Charting the Course of Fixed Income Markets in the Face of Inflation with Althea Spinozzi

Prepare to navigate the treacherous currents of the fixed income market as I, Michael Gayed, along with the astute Althea Spinozzi from Saxo Bank, impart pivotal insights into a decade of fixed income strife and strategies. Our latest Lead-Lag Live voyage casts a spotlight on the inflationary tumult and investor risk perceptions that have molded the financial seascape, with Althea expertly dissecting the ebbs and flows from the European debt crisis to today's volatile treasuries. Catch the drift as we scrutinize the enduring strength of credit spreads amidst a swift rate hike cyclone and discern the foreboding clouds amassing over the junk bond horizon.

Feel the pulse of the Federal Reserve's monetary machinations and their enigmatic influence on long-duration treasury yields through the lens of Althea's profound expertise. As we probe the complex dance between fiscal policy and the looming US election, we weigh the Fed's prospects of navigating the economy without tipping the political scales. This delicate balance underscores the paramount discussion for investors and policymakers alike, highlighting the Fed's pivotal role in maintaining economic equilibrium as we edge closer to 2024.

Venture further into the global theater where the chess pieces of international investors and national policies sway the fate of US Treasuries. Acknowledge the seismic potential of a Japanese investment retreat and the consequent shockwaves that could jolt the global markets. We also cast our gaze towards China and Europe, dissecting how their economic strategies resonate with the US financial ecosystem. With Althea's expertise at the helm, brace for a comprehensive analysis of transatlantic rate dynamics, served directly from her Saxo Bank analyses and Twitter dispatches, ensuring you remain a move ahead in the strategic game of fixed income markets.

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The content in this program is for informational purposes only. You should not construe any information or other material as investment, financial, tax, or other advice. The views expressed by the participants are solely their own. A participant may have taken or recommended any investment position discussed, but may close such position or alter its recommendation at any time without notice. Nothing contained in this program constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments in any jurisdiction. Please consult your own investment or financial advisor for advice related to all investment decisions.

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Transcript

Speaker 1: 0:08

My name is Michael Guy, publisher of the Lead Lagerboard. Join me. If there is, I'll say Espinosi. I'll take interest in the audience and to me formally. Who are you, what's your background, what have you done throughout your career and what are you doing currently?

Speaker 2: 0:19

Yeah, absolutely Michael. So I'm head of Fix Income Strategy here at Sackso Bank and my background is always being in Fix Income. For more than 12 years I've been covering European sovereigns, us sovereigns and also corporate bonds in both continents. Currently, my focus is more on rates and central banks and monetary policies, so I hope to be helpful for you all today.

Speaker 1: 0:53

So 12 years? Of course overlaps with the eurozone crisis of 2011,. When they termed the pigs were all the rage in terms of yields blowing out on the sovereign side. Clearly an exciting time to be a Fix Income Strategy. Then I am curious if what's happened the last three years has been maybe more exciting from a career perspective, given what's happened to duration.

Speaker 2: 1:17

Absolutely, and what is exciting about the past three years is inflation. You see, the problem with the European sovereign crisis in 2011,. 2012 was more about politics and underlying sovereign stress within the European countries. Being an Italian was a very much heartfelt for myself as well, but what is interesting is that this kind of inflation in the past three years has never been seen since the 80s, and myself, and I'm sure many others, were not expecting such a high wave in inflation in the past couple of years to come.

Speaker 1: 2:03

What's the difference in the sovereign stress from that 2011 crisis with Europe to what the US and really all governments have gone through the last three years? Because when I hear stress, my mind goes to volatility and we've seen some of the greatest volatility really in history when it comes to long duration treasuries.

Speaker 2: 2:20

Absolutely. I think that the main difference is the way that investors are looking at bonds and how they price them. You see, in the sovereign period of time, investors were looking at specific sovereigns within the European Union and they were demanding a higher yield in order to hold these securities. Now, if we look at US treasuries today, well, the term premium is below zero, so it means that, effectively, investors are not demanding a pick up over what nominal yields are representing, so meaning real rates, the break even rates, at this point in time. So, but I think, michael, that might change, and the reason for that is that we have seen that already in the last quarter of 2023, when the term premium on 10 year US treasuries arose again in positive car at territory and hit 40 basis points, and that is just a sign that investors start to price the risk of holding these long term securities in their portfolio.

