Lots More on the Global Selloff in Government Bonds

Summary

Odd Lots: Lots More on the Global Selloff in Government Bonds – January 10, 2025

Hosted by Bloomberg’s Joe Weisenthal and Tracy Alloway, "Odd Lots" delves deep into the intricate dynamics of the global bond market in this episode titled "Lots More on the Global Selloff in Government Bonds." Released on January 10, 2025, the discussion navigates through the complexities of the term premium, Federal Reserve policies, fiscal pressures, and global influences shaping the current bond market landscape.

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Introduction to the Global Bond Selloff

The episode opens with Joe Weisenthal and Tracy Alloway addressing the significant downturn in government bonds globally. They are joined by Jay Barry, Head of Global Rate Strategy at JP Morgan, and Ira Jersey from Bloomberg Intelligence, who provide expert insights into the factors driving the selloff.

Debating the Term Premium

A substantial portion of the discussion revolves around the concept of the term premium—the extra yield investors require to hold longer-term securities.

• Jay Barry initiates the conversation with skepticism about the term premium's significance:
  “Are we going to spend this episode just arguing about the term premium?” [01:05]

• Joe Weisenthal expresses his fluctuating stance:
  “I oscillate between extremes.” [01:34]

• Ira Jersey clarifies his position, emphasizing the term premium's role as reflected in the yield curve's slope:
  “I think the slope of the yield curve is steeper for a given level of policy rates. So I think it tells you that there is more term premium in the curve right now.” [03:35]

They explore how the term premium is challenging to measure due to the necessity of estimating a risk-neutral rate but agree it remains a pivotal factor in understanding bond market movements.

Federal Reserve Policies and Yield Repricing

The hosts delve into how the Federal Reserve's actions have influenced bond yields and the broader economy.

• Joe Weisenthal points out the rising 10-year yield and shifts in terminal rate expectations:
  “The fair value would be probably closer to four and a quarter. The fair value metric would be around four and a quarter.” [23:04]

• Ira Jersey explains the Fed's preemptive rate cuts and their implications:
  “What the Fed did was unusual because basically by preemptively cutting 50, they said even though inflation hasn't come back to target, we do not want to sacrifice this expansion.” [04:32]

They discuss how these policy changes have led to an upward repricing of the terminal rate since September, significantly impacting long-term yields. The conversation highlights the Fed’s strategy to prioritize labor market stability over aggressive inflation targeting, leading to expectations of fewer rate cuts in the future and higher long-term rates.

Fiscal Pressures and the TCGA Impact

A critical aspect addressed is the fiscal pressure stemming from the Tax Cuts and Jobs Act (TCGA) and its global repercussions.

• Ira Jersey highlights the extension of TCGA and its effect on deficits:
  “We expect the TCGA to basically be extended in full. And that's going to add an additional 4 trillion to deficits over the next decade.” [08:47]

• Jay Barry ties fiscal pressures to bond yields:
  “If bond yields are going up, particularly at the long end, when the US is planning to do more long issuance, that means the cost of borrowing is going to go up.” [17:10]

This segment underscores how increased deficits necessitate greater bond issuance, compelling the government to attract new investors, thereby elevating the term premium and overall yields.

Global Influences on the Bond Market

The discussion broadens to encompass global factors affecting government bonds, with a specific focus on the UK and comparisons to other major economies.

• Ira Jersey compares the US with the Eurozone and Japan:
  “The Fed and the US is in a very different spot from rest of the world. Euro area ECB is cutting 25 until it goes into slightly accommodative territory... Japan is in the midst of normalizing rates.” [15:37]

• Jay Barry notes the unique challenges faced by the UK:
  “It has the same fiscal pressures as the US but it doesn't have the same productivity growth.” [16:17]

They explore how divergent monetary policies, fiscal issues, and productivity levels across countries contribute to the global bond selloff. The UK’s struggle with fiscal pressures without corresponding productivity gains exemplifies the complex interplay of domestic policies and economic performance affecting bond markets.

