Yen Intervention and Market Drivers

Summary

Bloomberg Surveillance Podcast

Episode: Yen Intervention and Market Drivers
Date: August 3, 2026

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Episode Overview

This episode delivers expert analysis and in-depth interviews focusing on major developments influencing global finance. Key discussions center around the recent coordinated intervention to support the Japanese yen, shifts in Federal Reserve policy communication, enduring inflation risks driven by geopolitics and energy, S&P 500 earnings trends, the AI investment landscape, and strategic portfolio positioning in a volatile environment.

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1. Coordinated Yen Intervention & FX Market Dynamics

Guest: Sonja Martin, Chief Economist, DZ Bank
[01:28–07:42]

• Coordinated Intervention:

  • The Bank of Japan, historically unsuccessful with solo interventions, collaborated with the U.S. Treasury to support the yen.
  • "Moving in together with the Americans is a much, much smarter move… it may well serve to draw a limit to the upside dollar/yen." — Sonja Martin [01:40]
  • The move is seen as a strong market signal, possibly foreshadowing further interventions if needed.

• Market Reactions & Positioning:

  • Recent intervention appears to have wiped out some speculative short positions against the yen.
  • "It’s a clear signal to investors that speculating against the yen is no longer going to be sort of a free lunch." — Martin [02:35]

• Unusual Use of Euros Over Dollars:

  • The U.S. Treasury utilized euros for intervention, likely to avoid undermining the U.S.’s long-standing “strong dollar” policy.
  • "By intervening in euro/yen, they circumvented having to sell dollars, which… may have raised questions about the official strong dollar policy." — Martin [03:14]

• Impact on Fed Policy Communication:

  • Fed Chairman Kevin Warsh is pursuing less frequent, less transparent communication, unsettling bond markets accustomed to forward guidance.
  • "He is a bit of a closed book when it comes to communicating with the market. … It leaves much more room for speculation… more volatility, more uncertainty." — Martin [04:16]

• Inflation and Geopolitical Risks:

  • Inflation pressures persist, especially due to disruptions in oil supply through the Strait of Hormuz and rising food prices linked to the war in Ukraine.
  • "Every day, it [inflation] just gets a little bit taller… factors that are pushing inflation higher are still very much in place… These aren’t going to disappear just because the oil price falls 5 or 6%." — Martin [05:33]
  • Biggest Underestimated Risk: Physical shortages of goods and the depletion of strategic reserves could trigger sharp price hikes. The risk is "heavily underpriced in the market." — Martin [06:53]

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2. Corporate Earnings, Investor Sentiment & AI Diversification

Guest: Ray Ann Mitrione, Founding Partner, Callen Family Offices
[09:08–15:57]

• Earnings Season Dynamics:

  • 86% of S&P 500 companies beating earnings, 77% exceeding revenue estimates; earnings growth now expected at 47%, double initial forecasts.
  • "We’re off to another really strong start for this earnings season… broad-based strength across the board." — Mitrione [09:22]

• Investor Expectations & Reactions:

  • Investors are demanding both spending and visible ROI; strong reports are not enough without clear future payoff.
  • "It’s not enough to just be spending. We need to see that there is potentially some ROI coming from that." — Mitrione [10:17]
  • Mixed tech earnings: Microsoft and Amazon rewarded for growth, Meta punished for weak free cash flow.

• Diversification & Sector Rotation:

  • Callen recommends spreading equity exposure across value, international, and small cap stocks as well as exploring fixed income and alternatives, especially as AI’s influence broadens.
  • "We do want to have that spread out of exposure across the board… especially the emerging markets, the small caps." — Mitrione [11:25]
  • Semiconductors may provide selective buying opportunities after a correction, but they're not a sector to overweight.

• Fixed Income & Private Market Appetite:

  • Preference for high-quality investment grade bonds, some selective credit risk (private credit, muni high yield), and increased interest in private investments given prolonged company privates.
  • "We do think there is the ability to enhance your returns over the long term if you take some of that illiquidity and invest in private markets." — Mitrione [15:05]

• Fed Policy Focus:

  • Inflation remains the Fed’s top concern; labor market health and incoming data will steer decisions on rate moves.