Speaker 1: 3:36

Shouldn't that mean that the corporate credit must at some point respond? I mean, the entire financial system is predicated on RF, the risk-free rate, and if the idea that there's now pricing in a risk on the US government debt side, I would think we would see credits for it start to widen at some point.

Speaker 2: 3:55

Absolutely. Right now, corporate spread, but especially junk bond spreads, are the tricest that we have seen since before the COVID pandemic. If we look at how much junk bonds are paying over, for example, investment grade corporate bonds, they're paying only around 200 basis points. That has been a minimum within the past 10 years, but when we look at the Fed fund rate, we see that it remains the highest that we have seen since 2000 until today. So you are absolutely right, michael, and that's why, when I look at the bond market, I really dislike credit risk at the moment. I dislike ultra long duration and I prefer quality. I prefer sovereigns and maybe, as central banks are preparing to cut rates, extend some duration within the space rather than picking risk among the credit bond space.

Speaker 1: 5:01

Yeah, and I mean I've been saying that to finish advisors that I talked to. But a lot of people will say it was obvious that we're going to enter a cycle where thoughts and bonds would both sell off. And my response to that is OK, you can argue it was obvious, but I don't think anybody had on their bingo cards. You'd have the fastest rate hike cycle in history from the Federal Reserve, you'd have the duration crash and credit spreads just junk versus AAA to your point would be at cycle lows at this point. Has that dynamic been surprising? I mean, I've been early in wrong in arguing that inevitably a duration crash will result in credit crash, but I still think there's a possibility for that if the lags are still in place.

Speaker 2: 5:41

Yes, for us it has been surprising actually, and the reason is that benchmark rates are the highest we have seen, but I think Michael Wood has been really supporting credit spreads at the moment. It's been this kind of delay in refinancing of coupon maturities coming up. You see, like last year and also this year, we have very little corporate bonds maturing, so corporate bond market is not testing the primary market really at this point in time. I'm talking about junk bonds, because we have seen a lot of investment grade supply in January and February this year, but junk bonds, especially like the cashstrap's one, they don't have a reason to go in the primary market and raise debt at this moment in time with basically absolute nominal yields. That would be the highest that they have seen since the global financial crisis until today.

Speaker 1: 6:43

And is it fair to say that there's an effect of low credit spread essentially is a reflationary or inflationary source, whereas rising spreads are more of a disinflation and deflationary force.

Speaker 2: 6:55

You can put it that way, but really, If we look at inflation or disinflation at this point in time, the kind of pace of disinflation is going to weigh on credit exactly like it will weight on sovereign bonds, and the reason for that is that we have seen quite an uptick of disinflation in the past few months. But there are signs of stabilization in the high twos at this moment in time. Even tomorrow, CPI numbers they are expected basically at the headlines around 3.1 to remain the same as January and the core CPI to adjust slightly lower.

Speaker 1: 7:43

The point with signs of stabilization is, I think, leads into a discussion around QT, quantitative tightening. You said the note saying tapering is coming sooner than most expect. It doesn't mean it's going to be good for duration, which maybe we can debate a little bit. But let's talk about the state of the feds balance sheet QT in the context of the signs of stabilization.

Speaker 2: 8:04

Yeah.

Speaker 2: 8:05

So what's happening here with QT and the reason why the Federal Reserve is starting to speak about that is that it realizes that the QT at this pace might start to put a strain on liquidity and that's going to be a problem for the Federal Reserve.

