Ahead of the Curve

Hello and thank you for joining us for T. Rowe Price’s biannual fixed Income Roundtable Ahead of the Curve.

Now in today's roundtable titled “Our Bond Markets Nearing an Inflection Point”, we will discuss the evolving macro and market backdrop and what it means for fixed income positioning and portfolio construction this year.

My name is Amanda Stitt. I'm an investment specialist covering fixed income, and I'm delighted to be your host today.

If we rewind to the start of the year, markets were in a pretty comfortable place.

Volatility was low, yields were drifting down, and if you're a fixed income investor, value was, let's say, hard to find.

At the same time, demand for income remained very strong, and the thirst for yield help the market easily absorb newborn supply.

The consensus macro story also seemed fairly clear.

Inflation was falling, growth was holding up better than expected, the Fed was expected to cut rates at some point, and investors were broadly positioned for risk to outperform, with a weaker dollar a part of that narrative.

But over the past few weeks, that story has been challenged.

The conflict in the Middle East has injected a new layer of uncertainty into markets, and we've seen some of those consensus trades begin to unwind.

Volatility has picked up, positioning has shifted, and investors are reassessing their outlook.

Predicting markets is difficult at the best of times, and during periods of heightened geopolitical uncertainty, it's close to impossible.

In those moments, the best investment decision is often patience rather than trying to trade through the noise.

So today we want to step back and talk about where the real opportunities might lie.

So with all that out of the way, I'm delighted to be joined in the studio today by Arif Husain, Chief Investment Officer and Head of Fixed Income.

Welcome, Arif.

Hi, Amanda, Thanks for having me.

I'm also joined by our Baltimore studio by Robert Larkins, Head of Fixed Income Quant Portfolio Management and Adam Marden, Co Portfolio Manager for the Global Bond High Quality Strategies and Dynamic Global Bond Strategies.

Good to see you, Amanda.

Hello, good to be here.

I'm going to jump straight into it and I think my first question I'm going to ask to you, to you, Arif.

It's about government bonds.

Now we've had a obviously a little bit of a shock in the market more recently and we've seen what was traditionally perceived as safe haven assets like U.S., Treasuries, like bonds, like gilts sell off at the same time as equity markets have.

Now, does this mean that we need to question that safe haven status of government bonds at this point in time?

Well, Amanda, again, thanks for having me here today, but I think that question just annoys me.

Let me start by saying that because if you lazily expect Treasury's gilts to be your hedge, where have you been for the last 5-10 years?

You know, they didn't work in 2020, COVID, they didn't work in 22, they didn't work during liberation day.

So why would you expect them to work today?

I think really the safe has asset, the hedge really is cause and effect.

You've got to understand what's the underlying factors before you just naively assume something is going to work on the other side.

You know, reality is there's been very little proof of any safe haven in the last few weeks.

So your point is there's actually no safe haven asset.

Well, cash is still king.

OK.

It's a related question and it's something I wanted to ask Adam now if we came into the last couple of weeks with the US economy being strong, inflation being sticky, a lot of fiscal, fiscal's expense, if you like, or fiscal expenditure and a lot of Treasury supply coming onto the market.

My suspicion is if that was happening in any other market except U.S. Treasuries, you would have seen a response in the yield curve, but it really hadn't in U.S. Treasuries.

Is there something unique about the US?

Well, thanks, Amanda, I think there are two things that happened going into this.

One is simply because all these other countries that you spoke about did not have the inflationary impulses, did not have the fiscal impulses, positioning was heavy in those curves leading into this.

So what happens when we talk about these volatility events, the market goes into seek and destroy mission and knocks out every crowded position.

That's the first thing that happened that we saw.

The second thing that we have that we saw that happened is not necessarily US exceptionalism, but more national resilience.

If you look at the differences between the UK and how the US curves reacted, the UK has spent the past three decades gutting their energy infrastructure to where they are susceptible to these type of energy shocks.

The US is now a net oil exporter. So you have this situation.

So one, positioning for the rest of the world was very heavy versus the US because of those reasons.

And two, when you have these type of external shocks and this long term geopolitical shift that we've seen from globalism to more nationalism, more national resilience, you price in that national resilience premium.