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3. Tech Earnings, AI Investment & Market Bifurcation

Guest: Sarah Hunt, Partner & Chief Market Strategist, Alpine Saxon Woods
[17:09–22:07]

• Tech Capex & Reward Structure Shifts:

  • The market moved from universally rewarding increased Capex a year ago to demanding proof of return.
  • "Where you start to see that acceleration in growth… you’re starting to get bifurcation on how people are accepting the kind of spending that's happening." — Hunt [17:30]
  • Microsoft and Amazon’s visible AI-related demand contrasts Meta’s struggles.

• Assessing AI Payoff:

  • A moderation in Capex is being rewarded as investors seek evidence of integration and economic return rather than just being “first.”
  • Global supply chain (China) and high memory prices complicate the picture, potentially constraining tech sector pricing power.
  • "It’s not just you have to get there first, it’s how do we integrate this? What’s actually going to happen and what are you going to get paid for overall?" — Hunt [18:25]

• Inflation, Consumer Pressure, and Fed Dilemmas:

  • The Fed faces the challenge of balancing persistent inflation (primarily energy and supply-driven) against consumer strain.
  • "If you have a supply shock in oil, it’s hard to see how higher rates help you unless you just kill demand." — Hunt [20:14]

• Diversifying Beyond Tech:

  • Opportunities remain in healthcare, industrials, and companies with strong cash flows and balance sheets.
  • "You want to be looking at the companies that are outside [tech] to some degree and have a good cash flow, a good balance sheet." — Hunt [21:03]
  • Increasing focus on whether companies fund Capex with cash flow vs. resorting to external financing.

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4. Bond Market Reaction, Fed Policy & Credit Strategies

Guest: Joanna Gallegos, Co-Founder, BondBloxx
[22:37–29:48]

• Bond Market’s Role Amid Higher Yields:

  • Investors pouring into short and ultra-short ETFs as the curve steepens and the bond market seems to “do the work of the Fed.”
  • "This is a big move and investors are… absorbing it and reacting as they have, where we're seeing a lot of short end and ultra short flows into ETFs." — Gallegos [23:27]

• Competing Returns from Bonds:

  • With corporates yielding 5–6% and high yield 7–12%, bonds regain appeal for both income and stability, especially as equity valuations stretch.
  • "Bonds are becoming more competitive in your portfolio… It's a moment for you to acknowledge… that when things have reset to their traditional levels, you should be using bonds in a traditional way." — Gallegos [24:36]

• ETF Innovations & Private Credit Access:

  • Discussion of the PCMM ETF, which delivers broad diversification via CLOs, providing exposure to middle market private debt while also benefiting from ETF liquidity.
  • "It's the perfect marriage between the structural side of ETFs… and access to private credit that's much more diversified." — Gallegos [26:11]

• Yield vs. Duration in Fixed Income:

  • "We say income over duration." — Gallegos [28:03]
  • Recommendation: focus on short-intermediate duration credit and pursue high yield for yield pickup with limited interest rate risk (3-year duration or less).
  • Encourages investors to “lean into” higher yields in extended credit, triple C for equity-like returns with strong fundamentals.

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5. Memorable Quotes & Moments

• On Yen Speculation:

  • "Speculating against the yen is no longer going to be sort of a free lunch." — Sonja Martin [02:35]

• On Federal Reserve Communication:

  • "He’s a bit of a closed book when it comes to communicating with the market. … It leaves much more room for speculation… more volatility, more uncertainty." — Martin [04:16]

• On AI Spending:

  • "It’s not enough to just be spending. We need to see that there is potentially some ROI coming from that." — Ray Ann Mitrione [10:17]

• On Equity & Fixed Income Diversification:

  • "Bonds are becoming more competitive… It's a moment to use bonds in a traditional way." — Joanna Gallegos [24:36]

