Lots More on the Global Selloff in Government Bonds

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Tracy Alloway (0:07)

Joe, are we gonna spend this episode just arguing about the term premium?

Joe Weisenthal (0:12)

I don't know, like, yeah, maybe. You know, I've always been sort of, I wouldn't say a term premium denier, but I'd never totally-

Tracy Alloway (0:19)

Yes, yes, you are.

Joe Weisenthal (0:20)

Okay, but like, and I was totally ready to capitulate. I was like, oh, it's all the term premium. And I was like, I'm totally convinced the term premium is this really important concept that can be measured analytically with precision. And then some people are like, oh, it's actually, you don't really have to go that far. It's sort of straightforward. I still don't know.

Tracy Alloway (0:37)

You know, there's a middle path where you can say that the term premium is hard to measure because you have to estimate like a risk neutral rate, but it still exists. It might mean different things to different people, but-

Joe Weisenthal (0:51)

I've never been good in life at taking the middle path, in anything. I oscillate between extremes.

I did a deadlift.

Tracy Alloway (1:00)

I am both the most popular trader and most successful trader at Citadel.

Joe Weisenthal (1:05)

Fed is going viral.

Tracy Alloway (1:07)

Barges.

Joe Weisenthal (1:07)

This is an after school special, except-

Tracy Alloway (1:09)

I've decided I'm going to base my entire personality going forward on campaigning for a strategic pork reserve in the US.

Joe Weisenthal (1:15)

Black gold.

Tracy Alloway (1:16)

These are the important questions. Is it robots taking over the world?

Joe Weisenthal (1:19)

No, I think that in a couple of years, the AI will do a really good job of making the Odd Lots podcast. One day, that person will have the mandate of heaven.

Tracy Alloway (1:29)

How do I get more popular and successful?

Joe Weisenthal (1:31)

We do have the perfect guest.

Tracy Alloway (1:34)

You're listening to Lots More, where we catch up with friends about what's going on right now.

Joe Weisenthal (1:39)

Because even when the Odd Lots is over, there's always lots more.

Tracy Alloway (1:42)

And we really do have the perfect guest. Back with Jay Barry. He is now the head of Global Rate Strategy at JPMorgan. The last time we had him on was in October of 2023 And the headline on the episode was like Jay Barry on the big sell-off in bonds. And we can just recycle that headline.

Joe Weisenthal (2:05)

Let's call that again. Was that the peak when we had him on then?

Tracy Alloway (2:08)

I don't know. It might have been.

Joe Weisenthal (2:10)

It was probably close at the time.

Tracy Alloway (2:12)

Jay, do you believe in the term premium?

Jay Barry (2:14)

Well, Tracy, I think it's funny you talk about the last time I was on, because 10-year yields are basically at the same level they were then. And at the time, the funds rate was 100 basis points higher than it is right now. So term premium is hard to measure. But I'm a simple man, and I think of it as the slope of the yield curve. And the slope of the yield curve is steeper for a given level of policy rate. So I think it tells you that there is more term premium in the curve right now. Absolutely.

Joe Weisenthal (2:38)

Ira Jersey, who does rates here at Bloomberg Intelligence, had a chart. And you just said, look, yes, one term premium, all that. But one part of the story is just that the market's estimate of the terminal rate is now higher than it would have been, say, six months ago, et cetera, at the start of the cutting process. And a big part of the story with the rise in the long end since September is just that, you know, there's not as much cutting baked in.

Jay Barry (3:04)

I think that's exactly it as well, Joe. I think that's a really important point, because this is now the middle ground.

Joe Weisenthal (3:09)

It's like part of it is the term premium and part of it is the terminal rate.

Tracy Alloway (3:12)

If we get Joe to take the middle path, this is a success.

Jay Barry (3:15)

Yeah, I'm a middle of the road guy. And I don't think a single explanation or a single factor can explain the bond sell off. But term premiums won Tracy. But Joe, Fed policy expectations matter because it's fascinating.

Joe Weisenthal (3:26)

Yeah.

Jay Barry (3:27)

When the Fed cut 50 in September, we were pricing in a terminal funds rate of like two and three quarters.