Market Volatility and Sentiment

The hosts examine the role of market sentiment and volatility in the bond selloff.

• Jay Barry suggests monitoring social media chatter as a gauge:
  “You need to do a volume index. A global Vol. X index. Just a measure of social media talk around the world relating to fiscal policy.” [19:19]

• Ira Jersey discusses regulatory and market structure factors:
  “Swap spreads until recently have been narrowing globally across the DM as well. You can see the imprints of QT there.” [20:00]

They consider how political noise, especially in the UK, and regulatory changes contribute to market volatility, further exacerbating the bond selloff.

Central Bank Quantitative Tightening (QT)

The episode touches upon the ongoing role of central bank asset purchases and sell-offs in the bond market.

• Ira Jersey explains the subtle yet impactful nature of QT:
  “The Fed's balance sheet as a share of GDP matters for rate levels... It continues to normalize, placing steepening pressure on the yield curve.” [19:52]

While QT is acknowledged as a background factor influencing the bond market, it is deemed a third-order effect compared to policy expectations and fiscal pressures.

Strategies for the Future

The conversation concludes with reflections on the future trajectory of bond yields and market dynamics.

• Ira Jersey posits that current yields are above fair value:
  “We're at a similarly high level right now, so the fair value would be probably closer to four and a quarter.” [23:34]

• Jay Barry inquires about potential regulatory reforms to attract new bond investors:
  “What exactly can the US do if a bunch of traditional buyers like banks, the Fed for the past more than a decade are stepping away from the market other than yields going up?” [21:00]

• Ira Jersey suggests potential Treasury strategies, including introducing new bond products:
  “Adding another floater at the short end of the curve... adding another point on the TIPS curve.” [21:28]

The hosts emphasize the importance of adapting Treasury strategies to broaden the investor base and mitigate the impact of declining traditional buyers.

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Concluding Insights

"Lots More on the Global Selloff in Government Bonds" offers a comprehensive analysis of the multifaceted forces driving the current bond market turbulence. From the nuanced debate over the term premium to the significant influence of Federal Reserve policies and global fiscal pressures, the episode provides valuable perspectives for investors and policymakers alike.

Notable Quotes:

• “I think it's an important valuation framework we have at JP Morgan, is that we've been trading either at fair value or cheap to fair value for the last two to three years.” – Ira Jersey [23:34]

• “The Fed's balance sheet as a share of GDP matters for rate levels. It matters more for curve slope as well.” – Ira Jersey [19:52]

• “We do not want to sacrifice this expansion. And this probably means better growth outturns in the future, higher inflation in the future, thus justifying fewer cuts down the road and actually higher rates.” – Ira Jersey [04:32]

Produced by Carmen Rodriguez and Dashiell Bennett, with contributions from Moses Andam and Cale Brooks. Special thanks to producer Dash and sound engineer Blake Maples.

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For those looking to stay informed on the nuances of the financial markets, "Odd Lots" continues to be an essential listen, offering in-depth discussions and expert analyses on the most pressing economic issues of our time.

Transcript

[Joe Weisenthal]

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[Tracy Alloway]

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[Bloomberg Audio]

Bloomberg Audio Studios Podcasts Radio News Joe.

[Jay Barry]

Are we going to spend this episode just arguing about the term premium?

[Joe Weisenthal]

I don't know. Like yeah, maybe. You know I've always like, I've always been sort of, I wouldn't say a term premium denier, but I guess you are. Okay, but like, and I was totally ready to capitulate as like, oh, it's all the term premium. And I was like, I'm totally convinced the term premium is this really important concept that can be measured analytically with precision. And then some people are like, oh, it's actually, you don't really have to go that far. It's sort of straightforward. I still don't.

[Jay Barry]

You know, there's a middle path where you can say that the term premium is hard to measure because you have to estimate like a risk neutral rate. But. But it still exists. It might mean different things to different.