Speaker 2: 8:26

You see, if we look at coupon redemptions in the next 12 months, if the Federal Reserve doesn't adjust the cap on US treasuries that are going to be runoff from the balance sheet, well, we are going to have around 170 billion T-bills running off from the Federal Reserve balance sheet in just one year. And we had around 10 days ago a ruler saying that they want to increase the size of T-bills in the Fed balance sheet while decreasing the ones of coupon treasuries. So I think that quantitative tightening at this point in time, tapering is going to be necessary because the Federal Reserve needs ample liquidity. They don't know exactly what ample liquidity means. There are some research from the Sanctuary's Fed that points it out to be around 10% to 12% of GDP, so between 3 to 3.3 trillion, but we are awfully close to that level. If the Federal Reserve doesn't taper, quantitative tightening.

Speaker 1: 9:43

So, as I recall you can correct me if I'm wrong on this when the Fed was expanding its balance sheet and buying long-duration treasuries, yields would actually rise. Even though they were buying them up, the market saw that as expansionary and then, as they tried to do, tapering or reducing as our call yields fell. So it was very much a counterintuitive type of movement. Is there a situation where the Fed could sell into the market, that the market would absorb it and maybe result in an opposite reaction on long-duration yields than they might want to expect?

Speaker 2: 10:17

Well, right now, the Federal Reserve is not actively selling US treasuries, but there has been an instance in the Federal Reserve history, which is around 2012, where the Federal Reserve started to sell actively teabills to buy long-term US treasuries and that was to decrease the yield on that part of the year curve, according to Woller's comment. Well, they now want to do the opposite, so I don't exclude that they might want to sell actively long-term US treasuries to buy short-term US treasuries, and the reason for that is that, realistically, the yield curve remains very much inverted and the Federal Reserve needs a steeper yield curve in order to carve inflation successfully. Because we can say that, while they have been saying, actually the Federal Reserve members have been saying that their monetary policy stance has been restrictive enough, but we have seen that GDP continues to grow up trend or below or above apologize and that is a sign that actually their monetary policy stance is not restrictive enough and the only way to become more restrictive is to make sure that the long part of the incurred rises.

Speaker 1: 11:42

I guess the question is how much of that can they fully control? Right, I mean sort of finance 101 is the Fed controls the short end, not the long end, and as much as they've done QE and QT, it seems like there's some evidence that suggests that's still largely market driven. So they may need it, but I guess the question is how much can they really affect it?

Speaker 2: 11:59

Well, yes, absolutely. It's much harder for the Federal Reserve to affect long-term yields because the way that the long-term yields work is that the price according to market expectations on growth, and that's what we have seen in the past few weeks. As soon as the market sees signs of a recession, we have the 10 years dropping. Then it also prices on inflation expectations and if inflation expectations have become somewhere hunkered above 2% levels, then that's also negative for this part of the year. But also, michael, going back to the term premium, I think that's very important Because what happens now is that the 10 year US trade yields around 4% is telling me that there is going to be a soft lending, because it's basically showing me that there is going to be growth around 2%, inflation around 2%, and that's the description of a soft lending.

Speaker 2: 13:12

But what if the Federal Reserve starts to taper quantitative tightening and at the same time, let's say in June, it begins to cut rates? Well, that, and inflation is still not that two percent. At that point, basically, we can have a resurgence of bond vigilante and they're going to say well, I don't want to hold ten year at four percent because there might be a risk of a rebound in inflation because of the behavior and the decisions of the federal reserve and the term cream you might rise and that's why I think that the ten years at four percent right now, the fair value should be more closer to five percent. But still, when you look at the, the offering that the ten years has on a balance portfolio, it makes sense if you want to hedge against the downturn what other dynamics could have the effect of a five percent type of fair value rate where the Fed wouldn't be the cause of it?

Speaker 1: 14:16

I'm thinking in terms of, you know, currency movement of the dollar, where to have a spike that's a disinflationary force. You know that's a form of tightening or broader volatility in risk assets. I mean, it seems like you could still get to a restrictive place, but you need to fed to not be the primary source of that yeah, absolutely.

Speaker 2: 14:33

I think that the federal reserve is scared of that prospect because we had the federal reserve pivoting in december after basically ten year.

