Macro Matters: DWS’ Catrambone on Long-End Selloff, Warsh Fed

[music] Welcome to FICFocus, where Bloomberg Intelligence fixed income credit currency and commodity strategists and analysts discuss their short and long-term views on debt markets and issuers. Now here's the Bloomberg Intelligence FIC research team. [music] Welcome to this macro matters edition of the FICFocus podcast series on my Regersie, the chief interest rate strategist for Bloomberg Intelligence, the research on the Bloomberg LP. Joining us today is George Catcher Bone. He is the head of fixed income for the Americas at DWS Group. George, thanks very much for coming on the FICFocus podcast. Great to be with you, Aura. So we're talking about fixed income here, obviously, and the only thing that I've been asked about recently is the 30-year Treasury yield and the fact that we're kind of hovering near the cycle highs. Your thoughts on how we got here and if we're going to kind of hold these levels or if we're going to make new highs in terms of yield? Sure, I think all I'm hearing about lately is not fixed income. It's oil and the war, right? That's one of the ways that we got here. I think, geez, but 90 days ago, right? We were at 393 or so in 10-year yields, at least here in the US, and that curve is really bare-steepened out, right? Not just here, but globally. And I think what you're seeing there is somewhat an expression of deficit and deficit concerns, wars are expensive. There's a service of the debt that's out there right now. And coming from here, this is also providing some restrictiveness to the global economy, but also the US economy. So you would hope the cooler heads would prevail. This is a supply-driven shock, and ultimately, rates will come down. But it's unbelievable to me that in 30-year yields, we're now well over 5%, right? And that's hadn't seen these levels since 2007 or so. And the 10-year scene-- Well, once we go. --we are in fairness. We kind of-- that was one basis point above the yield. The yield high from about two years ago. So we have to couch that into a page, right? You get that red headline that says, oh, highest yield since 2007, but it was a basis point, right? The higher than what it was two years ago. So how much of this do you think is the fiscal and how much is the war, right? I think that's a big question. Why all of a sudden is everyone worried about the fiscal situation? Why is it a problem is it's not based on growth, right? So other way, it's difficult. So I think it's based on the war and a read-through to inflation expectations. Five-year, five-year haven't has not moved as much, but one-year, one-year has. This is going to be a difficult conversation, both with Trump and with the rest of the Fed for war. But this is a hundred-- I mean, just again, just looking where we were and we've gone really far, really fast. I take your point, a basis point or two away, 2007. But I think it's not so much the level as much as the velocity. And there's a clear difference in the curve pre-war beginning. And now in the middle, or hopefully towards the end of this conflict. And I think what's most important is this will be with us for a while based on how much supply chains have been disrupted, how far reaching it is just beyond oil, helium, other natural resources. So unfortunately, I think that-- and you saw this a little bit with the headlines that do come out-- positive headlines on war. Generally, it leads to lower oil and lower yields. But I don't think we're going to be testing three on each front any time soon. Yeah, I think that's probably a fair bet. You have to-- yeah, 420 seems to be a really important number for the 10-year yield. Talk about the front end versus the long end here a little bit. Because you mentioned oil and inflation a number of times. And when I look at long-term inflation break evans, and then you can apply some forwards out of there, the longer term inflation outlook doesn't seem to have changed very much. So a lot of this move in the long end, in particular, is on real yields, whereas it's much more balanced than say the two-year yield. So one of the things that we've been pointing out is you get that resolution. You just mentioned oil goes back to 80 bucks. You might get a 20 basis point snapback in the two-year yield just because of inflation break evans coming down pretty significantly. But the long end is that real yield part of it. I guess part of my question is, is there an opportunity there? Or do you think that there's still significant risks and should people still be avoiding long-gravation assets here? Just a barbell up for you and a friend. We think the greatest opportunity right now in my highest conviction trade on the platform is to be long two-year yields. Assuming that we're neutral, which I don't believe that we are right now, you would figure what? 10 to 15 basis points on average over Fed funds rates. And that two-year yield to your point is up at four or above. At this point, the market is pricing in hikes. I think the first one coming somewhere between January and March of next year. That doesn't seem like it's the most likely outcome to us. And so far, those hikes would not stop the war and certainly not stop, or restore oil supply chains. And if you look at the state of the American consumer, at least what we believe in the second half of this year, we don't think this is the beginning of a hiking cycle. As you out the curve a little bit, we