[Joe Weisenthal]

People, but I've never been good in life at taking the middle path in anything. I oscillate between extreme. I did a dead list.

[Jay Barry]

I am both the most popular trader and most successful trader at Citadel.

[Ira Jersey]

Feta's going viral Barges.

[Joe Weisenthal]

This is an after school special.

[Jay Barry]

Except I've decided I'm going to base my entire personality going forward on campaigning for a strategic pork reserve in the US Black Gold. These are the important questions. Is it robots taking over the world?

[Joe Weisenthal]

No. I think that like in a couple years the AI will do a really good job of making the Odd Lots podcast. One day that person will have the mandate of heaven.

[Jay Barry]

How do I get more popular?

[Joe Weisenthal]

And success do have the perfect guest.

[Jay Barry]

You're listening to lots more where we catch up with friends about what's going on right now because even when the.

[Joe Weisenthal]

Odd lots is over, there's always lots more.

[Jay Barry]

And we really do have the perfect guest. Back with Jay Berry. He is now the head of global rate strategy at JP Morgan. The last time we had him on was in October of 2023 and the headline on the episode was like J. Barry on the big sell off in bonds and we can just recycle.

[Joe Weisenthal]

Call that again. Call that again. Was that the peak when we had them on then?

[Jay Barry]

I don't know.

[Joe Weisenthal]

It might have been probably close right at the time. Yeah.

[Jay Barry]

Jay, do you believe in the term premium?

[Ira Jersey]

Well, Tracy, I think it's funny you talk about the last time I was on because 10 year yields are basically at the same level they were then and at the time the Funds rate was 100 basis points higher than it is right now. So term premium is hard to measure, but I'm a simple man and I think of it as the slope of the yield curve. And the slope of the yield curve is steeper for a given level of policy rates. So I think it tells you that there is more term premium in the curve right now. Absolutely.

[Joe Weisenthal]

Ira Jersey, who does rates here at Bloomberg Intelligence had a chart and you just said, look, yes, one term premium, all that. But one part of the story is just that the market's estimate of the terminal rate is now higher than it would have been, say six months ago, etc. At the start of the cutting process. And that a big part of the story with the rise in the long and since September is just that, you know, there's not as much cutting baked in.

[Ira Jersey]

I think that's exactly it as well, Joe. I think that's a really important point because this is now the middle ground.

[Joe Weisenthal]

It's like part of it is the term premium and part of it is.

[Jay Barry]

If we get Joe to take the middle path, this is a success.

[Ira Jersey]

Yeah, I'm a middle of the road guy and I don't think a single explanation or a single factor can explain the bond sell off. But term premiums won, Tracy. But Joe, Fed policy expectations matter because it's fascinating. Yeah, when The Fed cut 50 in September, we were pricing in a terminal funds rate of two and three quarters and now we're pricing in a terminal funds rate of 4%.

[Joe Weisenthal]

It's a big change.

[Ira Jersey]

It's a huge change. And that's driven it as well. And it's so unusual. And I think it's unusual, but what the Fed did was unusual because basically by preemptively cutting 50, they said even Though inflation hasn't come back to target, we do not want to sacrifice this expansion. And this probably means better growth outturns in the future, higher inflation in the future, thus justifying fewer cuts down the road and actually higher rates. So that's a big piece of the puzzle because that's been 125 basis point move as well.

[Jay Barry]

The one thing I would say though, I mean, I agree obviously me and.

[Joe Weisenthal]

Tracy debating through J.

[Jay Barry]

Obviously bond yields react to Fed expectations. You're the mediator and the near term path of the economy and inflation. But the one thing I would say is like in October, there were other things you could look at to measure nervousness about a potential Trump win. Like, you know, puts on the TLT that suggested that a bunch of investors really wanted to shed long term bond exposure right after the election. And this was happening like, you know, those were going up as Trump's polling odds were going up. So I feel like there are other things that suggest some of this nervousness is like secular in the long end. But anyway, the thing I wanted to ask, jobs day is coming up, so we're recording this on Thursday, January 9th. The bond market is actually off early today for Carter's funeral. But how big a deal is the bond market reaction going to be to the jobs day? Like, if we're debating whether this is some secular, maybe politically related change versus something about the Fed and the path of the economy and inflation, it feels like jobs are going to be a big factor here.