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6. Timestamps for Key Segments

• Yen Intervention & Policy Analysis: 01:28–07:42
• S&P 500 Earnings & Investor Strategy: 09:08–15:57
• AI Investment & Tech Market Bifurcation: 17:09–22:07
• Bond Market & Credit Allocation: 22:37–29:48

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Conclusion

This episode offers crucial insight into the interplay of central bank intervention, shifting market expectations, and investor portfolio strategy. Listeners are equipped with both macro and micro perspectives—ranging from global FX policy to individual security selection—emphasizing the need for diversification, agility, and skepticism amid today’s uncertainties.

Transcript

[A]

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[A]

Sonia Martin joins the chief economist for DZ Bank. Sonia, what do you make of this move here by Japan in the US to kind of support the Japanese yen here? What's your take?

[C]

Actually, I think it's a pretty clever move. I mean, the bank of Japan has been trying to, you know, to to manage the yen. They've been trying to support the currency for some time. They have intervened time and again and every time they intervene, dollar yen just ended up going higher afterwards. So it wasn't a particularly successful intervention story. So moving in together with the Americans is a much, much sm and it's much more likely to have some success in it so far is that it may well serve to draw a limit to the upside dollar yen. It's not going to change the fact that the yen is a weak currency, but it might be more successful and it's a very, very strong signal to the market, particularly because it seems to be the case that there might be further intervention if need be.

[E]

Investors were heavily positioned, though, for a weaker yen before the intervention. It may be early to tell, but how much of the move we're seeing, in your view, is about a policy shift versus maybe an unwind in positioning?

[C]

Yeah, we'll have to wait about a week until we get some data on this, but I suspect strongly that quite a few of these positions have been wiped out. And that is a good thing because it's a Clear signal to investors that speculating against the yen is no longer going to be sort of a free lunch, as it were. I mean, we have been having this problem. Said investors have been speculating heavily against the currency and maybe this move will at least curtail this happening in the future.

[A]

One of the interesting mechanics here of this potential intervention have been reports that the US treasury used euros rather than dollars to fund its purchases. Talk to us about that.

[C]

Yeah, well, it's very unusual, certain unexpected. I wonder whether they called the ECB to at least let them know a courtesy call that this was going to happen. So, yeah, a bit unusual. There's a lot of speculation about why they might have done this. And I think the, the current consensus seems to be that they didn't want to open the Pandora's box of the strong dollar policy. So by intervening in euro yen, they circumvented having to use to sell dollars, which again may have raised questions about the official strong dollar policy that US governments have held for decades. So maybe that's why they did this. That's, I think, the most logical explanation. We'll see if they have to intervene again, whether they stick to that and if they do, what the ECB might have to say about that as well.

[E]

And what about the Fed? I mean, we have Chair Kevin Warsh signaling a different approach to Fed communication with less forward guidance. And we have the New York Times reporting that it may even be, I think, six times a year. And how is that going to change the way fixed income investors think about risk more broadly?

[C]

I think Kevin Wash is a big challenge for the bond market right now. He's very different than his predecessor or predecessors, I should say. He obviously has plans with the Fed. There's all these working groups that are active trying to change certain things the way that the Fed does business. Then there is the talk about less meetings. He is a bit of a closed book when it comes to communicating with the market. It's very different. And I think people are not sure how to read the Fed. And that ultimately creates more volatility, I think, because it leaves much more room for speculation. And given the fact that there's so much political pressure on the Fed from the White House, I think personally I'm not sure if this is the right moment to scale down the communication with the market because that could be interpreted as something rather unfavorable. So more volatility, more uncertainty, I think. And maybe over time we'll get to know Kevin Wash better and you can read him better. But for now, it's a bit of

[A]

a black box, Sonia. A lot of folks are trying to get their handle on underlying inflation out there in the marketplace. Today's a day where we've got oil down 5,6% here, but it could just as easily be up 5,6% given the social media activity out there. What's your view of kind of underlying inflation out there in the marketplace?