Speaker 2: 14:44

Heels hit five percent in november and the federal reserve pivoted in december despite having five quarters of us GDP above trend and inflation still being above three percent. Michael, I think that the federal reserve is political, but we cannot hide the fact that 2024 is all about the us election and the federal reserve is composed by human beings that are going to vote in that election. So when they look at the real rates, slightly below two percent and they are panicking, believing that they might be to restrictive and if in the economy might suffer, let's say, just before the us election in summer, and basically it would compromise the outcome of the us election or will influence it. So what is happening here? I think that they are going along with this kind of preventing, preemptive cuts and preemptive quantitative tightening, tapering, just because they are afraid that something might break close enough to the us election you actually read my mind on that and I saw a headline that said that biden predicts the federal cut rates this year and it's like all right.

Speaker 1: 16:44

Now they're just kind of outright saying it right, not even hiding it. But the political side of interesting discussion it's not clear to me if it politically bad for them to, or good for them to, lower rates in advance of an election, just because if they lower rate they're going to be accused by the republicans of supporting the democrats. If they don't lower rate, then republicans will say it looks at democrats, that they're making the cost of money so high for you.

Speaker 2: 17:10

So it seems like the fed either way doesn't win, doesn't win politically absolutely and the federal reserve is trying to find a balancing act really in order to get to those us election. But also, like we said before, if the federal reserve cut rates and the market is not sure that inflation it is under control, then bond vigilante is that can ask for a higher term premium and the ten years can go rapidly towards a 5% and that's obviously a very bad situation for this, for the federal reserve. So I I really believe that what the federal reserve is going to do is tapering a first, that quantitative tightening, and the reason for that is that it makes sense because the runoff of TBLs accelerate since June. They are going to assess the tapering, how it's going to affect the bond markets and the lookout inflation is going to behave and then they are going to follow up with rate cuts. But to be clear, michael, I don't think there is going to be a rate cut in September. It has to become.

Speaker 1: 18:21

It has to happen either after or before and it's very likely that if the federal reserve relieves that there is some sort of stress in markets, is going to cut before so this one directly to a conversation around the name of the space, which I changed a few times, but talking about how Japan and monetary policy from the BoJ could impact us markets. I put a post out there which sounds a little bit of an inspiration, but it's something along the lines of the fed me want the bank of Japan to cause some volatility through the reversal of the carry trade, to give them an excuse, and for Japan to maybe be a scapegoat as far as them responding to that could come from whatever the Bank of Japan does next and how that kind of metastasizes across the globe. So let's talk about the importance of the Bank of Japan when it comes to global leverage and what is, in your opinion, coming. It does seem like they're gonna act and it's not clear what the secondary, tertiary effects are gonna be.

Speaker 2: 19:25

Well, it seems very much that the Bank of Japan is going to act, because the modus operandi of the Bank of Japan is that it leaked stories to the media, and we had several stories from the Bank of Japan, from various media in Japan, saying that the Bank of Japan is willing to exit Yonker control as soon as this month and hike rates. So I think that it is really coming. And what does that mean? Well, before considering what does that mean for US Treasuries, we have to consider that Japanese investors hold around 15% of all US Treasuries outside of Japan. So if they stop buying US Treasuries, or even Europeans over in bonds, that is going to be a blow for the US Treasuries and that is going to show off as higher yields on both sides of the Atlantic. They just to understand how Japanese investors buy US treasuries that they normally have to hatch this position against the Japanese yen, and so they are going to buy, for example, ten year US treasuries and then they are going to sell dollar yen forward, three months forward. If you do that right now, you would secure a yield of minus 1.2% and Japanese investors they can get 0.7%, 75% on their ten years GGB. So it doesn't make sense for them to buy ten year US treasuries. You can argue that they might want to buy ten year US treasuries unengined, but even like that, if we have the Federal Reserve telling us that they are going to cut rates and we have the Bank of Japan telling us that they are going to hike rates, is not convenient for Japanese investors to buy ten year US treasuries either.