And Amanda, can I maybe just jump in on what Adam said?

So I think it's really important, you know the last couple of weeks, the war has been a shock to markets.

But Adam seek and destroy comments in financial markets terms is really important.

You can explain pretty much all the price action that we've seen, whether it's in currencies, whether it's in bonds, credit, equities, simply based on positioning ahead of time.

The moves have not been huge.

You know, we're back where we were maybe 4 weeks ago, right?

It's not been a big move in markets.

So why do I say that?

Well, I think we have to think back to what we knew before the war started and then think forward, what are those factors are still going to play out?

Which of those factors do we believe beforehand are going to be emphasized, pushed forward and what's actually changed?

And if you know, inflation, fiscal deficits are only getting worse here.

So I think it's really important not to just get too myopic on the price action or the last couple of weeks.

I think it's, you know, we need to be thinking 6 months, 12 months forward and, and think what truly has changed?

And you coming into this were actually quite bearish on European rates as well as U.S. Treasury rates.

Where are you now?

Well, European rates are actually under form pretty substantially.

You had the ECB come out and actually become fairly hawkish.

Talk about rate rises. We haven't yet heard from the Fed.

That's kind of interesting.

But the main take away that I take from the price action is dispersion.

You know the true opportunity set for active management of rates now is more relative value between countries, dispersion between countries, one central bank hiking, one cutting, etcetera.

That's where I think the true game is now.

But back to your question, you know, I was bearish.

All the factors that made me bearish, I just got worse and worse.

But again, just as I said, the price action hasn't confirmed that.

So maybe there's something else out there, maybe, maybe there's a buyer of last resort in Treasuries that's holding yields down but hasn't entirely become clear yet.

So potentially this is an opportunity to buy a little bit of short term duration, but be totally clear, inflation is only getting worse now.

Fiscal deficits are getting worse and those are the reasons we're bearish in the first place.

I wanted to sort of get nailed down that sort of inflation question as well or that inflation comment.

Obviously the market is very clearly worried about the long term trajectory of inflation, particularly with oil prices how they are at the moment.

But when you think of your classic inflation hedge, most people think inflation linked securities, whether it be in Europe, whether it be in the US Adam, question to you is have they done their job?

Have inflation linked securities actually protected you against this inflation concern at the moment?

Short answer is no.

The longer answer with this is that at the end of the day, these inflation linked securities are somewhat risk instruments.

And as Arif and I spoke about later, when the market goes into this volatility, the moments where they're in seek and destroy mission, these do not act as inflation hedges over the short term.

They act as risk instruments.

That's one side of it.

The other side of it is over time, we haven't seen the inflation linked security, specifically breakevens work in the same way we have over the past, call it 5 to 10 years, over the past 6 months, going to the point that Arif noted we need to pay attention to this price action to see if there's something we don't know.

But over time it goes to the point that Arif was talking about early with safe haven status in terms of risk off instruments, in terms of how do you protect your portfolios.

The old playbooks that were used for 10 to 20 years just don't work anymore in this type of inflationary environment.

Overtime will those inflation leak securities tend to pay off with CPI? Yes. But what you're looking for is not necessarily getting paid off in CPI.

What you're looking for is the mark to market daily price action that protects portfolios overall.

And that's just not being done by the current plethora of instruments that we have.

I wanted to switch pace a little bit and address a question to Rob and I think a term that maybe a lot of people aren't familiar with, which is, is your investment process is the quantum mental approach to investing.

Can you first of all describe what that process is and how it applies to an environment that we're seeing at the moment?

Sure, I appreciate it Amanda and I'd love the opportunity to talk a little bit about quantum mental because it can mean different things to different people.

I think you know, at T. Rowe primarily we're a fundamental investment platform supported by a strong quantitative group in, in the more quantitative portfolios that my team manages, it's a little bit the opposite.

We're a quantitative process supported by the fundamental platform, which really works nicely.

And when I talk about the quantamental side or the quant side, our primary focus really isn't black box trading models or directional statistical models, but we're really more trying to focus on long term structural inefficiencies in the market and exploit those to give us some return.

