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- [00:00]
Barclays Investment Bank Host
Bull or bear? Trade or tariff? Future or fad? There's more than one side to every story. With the Flipside podcast from Barclays Investment bank, you'll hear two research analysts having a provocative debate on hot topics in business and markets. Listen to the flip side on your favorite platform,
- [00:26]
Rob Armstrong
Pushkin. The US and Iran have reached a deal to extend their ceasefire and open the Strait of Hormuz. One might expect, given this, that inflation expectations would fall and bond yields would collapse and we'd all return to the land of milk and cheap money. Nope, this is unhedged. The Markets and Finance podcast from the Financial Times and Pushkin. I am Rob Armstrong reporting from a sunny and joyful New York City. And I am joined by my colleague Katie Martin, who is currently in a janitor's closet in a fancy hotel in London somewhere. Katie, how is it in there?
- [01:16]
Katie Martin
I can just about hear the plinky plonk piano that's playing in the lobby from the little kind of office room that I'm in now. But basically, the great and the good of the bond markets, certainly in Europe, are here at this event. It is the FT Global Bond Summit. It's the most iconic week in the bond market according to itself. I'm willing to endorse that message. We had UK Chancellor Rachel Reeves here this morning. Our colleague Chris Giles asked us some tricky questions and she dealt with them pretty well, I've got to say. And there's people who are bond investors, they are bond issuers. So they're the people who work for governments that launch bonds into the big wide world. They are investors, they're intermediaries, the whole thing. Yeah, the whole gang is here.
- [02:05]
Rob Armstrong
So, as I said, our attention is kind of very much focused on the treasury market here. What are people at the conference talking about? What's on people's minds there?
- [02:17]
Katie Martin
I think the thing to remember right, is that, so stock markets love this idea that we've got a deal and that there's going to be like a ceasefire and later there's going to be enduring peace between the US and Iran. Stock markets love that sort of thing, but bond market people are just different. Like, you know, if you're a normal person who doesn't work in finance, you probably think people who work in finance are all the same. They're not. They're very different tribes. And stock market people are kind of paid to be kind of optimistic and like, well, hey, line, go up and look rockets and, you know, data centers in space. Let's buy that thing. Whereas bond market People are much more programmed to think what can go wrong? How can I lose my money? They're just completely different sets of people. And you know, rightly or wrongly, and the bond market people look down their noses at the stock market people and the stock market people don't care. So because they make much more money.
- [03:13]
Rob Armstrong
But you can see this, what you just described, Katie, is very visible in, in the prices in the US since last Thursday, when the possibility of a deal between the US and Iran became credible, the S&P 500 has rallied sharply and we are now once again pressing at all time highs there. Meanwhile, in the bond market, the 10 year treasury yield is now at 4.45%, hasn't moved much and that is up from about 4% pre war. So that means bond prices have fallen, yields and prices move in opposite directions, of course, and haven't really recovered on news of the deal. So there you see the effervescent equity person and the dour and dreary bond person doing their collective work.
- [04:09]
Katie Martin
Yeah, all of the bond investors that I've seen on stage or spoken to so far today have said, okay, there's a deal. We haven't seen this deal. There's a whole negotiation period that has to come after the deal. We still don't know what's happening with the straight up Hormuz and so on and so forth. So let's not get carried away with our ourselves and think this is all like finished and over. But look, a few important kind of long term points that come out of the way that the bond market has reacted to the start of the war in Iran and everything that's happened ever since. One thing is, a couple of people on the stage I was watching earlier today were saying three is the new two, by which they mean like forever. For like the past few decades, most big central banks have targeted a 2% inflation rate. And the vibe now is that's almost like they're targeting a 2% floor for inflation. Now pretty much everyone has accepted that inflation has settled something closer to 3% for the long term. So three is the new two.
- [05:10]
Rob Armstrong
It certainly has settled there in the United States. I mean, we've written a lot about this. They just can't get that last percentage point done.