Speaker 2: 21:43

So, michael, it all comes to what happens also to US Treasury auctions, because the US Treasury is selling an amount at every auction that is equal or above pandemic levels. So the last month the US Treasury has sold 42 billion ten years notes. This month, actually tomorrow, the US Treasury is selling at 39 billion ten year US notes and that's the amount that we have seen during the pandemic. If we don't have the Federal Reserve buying, we don't have a Japanese investor buying. The reason.

Speaker 2: 22:29

The question is is the demand coming from everybody else enough to absorb this kind of supply? And I think that we are going to be answered that question already tomorrow. And what I'm going to look at that ten year US Treasury auction is the indirect bidders. I want to see indirect bidders can be not only foreign investors, also other investors that have not buying directly from the US Treasury but it's still it's. It gives an idea of how much demand outside of traditional buyers there for US Treasuries and that can spark that. That can be basically be a volatility kind of. It can cause volatility in in bond markets, especially on the back of the CPCI print.

Speaker 1: 23:20

There's this thing you say the point about. You know where the demand come from and I was a lot about this last year. Obviously my timing was not ideal, but I did show data that shows that historically, in the top 1% of stock market declines, there is this flight to safety that happens into Treasuries, into duration. I've used that line before, that you know to save bonds you have to crash stocks, release. To save Treasuries, you have to crash stocks. Because it creates the flight to quality, flight to safety sequence for a moment in time. My Treasuries tend to drop and yield during extreme tail events for equities in a concentrated way. Is there a possibility that that may be sort of the way we get past this demand issue, that it could just be absorbed by scared money and risk on assets If Japan decides to no longer buy Treasuries and the Fed is doing tapering, or is the supply so overwhelming that's unlikely.

Speaker 2: 24:16

I think that it's likely that we are going to have these kind of supplies going to be absorbed by markets. Let's be in mind that in every US Treasury auction there is, there are always primary dealers that are buying whatever is not bought by indirect and direct bidders but said so. If we have some sort of volatility that is going to affect equity markets, it's very likely to see that rotation from basically stocks to bonds. But the big question is which bonds are going to be picked up, and that's why, when I tell you, yes, 10 year yields might rise to 5%, but I would still like to have them in my portfolio, I would like to have a 10 year US Treasury in my portfolio. Why, if you think that basically the 10 year yields is going to go to 5%? Well, because if I'm on buy to hold investors and I try to make some sort of risk reward analysis on the 10 year US Treasury, if I assume one year holding periods, if 10 year yields rise to 5% within this timeframe, I'm going to lose around 3%. But if 10 years are going to drop by 100 business points, so to 3%, I'm going to make around 13% and that's going to be risk-free.

Speaker 2: 25:46

So, the 10 years right now because there has been these huge rising yields that has also increased that the coupon of these issuance offers a very good risk and reward ratio. These changes, if you're going to look at 30 year US Treasury, it's because if you do the same kind of risk and reward analysis well, it's going to be much more directional on the pace of interest rate cuts or deflation or disinflation. So if within one year 30 year US Treasury yields rise by 100 business points, you are going to lose around 20% of your investment and if they drop by the same amount, you're going to make 15%. So it's a much riskier kind of trade and that's why I see the front part of the young curve up to 10 years to benefit from such a rotation, let's say from risky assets to safe assets. But the long part of the young curve is really in doubt as it offers no pickup over the 10 years or very slight pickup at 20 business points or so.

Speaker 1: 27:01

Just to reset the room for the remaining 20 minutes. Everybody, please make sure you follow Althea's Tinozi here on X. If you want to come up and ask questions, click that bottom left micro quest button and, as always, this will be in podcast under lead lag live. Do you get a sense that and I understand you're in Denmark I don't think in the States people really understand how significant a policy shift from the BOJ could be, but do you get a sense that people are talking about it as if it could be a big deal internationally? Because even if they do scrap yield curve control and do raise out of negatives, that's just an initial move. I mean, I've made this point before there's no central bank of the world that's more lagged when it comes to inflation, an inflationary response on the bank of Japan, and that's a central bank that doesn't even know how to deal with it, given their own disinflation, deflation for decades.