[Ira Jersey]

I think they absolutely are. And I think it depends on which part of the term structure you're talking about. Because what's been interesting in this move is that the front end has remained, Tracy, really well anchored. Right. I think it's because the Fed has been asymmetrically dovish in its reaction function right now, even with what happened in December with the dots showing only two cuts for next year, the Fed in aggregate is talking about cutting further, albeit at a slower pace or just going on hold. Nowhere in the discussion is hikes. And that's why the money market curve, even though we're pricing in fewer eases, is still inverted. I think that could start to change if you see the labor market start to tighten again, if the unemployment rate starts to come back down, that could be meaningful for repricing the front end in the opposite direction. But at the same time, even though the labor markets are not as weak as we perceive them to be back in August and September, there has been a steady slowing in private payroll growth. There's been A steady slight increase in the unemployment rate, which tells you that the demand for labor is moderating. If you get another sense of that tomorrow, and I think consensus is 160k with the unemployment rate at 4.2%, we're 154.2%, so we're very close. I think that probably anchors the front end and tells you that it's probably relatively stable here. The long end is a different story. I think if the pace of employment growth is stable, but you see something like the rate come down and average hourly earnings firm back up, then the markets can price out a bit more of the Fed easing that we've got priced in and it becomes a bit more of a parallel shift because that justifies higher long term rates as well. So I think it's important with some asymmetry that the front end is better supported than the rest of the curve. But this has been kind of our whole thesis too, and the employment data tomorrow is a key piece of that puzzle.

[Joe Weisenthal]

The economy overall seems very noisy to me right now and hard to parse because there do seem to be signs like, look, growth continues, no real signs of slipping into recession. But on the other hand there are signs that the labor market is softening. Maybe the labor market is strengthening. I think it's actually really noisy. Let's zoom out though. Sort of big picture to talk about, I guess, since September, what's happened? So there's been a few developments. First of all, just looking at the 10 year, you know, that bottomed at about 3.6 on September 16th, it's currently at 4.6465 as of this second when we're talking at 8:01am January 9th, 2025 since then, obviously we did have the Trump win. We're not going into. There are still no signs of imminent recession. How would you tell the story basically of just what's happened and explain perhaps the upward repricing of that terminal rate since that initial 50 basis points?

[Ira Jersey]

I'm glad you asked that. And I think it's fascinating that that trough in yields was a day before the Fed meeting. Right. So that was when we were priced for maximum dovishness.

[Joe Weisenthal]

And at that point we had seen the unemployment rate had been solidly ticking higher in the months before. And you could maybe it turned out to be wrong, but you could at least tell a story then. Oh, this looks like what happens before a recession.

[Ira Jersey]

