So we would see the bottom of the bond market first. What's the catch? That would be the bond market actually bottoming out. then people realize, wait a minute, inflation is sticky. So you're looking at a first, equities look good. We have always been saying that we think the bond market is going to be the first to fall. JULIE HYMAN: Because you're talking about some other factors here. If we're getting a steeper yield curve, does that also mean lower probability of recession? JULIE HYMAN: Just a really quick follow here. Hit 4% on the 10-year and see if it keeps going. So far, the market is still hasn't realized that yet. And, thus, you'll actually have to think about the implications for long-term cash flows. Wait a minute, inflation is really going to stick around longer. When is this going to happen? When are we going to have a steeper yield curve? And I think what we think is that it's going to take a realization from investors. But I think I've been asking this question over and over again was internally in the office. The question is going to be, could we eventually have a breakout where we have a steeper curve? But at the same time isn't There really a support under the bond market right now because people want that yield. Although, earlier in the year, we hit close to a 10.4% on the 10-year. We're getting closer to there now we've seen a little bit of movement more recently. And when you have inflation, thus, I would expect the longer end of the curve to break out. Looking at statistics over empirical periods with higher inflation, fixed income struggles. Something that most of us haven't seen throughout most of our investment career. And this is particularly true during rising rate environments. So I think people are underestimating the potential weakness in fixed income. What happens to long-term cash flows? They're at risk, as long as we don't see inflation go down fast enough. But bond markets have to react, if we should actually pause or have less tightening. bond markets with the inversion in the curve, have been, in some sense warning us of a recession.Īnd so what we're seeing now is that stock markets are looking pretty strong. Stock markets have looked like, we're probably going to get a soft landing. KATY KAMINSKI: Well, I think the biggest challenge this year is that you've seen that the bond markets and the stock markets have disagreed. So what are the implications for not just bond prices, but also the competitive nature of equities and bonds here? Because there's a lot of other things that are at play in the bond market, in addition to just watching the Fed, there's the fact that the Treasury is now going to be selling what worth of securities that got backed up during the debt ceiling situation. JULIE HYMAN: So let's talk about the implications for the bond market of all of this, which you touched on a little bit before. Because they're thinking it's probably not going to be that bad. And as long as we're hoping that things will pause, then people Are buying. Thus, we're probably going to be here longer than people would like. And that as long as inflation stays high, the Fed's mandate is to regulate it. It is not clear that inflation is going to go down quickly. So the market is really starting to focus a little bit more that hey, wait a minute, data is not a slam dunk here. Another thing to note in the last two weeks, interest rates have been going up as well. It's roughly around 30% view that they might still hike.Īnd that has creeped up a lot. KATY KAMINSKI: Well, I think what's interesting today is you're thinking about a situation, bets that they would actually hike were very low until recently. So as we weigh the different central bank policies that are being moved forward with throughout the world, if you're the US now looking at what other entities are doing, what does that set up for the talks at the next meeting here? We're back with Katy Kaminski, who is the Alpha Simplex Chief research strategist and portfolio manager here. And even consider the possibility of more tightening from the Federal Reserve. The moves by these central banks are sending yields higher as investors rethink their bets on rate cuts later this year.
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