And when I talk about that, you know especially in the high quality fixed income market, there's a very fragmented buyer base of people buy high quality fixed income for many different reasons.

You know, a good example of this is, you know, there's insurance companies that just buy purely for yield or pensions that buy strictly for maturity are trying to match their liabilities or others that are RV driven.

So because there's a lot of different forces that are buying for different reasons, they create some long term kind of persistent inefficiencies.

A quick example of some of these is long investment grade corporates.

So long investment grade corporates, insurance companies tend to buy those because they're seeking for highest yield and have book value accounting. Pension companies buy those because they want to match liabilities.

So those tend to be kind of rich.

You're not getting paid for the risk you're taking as far as risk versus reward.

And so on the quant side, we can tilt away from those inefficient parts of the market and towards like a more efficient shorter term investment grade corporates.

And these tilts over long periods of time tend to generate a modest positive alpha very consistently.

And so that's kind of the basis of our structure.

Now in volatile times like this, in some ways it's nice because I'm not trying to get the direction right, and so the volatility, you know, the model doesn't necessarily adjust to short term volatility like this.

We're looking really at long term relationships, but these tilts that I talked about can have some be affected by the near term volatility as far as some correlations might change and things like that.

And so it's important for us to kind of keep track of this and we can kind of take off the tilts a little bit or press them a little bit.

And that's where the fundamental side comes in.

And it's great to be at a place where there's strong fundamental research and have people like Arif and Adam, where then I have some insight into what the Treasury market's going to do or the Treasury curve and how is that going to affect the environment for these tilts, the structures that we're putting on and helps us to do that.

And so that's a little bit how I think about the short term volatility.

And so relating that to the current situation at the moment.

And obviously a lot of the volatility is coming from oil price.

How are you tilting at the moment given we are essentially experiencing some degree of an oil supply shock at the moment?

Well, certainly oil is an input into our breaking inflation models, obviously a direct input and you know, certainly that's giving us a signal about break evens being a positive signal for break evens and inflation.

You know the part about the fundamental side becomes really important in in shocks like this because again, the models can't necessarily pick up a war or volatilities that's happening.

That's where the fundamental analysts really kind of do their work.

You know, our structure that we put on are these tilts that we put on, we have to buy individual bonds.

And so in the oil sector, you know, their analysts can help us.

You know, Arif talked about the dispersion.

I think in volatile times like that, the dispersion starts to widen and you know, whether it's oil or whether it's AI related in the last few weeks that our analysts, we can invest in the bonds as we're building our structures that our analysts know and like and understand.

And that's the part that sometimes has a hard time catching turns or when there's volatility or exogenous things that the data can't necessarily pick up.

Where the fundamental side really comes and is very important to what I'm trying to accomplish because I can pick which oil companies are more exposed to the higher oil rates are less exposed or on the AI side, other things that, you know, help that I'm not in the bonds that are going to get beat up.

But it's a very important part of the fundamental side of that fundamental.

I'm going to switch a little bit.

And, and it's something not related to what's obviously been happening over the last couple of weeks, but it's something that the market was a little bit more concerned about maybe about a month ago.

And this is a question I have for Adam.

And it's related to a new Fed chair coming on.

And a few weeks ago, it was all about, you know, the AI story, whether it was going to be deflationary as Kevin Warsh suggested.

I wanted to hear your view on that.

Is that going to actually be in your mind a long term inflation suppressant, if you like.

So it's an interesting question.

I would say over the long term, I do believe it to be productivity positive.

And that tends to come in hand in hand with disinflation.

But now the time horizon is very important here.

And the real question that we get to is how does it affect longer term yields?

The only price target I've ever truly believed with longer term yields is longer term expectations, nominal growth.

When you have these productivity enhancements that are already happening as we're implementing AI, real growth should pick up faster than inflation comes down.

Specifically because you mentioned these worries about, you know, software and AI taking over and eating the world a month ago.

That was from a Substack article.

If that Substack article is actually correct, we're going to need somewhere between 100 to 1000 times more memory than we currently have in the market right now.

And we currently have a set of buyer bases in the hyperscalers that because of behavioral finance worries of their terminal value are going to spend money on it no matter what price it is.

And then the past probably call it six months.