Yeah. And it wasn't just the unemployment rate because I think it's tough to disentangle what's happening with the rate because there's obviously supply side factors going on there. But the pace of private payroll growth had decelerated sharply. So that was a big one with what the July and August data showed. So I think since then, first it's what the Fed did when they went 50. I'm not going to sort of toot our own horn, but Mike Feroli, my colleague and our chief U.S. economist, I think was one of the few calling for a 50. And I think that was a surprise at the markets because it showed the Fed's hand with respect to its reaction function. It really valued the labor markets over inflation and did not want to sacrifice this soft landing. And again, that generates better growth outturns and higher inflation in the future, which was a turnaround in rates because perversely enough, it requires fewer eases down the road. So that's a big dominant driver. And I think we can see that in the interim since then, to support this growth, expectations have moved up. And just for example, we've got our series of forecast revision indices and our year ahead growth forecasts over the last three months have gone up something like, like a percentage point. Right? We've come off consecutive 3% quarters. It looks like we're running 2.5% right now. So that's a piece of the puzzle. The second is, and this is where we'll get back to Tracy. And term premium is the change in the fiscal expectations because of the reelection of President Elect Trump. And that is meaningful because we expect the TCGA to basically be extended in full. And that's going to add an additional 4 trillion to deficits over the next decade on a baseline of what I believe was about 22 trillion to begin with. That matters because I think as we spoke about the last time we were here, the budget deficit running at 6 to 7% of GDP when we're close to full employment is highly unusual. And the growth of the treasury market is just outstripping demand from its most price insensitive historical investors like the Fed and US Banks and foreign official investors. We've got to find other price sensitive investors to underwrite this supply. And when that happens, it just requires a higher term premium and higher yields and a steeper curve for a given level of policy rates. So I think those are the few drivers there. And it's a global story. Yes, the US has led the way, but it's been happening Everywhere as well.

[Joe Weisenthal]

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[Jay Barry]

So back in October, I think you, I think it was October. You had a note where you sort of mentioned your former colleague Josh Younger's famous Volfefe index. I think probably the only piece of JP Morgan bond research to ever make it into New York magazine's like Hot or not graph at the end of the magazine. You remember that, Joe?

[Joe Weisenthal]

Wait, do they still have. They still have that Hot or not?

[Jay Barry]

I don't know if they do, but they did when it was first published.

[Joe Weisenthal]

Yeah, I do remember that.

[Jay Barry]

That was a good Valfefe was hot. And the idea, the approval matrix is.

[Joe Weisenthal]

Our producer Dash reminds us.

[Jay Barry]

Yeah, that's right. And you sort of, you mentioned it. Are you guys going to be reviving it under the Trump administration.

[Ira Jersey]

So I can't comment on things that we intend to research, Tracy. But as you said, we talked about it a few times in the last few months. And I think it's important to understand that during the first Trump administration that announcing policy via Twitter or via X right now, or Truth Social or Truth Social, as the case may be, was something that did actually raise implied rate volatility. And higher rate volatility necessitates higher term premium and thus more sticky higher rates. So it's something I think in the background that we're sort of focused on. And it's funny you talk about Josh. I actually was on the phone with him yesterday.

[Jay Barry]

Oh, yeah.

[Ira Jersey]

And so I think this is all kind of coming full circle, but I think that's something in the background that we need to focus on as well. No doubt.

[Joe Weisenthal]

Why is this a global story? I get the labor market looks stronger perhaps than it did six months ago or five months ago or whatever, but a lot of headlines this week about the UK specifically. And now you have the global seat. I can ask you UK question. So why is this a global story? And maybe tell us something about the.

[Ira Jersey]

UK Yeah, thanks for that, Joe. I think there's a policy story globally that's divergent. The Fed and the US is in a very different spot from rest of world euro area. ECB is cutting and cutting 25 until it goes into slightly accommodative territory, we think. So there's a slightly divergent factor there. BoJ is in the midst of normalizing rates also.

[Joe Weisenthal]

Rates are going high in general.

[Ira Jersey]

Rates are going higher. Exactly. Then you ask about the UK I think the UK is stuck somewhere in between the US and the euro area because it's got the fiscal issues that we're talking about in the US it's got the sticky inflation that we're talking about in the US but it lacks the labor supply and productivity benefits that we've had in the US You've got a central bank that's getting stuck here and can only ease at a somewhat more gentle pace. There's nothing really we can point to this week in the UK about the fiscal pressures, but they're just there in the background. And it's the same way the US has sort of seen this move to higher rates since we've walked into the new year, that they're coming back in full force.

[Joe Weisenthal]

So just to summarize the sort of core tension, it has the same fiscal pressures as the US but it doesn't have the same productivity growth as the U.S. therefore, all that spending is running into a less productive economy and that sort of creates that upward move in rates and the inflationary pressure and so forth. Is that the idea here?