have a lower conviction call in 10-year yields. Like you said, a call between 420, 430 seems to be a more naturalized resting place. So there's definitely some pickup there. We just think the carry and the roll down, right? I.E. where you are over Fed funds and where the natural movement towards maturity will be. And two-year yields, for example, somewhere between two and five, is really attractive right now and more attractive than it's been in quite some time. So let's just mention a couple of times the Fed and hiking and obviously we're getting a new Federal Reserve chair very soon. As we speak here on, I always have to time stamp these things now on the 21st of May, 2026. So that's true. Things might change by the time this podcast is out this afternoon, you know, Nost. Talk a little bit about your expectations for Kevin Moore. I think the consensus is he's not going to be able to convince most of the committee to lower interest rates anytime soon if that's actually what he wants to do. Number one, and we did receive the minutes yesterday from the April meeting. Our natural language processing model showed that it was the most hawkish since they were hiking a couple years ago. So it actually at the level that they typically hike within one to three months, which I concur with you. I doubt that they're going to be hiking anytime soon. But I think it's more of a risk management measure. So talk about what you think the dynamics are within the Federal Reserve and, you know, are they on hold forever or is there a real possibility that if the wars resolve that Kevin Moore might be able to convince the committee to lower interest rates? Well, I think the biggest difference between us and other central banks is there is a dual mandate. And I think if you're looking purely at inflation alone, I think that the path to cuts is a much more challenging one for him to have to navigate. But in looking at the labor markets, I totally appreciate the last two months were much better on a headline basis. If you're looking under the hood, it's mostly in healthcare, education, administration, and literacy, right? Non-cyclical growth areas. And what this movement and rates has done in the front end as you pointed out earlier is, is really create a much more restrictive backdrop for consumers, right? The one big beautiful bill, tax refunds, no tax on tips, additional money in the consumer's pocket, is not gonna go as far, right? It's gonna be spent on gas, healthcare, which is how we paid for it, and shelter. And this is a very difficult timing right now where compensation, notional wages or nominal wages have been trending lower. I totally appreciate it. And I think you're gonna say, "I want a real basis, they're just fine." Yeah, before we've had this spike in inflation indicators, I believe real wages for a fair portion of the economy are gonna flip the negative. I think that's where that's gonna show up a little bit more in labor in the back half of the year. That's what I was talking about earlier when I said we were worried about the consumer. And I think that's gonna very much be Worsh's talking points. And I think if you look to the constituency of the Fed as to your question, I think it sort of leans a little bit dubbish, right? Worsh has Bowman and Waller and Cook, irrespective of investigations going on right now and probably Anna Paulson as well. So it's essentially gonna be that sort of dubbish tilting leaning members that I think at some way will find their way onto his side versus the Hawks, right, with Beth Hammock, Cash Carrey, and Laura Logan. And if you look at the Minnes, that I think is where the Hawks' interest is coming from. That's where the descent came from to remove the easing bias from the Fed's last statement, which they didn't. And here's the interesting part to me. So I've outlined to you the dubs and the Hawks, guess who's still sitting square in the middle 'cause he's not left, right? - Yeah, Jay-Powell, right? Yeah, do you think that that within the committee will create an awkward dynamic for a new Fed chair coming in? It's not unprecedented, but it's been quite a long time that we've had a Fed chair stay on as a governor. Again, not unprecedented, but it's been decades and decades since it's happened. Do you think that Powell will have Morse sway over the committee early on? Just because he was Fed chair, because he was more respected among some of his colleagues, or do you think that Kevin Morse, just because he's chair might be able to take some of that gravitas back from Jay Powell? - I think it's gonna be a little awkward, just with the way that he came in and the investigations that were going on and Powell kind of uncomfortably having to talk about it at some point, press conferences. Right? I mean, worse is not an unknown commodity to members of the Fed and members of the investment community. He's certainly one of this job for a long period of time, but has also come in under sort of auspicious backdrop and also kind of been out there and trying to change things a little bit, right? There's this balance sheet conversation that's out there. There's forward guidance conversation that's out there. And the people that I talk to that are sort of close to close have sort of whispered that he's been trying to tamp down a little bit. The regional governors were presidents in some of their commentary that they've been out with, you know, sort of the Powell administration or at