We've already seen 2 to 300% increase in memory pricing and they're still hiking prices by the way this month.

So what we see in the short term is none of these, none of these disinflationary forces right now. We're not seeing that.

And there are worries about labor of course, but that's not truly affecting inflation that we're seeing right now.

So do I think it could have long term disinflationary impact?

Probably.

But for right now, it's actually more affecting real growth and higher to where it should be actually a boon for the longer term yields higher than it is lower right now, which is not in the market pricing at all.

The other question I had around change in central bank chairman is another belief that Warsh had and that is to reduce the Fed balance sheet.

It was very clear in the media that that's something that one of his objectives is to reduce the Fed's balance sheet.

But the reason why I find it interesting is given clearly in a period where maybe others aren't looking at treasuries as much and wanting to reduce the balance sheet, which I think is what, 6.5 trillion at the moment, who is going to be the buyer of those bonds?

Well, so first we start with, does Kevin Warsh want to make the balance sheet smaller?

10 years ago he did.

I'd say when questions around one of my friend of mine who's known Kevin for a while, he had the best quote on Kevin going into this.

If asked if Kevin Warsh is a Hawker, a dove, he said we'll see.

When you become the chairman of the Fed, you don't know what you're going to do.

Events will dictate what you're going to do.

And the same thing.

It's going to be the exact same thing with the balance sheet.

So start with the Fed's balance sheet.

They have the reserve management purchases they set up because of the volatility we saw in financing rates near the end of the year.

They basically have this set up to continue to buy until we get through April tax payments.

At that point in time, they'll reassess.

At that point in time, they probably weren't expecting to have an Iran war going on right now.

And given what we've seen, we don't know what's going to happen there.

But if that continues on with that type of volatility, odds are they're probably going to continue buying at that point in time over words.

So I will say two things.

One, the Fed probably will continue buying if there is continued volatility in the markets.

But B, the more important thing that you talked about was the other buyer list.

What we do know for sure is that the administration is deregulating the commercial banking sector at a pretty rapid pace.

And so in ways we haven't seen for decades. That buyer base, what they normally do when they get capital relief, they want to make loans, they want to make mortgages.

First thing they do want to do with extra capital is just put in higher yield and treasuries versus cash.

So you will get a buyer base of that very quickly.

Now, over time, that will spread because commercial banks love to hold mortgages over treasuries versus the Fed who's primarily in Treasuries and wants to get out of the mortgage business.

But over the short term, basically your two buyers are the commercial banks that are usually the buyer.

And we'll see what events can cause the Fed to stop buying.

But based off what we know right now, I see it unlikely over the next six months that the Fed will stop the reserve management purchase.

OK. Watch this space in six months.

Yeah.

I wanted to switch to corporate bonds and interestingly enough again over the last few weeks there has been some degree of a sell off, but it's been very, very minor.

We came into this, I want to call it a crisis or this war with potentially corporate bonds looking quite expensive.

They've cheapened up a little bit, but not really that much.

Is it still an asset class that we should be attracted to?

And Adam, why don't you just start that answer?

Let’s start with the widening of spreads that we saw in corporate credit over the past couple weeks up until probably Thursday or Friday.

That could be entirely explained by volatility and maybe a little bit of liquidity.

The market was not really pricing in fundamental stress outside of pockets of software.

So is it still an attractive asset class?

Yeah.

We still actually do believe fundamentals are still strong in the US given all the reasons we talked about earlier of the US versus the rest of the world in terms of rate curves.

So from a corporate buyer base for the credit markets, you have to price in higher spreads because you're going to see higher volatility.

That's just natural because credit is the most short of volatility asset clash you can find.

Is it attractive right here?

Yeah, in spots of course. Honestly some of the stuff that's been sold off a lot actually is fairly attractive right now too.

So I don't think, if you're looking at spreads, the market is still not priced in real fundamental stress.

And if that's your base case, then it's a very different story.

Rob, are you seeing the same sort of opportunity within your models or your process?

Yeah, I mean, going into the, the kind of the recent volatility, you know, valuations were very rich and valuations are a dangerous kind of metric to use because valuations have been rich for the last year and a half, particularly in the long investment grade part of the market, you know, where literally we're tighter than we've been since the early 90s.