Speaker 2: 28:20

Yeah, absolutely yeah. The problem here is that I think that we are going to have two kind of phases when that happens. The first phase that is going to maybe benefit the US Treasuries because it's going to be bearish for Japanese bonds if the bank of Japan starts to high crates and exit yield curve control. So maybe within that timeframe it makes sense for investors to buy yields where. But then there is going to be a kind of consolidation phase where the bank of Japan is going to stop hiking and that's going to definitely see some reputation from my US Government bonds and European government bonds back home. And that just Michael, just out of interest, that when I look at the convenience of the Japanese investors to buy either US treasuries or European sovereign bonds that they're better off buying European sovereign bonds because the visa visa from US treasuries one edge against that again, they basically provide a higher yield helping out with a narrative disconnect that I keep harping on.

Speaker 1: 29:40

So AI is all the rage and I am skeptical because I keep making this point that if AI is the next let's call it industrial revolution, you have to be bullish on bonds because technology is inherently disinflationary, maybe even deflationary, and AI is supposed to be this exponential force. And yet you'll have and really moved all that much on that narrative. It's still being driven by your term, inflation concerns and the fed. Am I often thinking that there's a divergence in the story around the AI and what that should imply for bonds broadly?

Speaker 2: 30:21

I think you are a spot on now. I think that the play you are talking about, that is going to materialize, but is going to be a very much like long term play. Right now the bond market is focused only on inflation and the reason for that is that inflation is driving the ELS, is driving the nominal ELS across the board, across the word. So if inflation is not resolved, if inflation is not going to go to 2% that easily, it might mean that the neutral rate long term neutral rate, is going to be above 2.5% and that's going to change the valuation for all tenors across the income curve. I want to make an example on the 70s, when we had very high inflation, very high unemployment and low growth. So basically, as we can basically identify that as a stock inflation that was intensifying. So basically, the economy was weaker and weaker but inflation was not going back or basically descending fast.

Speaker 2: 31:38

That towards 2% US Treasury, nominally ELS continue to rise and that sets an example that until inflation is not that, the focus on bond market will continue to be inflation, even if the Federal Reserve is telling us that the focus should be on a soft landing.

Speaker 2: 31:59

And that has been what, and that is increasing volatility in bond markets, especially in the long part of the year curve. And Michael, on that point, on the long part of the income curve and short part of the income curve kind of point of view, I want to make an example of the two year US Treasury which I think that now offers a win solution for all kind of investors. Because you see, if I assume a holding period of six months, I need that two year ELS to go from 4.5% to 6.3% before starting to record a negative return. So basically the two. It's almost impossible to lose money within this part of the income curve and the only way that it's possible to lose money in this part of the income curve is if the Federal Reserve hikes another six times, which right now doesn't look probable, especially with China being in deflation and probably Europe joining deflation in the second part of the year.

Speaker 1: 33:08

Okay, so that's a good direction to go. The deflationary effect of China, I'd say more than Europe, but we can debate that. Has it been surprising at all that China hasn't taken out like a bazooka to try to counter the deflationary forces? Or is there maybe a realization that they can't do much because of how much debt they have in general?

Speaker 2: 33:30

I think what's happening in China is that one policy makers just don't want to end up like a Japan and that's why they're basically letting the real estate bubble burst and they are not actively helping the economy. The consequences it will have globally can be can be massive and we will see one of the first consequences probably in Europe, where we see basically inflation to be fast returning to 2% and people starting to talk about deflation. In the start, in the second part of the year, let's be clear that the ECB could have already cut rates, but it didn't so because I still concern that in terms of the euro currency at the valuation of the currency will bring again a rebound of inflation because everything is put in US dollars. But I think that the direction is going to be that one going forward.

Speaker 1: 34:33

Yeah, next year I would. I would think if somehow China decided to reverse their mindset on that and create a short term inflationary boom, then commodities would run and that then really would force the feds hand to Resume the rate hike cycle just because of the cost push inflationary side of the equation absolutely, but so far, you know, like in 2023, has been full of bats around China and we didn't see any of those materializing.

