgage rates start to fall.

Jack Howe (17:35)

Okay, so of your three ways to get the 10 year yield lower, you've talked about the regulatory way, you've talked about demand. There was a supply way too.

John Hill (17:46)

Absolutely. And this in some ways is the easiest policy lever for the treasury to potentially pull is that, well, the treasury decides what Treasuries they want to issue. It's kind of in the name. And so if the treasury wanted to reduce long end supply, thereby driving up the price, driving down yields, it's possible that they could consider reducing coupon issuance. Now this is speculative and to be clear, our baseline expectation is that auction sizes stay largely constant. And the reason why, the reason why treasury can't just go ahead and cut all the long end auction sizes they want is we still have huge deficits. And if they stop issuing as much longer term debt, they still need that money in order to fund these deficits. That, that either has to come from the front end or the belly of the curve thinks something like 2, 3, 5 year issuance. But it's not costless. But it is something that is starting to percolate in the macro narrative.

Jack Howe (18:46)

Okay, so I tried to talk about politics as little as possible. It makes me break out in an itchy rash, but it's hard to get away. This has been, this is kind of a handsy administration when it comes to, you know, interest rates and what the Fed is doing and that it seems to me. So do you have an opinion on this? And if you don't, that's okay. But we've seen some sort of jarring headlines over the past week. The President wants interest rates to be lower. There have been a few cuts from the Federal Reserve already, but he just seems generally displeased with the Fed chair. And now there's this investigation from the government and it seems, I don't know, it's been described in various opinion pieces like putting pressure on the Fed to do what the government would like and so forth. And people have raised the possibility that backfire. Maybe the bond market doesn't like that. Maybe that makes investors nervous. Maybe they sell the things that the administration would like them to be buying. And maybe interest rates do the exact opposite of what the government Wants. Do you have any opinion on that? What do you make of all this?

John Hill (19:50)

So first, I would say that is one of the core questions right now. I think that is one of the most important questions for US Fixed income. And I would say that we kind of got a natural experiment in how the market would respond to some of that news last July. So if you remember last July, there are all these headlines and this was around part of the idea, you know, the President started to really put pressure on Powell and what we saw is the market price, a higher probability of additional rate cuts. So the front end of the yield curve came down, but the back end sold off. So that meant that, you know, 30 year yield, 10 year yields, the kind of things that really inform corporate borrowing costs, household borrowing costs actually pushed higher. So even if there's a desire or push to get some policy rates overnight, policy rates lower, and maybe that trajectory for the next year or two, that doesn't actually necessarily mean that you get all interest rates in the US treasury complex lower. And you know, a reasonable takeaway from that is if you're the administration, not only are you trying to get policy rates lower, you're also trying to think about ways to get aggregate yields lower, including that 5, 10, 30 year further out the curve. And this is where some of these other more creative policies come around as well. And so it's something where a lot of people focus on cuts, no cuts, but this is where stuff like treasury issuance matters. This is kind of the conversation about the Fed's balance sheet decision, these type of bigger picture, more consequential, less binary things, but they still do lead into supply demand for US fixed income. And, and it's something where, if I take a look at what markets are priced for right now, the market is basically not priced for policy rates to dip below 3%. And most people think that a neutral stance of policy, that is an overnight interest rates, that's not restrictive, not accommodative, just kind of neutral with the stance of the economy is somewhere 3 to 3.5% era bands around that. And that's basically what the market is priced for, for the path of short term interest rates. So I think that says something very, very compelling about the scale and significance and depth of Fed credibility when it comes to the interest rate path.

Jack Howe (22:07)

So the last thing I want to ask you is let's bring it home for somebody who is interested in doing something with a house this year, selling one, buying one, maybe they've been selling, sitting still for a while because they're you know, locked in on a low mortgage rate and rates out there are too high, and they're wondering what's going to happen with mortgage rates. So when you put together all of the possibilities that the administration has to try to affect the bond market and make some room for lower mortgage rates, what do you actually think might happen in the year ahead? Do you have a view, does Barclays have a view on what the path is for mortgage rates going forward?

John Hill (22:49)

So I think the short answer to that is it is extremely hard to know and very, very hard to predict to these kind of things. You know, I wish I could, but.

Jack Howe (22:58)

You'Ve got a better shot than I do.

John Hill (23:00)

Yeah, I heard a joke once that two decimal points is proof that economists have a sense of humor, which I thought you might like. But I do think that there is, and this is where I get back to the broader push is on affordability, and it's on improving consumer sentiment. And this is clearly a very creative administration that comes up with a lot of ideas and pushes them through where people aren't necessarily expecting. So I guess I would say they have a variety of tools at their disposal, partly to get mortgage spreads tighter to Treasuries, partly to get treasury yields down, or at least attempt to. But there are a lot of factors that go into what treasury yields are, some of which they can influence, some of which they can't. And I think this kind of gets to, you know, we're going to be sitting in this big macro conference while this president's giving this big speech in Davos. He's already teed up wanting to announce other things in this speech. I don't have any particular insight into what's going to be announced, but I would expect that this isn't the end of the story. There are a lot of different policy levers the administration can pull and will try to pull, and a lot of it has tried to focus on improving affordability going into November. So even though we're, what, two weeks into 2026, it feels like it's been a lot longer. And I expect this to be a pretty noisy few months while we're all trying to figure everything out.

Jack Howe (24:21)

Thank you, John, and thank you all for listening. If you have a question you'd like played and answered on the podcast, you could send it in. It could be in a future episode. Just use the voice memo app on your phone. Send it to Jack. How that's h o u g h@Barrons.com Alexis Moore is our producer. Pause here for applause. Subscribe to the podcast on Apple, podcasts, Spotify or wherever you listen. If you listen on Apple, you get ready to review. See you next week.

Ridgeline Representative (24:55)

Wall Street's had to go through big changes over the years. Before, to play with data, you had to go to someone else, manipulate it, ask them for more data. Data. The speed of Ridgeline helps me do that in one place, at one time, in one moment. Ridgeline is a cumulative advantage.