Why Falling Rates Could Power the Next Market Rally

Sam (0:00)

Let's examine the current macro environment. Welcome in our next guest, Jay Hatfield, CEO and CIO of Infrastructure Capital Advisors. Jay, good afternoon to you. So, the lowest close here for the 10 years since mid September. I mean, clearly there's some buyers at these levels, but you know, there have been conversations around how this could be the lower end of the new range for yields now, given where nominal GDP is at. Can you help us make it make sense right now?

Jay Hatfield (0:28)

Great. Thanks, Sam and Marlee. Great to be back.

Well, we don't subscribe to those Keynesian models that say economic growth has to produce high inflation and high interest rates. We see the increase in rates being more than 100 percent accounted for by the increase in oil and the hawkish global response from both the ECB and the Fed. And we're optimistic that the Fed is only going to increase once. So the 10-year Treasury trade is pretty lockstep, 100 over terminal Fed funds. So right now it's implying two more increases. The Fed itself said one.

We believe that the data really doesn't even support one, because housing is weakening, and you're seeing the labor market slow down. And core CPI, which is what the Fed is supposed to look at, is right on top of their target. So we think they probably will do one more, just because they're kind of hell bent on doing that. That'll get rates lower, that'll support a higher multiple on the market, and get us to our 8,300 target at the end of the year.

Marlee (1:42)

And the market increasingly is blaming, these higher long-term yields on deficit, on the treasury supply, on the massive AI spending that we have here. But you argue that this rise in rates has been driven nearly entirely by this hawkish Fed. What is making you so confident that fiscal spending and AI capex aren't bigger drivers here, Jay?

Jay Hatfield (2:05)

Well, the main reason, although we just did a little research a few minutes ago, because everybody in the world thinks it's hyper scalar spending. But if you did a regression or in other words, just looked at the change in the data since two weeks before the war, we're at 4 percent, so we're 125 base points lower. Everybody knew there was going to be heavy hyperscalers, capex, and everybody knew the budget deficit would be roughly where it's been for 25 years, which is about 5.8 percent of GDP. So the only thing that changed is the war, oil and a hawkish response. So any logical person would come to conclusion that that's what's driving it. In fact, the expectations for Fed funds rose 125, 150 base points rather, and the 10-year only rose 125 So actually more than 100 percent of the increase was caused by the hawkish Fed. I know that's unpopular. I was talking to some reporters earlier and they said, they got to put it in their story, because every bit sort of like does your cat explode when you put it in the microwave? Like everybody thinks it does, so you have to say it does. But I looked it up. It's 5 percent of corporate issuance on the hyperscaler side.

Overall corporate issuance is high, but it's not that significant compared to the fact that mortgage debt issuance is low because the residential market is fading. It's not the key driver of global rates. It's Fed policy.

Budget deficit is already built in because we have huge spreads to Canadian and German rates we have for 10 years. So the budget deficit is already built in to the spreads that we trade out over these more fiscally conservative countries.

Sam (3:58)

But if you take a look at some of the data we've been getting, you know, the more forward-looking stuff, the early indicators like PMIs, for instance. I mean, are you concerned about the heat that's showing up in prices with some of these companies are actually reporting here, which obviously then feeds into the PPI and then inevitably the PCE?

Jay Hatfield (4:17)

Well, 40% of core is shelter. It's massively overstated by CPI.

So consumer prices, you know, which by the way, the PCE is really garbage. It's only used by the BEA to adjust GDP.

So CPI is used in treasury adjustment, social security. So that's really the key. It's at 2.4% core. It's dropping because of shelter. To extent that those wholesale prices are a little bit elevated, they don't really show up that dramatically in consumer prices. So that's not really the key driver. It's really monetary policy, the residential market shelter. That's the key driver of consumer inflation. It's way overstated by even CPI core 2.4. So it's important to look at what actually shows up in the data versus just looking at some individual indices.