[C]

Well, I think, you know, ever since this trade of Hormuz was effectively closed with the beginning of the war, what we are basically witnessing is this big wave of inflation that every day it just gets a little bit taller and it builds up a little bit further. Right. And so that is still happening, even if the oil price goes down temporarily, even after we had the MoU and there was some, you know, ship traffic going through the Strait of Hormuz. Ultimately, the factors that are pushing inflation higher are still very much in place. And it is, of course, predominantly energy. But the longer this is going on, the more you can have other effects. I mean, I always. The best example, I think, is food prices. I mean, food is expensive, energy wise, to store, to cool, to transport. You know, we're going to see that effect. Then we have, of course, the issue with wheat prices being higher because of what's happening in the Ukraine. So there are a lot of inflation factors still in the pipeline, as it were, and those aren't going to disappear just because the oil price falls by 5 or 6% or because we maybe get a resolution in Iran. Potentially. We'll see. That's still very much in place. And I think that's what central banks need to focus on.

[E]

Between Fed policy Sonia and coordinated FX invention, throw in geopolitics there and maybe even oil. What do you think is the biggest macro risk that markets are underestimating at the moment?

[C]

Well, I think the risk that could be a negative or if we think about forecasting a positive event. But I think on the downside, I think the big unknown and the big risk is probably the question of when we will get physical shortages of goods, including potentially oil. I mean, one of the reasons why we fared so reasonably well for the last five months, despite what's happening in Iran, is the fact that strategic reserves have been drawn down. But that is not an. That will end at some point. At some point, you cannot draw down strategic reserves more. Some countries, like the US or China, still have a lot. Other countries have less. So this is, I think, a major risk. And I think when I look at how the market is behaving in this environment, the equity market. I mean, the DAX just posted a new record high. Clearly this is a risk that I think is heavily underpriced in the market.

[A]

Very good, Sonia. Thank you so much. We really appreciate getting a few minutes of your time. Sonia Martin, she's the chief economist at DZ bank there. Stay with us. More from Bloomberg Surveillance coming up after this. Salary bonus, 401k stock options, investment accounts. If your wealth manager only sees one piece of the puzzle, who's connecting the rest? Creative Planning's integrated team of specialists coordinates all of it. So everything fits together. Creative Planning, where wealth works together. Creativeplanning.com BSP the Big Take Podcast from

[B]

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[C]

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[B]

Stories that move markets.

[A]

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[B]

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[D]

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[A]

Ray Ann Mitrione joins us. She's a founding partner of the Callen family office. Hey Ray. And we're about 60% of the way through the S&P 500 earnings so far this quarter here seems to be pretty darn good. What do you make of it?

[F]

Good morning, Paul. Yeah, absolutely. We're off to another really strong start for this earnings season. We have 86% of companies are beating on earnings, 77% are beating on revenues. You have 10 of 11 sectors that have year over year growth in earnings and eight of those have double digit growth. So we're really seeing broad based strength across the board. And earnings growth is now expected to come in for the quarter at around 47%, which is more than double the 23% expectation coming in into the quarter. So we've really seen, we're really pleased to continue seeing that the strength is still there.

[E]

How are you interpreting the earnings season so far? Because I feel like this is the earnings season where spending stopped being enough on its own and maybe investors were really, really looking for when they'll see the roi. And you see investors really seeing rising costs or delayed payoffs and really punishing them.

[F]

That's absolutely true. I mean, and you're seeing companies that are coming out with phenomenal results and are selling off on that news. But a lot of it, I mean especially what we saw last week with some of those hyperscaler earnings, that there are very different outcomes in the stocks based on, based on what we're seeing. And it's not enough to just be spending. We need to see that there is potentially some ROI coming from that. And we saw that last week with Microsoft with the Azure and Copilot businesses and Amazon with us and the growth that they're both seeing. But then the opposite. The market didn't feel as good about what came out from the metal report and that the free cash flow dropping significantly weaker than expected results. So we are going to need to start seeing more tangible results I think for the stocks to continue moving up on these high expectations and all this cash that's being spent to fund these investments.