And so it's, it's, it's been a challenging environment, but evaluations have said it's too rich, but they continue to perform well.

But kind of because of the backdrop and the positive credit environment.

But like Adam said, you know, we have had some widening.

So we've gone from the zero percentile evaluation to maybe single digit, low single digits, which provides a little opportunity.

And if you think about the background prior to the war and some of the oil volatility, it is a pretty positive environment.

So it kind of depends on if you view if this volatility is going to fade or not like Adam said of whether this is an opportunity.

You know, the credit curve is flattened a little bit here.

So in the quantamental space, it gives us an opportunity to put a little more of those tilts on into this volatility.

I wanted to talk about something that hasn't been one way is the US dollar, which was a very much a consensus short at the beginning of the year.

So most asset managers were short the dollar.

Over the course of the last three weeks that has dramatically changed, whether it be a position switch or it's just getting rid of your short position, who's to say?

But I mean, you said earlier that there hasn't been a safe haven trade.

Has the dollar been a safe haven trade?

So again, let's go back to what Adam said earlier.

So you can destroy. The dollar has been right in the crosshairs of that.

I think again we need to think about cause and effect.

Has the dollar strengthened because it's a safe haven or has it strengthened because it was over positioned and they've been unwound like you just talked about?

Or is it because oil, the scarce asset at the moment, is priced in dollars? Could be any of those.

Again, I think it'd be a really lazy assumption to make to think in the next crisis, if it's not oil related, that the dollar would be the safe haven.

Because again, my job, all our jobs, is to think what has fundamentally changed.

And actually, from a dollar perspective, I don't think much has.

I said earlier that we hadn't heard from the Fed.

We have heard from the president who encouraged the Fed to cut rates during the war.

So nothing really has changed from that perspective.

So I personally and the portfolios we invest in are actually pressing the US dollar position.

We think this is a great point in time to actually add to the position.

And longer term the factors that that we look at that determine currency movements still favour a weaker dollar, to be clear.

I was going to ask a question about emerging markets and this is again a asset class, whether it be locals, whether it be sovereign dollar, whether it be corporates, they've all had a very good run and again up until the last few weeks.

And this asset class potentially particularly the FX side of things has probably seen more volatility than others.

And I know you can't generalize emerging markets because they're very different particularly from their exposure to commodities.

But Adam, if you were going to say there is an area that is attractive within emerging markets, what would it be and is this an opportunity or not?

Thanks, Amanda.

So as one of my colleagues here at T. Rowe says, we're now in the fourth year of a two year cycle in emerging markets.

By that means, part of this is because the two things that generally I know you can't really call a monolith for emerging markets except for two things that affect them.

One, is the quantity global export cycle and two, is the dollar.

The commodity export cycle has been strong for about two or three years now and we talked about safe haven assets. What has proven to be a safe haven asset over this volatility time? Commodities. Oil is 40% of the cost curve for every other commodity and oil is a safe haven asset that's being priced right now.

So that's going well.

And also as Arif said, we do believe the dollar in the short term strength that we've seen is a good time to be faded because once again seeking destroyed dollar shorts were pretty crowded going into this.

So the two from a monolithic perspective and I want to get into specific parts of this, it's actually a very good setup for emerging markets.

Now there are different parts of this.

The part of the reason that it's held in so well of this past four years is just the markets are not that deep.

When we talk about you're investing in a bunch of U.S. Treasuries, we have a US$30 trillion market.

Some of these curves are only a couple US$100 billion max.

And these are the large curves.

So the actual flows into the asset class of the diversification from the dollar during this time period have just held in valuations now where are parts that are maybe not as well positioned.

We like EM local.

Now you do have to be very, very fundamentally focused in terms of who's going to be affected by this by, but the reason we like EM local is a couple reasons.

One, we talk about the fiscal concerns in developed markets.

Emerging markets had to be adults in the room about this for the past decade or several decades as well and then they know how to hike rates.

The developed markets still don't know how to do austerity.

We haven't figured it out yet.

The flip side of this too is on emerging market local bonds.

If you look at short term positioning indicators, they can look pretty stretched.

