00:00:19:06 - 00:00:22:21 Welcome everybody back to Mizuho's Markets Mindset, 00:00:22:21 - 00:00:25:04 our quarterly update on the bond market. 00:00:25:04 - 00:00:30:21 And Moshe, I said quarterly, but we are halfway through July, 00:00:30:21 - 00:00:34:21 so it's kind of like the mid-summer update. But a lot is going on, so 00:00:34:21 - 00:00:38:00 we'll give you a quick recap and we'll try to get right into it with some of your thoughts here. 00:00:38:00 - 00:00:41:20 So Moshe, year-to-date supply is running ahead of last year, 00:00:41:20 - 00:00:47:06 and we're currently on pace to have the second-largest year of issuance ever, 00:00:47:06 - 00:00:49:18 only next to Covid 2020 year. 00:00:50:17 - 00:00:56:07 $969 billion in market, that's a 3% increase over last year, led mostly by financials, 00:00:56:07 - 00:00:57:17 and we'll talk about that a little bit later on. 00:00:57:17 - 00:01:00:00 Corporates right now, basically flat year over year. 00:01:00:00 - 00:01:00:16 And got to be honest, when you look at the technicals around the new issue market, 00:01:00:16 - 00:01:07:07 And got to be honest, when you look at the technicals around the new issue market, 00:01:07:07 - 00:01:12:21 we're talking about, year-to-date, we've had 3.78x oversubscription, but 00:01:12:21 - 00:01:16:04 every week, but one in the last eight weeks has been above that. 00:01:16:12 - 00:01:20:12 We have new issue premiums that have settled into 0 to 5 basis points. 00:01:20:18 - 00:01:25:14 We've got movement off of IPTs at their highs above the year-to-date average. 00:01:25:14 - 00:01:30:18 Everything is fitting in place in this market, and it feels almost too good to be true. 00:01:30:19 - 00:01:31:09 Wouldn't you say so? 00:01:32:00 - 00:01:33:03 I'd call it scary good. 00:01:33:23 - 00:01:35:04 Now, scary good. 00:01:35:10 - 00:01:36:18 Where is that coming from? 00:01:36:18 - 00:01:41:12 When we think about all the factors that have gone on this year, we'll talk about tariffs and 00:01:41:12 - 00:01:43:13 the ambiguity around rates, et cetera. 00:01:44:10 - 00:01:48:18 Why are we where we are right now from a technical perspective in the new issue market in IG? 00:01:48:18 - 00:01:55:07 We have, and this isn't just an IG phenomenon, I would say this is a broader capital market trend. 00:01:55:14 - 00:02:00:06 We have a copious amount of excess liquidity in the marketplace right now. 00:02:00:21 - 00:02:06:10 You said that we had a trillion dollars, we're near a trillion dollars of issuance for the year in IG. 00:02:06:20 - 00:02:14:20 Well, behind that a trillion dollars is approximately $5 trillion of demand all coming into our market. 00:02:14:20 - 00:02:24:04 So what liquidity does, it suppresses volatility, it minimizes risks, and frankly, it breeds complacency. 00:02:24:15 - 00:02:26:00 So we talk about liquidity. 00:02:26:07 - 00:02:27:14 Where is the liquidity coming from? 00:02:28:04 - 00:02:31:22 So, I think it's coming from four different spots. 00:02:32:13 - 00:02:34:10 One is government spending. 00:02:34:10 - 00:02:39:01 If you look at the data, we're basically spending the same amount of money 00:02:39:01 - 00:02:41:18 that we did when the economy was shut down. 00:02:41:21 - 00:02:42:21 2020. Covid. 00:02:42:21 - 00:02:43:10 Exactly. 00:02:43:10 - 00:02:46:07 And the economy is anything but shut down right now. 00:02:46:10 - 00:02:49:08 So that money is going to work its way through the system. 00:02:49:21 - 00:02:52:03 Private credit is another one. 00:02:52:03 - 00:02:55:20 Assets under management in private credit are approaching $2 trillion. 00:02:56:04 - 00:03:00:20 That's money that historically the banks and the capital markets would manage. 00:03:00:23 - 00:03:02:02 That's not there anymore. 00:03:02:05 - 00:03:04:17 So they have to deploy that liquidity somewhere else. 00:03:04:22 - 00:03:06:16 And that's fueling valuations. 00:03:07:04 - 00:03:10:12 You also have a good economy with stimulus on the come. 00:03:10:21 - 00:03:15:16 And the other thing which I think is important, Victor, is the front end of the yield curve. 00:03:15:20 - 00:03:19:16 So you have about $7 trillion that have been hanging in money market accounts. 00:03:20:03 - 00:03:24:09 You have the President telling you that he's going to bring in someone to the Fed 00:03:24:09 - 00:03:27:07 who's going to cut rates fairly substantially. 00:03:27:07 - 00:03:33:10 So all of a sudden, my 4%+ type of return that I've been getting in money markets is now in jeopardy. 