00:00 Speaker A
JP Morgan CEO, Jamie Diamond, weighing in warning on the bond market. This comes as institutional investors shun long bonds. Joining us now, we’ve got Kathy Jones, Charles Schwab, Chief Fixed Income strategist. Great to have you here in studio with us this morning, just after the bell, as you think about the bond market. What what is your kind of overall assessment, given the interest we’ve seen in duration right now that investors are clearly favoring?
00:31 Kathy Jones
Yeah, I I think right now, the market’s been caught between We have policies that, on the one hand, will boost growth, like expansive fiscal stimulus. Then we have some that will slow growth, like tariffs. We have some that boost inflation. We have some that will probably bring down inflation. So, the bond market is just caught in the middle. And But, as you mentioned, there’s a global trend at the long end towards higher yields, led by Japan. And that’s having an influence on the US market as well. So, we’re looking at a steeper yield curve as kind of a dominant trend.
01:36 Speaker A
Yeah, and what are you telling clients about the longer end of the yield curve, and what that kind of indicates about where the economy may be heading?
01:47 Kathy Jones
I’m not sure it indicates a lot about the economy. I think it reflects a lot of worries and uncertainty. And we haven’t seen this for decades. I’ve been doing this a long time, and we haven’t worried about the 30 year for a very long time. But now, because we have this deficit that looks like it’s going to continue to rise, we have rising yields in, um, other countries, like Japan where they kind of loosened up the reins on the long end of the market. And you can see that, globally, there’s rising concern about financing this debt. So, we’ve been telling investors, kind of shy away from the long end of the yield curve and stay in the intermediate term. Still get nice yields, a lot less volatility and risk.
02:54 Speaker A
We know that the budget bill places a lot of emphasis within the bond market as well, because it really places the attention around the US debt sustainability here. What’s the correlation that you’re tracking on that front?
03:14 Kathy Jones
Actually, there has, historically, been very little correlation between our debt-to-GDP or our deficit growth rate and yields. That’s because, you know, we’re a big um strong economy. We’re Largest in the world. largest in the world. We’re very wealthy. And Treasuries are, you know, the risk-free rate. We have the world reserve currency, though. So, there really hasn’t been a price to pay um for rising deficits.
04:14 Speaker A
Is this time different?
04:17 Kathy Jones
It feels different, partly because it’s global, and partly because, you know, the markets this has been a concern for years and years, but it feels like we’re hitting an inflection point where the market and bond investors are saying to Washington, “You You can’t keep doing this ad infinitum. You can do it for a while, but, at some point, we’re going to demand more risk premium if you’re going to do that.”
04:54 Speaker A
Right. And And I wonder, too, how you’re thinking about one particular uh part of the quote “big, beautiful bill,” that’s 8.99 The 8.99 clause, which would make it more expensive to have US holdings, in particular. How does that impact activity in the bond market, when we already have foreign countries uh potentially being a little bit more concerned about holding US Treasuries?
05:24 Kathy Jones
Yeah, it’s counterproductive. Um, I I wonder, when it gets to the Senate, if somebody will kind of raise their hand and say, “Oh, wait a minute, that doesn’t That doesn’t help us.” Um, so, we don’t know what the final bill will look like. But anything that discourages foreign investment in any way, shape or form, whether it’s direct investment or through financial instruments, is going to be negative, because we run a large current account deficit. We need that capital inflow. And if we’re not getting it, that’s going to depress our economy. And it’s It’s going to mean that yields have to rise to a level where foreign investors do find them attractive.
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