Speaker 2: 35:00

So it's a very much. It's a very kind of unsafe right now. I think that it's better to think as of to take out China in the equation and basically focus on domestic kind of trends. And also, michael, if you think about the US election and that can be inflationary as well right, because both candidates are going to increase fiscal spending and in the case of Trump, we might get even a geopolitical rise intentions and that's going to be bad or while it's going to basically increase prices there, all of goods. So that can be like a what a differentially risk looking at the US election, rather than China basically rebounding, or call that the, the bank of China to help the economy.

Speaker 1: 35:56

Yeah, I mentioned the Eurozone and Germany in particular, and going back to 2011, germany was the poster child for arguing for austerity rather than trying to save the sovereign debt crisis back then and now they, as I have seen their intercession. You know the markets have actually done pretty well. Any thoughts on opportunities? When it comes to the boons relative to Treasury Is there? Two, from what I've seen, tend to act in a risk-off way when you have high volatility, meaning there's that flight to safety dynamic that you see in the US. You also see it in Germany. I don't think it's a uniform response, but what are your thoughts on Germany?

Speaker 2: 36:35

Well, Germany. The problem with boons in general is that there is a massive scarcity of collateral in Europe and that's why normally when we have some dovish remarks, it can be even from the Federal Reserve. The boons are going to be more sensitive to such remarks than other European sovereigns out there. I think that, honestly, we have seen the government, the politicians in Germany arguing for more fiscal spending, but so far it has not been that great in order to affect the availability of boons in the market. So I honestly think that the boons is going to be a better safe haven especially when we look at where the European macroeconomic backdrop stands versus the US, than US Treasuries. But sad that, Michael, everything is connected and the correlation between US Treasuries and boons is positive. So it's going to be very unlikely, if we see a rebound of the long part, let's say 10-year US Treasury yields, that boon yields will not follow. But, like in terms of resilience and volatility, they are going to be definitely a better investment.

Speaker 1: 38:00

So on that point about the correlation is positive. Is there historical evidence that the correlation of credit spread movements in the eurozone is there when it comes to US corporate credit? So, as I understand it, the eurozone credit spreads have been widening while ours in the US have been obviously tightening at these kind of lows when you look at junk. Is there a correlation there, and is there maybe even a lag, because maybe the eurozone, if that's the dynamic, is sort of a leading indicator of what comes next for corporate credit in the US?

Speaker 2: 38:32

Yeah, well, the thing is that in terms of European corporate bond spreads, they haven't really been widening, they have been stabilizing somewhat higher, while basically US corporate bond spreads continued to tighten. And the reason for that can be explained very much from the macroeconomic backdrop that we see in Europe. We are basically in a recession and the economy is expected to improve, but at a much slower pace than what was forecasted earlier. So we are going to be stuck in this kind of stuck inflation mode, which is negative for corporate bonds, and that's why investors are demanding a higher spread than the US. But you are completely right when there is a correlation between corporate bond markets in the US and in Europe and when we have some problems in the US, that is going to spread very fast even in Europe, and we had that kind of confirmation during the SBB crisis, where the kind of concerns were surrounding only US banks, and that spread anyway to the European space.

Speaker 1: 39:56

I'll tell you for those who want to track more your thoughts, more your work. I understand with Saxo Bank you're putting a lot of content out, probably for institutional clients of yours, but where could people track some of your thoughts?

Speaker 2: 40:06

I'm posting a lot on Twitter. A lot of time I will post articles. The majority of my analysis are available on the Saxo website, so definitely you can follow me and you can look at the publication there. I normally talk about European rates, us Treasury rates and also UK rates, so if you have any interest you can definitely look me up.

Speaker 1: 40:37

All right, please make sure you give Altea here a follow. I have another space coming up to stay tuned for that and for those that are not going to join the next one. I feel sorry for you. Thank you, Altea, I appreciate it.

Speaker 2: 40:49

Thank you, Michael, for inviting me and good luck for the next speaker.

Speaker 1: 40:52

See you there, buddy.