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.

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.

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.

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.