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Katie Martin
They can't get that last percentage point done. And they have no interest in raising interest rates super aggressively to the point where they might be able to get that rate back down again because growth is too fragile and because the reasons why inflation is set higher are so structural and so sticky. And actually the war in Iran, what it does is remind people why that's the case. You know, there's so much spending that needs to happen globally into kind of rewiring the global energy system and moving away from fossil fuels, moving away from these choke points, moving away from Middle east and thinking about different technologies, different sorts of contingency. So, you know, one of the big mysteries actually of, of the, of the way that the market reaction to Iran has panned out is how did the energy guys all call this so wrong? You know, they were all saying this to us very confidently. We're heading to $150 a barrel and now we're at what, about 80?
- [06:18]
Rob Armstrong
Yes.
- [06:19]
Katie Martin
So the oil price has proven to be much more resilient in the sense that it's been much lower than people anticipated. And in part that's because China did the world a favor. It already had shed loads of oil, you know, much bigger reserves, and that used them much more smartly than the rest of the world. And so the message then to the rest of the world is get your energy resources done right, be like China. And so the way to fund that is guess what? Is to issue bonds. And the more bonds you have, the weaker the other bonds that already in the market are going to be.
- [06:52]
Rob Armstrong
So the world does not have the appetite, the world's central banks specifically don't have the appetite for waging war on a single percentage point of inflation because the governments they work for have big, expensive projects. They need to do energy. In Europe, you have re rebuilding the military industrial base, et cetera, et cetera.
- [07:17]
Katie Martin
Yeah, yeah.
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Rob Armstrong
In this context, Katie, has the name Kevin Warsh come up at all?
- [07:23]
Katie Martin
A few times, yeah. So this is indeed an iconic week for the bond markets because not only is it the FT Global Bond Summit in London, but Kevin Walsh has his first spin as chair of the Federal Reserve. They've got a rate decision coming from the States on Wednesday, Wednesday evening, UK time. As far as I'm aware, no one is looking for the Fed to change rates this time around, but it will be Warshire's first big press conference. And I mean, get your popcorn out. This is going to be really interesting.
- [07:59]
Rob Armstrong
So one interesting issue there is that one of Warsh's primary complaints in his many years, more or less as a professional critic of the Fed, has been that the Fed talks too much, they give too much guidance, the Monetary Committee members give too many speeches, and the whole institution should shut up a little bit and let its actions do the talking. People are even talking about whether Warsh will leave his dot off of the famous dot plot for listeners who are not central bank nerds. The dot plot is a graphic on which each member of the Open Market Committee puts a little dot which indicates their expectations for future interest rates. And it's possible that Warsh, in his capacity as the new chair, may boycott the whole thing.
- [08:54]
Katie Martin
That would be amazing if he doesn't do his, you know, pin the tail on the donkey thing. But look, so, you know, these are the sorts of, like, tiny little things that sound ridiculous to normal people, but for, like, bond market people in particular, they are like a super big deal. But also, again, people have been talking about three is the new two, right? Three is effectively the new inflation target for the world's big central banks, and not 2% anymore. But another really interesting wrinkle to that is that a few people at the event today have been saying kind of, the Fed has a third mandate. So everyone knows that the Federal Reserve looks to keep inflation at around 2% brackets. Maybe it's more like 3% now, but also seeks to accommodate full employment. But maybe his third mandate is keeping the President happy and bending towards politics. And so that's the thing that people are really looking out for at this press conference and in Washing's opening weeks. And someone on one of the panels today made a very important point, which is, do we start to see pressure on the Federal Reserve to cut interest rates moving into the midterm elections in November?