[Ira Jersey]

It is to an extent. And I think it's also more idiosyncratic, Joe, as well, because look at what happened with the UK market. What was it back in September, October of 22, when the LDI sell off happened? It's a market which, yes, it's smaller than the treasury market, but it's less liquid, it's more concentrated in its ownership. So when you have a market where I think it's a bit more concentrated in its ownership than a very diffuse set of ownership in the treasury market, you can go through these balance of idiosyncrasy where it's hard to identify a single driving factor to see what happened with this sell off, but it can get exaggerated by those factors as well.

[Jay Barry]

There is also a reflexivity at play here where if bond yields are going up, particularly at the long end, when the US is planning to do more long issuance, that means the cost of borrowing is going to go up, which maybe increases the fiscal burden and then yields go up even further. Is that the kind of risk that we should be thinking about in 2025?

[Ira Jersey]

I think it's a slow moving train there, Tracy, because the average maturity of the US treasury market debt's about six years. So higher rates will definitely lead to higher interest expense and will add to the burden. But I think a large part of that burden and that increase occurred as the Fed was raising rates rapidly. And we know that T bills are about a 20% share of total debt outstanding. So there's a fair amount of short term debt outstanding and it's less expensive than it was a year ago. So this will continue to feed through, but it will be at a very slow rate. So I think it's certainly there in the background as well, but not as primary or secondary driver as these other factors that we've been talking about.

[Joe Weisenthal]

Speaking of policy by Twitter, I don't think that Keir Starmer or what's the Chancellor's name, Reeves in the uk, they're not doing as much posting policy by Twitter, but the owner of Twitter is posting a lot about the UK these days. So to the extent that there is just a lot of noise about the government going on, setting aside everything else, there is a lot of just political noise in the UK on top of all the sort of core economic stuff.

[Ira Jersey]

And it's not just the uk, Joe I think this fiscal noise is going on everywhere. Right. We're talking about the TCGA and the fiscal burden in the us. You're talking about fiscal in the uk. Look at what's happened with France, right, With its government falling.

[Joe Weisenthal]

That's right.

[Ira Jersey]

And they've got deficit issues to try and get back out of the EDP over the next few years, which seems unlikely. You're talking about it in Japan as well. So fiscal and supply is, I believe, a global story to varying degrees across developed markets.

[Jay Barry]

Right now you need to do a volume index.

[Joe Weisenthal]

That's right. Vol.

[Jay Barry]

X. Oh, Vol.

[Ira Jersey]

X is good.

[Joe Weisenthal]

Yeah, A global Vol. You can have that one. A global Vol. X index. Just a measure of social media talk around the world relating to fiscal policy. That's a free one.

[Jay Barry]

That's great.

[Ira Jersey]

Break it down by country there.

[Jay Barry]

You do an ETF on that too.

[Joe Weisenthal]

Yeah, the Vol. I'm going to trade Vol. I'm going to trade Vol. X. I like that idea. What about central bank QT people? I don't know. People don't seem to talk about as much about qt. But what about the role of central bank asset purchases or sell offs in this story or on Wyatt? Where are we with that?

[Ira Jersey]

I think it's something in the background, right? I think back to 2018 when Chair Powell talked about QT and referred to it as watching paint dry. And I think it is just sort of going on in the background. And of course in the US it's at a slower rate than it has been for most of the last couple of years. But in our work, the Fed's balance sheet as a share of GDP matters for rate levels. It matters more for curve slope as well. So that's something that's happening in the background because the Fed's balance sheet has been not only shrinking on a nominal basis, but shrinking relative to the size of the economy. We found that every 1 percentage point move relative to the size of the US economy has been worth a handful of basis points on the yield curve as it continues to normalize. That is something that's in the background also placing steepening pressure on the yield curve. It's of course a global dynamic because you've got the ecb, the bank of England and now the bank of Japan all doing this as well. You can see it not just in curve slopes globally, but vis a vis swap spreads. I think there's been a story where swap spreads until recently have been narrowing globally across the DM as well. You can see the imprints of QT there It's there, but I think it's probably, again, kind of a third order factor when considering the term structure of rates in the US and globally as well.