least the Powell tenure. So I'll be curious just how vocal they are. And I think no matter what, I'm not stepping out of the limb here. You're going to see a lot more to sense that are going to happen. And that would be a flying a wall as worse tries to convince people to kind of come on his side and go to a cut. And I can't wait to see if we get one of the next dot plot looks like where that Myron dot, right? If that's there or not, I think a little bit and then I'll close on this one here. The dissents that you saw in the last meeting, because those were sort of interesting, right? The way that they came across, we're very much a pushback immediately to Worsh and sort of saying, we're not going to go quietly into that good night. And candidly, this move in rates is very much going to be an early test for Worsh. Yes. So how do you think, you know, Kevin Worsh as a as a fedger rate at the press conference in June? He's going to supposedly speak for the entire committee and presumably will, you know, get a speech or two over the next couple of weeks before the quiet period starts. You know, any any indication from what you know, you've heard and obviously we don't have a big, a big corpus of of speeches and anything from him. Besides really the testimony that he had plus a couple of speeches from last year. You know, do you think that he will come in and be that dovish? Like he's he always seemed like a more middle of the road type of person. I know people said that he was hawkish back at the end of the global financial crisis, but I don't know if he was particularly hawkish. He just said, hey, we shouldn't be doing more QA, right? He didn't say, oh, we should be hiking interest rates right now, things like that, right? So yeah, I don't think he's necessarily a hawk, but at the same time, he's also hasn't shown dothish time then season the past. Oh, he's an inflation fighter, right? I mean, that's what he sold himself is. The better question is what if any handshake Wanko or not occurred that led to Trump's nomination of him over has it and candidly pop out awkward Chris Waller, right? I think the the role that he's going to have to find himself into your point is being a little bit wary as to what he says publicly because you can see whatever he wants publicly, but he has to go back into that room with 11 under other members and try to kind of get them to vote, right? With the policy and the rate path that he thinks is appropriate. So, you know, I agree with you. I think it's misplaced that all of a sudden he's going to come in and have this like back pocket hawkishness that's been there, but I would find it very hard to believe that he walked into it. Any meaning of President Trump and said that I think that we're at neutral and or I think that rate hikes would be appropriate. I think the ironic part of all of this, and this is where I think people don't give Powell enough credit. I think we were on a path towards neutral and to cutting rates earlier in both years, right? A Powell himself before this as war occurred says that inflation was closer to 2%. This is relates to non tariff related goods, right? Or services. And if you look last year before the before the whole liberation day event occurred, I think we're much closer to cutting earlier on than we did kind of towards end of that year is there was so much clalieness is the pace, the pace of the economy and the path of rates. So, look, I mean, I think Powell had a tough end of his term. And I think Worsh is coming into a very difficult timing as well, because how much is that of his control? Yeah. So, we did a survey of Bloomberg terminal users the last couple of weeks that came out earlier this week and 84% of them said that there's the possibility that the Fed might change its framework and its communication policy. Do you think that that's firstly possible or what probability would you put on that? And secondly, do you think things like the dot plot, which obviously Kevin Worsh isn't a huge fan of as a forward guidance tool? Is that possible that he can convince most of the other members of the board of governors to amend that type of thing? It's changed before, right? They do these reviews occasionally and things like that. So, what's your thoughts on that? Will it help or hurt the forward monetary policy? I for one like the dots, but I also can understand that if you plot the dots to where the market and forward curves are, they don't really match up and now is a good time, right? Where the dots still shows one cut and forward curves are completely showing something different so are Fed futures, right? So, I think it's important on the quarterly basis to at least provide the destination, the Fed believes that they're going and also long run rate keeps us somewhere understanding where neutral is. So, I for one appreciate it. I think so does the market, but I can appreciate where it may not also be the best tool and I'm sure that Worsh would want to control as much of the narrative as possible. I don't see the balance sheet kind of taking form, right? Oh, the Fed has actually reduced their purchases as so for as sort of to continue to tick down. So, I think we already had a Fed chair that came in and cut rates and actually reduced the balance sheet as well. I don't know how much room is going to have to do that. I think we're ultimately there's probably agreement on the committee and I think Worsh has been vocal about this in the past is