[A]

Hey Rayyan, I know a lot of investors are probably looking for some diversification away from the AI trade here, which seems to be impacting a lot of different sectors across the marketplace. Where do you guys look for a little diversification?

[F]

That's a really important thing. I mean we believe strongly in diversified portfolios and even within the equity markets trying to find some of that diversification outside of the tech sector. Even though to your point you are having a lot of the trade is, you know, you're seeing it in, in the power gen, you're seeing it in the industrials with the data center build out, you're seeing it in small caps with smaller semiconductor companies and emerging markets. But we do want to have that spread out of exposure across the board and you know, leaning into some more of that value, more of the international, especially the emerging markets, the small caps and just getting some of that diversified exposure as well as looking into other parts of the market, whether it's fixed income or alternatives where appropriate for different investors just to have a little bit of diversification. So when we get into these periods where you see some volatility in the markets like we've seen this past month, your portfolio can still hold up.

[E]

What about semiconductors? We saw for instance, the Philadelphia Semiconductor Index see its worst month since the great Financial crisis. Do you view that as a buying opportunity or do you think that maybe it's a sign that expectations got a little too far ahead of reality?

[F]

There's no question that the momentum has pushed up those stocks so high. I mean they were up over 80% for the year. So it's not that surprising to see it take a little bit of a Breather and have some of that profit taking and rotation into other sectors. We saw dollars going to value in more defensive sectors, financials and staples health care. But we do think if you're under allocated in that area, we do think some of those valuations have now come down even though the, the group as a whole is still up about 60%. There are still some good names and good buying opportunities in there as well if you're under allocated. But we're not looking to overweight that sector given where we are in the market.

[A]

Rand, how about the fixed income side of the world here? Boy, you can clip some very nice coupons in the treasury market. Four and a quarter percent on the two year, you know, 465, 470 in the 10 year. Is that where we should be hanging out or you suggest some of your clients take credit risk on top of that?

[F]

We keep most of our fixed income allocations primarily in high quality investment grade but we do think that there is some opportunity as well in the below investment grade space. And some of that we're, we're leaning in some on private credit. We do have some muni high yield exposure as well. But you know some spreads are, spreads are still pretty tight so we want to be careful about where we're taking that and being very deliberate and that's why we're, we like the private markets for some of that as well.

[E]

And what about the Fed? I mean the Fed remains focused on inflation but markets are pricing at a possible rate hike. What data point to you matters the most when it comes to the next move and interest rates, I think we

[F]

really need to be, they're very focused on inflation and what direction that's going to go in. I mean the labor market really has been incredibly resilient and looks pretty healthy. So we'll get some more data obviously on that this week. So unless we see some surprise in one direction or the other, we think the focus will continue to remain on the inflation picture since we're still pretty far above that 2% target. If we get softer than expected employment picture then maybe the Fed stays on pause a little bit longer. But if we see a surprisingly strong report, then we may see yields jump on the expectation that they may make a hike sooner rather than later.

[A]

Rand, what's the appetite from your clients for alternative investments? Whether it's private credit, private equity, hedge funds, what's the appetite and kind of how do you deal with that?

[F]

Yeah, I mean we work with ultra high net worth investors with pretty multi generational time horizons so there's certainly in most cases the ability to take that illiquidity into their portfolios. But we want to make sure we're evaluating each case by case and that the willingness is there and it's appropriate for the client. But we do think that there is the ability to enhance your returns over the long term if you take some of that illiquidity and invest in private markets. I mean, so many companies are staying private for so much longer now. I mean we saw it for example with SpaceX, with Anthropic, these companies that are seeing so much growth in the private markets. So it does open up the opportunity set if you go in that area. And we like it on the private credit, private real estate as well, we think that helps to add some diversification to the portfolio. And most of our clients do like to take advantage of those opportunities as well.