00:03:33:10 - 00:03:37:07 So I’ve either got to move that out the curve or throw that into equities. 00:03:37:07 - 00:03:39:10 And I think both of those are happening right now. 00:03:39:10 - 00:03:41:12 You talk about the rate move. 00:03:41:15 - 00:03:48:05 When I look at the supply that's come to market right now, I think about the idea that 00:03:48:05 - 00:03:52:07 we're a little bit ahead of last year on financials, but pretty flat on corporates. 00:03:52:07 - 00:03:57:18 In fact, I would argue if you look at the net supply, right, net of maturities, corporates are well behind. 00:03:57:18 - 00:04:00:12 The spread funders seem to be taking advantage of the market, right? 00:04:00:12 - 00:04:02:05 We have index spreads that have— 00:04:02:05 - 00:04:07:08 They've bounced off, I use the Bloomberg Index, they've bounced off 77 twice now, earlier in the year 00:04:07:08 - 00:04:08:15 and just a short while ago. 00:04:08:15 - 00:04:13:19 But we're hanging in that very tight window that's 0 to 5 basis points off the year-to-date tights 00:04:13:19 - 00:04:18:07 and within spitting distance again of the 1998-since tight levels. 00:04:18:21 - 00:04:21:11 So the spread funders are taking advantage of that. 00:04:22:03 - 00:04:26:10 Coupon funders seem to be sitting a little bit more on the sidelines, especially in the net basis, not refunding. 00:04:26:19 - 00:04:31:07 What are your thoughts around coupons, yields, et cetera, going forward? 00:04:31:07 - 00:04:32:06 You just talked about the Fed. 00:04:32:08 - 00:04:35:07 Maybe we're going to have somebody who eases, but where do you think yields are going 00:04:35:07 - 00:04:36:22 given we just passed the Big Bill 00:04:36:22 - 00:04:42:22 right, big spending bill, and we have not yet seen inflation really permanently come down below 3%, 00:04:42:22 - 00:04:45:14 and we have not seen the crack in unemployment at this moment? 00:04:46:06 - 00:04:50:15 So I'm in Steve Ricchiuto's camp, our chief economist, 00:04:50:15 - 00:04:56:08 and his view has consistently been that the economy is stronger than the market is giving it credit for. 00:04:57:00 - 00:05:02:05 And I share that view. It's July 17th right now. 00:05:02:06 - 00:05:03:22 We're at the start of the earnings season. 00:05:04:12 - 00:05:06:18 We've already heard many of the big banks report. 00:05:06:20 - 00:05:09:10 And what was a common theme that we heard from all of them? 00:05:09:15 - 00:05:11:06 “The economy is in good shape.” 00:05:11:06 - 00:05:13:06 So we're about to add a stimulus package that's very front-loaded. 00:05:13:06 - 00:05:16:16 So we're about to add a stimulus package that's very front-loaded. 00:05:16:16 - 00:05:19:04 Our economics team did the math. 00:05:19:07 - 00:05:28:02 I think it's $900 billion of net stimulus from the OBBB, and 30% of that is coming within the next 12 to 18 months. 00:05:28:07 - 00:05:34:10 And any of the cuts that were associated with the bill are happening after the midterms. 00:05:34:10 - 00:05:40:13 So we're throwing even more logs on what is apparently a fairly strong economic fire. 00:05:41:04 - 00:05:45:01 So that makes me think that rates are too low. 00:05:45:13 - 00:05:49:19 But I have to be honest, again, we're sitting here on the 17th. 00:05:49:21 - 00:05:53:13 We've had a fresh slate of tariff headlines. 00:05:53:13 - 00:05:57:17 We had news that Trump was going to fire Powell imminently, 00:05:57:17 - 00:06:01:01 and the 10-year still can't break above the 4.5% yield. 00:06:01:13 - 00:06:05:22 I have to respect that, but all the fundamentals are pointing me to higher yields. 00:06:06:10 - 00:06:08:21 So think about this for a second. 00:06:08:21 - 00:06:13:11 You have stock markets making highs, it seems, every other day. 00:06:13:11 - 00:06:15:05 We've got spreads at their tights. 00:06:15:14 - 00:06:20:07 We have yields, I will say, based on the economic view you just threw out there, 00:06:20:07 - 00:06:22:11 behaving themselves actually pretty well. 00:06:23:13 - 00:06:25:11 Liquidity is fresh in the system. 00:06:25:11 - 00:06:31:07 CP balances have gone up and that market's been very liquid and available to people. 00:06:31:07 - 00:06:34:13 Bank lending, as you pointed out, has been available. 00:06:35:15 - 00:06:36:22 Everything seems too good. 00:06:36:23 - 00:06:37:21 And you said scary good. 00:06:38:10 - 00:06:40:05 What are we looking at that's going to go wrong? 00:06:40:08 - 00:06:43:04 Where do you see the risks or the surprises? 00:06:43:06 - 00:06:48:06 Because it seems like every piece of news that comes out, if it's good, it's only going to get marginally better. 