JPMorgan's Jay Barry on the Big Selloff in Bonds

Tracy Alloway (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:14)

And I'm Joe Weisenthal.

Tracy Alloway (0:15)

So Joe, the big story in markets up until relatively recently has been the bond sell-off, like quite a dramatic sell-off across the fixed income space.

Joe Weisenthal (0:26)

Yeah, really over like, I guess is the last couple months. So the yield today, well, we can sort of talk about the bond market up until today, but we had been like in the threes, then the fours, and then we got almost the size, 4.9% on the 10-year. I've had a little bit of a pullback. We're recording this October 10th, but we are very high by any recent standards.

Tracy Alloway (0:48)

Yeah, it is not lost on me that we are recording our bond sell-off episode on the day when Treasuries are recording their best one-day performance since I think March of last year. But, you know, we're trying, we're trying here. But you're right, the recent bond market sell-off, it was one of those times when you see a lot of superlatives around, a lot of, like, highest yields since 2007, a lot of talk of standard deviation moves when we try to start calculating, you know, how many trading days it would, normal trading days it would take to get moves of this size.

But the interesting thing about this whole dynamic is it's not really clear what the proximate cause of the sell-off is. So you have a lot of people blaming, you know, the recent FOMC meeting when they released the dot plot, showing higher for longer. You have some people blaming oil. You have people talking about supply.

Some people are looking at more technical aspects. You have some people blaming the term premium, which I find absolutely hilarious because to me, a higher term premium is like a symptom of the sell-off, not the actual driver of it. But anyway, all of this means we really need to try to get into the weeds of what is happening here and what it might mean for the wider market.

Joe Weisenthal (2:02)

Right, because even if, OK, maybe maybe last Friday, right after the jobs report, when we got that very brief spike, maybe that was the peak, who knows. But I do think it's important to try to disambiguate these things. Because as you said, I guess it's one of those things when there is a lot of explanations for something, none of them are very satisfying. Like a lot of deficit talk lately.

But it's like, what?

I think we knew that the deficit was really big for a long time. There was that recent Fed meeting. But again, OK, like the 2024 dots came up a little bit. But does that really explain 4.9% on the tenure? Nothing is quite satisfying as to what happened and why we're at this sort of like new level.

Tracy Alloway (2:41)

Exactly. Well put. So today, I am very pleased to say we do in fact have the perfect guest. We're going to be speaking to a bond analyst. I've been a fan of his research for a long time. He used to work with one of our other favorite Odd Lots guests, Josh Younger. We're going to be speaking with Jay Barry. He is the co-head of US interest rate strategy at JPMorgan. We're going to be trying to get a handle on what might be driving the moves in bonds, but also how you go about as an analyst trying to disaggregate all these different factors. So I'm very excited.

Jay, thank you so much for coming on Odd Lots.

Jay Barry (3:16)

Tracy, thanks so much for having me. Really appreciate being here.

Tracy Alloway (3:19)

So I guess maybe just to begin with, I mean, the simple question, what is driving the sell off? We'll start there and then we can try to dig into different pieces.

Jay Barry (3:28)

Well, I mean, Joe just said there's a whole host of reasons that have been bantered about and that maybe none of them are all satisfying. But I really think it's the confluence of a number of different factors here.

So, I mean, in aggregate, now we're off the highs and yield, as you said, but we're still about 100 basis points higher than we were in the middle of the summer.

And to me, it's like what's changed over that period.

And I think the early part of the move, you could say, was definitively a story about the US economy and fundamentals, because I look back at where we were very early in the summer and where we are right now. And over that period, we increased our second half growth expectations at JPMorgan by about two and a half percentage points, from like the mildest of recessions, if you can call it that, to looking for above trend growth the second half of this year. And that's like a meaningful driver, I think, of the move in long term rates, because it's given us more confidence that the recession may be a bit further off, but it's also helped sort of anchor Fed expectations at higher levels as well. So, you know, we haven't really changed the expected peak in the Fed funds rate since the early part of the summer, but we pushed out the timing.