[A]

Rayan, thank you so much. Always appreciate getting a few minutes of your time. Ray and Mitrione, founding partner at Callen Family Offices down there in West Palm Beach, Florida, which is kind of ground zero for high net worth families and individuals. So that's a good place to have a family office of business here. Stay with us. More from Bloomberg Surveillance coming up after this.

[B]

The Big Take podcast from Bloomberg News keeps you on top of the biggest stories of the day.

[C]

My fellow Americans, this is liberation day.

[B]

Stories that move markets Chair Powell opened

[A]

the door to this first interest rate

[B]

cut, impact politics, change businesses. This is a really stunning development for the AI world and how you think about your bottom line. Listen to the Big Take from Bloomberg News every weekday afternoon on the iHeartRadio app, Apple Podcasts or wherever you get your podcasts.

[D]

You're listening to the Bloomberg Surveillance Podcast. Catch us live weekday afternoons from 7 to 10am Eastern. Listen on Apple CarPlay and Android Auto with the Bloomberg Business app or watch us live on YouTube.

[A]

Sarah Hunt joins us, partner and chief market strategist at Alpine, Sachs and Wood. She joins us here in studio. Sarah, last week we had a lot of tech earnings and there were some winners and some losers. And when you look at the stock market performance after they reported, how does that influence how you think about the AI trade? Where is the market in terms of where how it wants to be exposed to AI? How do you guys think about that?

[G]

Well, if you look at where we were, you know, a year ago, everybody was raising Capex and they were getting rewarded for raising Capex almost across the board. And I think that that's obviously changed dramatically. I think you saw in the Results this week that where you start to see that acceleration in growth which you saw for Microsoft and Amazon versus where you have issues like you saw with Metta. Apple's got different issues because I think that's much more about the supply chain and the fact that memory prices are so high. But I don't think it's a demand problem. So for something like Apple, I would be less concerned about that in the near term, but longer term or medium term. But I think that it really shows you, you're starting to get bifurcation on how people are accepting the kind of spending that's happening and what people hope for on the return side.

[E]

So this is definitely the earnings season where AI spending stopped being enough on its own. But we're seeing companies spend billions and billions on infrastructure. Are there key signs that you're looking at to see whether those investments will actually pay off? That might be a tricky question, but I know you look at these closely.

[G]

Well, I think, I mean, I think that this is where the earnings were very important because had you not seen the acceleration in demand that Microsoft was talking about and that AWS was talking about on that side, I think that that question would be even more in focus. But I think the fact that also you've seen a little bit of moderation on that raise of CapEx. Yes, the CapEx is still strong, but we're not talking about doubling it again and again and again. And I think that that's important. And I also think that, you know, the issue with what's going on in China and some of those models that are cheaper, that also brings into question, okay, maybe the capex moderates a little bit and I think the market starts to reward that moderation to some degree because it's not just you have to get there first, it's how do we integrate this? What's actually going to happen and what are you going to get paid for overall?

[A]

What's your take so far of earnings? Because boy, we had a really high bar to clear. We had fantastic earnings in the first quarter. Pretty big expectations for Q2 as well.

[G]

I think that the earnings, you know, you're still seeing earnings growth in the places where you expect to see it. In the information technology side, you're also seeing it in industrials. What you're starting to see like Tyson and like Procter and Gamble is some real issues on the consumer side because consumer staples are having trouble with that pricing. You're starting to hit a wall with pricing. You don't see that yet in the technology Space. But you, I mean this is the whole, this is why you saw such volatility is that that adding China with a cheaper potential mix into there makes it question how much you can continue to raise price on the technology side, I think that's going to be the tension going into 2027. I can't believe I'm saying that, that we're going into 2027, but there you are. And I think that that's how people are going to be looking at things as are am I seeing that acceleration in demand and can I count on some returns from all that spending that I'm doing right now?