00:06:48:17 - 00:06:53:01 But I think the big thing I worry about when everything looks that good is what's the thing that's going to go wrong? 00:06:53:01 - 00:06:54:08 What's the thing that's going to surprise people? 00:06:54:08 - 00:06:57:00 The thing I've been focused on all year is the bond market. 00:06:57:05 - 00:07:03:13 If the bond market stays in check, i.e. below 4.5% in 10’s, 00:07:03:13 - 00:07:08:14 and more importantly, with suppressed rate volatility, then we can keep on going. 00:07:08:14 - 00:07:13:01 Because remember, we're in an environment where we're going to put in a big dose of fiscal stimulus. 00:07:13:04 - 00:07:14:20 We're also going to deregulate. 00:07:14:20 - 00:07:16:07 All those things are bullish. 00:07:16:12 - 00:07:18:18 And so even though we're overbought, 00:07:18:18 - 00:07:26:13 actually, in some cases, ridiculously overbought, the fundamentals underlying it are getting stronger. 00:07:26:13 - 00:07:33:12 But they will get their legs chopped out from under them if the bond market ends up going sideways in a pretty big way. 00:07:34:01 - 00:07:38:04 I know maybe it's not the question you want to answer, but it's a question everybody's going to ask is tariffs. 00:07:38:11 - 00:07:38:18 Yep. 00:07:38:20 - 00:07:39:03 Right. 00:07:39:03 - 00:07:40:16 You've talked a little bit about Powell, et cetera, 00:07:40:16 - 00:07:43:01 but where is the risk in tariffs? 00:07:43:02 - 00:07:49:19 Because from my perspective, when I talk to accounts, it seems like the market wants to believe that 00:07:49:19 - 00:07:56:04 the delays, the negotiations all get back to something that's more moderate, like a 10% plus or minus kind of 00:07:56:04 - 00:07:58:06 average tariff across the board. 00:07:58:06 - 00:08:01:22 Where does it go wrong with tariffs that it affects the market? 00:08:01:23 - 00:08:05:09 Or is it something that's a delayed situation with prices? 00:08:05:15 - 00:08:08:03 You think about what the market's pricing in right now, 00:08:08:03 - 00:08:13:21 the market is pricing in basically that tariffs are not going to be a big economic headwind. 00:08:13:21 - 00:08:20:00 They're also pricing in that tariffs are highly likely to be non-inflationary. 00:08:20:00 - 00:08:27:16 So if any of those two premises get tested and fail to pass that exam, that's a problem. 00:08:28:08 - 00:08:30:20 So we got the duration bid in the market still going on. 00:08:30:20 - 00:08:31:13 We know that, right? 00:08:31:13 - 00:08:34:04 We've got pension money coming back in from equities. 00:08:34:10 - 00:08:37:12 We've got insurance money coming into the sector. 00:08:37:12 - 00:08:38:16 Spreads at their tights. 00:08:39:07 - 00:08:40:11 What are you telling your issuers? 00:08:41:04 - 00:08:43:05 When is the date you want to get stuff done by? 00:08:43:07 - 00:08:44:18 When do you not want to take the risk? 00:08:44:20 - 00:08:46:22 Are you just pounding the table, “Now is the time to go”? 00:08:47:02 - 00:08:49:01 I want to get it done yesterday. 00:08:49:08 - 00:08:54:04 When I look at this market, I see one that’s the risk factor is rates not spread. 00:08:54:04 - 00:08:59:16 And I just walked through how I don't necessarily think rates are priced correctly. 00:08:59:18 - 00:09:00:02 Right. 00:09:00:02 - 00:09:04:03 So my view is that liquidity is a tide. 00:09:04:17 - 00:09:05:19 Sometimes it's high. 00:09:05:23 - 00:09:06:23 Sometimes it's low. 00:09:07:00 - 00:09:08:20 We're in a high tide right now. 00:09:08:20 - 00:09:13:01 When we're back in low tide, then the fundamentals get exposed. 00:09:13:01 - 00:09:17:22 So where do you think spreads go if we get a grind higher in rates above 4.5% or we start going back to 00:09:17:22 - 00:09:20:10 4.75%, we start going back higher on the 10-year? 00:09:20:10 - 00:09:22:20 If it's a slow march higher, we go tighter. 00:09:23:09 - 00:09:24:12 How much tighter? 00:09:24:12 - 00:09:26:01 Do you think we break through that 77? 00:09:26:01 - 00:09:29:15 You think we get to test the 25-year tights? 00:09:29:23 - 00:09:30:17 I think we do. 00:09:31:06 - 00:09:32:01 I think we do. 00:09:32:06 - 00:09:34:17 As again, I'm going to say this caveat all the time. 00:09:34:18 - 00:09:36:07 As long as the bond market plays ball. 00:09:36:15 - 00:09:37:23 All right, Moshe, that's a wrap, I guess. 00:09:37:23 - 00:09:40:17 Thank you again for always being here with the insight. 00:09:40:17 - 00:09:43:15 And thank you everybody for watching here on Mizuho's Markets Mindset. 00:09:43:22 - 00:09:44:14 Until next time.