[Jay Barry]

This might be a weird question, but since we brought up QT and earlier you were talking about the need to find new buyers for bonds, what exactly can the US do if a bunch of traditional buyers like banks, the Fed for the past more than a decade are stepping away from the market other than yields going up, is there anything else they can do to market debt to the outside world or, I don't know, even internally have banks buy more bonds.

[Ira Jersey]

So it's funny because the Treasury Department can only deal with the symptoms and not the root cause. But the treasury and its sort of cadre of private sector advisors, the tbac, have done a lot of strong work on this. And there are charge questions that are asked at every single refunding process. And one that was asked of the TBAC a couple of quarters ago was what new products and processes can we open up to widen the spectrum of demand? I think they're asking this question, Tracy, for that very reason. Two products that were talked about were adding another floater at the short end of the curve. There's a lot of demand for a short duration floating rate product that's latent. The other is adding another point on the TIPS curve. The TIPS product has been around for close to 30 years right now, but we've only had three points on the yield curve. We've added three or four bill points, we've added three nominal points. In order to make sure that you're maintaining the TIPS product as a share of the treasury market and your commitment to it, you can add TIPS as well. They're certainly focused on it and that's one way to try and widen the spectrum. The other, less from the treasury, perhaps more from the regulatory side, is thinking about how you make it easier to intermediate in the treasury market for banks and dealers and own Treasury. There's been a lot of focus on potential regulatory developments in the context of Vice Chair Barr's announcement earlier this week. I think that's something that we can think about in the background over the medium term, but would just offer that the timeline for regulatory reform is probably years to unfold and not months even when it occurs. I think some important points that we've made is that banks aren't leverage constrained right now. Bank demand for Treasuries is not being constrained by leverage ratios. It's something that could happen once again down the line, but it's not an issue right now.

[Joe Weisenthal]

Do you have like a fair value here? So again, we're at like 4.64, whatever. A lot of it seems to be explained by just the sort of overall change in the outlook since September. Then there's various reasons for volatility. Maybe Tracy would call it the term premium, but obviously more issuance, uncertainty, higher deficits, et cetera. Where does that put us? Are we around where it quote should be, what makes sense to you, or where could it go?

[Ira Jersey]

It's funny to draw the parallels again, Joe, because the last time I was on we talked about this and we made the case at that time that 10 year yields looked about 35 to 40 basis points too high relative to that fair value metric. And that's adjusting for how the market's pricing, Fed policy, inflation growth, and the size of the Fed's balance sheet. We're at a similarly high level right now, so the fair value would be probably closer to four and a quarter. The only thing I'm going to caveat there, and not to say that we're losing the anchor that's an important valuation framework we have at JP Morgan, is that we've been trading either at fair value or cheap to fair value for the last two to three years. I think it's because in the background we don't have a term premium factor in that model and we have to be sensitive to the fact that that is something that's changing even though we're call it two standard deviations cheap right now. My argument is that the propensity for mean reversion is probably lower than it's been in the past.

[Joe Weisenthal]

Got it.

[Jay Barry]

Joe, are you a term premium convert yet?

[Joe Weisenthal]

Yeah, sure, Cor, sure.

[Jay Barry]

I mean, listen, say the sentence. Say the sentence. I believe in the term premium. You won't do it.

[Joe Weisenthal]

Lots More is produced by Carmen Rodriguez and Dashiell Bennett with help from Moses Andam and Cale Brooks.

[Jay Barry]

Our sound engineer is Blake Maples. Sage Bauman is the head of Bloomberg Podcasts.

[Joe Weisenthal]

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[Jay Barry]

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[Bloomberg Audio]

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