[E]

We are heading into 2027 and it's August, which is for me hard to believe. What about the Fed? They're balancing stubborn inflation against concerns about consumer pressure. Do you think there's a risk that maybe keeping rates higher for longer may create more economic damage than maybe some brief relief?

[G]

I think the problem is that where we're seeing the inflation coming from, it's hard to see how higher rates are going to solve that problem. If you have a supply sh oil, it's hard to see how higher rates help you unless you just kill demand. And that has ancillary effects that they don't necessarily want. So I think it's more about keeping things elevated as opposed to elevating them further. Although that argument is going to continue into the summer and we'll see what happens both with the employment report and what happens with inflation. Because that oil shock that was getting better is now, it's now gotten worse. I mean today you're down a little, you're down four bucks, but there's a lot more volatility there. And I think people were expecting a one way trip down and I think that's going to complicate things for the fed.

[A]

Once again. 2026 is shaping up to be a year driven by information technology, consumer communication services. Are there areas outside of there that maybe investors should be looking for? Whether it's financials, health care, I'm not sure.

[G]

Absolutely. I think that there are places in health care, I think that there are places in industrials. This is really a good time. I mean you saw what happened with the memory stocks and you see what happens with the hardware stocks occasionally on this AI trademark, you want to be looking at the companies that are outside that to some degree and have a good cash flow, a good balance sheet. You know, we're big believers in capital return. We want to see those dividends being paid, we want to see that cash flow coming through and that cash flow growing. And I think that this is a good time to be looking in those areas because some of the valuations are not as punchy as you see on the air hardware trade.

[A]

Well, some of those tech names that we've since the beginning of time, whether it's Google or somebody else, gobs of free cash flow. Gobs is CFA term gobs of free cash flow. Now they were cash flow negative in some of these. I mean, that's a real issue for investors to deal with.

[G]

And I think that that's exactly why that capex question is becoming a bigger and louder one, which is okay, if you're funding it out of cash flow, at least you're funding yourself. If you're now going to the debt markets, are going to the equity markets, you really have to justify that in a way that when you had gobs of cash, again, a CFA term on your balance sheet, people didn't question that so much. And I think that those questions are getting louder.

[A]

All right, sir, thank you so much. Really appreciate it. Sarah Hunt, partner and chief market strategist at Alpine Saxon Woods. Stay with us. More from Bloomberg Surveillance coming up after this.

[D]

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[A]

We're going to check in with Joanne Gallegos, co founder of Bond Blocks. Talk to her about the bond market and what the bond market's reacting to this new Fed chair and kind of his strategies going forward. Paisley Nardini, she is portfolio manager, Simplify Asset Management. Get her thoughts on these markets. Apparently Eric Balchunas is supposed to join us here to talk about the ETF business. He has not badged in. That could be a problem given he depends on the Acela train. But we'll hope for the best there. So we got a lot coming up in the next hour here. We got some green on the screen. Let's go right to our first guest, Joanna Gallegos. She's the co founder of Bond Blocks. Joanna, talk to us about how the bond market reacting to Fed Chairman Warsh, his second meeting last week, kind of have the bond market doing the work of the Fed, bringing rates up over time here. What are you seeing in your platform with your flows?

[H]

Yeah, so I think a lot's been said this morning and a lot of guests have mentioned the same thing that you have about the market doing the work for him and his comments on Wanting to change the meeting schedule and the pace of the data, maybe being able to absorb and process that data. I think that's kind of important because we've gone through so many, many scares and cycles. I always like to bring it up on this show that in 2023 we thought there'd be a banking crisis. You know, when SVB went down, there's been Liberation Day War. And so these, these moments, you know, the bond market reacts and you're seeing the long end really move out and actually like although this time these are historical, even for the last four or five years. So this is a, this is a big move and investors are, you know, absorbing it and reacting as they have where we're seeing a lot of short end and ultra short flows into ETFs and they're great ways to look at what's happening, investor views.

[E]

And we have Chair Wash suggesting that higher yields themselves can maybe help slow the economy. Do you think that the bond market is doing some of the Fed's work or do you think that they're signaling something more concerning?

