JPMorgan's Bob Michele Talks Interest Rates

**SPEAKER_1** (0:02)
Bloomberg Audio Studios, Podcasts, Radio, News.

**Tom Keene** (0:07)
We are at vantage, and particularly that we're not under the time pressure of the Fed decides to have someone that's been a foundation of our thinking about our central bank and Bill's Notes and Bonds. Bob Michele joins us now, CIO, head of GFICC.

**Bob Michele** (0:26)
Global Fixed Income Currency and Commodities.

**Paul Sweeney** (0:29)
We've got them all, very good.

**Tom Keene** (0:31)
He attended every restaurant in the new building, and they gave him that honorarium. JPMorgan Investment Management. Do you know what worse strategy is yet?

**Bob Michele** (0:41)
Other than to set up task forces, it's not clear to us.

**Tom Keene** (0:45)
How long will it take based on the history of central bankers? Powell, for example.

**Bob Michele** (0:50)
We think his hand will be forced sooner than he likes it. Clearly, by having the task force come back at year end, he wants to glide into 2027 without having to do much, but the markets move, the economy moves.
The summers tend to be a crucible of intensity. So we think by the September meeting, he's going to have a plan.

**Tom Keene** (1:13)
I gotta get this in, it's too important. Paul's got a million smart questions.
I'm assuming James Diamond hates task forces with a passion. What do you expect to get out of a task force, plural, from the Fed?

**Bob Michele** (1:28)
Well, it depends who's leading them and who's on them. I think they'll come back with very thoughtful ideas.
In the end, you don't set up task forces unless you already know the answer. So he knows the answer. It's just a matter of seeing if he can pin it on the task force or just go ahead and say, do it this way.

**Tom Keene** (1:49)
Bronson, folks, you just heard they're absolutely perfect.

**Paul Sweeney** (1:54)
Tom, I don't want to say Bob is old here, but let's just say he's been around the block once or twice. Look at this note. The US bond market looks fair value. We expect the 10-year US. Treasury to trade between four and one-eighth and four and five-eighths. He's quoting, it's a fraction. I mean, who does that anymore? But Bob Michele, talk to us about that 10-year. I mean, it feels like we are where we are and that's kind of where the market feels pretty comfortable here.
What do we do here with rates here where they are?

**Bob Michele** (2:23)
Well, in two and a half months, we went from 390 to close to 470, and both of those proved to be extremes. We're somewhere in the middle. We're pricing in one, possibly two Fed rate hikes. I think four and five-eighths covers you for two rate hikes. I think when you get down to four and an eighth, probably you don't have enough yield in the market to cover you for a rate hike or two. So we're saying the bond market looks pretty good.
Right now, it has a repricing. The Fed, if they come in and lean into growth and inflation pressures, they don't need to do a lot. Maybe one or two maintenance hikes join the other central banks, but that's about it.

**Paul Sweeney** (3:06)
How much credit risk are you taking these days?

**Bob Michele** (3:09)
We're taking a lot. We had our investment quarterly last week. We tried, as bond investors do, to poke holes in the economy and prove that either it's about to collapse or melt up in a fireball of growth and inflation. And instead, what we saw is that businesses are rationally putting together capex plans. There's a lot going on. When we think about sovereigns away from the US., they're also thinking about investing. Everyone wants energy security. Everyone wants defense of their borders. Everyone has to invest in AI. So these are things that will keep the underlying trend rate of the global economy going.

**Paul Sweeney** (3:50)
Does that include emerging markets as well?

**Bob Michele** (3:52)
Well, emerging markets are the pleasant surprise of the year so far.
Here is yet another shock that they survive. They survive the Fed's 525 basis point rate hikes. Never happened before. They survived COVID, and now they're surviving an oil shock. It's a little bit more nuanced. We had owned the energy exporters. We've now gone back to the importers.
But when you look at the way China was able to cut imports of oil and repurpose how they get energy, it tells us that the emerging markets are maybe have developed faster than we want to give the term emerging markets credit for.

**Tom Keene** (4:37)
Whether it's across America and worldwide, Bob Michele of JPMorgan here, perspective from Bill's notes and bonds, of course, dragging it over to the equity markets as well. So I skim Firoli, Weekly Prospects, comes out every Friday evening. I've got to pause with a beverage of my choice, Paul, to read Firoli and the team.