- [10:08]
Rob Armstrong
We've spoken a little bit about this before, Katie, and you'll know that I'm deeply skeptical of the third mandate claim. Trump picked a fight with Jerome Powell and lost spectacularly, in my view. And it's like he tried. And the Fed institutionally is set up pretty well to just dig in its heels, right? So they have institutional protection. And also, once you are the Fed chair, and I say this again and again, and I apologize potentially, for repeating myself to listeners, once you have that Fed chair job, you have to worry about the judgment of history, not the judgment of the President. And if you bend because the President says bend, you are going to be the butt of jokes among finance nerds until you die. And afterwards,
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Katie Martin
that, as we all know, is our job. But no, so. So Salman Ahmed, he's like a macro guy from Fidelity International, which is, oddly enough, the building directly next door to the ft. But he was on stage talking about exactly this stuff, and he was saying, you know, the Fed could come out of this whole thing stronger if Walsh demonstrates that he has a spine and if he disregards any noise that might come out of the administration. It might not, but any noise that might come out of the administration ahead of the midterms, then the Fed's credentials will be absolutely nailed down. But if not, this third mandate thing really does creep in. And a bunch of fixed income, a bunch of bond managers at this event were saying, if that happens, I cannot overstate this. The world has changed. The entire bond market has changed. The entire way that all investors think about what central bankers do and why has changed. And it doesn't just affect the Fed, because if the Fed does something that undermines U.S. credibility and tanks the dollar, then what do you have? You have, for example, the Euro shooting higher in a way that might be unhelpful to the Eurozone. So maybe the European Central bank might have to respond with its own policy to kind of calibrate with this new style Federal Reserve. Now, this is all if, if, if at the moment, none of this is real at the moment. But these early days for wash at the Fed are exactly what people are looking at in bond market circles to say, okay, what kind of Fed are we dealing with now? And it'll be tiny nuances like, like dots and like the way that the press conference is conducted and like which journalists he takes questions from and which journalists he doesn't. That stuff is us a lot about what sort of Fed we're dealing with.
- [12:51]
Rob Armstrong
I don't want to say that Kevin Warsh is a cipher. On the other hand, though, Kevin Warsh is a cipher. So after the great financial crisis, he was one of the guys saying, the Fed is too loose, the Fed is too loose, there's going to be inflation. We have to be careful. Yeah, he was wrong. Then after COVID 19, he was saying the Fed is too loose, the Fed is too loose. And he was right then. But now in the run up to getting this job, he's been saying the Fed is too tight. And he's made this famous claim in several interviews that AI productivity is going to control inflation and that the Fed has to get ahead of that productivity. In other words, you can't wait until you see the productivity. He used the phrase you have to make a bet in this. He likens himself to Greenspan and the kind of Internet revolution 25 years ago. Now, I don't know if he was just saying that so he could get the job from Trump. I don't think other people know the answer to that question either. But we're gonna find out in the next few months whether he's really a dove or really a hawk or somewhere in between. And I really think we don't know what he is.
- [14:11]
Katie Martin
So we really.
- [14:12]
Rob Armstrong
Yeah, it's really unusual to have a Fed chair coming in and not knowing philosophically really where they stand, just not
- [14:19]
Katie Martin
having a read on them. But let me tell you something else interesting that's come out of this bond summit which is that in advance of that a lot of bond investors are hedging their bets. Right. So we've heard a lot over the past few years about de dollarization. Let's not get into an argument right now about whether that's a thing. Right. You can read it a number of different ways. But point is, at this event today, what people are talking about is de treasurization. So there is an urge among a lot of, you know, pretty conservative bond fund managers just to diversify somewhat away from US Treasuries. Not necessarily to sell any Treasuries that they currently own, but just to look to bulk up on other things. So for example, there was someone from the debt, someone involved in the in bond issuance on an EU level, which is a whole other thing that we should talk about in more detail another time. But he was saying of, of when they've been launching new bonds recently, there was one that they put out in May, 28% of the participation in that new issue came from Asia. Said normally the long term average of Asian participation in these bonds is more like 8%. So there is a whole new bunch of people who want non treasury debt. Also he was talking about another longer term debt issue. They did recently. 18% 1, 8% of the demand for that came from the Middle East. Normally he would get about 2% demand from the Middle East. So there were government people who issued government bonds for a living from Canada, uk, Germany, Italy, you know, a load of the biggies. And they were all saying the same thing, which is we are getting a lot more demand, a lot more interest from parts of the world that we previously never heard from. And that's pretty interesting to my mind this idea that it is real. You know, everyone's talking about this potential for de dollarization and you know, can you see it in the currency and blah blah, blah. You're looking in the wrong place. It's already there in the bond market.