[H]

I, I, the way we look at this and what we're talking to clients about are, okay, this is happening. We've seen again lots of different bouts of volatility. The rate, the curve move, especially on the long end. And what we talk to clients about is what you should do now. And we think that what clients are focusing on is they're focusing on income, they're focusing on the traditional role because the traditional return expectations are back. Bonds are, corporates are yielding 5 to 7% or no 5 to 6% high yield is yielding 7 to 12%. You have a 4% treasury yield on the short end. That is the traditional return expectations you should have. And so when you compare that against equity returns which have been outsized in the last five years but are still on average about 15% annually, the long term rate is 10%. Bonds are becoming more competitive in your portfolio and what you should do next so what you should do next is you should allow bonds to take that traditional position in your portfolio, add them in for both income and stability. Equities are expensive. Right now they're pricing 21 to 22 times their earnings. It's a moment for you to acknowledge which I think maybe feathers into Warsh's policies and thoughts that when things have reset to their traditional levels, you should be using bonds in a traditional way and also in a more precise way,

[A]

pcmm, which is the ticker for the bond blocks, private credit, clo, ETF talk To us about that. What are you seeing there?

[H]

It's my favorite product to talk about. Your previous guest was talking about middle market exposure and she's also talking about structural advantages and approaches. So this is the perfect marriage between the structural side of the ETFs and the benefits you get from ETFs liquidity, but also with a way to get access to private credit that's much more diversified than the stories we've been seeing. So the way this product works is it holds CLOs, which are packages of middle market loans. 80% of the portfolio has exposure to middle market private debt, which is direct loans to companies. And what that gives you is there's about 80 CLOs in the product and that represents around 78,000 underlying loans across 25 to 30 managers. So the concerns of concentration and manager decision, concentration in certain deals in certain sectors, it has that power of the ETF where you're getting broad diversification. You don't lose the characteristics of the asset class. You don't lose the opportunity to access those liquidity premiums. The product yields around 7%, the fund portfolio 7%. And you're getting a duration of something like seven months. So really low volatility with compelling yields that investors don't want to give up private credit completely. This is a great entry point. This is a great way to complement your more liquid products in your portfolio. So I think it has a marriage of all the things that, you know, other guests have been talking about. And we really keep reminding clients to look past the headlines and, you know, maybe introduce something like this structure to help you, you know, ease into your private credit exposure.

[E]

Many investors are now worried about taking too much duration risk. Where are you finding the best balance between maybe yield and rate sensitivity?

[H]

Yeah, we say, we say income over duration. And what Just as a way to talk to clients about it, we have been recommending intermediate duration for the last six, seven months. If you are in the three year, you really hit the mark as of June 30, it's completely flat. If you're in the three year treasury, you're completely flat and you got around a 4% yield all of that part of the year. If you're in the five year, you're down just a little bit. So that three, five and lower has been the place to be in terms of interest rate risk. But we also want to encourage people to go out and add some spread to that equation. So that's where the income comes in. You would want to go into either short or intermediate corporate debt either in investment grade or high yield. Those spaces have low duration risk, interest rate risk, high yield people don't realize is actually low in interest rate risk. It has about a three year duration in it. So anything under three years is something we think is compelling. We think that although spreads are tight, it's still a place where you want to reach and grab the yield from that and add the income into your portfolio. Don't be afraid of credit. One of our top recommendations is our triple C product. You're going to get equity like returns at 12% and with really strong underlying fundamentals relative to historical levels in extended credit. We we can't talk enough about making sure that you're, you're taking advantage of the opportunities of these rates that are structurally higher, but also the health and the resilience of the economy and you know, to lean into that in fixed income.

[A]

Joanna, thanks so much for joining us. As always, Joanna Gallegos, partner at Bond Blocks. They've got a fixed income ETF for pretty much every way to slice and dice the bond market. We appreciate getting a few minutes of joining us.

[D]

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