to try to look at other front end leading indicators and other sources of data to assess inflation, right? I know that they're looking at everything, but they're looking at PC core and there's different weightings right between the two. There's a wedge, how much is shelter versus healthcare or play. I think if and this is what the electorate is telling us is for the midterms go, it's one thing to a K shaped economy. It's another thing to try to be managing an industry of policy for all Americans. I think power was kind of leading on this. I think there's enough in the in the constituency of the Fed that they would want to I think try to adopt either different or measures that would be able to hopefully help them assess more in real time where things are because it's often a massive rear remeer that they're trying to navigate with while look what's happening in front of them with the war and where supply chains are right now, right? Yeah, so let's go into something that you talked about at the beginning of that answer and that's just just out of the box idea that I just kind of had what as you were mentioned on the dot plot. One of the things that Kevin Worsh espoused is the idea that we give too much forward guidance, but what if the Fed were to go the other way and say, okay, look, we're going to show you not only the dot plot, but also what are the economic factors for those members that put in those dots, right? Because I think one of the challenges that we have is we always look at a median dot and then we look at the kind of median consensus for GDP and stuff, but I think it would be instructive for us and maybe this is just because I'm a strategist and a nerd, but you know, what if what if we had the GDP forecast, the PC forecast, end the dot plot for each member, right? And you don't have to tell us the members, just labeled them one through 18 or whatever. And you know, would something like that be helpful for our analytical purposes as strategists? You have my vote and I will see if we can somehow find a nomination for you too. Yes, I mean, I think, and I think, you know, look, you're a good company with the nerd as well. I think if you're really in the casual observer, none of this, particularly, managed, right? But to us who are trying to set industry policy for our firms globally and actually trade around and also infer direction of economy and monetary policy. Yes, more information and more transparency, most importantly, would be super helpful. And I think, look, we could always guess, like I said, where myron's dot, whereas I'm probably where, where Laurie and Beth were, right? It wouldn't be too, it was not hard to perceive that from the actual dots themselves, but very curious because one of the questions that Powell had to field were when there was disconnects on an average basis of where those forecasts were in GDP and PC and unemployment versus where the dots were, right? I think sometimes they weren't saying the same thing. So I think more transparency would be better. I think the problem here is we may be embarking on a place where there's going to be less transparency going forward. And I think that can be a potentially difficult mix. So last, last question before we close out here, let's talk a little bit about supply. You mentioned early on about the fiscal situation. And that's obviously one of the reasons why at least the proximate cause in the UK and Japan, why we've seen this global developed market bond sell off. How worried are you about supplying? Do you think that the government will change its, it's a, you know, rose coup on issuance and or bill supply, you know, going forward? Yeah. I wasn't as worried before because, you know, actually, there were less coupons this year than last year. And we were getting tariff revenues, right? But all of a sudden, that's like reversed course. We've had a bare steeper, which increases the cost of servicing the dead itself. We have a gas tax holiday out there. Like I said, the wars are expensive and so are defense budgets that are now 1.5 trillion. And oh, by the way, we need to repay tariffs. So I think that is very much what's expressed in that long bond in the 30 years. And I think this is going to be best and just have to try to negotiate, right? I think there was a lot on the campaign trail a bunch of years ago about Yellen and her bill allocations. I don't imagine there got to continue to try to push into bill supply. But I think either way, irrespective of what the refundings have said, but time you get to May of next year, they're going to have to raise coupon sizes, right? And that's just simply mathematics based on what's outstanding where rates are right now and all the other costlier bills or more bills that were there, literally, then were there before, right? Unfortunately, the cost of service and the cost of the US economy running as it is is getting more expensive. Well, that's great. George, thanks very much for coming on the fixed focus podcast. My pleasure, thanks again, Ira. And that was George Catcherbone. He is the head of Fixing Come for the Americas for DWS group. I'm Ira Jersey. We appreciate listening. Please subscribe, rate and review us on your preferred podcast platform. Contact us on the Bloomberg terminal. Let us know what you thought of this topic and anything else you'd like us to cover or any guests you'd like to hear from. Thanks again for listening. And until next time, be well. (upbeat music)