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Rob Armstrong
Now I suspect I know your answer to this question, but why is the de Treasuryization? Is that how you say it?
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Katie Martin
D Treasury treasurization.
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Rob Armstrong
Yeah. Anyway, why is that happening now
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Katie Martin
really?
- [16:40]
Rob Armstrong
I feel obliged to ask this Question.
- [16:43]
Katie Martin
I refer the honorable member to the answer he gave to the House a moment ago. I mean, look, it's. It's US Institutional credibility. It's just being careful just in case something crazy happens. No one's saying that the US Is toast, but in case it just starts lightly toasting itself at some point in the future, if you are a conservative bond fund manager and you're looking after other people's money for a living, maybe you just spread your bets a little bit around the world so that you're not as exposed to that US Risk as you might otherwise be. Seems perfectly prudent to me.
- [17:17]
Rob Armstrong
America will continue its retreat from the world stage after a short break. When we come back with LongShort.
- [17:34]
Barclays Investment Bank Host
From globalization to innovation sustainability to market volatility, there's always more than one side to a story. Explore different perspectives on today's most important business and economic issues with the Flipside podcast from Barclays Investment Bank. Hear two research analysts in a lively debate and get insights from every angle. To further inform your view, listen to the flip side on your favorite platform.
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Rob Armstrong
We're back. This is long and short, that part of the show where we go long things we like and short things we don't like. Katie, what do you say?
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Katie Martin
I am long the ingenuity of British teenagers. So I don't know if you've heard, but the government is talking about banning kids under 16 from social media. Kids, please don't worry. You will still be able to listen to the unhedged podcast. But what I'm just thinking is that the government is massively underestimating how good kids are at getting round stuff like this.
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Rob Armstrong
Yes.
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Katie Martin
Like, they already, like, draw mustaches on their faces to get through, like, age verification checks. And like, they're constantly swapping SIM cards around. And I just don't know that. I don't know that you can crack the British teenager.
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Rob Armstrong
No, I'm sure that you cannot. And teenagers in general cannot be broken by something as trivial as a law. I, Katie, am long the tie every single. Have you seen this before? No.
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Katie Martin
Come on.
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Rob Armstrong
No, I think I was short the tie before. Not the necktie. I'm talking about the draw.
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Katie Martin
I.
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Rob Armstrong
Every single World cup game yesterday ended in a draw. And they were all really good, exciting games, including possibly the most exciting draw of all time, the 00 deadlock between Spain and tiny Cape Verde. So a couple of things.
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Katie Martin
First of all, it's called Nil Nil. Second of all, this is when Americans realize that football is actually good and then suddenly we start getting lectures from Americans about how great these ties were. They're Dr. And it's nil. Nil. Look, we literally make the rules of this one. You have to do it our way.
- [19:53]
Rob Armstrong
Okay, I am in favor of the draw. Thank you listeners. We will battle to another draw on Thursday. Tune in then. Unhedged is produced by Jake Harper and edited by Bryant Urstadt. Our executive producer is Jacob Goldfield. We had additional help from Topher Forges. Special thanks to Laura Clark, Greta Cohn and Natalie Sadler. FT Premium subscribers can get the Unhedged newsletter for free. A 30 day free trial is available to everyone else. Just go to ft.com unhedged I'm Rob Armstrong. Thanks for listening. Sam.