If you look at a 20 to 15 year positioning indicator, it is one of the most unloved asset classes you can possibly find.

It has been a downward trend of foreign ownership in any local rates for about 15 straight years and we're just now finding a bottom over the past two years.

So longer term, there's a lot of upside there within the asset class, especially if we get what we think that, what is not talked about, the US dollar getting weaker is not just a current administration issue.

It's actually fairly bipartisan in the US over a long period of time because people want jobs, people want reindustrialization.

And the way you do that is by having a more competitive currency over time.

I wanted to talk about market liquidity and I think again over the past couple of weeks, some particular markets, their liquidity has been tested.

And this is a question I wanted to have with you Rob, do you actually think liquidity is currently being mispriced into the market at all?

Well, I think the short answer coming into the volatility certainly there was very little liquidity premium priced in not enough at all.

I think there has been some priced into it.

But I'll and speaking to the high grade markets was, was more eye traffic, you know, let Arif and Adam maybe speak to the lower credit quality, but there still has been liquidity.

A good example is, you know, last week the investment grade market had new issuance of 120 billion roughly which I believe was the second largest week on record.

And this is in the midst of volatility.

So, clearly there's still liquidity in the investment grade market.

Now there probably should be more liquidity premium priced in now than there is because you know, that can change very rapidly if things were to deteriorate quickly or other things.

If you know, right now there's buyers on the sidelines for new issues.

And you know, but if that goes away and money starts moving out of the asset class, then the liquidity premium isn't enough to kind of account for those things.

So it probably should be a little higher than it is now.

And I mean, in these periods of uncertainty, it's really easy for investors, in my mind at least to get really caught up with the short term noise effectively.

Robert, in your mind, what are the key questions that investors should really be asking themselves right now?

Well, that kind of goes along with the philosophy of, of the quantitative, more structural investment style that we have.

But you know, on a broader sense, you know, I think Arif mentioned this earlier that the short term volatility we tend to focus on, but often what drives market is longer term relationships, longer term correlations and things that drive the markets.

You know, coming into this volatility, you know, there's a lot of things that were fairly positive.

The US economy was strengthening and getting better.

Fed was still kind of more on an easing bias.

You know, we had some of the stimulus in terms of tax rebates for personal people as well as for corporations.

So the, the environment's fairly positive for credit.

And so we've kind of lost sight of some of those things and you know, those longer term things may be more a driver of what happens in the future, you know, assuming this volatility kind of subsides, you know, that I guess that's kind of the big question though is this going to get worse or better?

But I think sometimes focusing on longer term relationships is what we tend to do and kind of what the big drivers are kind of in place that before this volatility happened.

I'm going to ask a very general question to you, Arif, and this is more about T. Rowe Price.

We've obviously heard from Rob and his approach to investing and his team approach is quantamental, whilst yours and Adam’s is high conviction, high alpha, very different to some extent.

How does that talk to or how does that speak to the T. Rowe Price fixed income platform?

So I  think the way to answer that, Amanda, is just step back.

What is fixed income?

Why do people invest in fixed income?

And the answer is to solve a problem. Diversification income, whatever it might be.

So fixed income at it's very, very hot is a solution.

It's a solution to a client's problem.

So we have very, very deliberately at T. Rowe Price under my leadership and before that we've been very, very clear that we wanted to build all the excellence and the components to provide solutions however the client wants them.

So that meant building a fundamental world class bottom up investing platform.

That meant building a world class top down macro platform.

That also meant building a world class best in the industry quant platform.

And so if you're a portfolio manager at T. Rowe Price, you have all that research and really the way we put it together and the way the portfolio managers put it together is they pick and choose.

They major minor on the different parts of the platform, but each of the underlying pillars is extremely strong and the culture binds it together globally collaborative.

So we have the tools to answer all those questions and solve the problems that the clients need us to solve, whether it's less tracking error or high tracking error.

I know we're running out of time and I always like to finish these sessions with a question, just a quick fire question.

I'm going to ask this to both Adam and Arif.

A wise portfolio manager once told me that often his best investment decisions were his most uncomfortable investment decisions.

So with that in mind, I'll start with you, Adam, what is your most uncomfortable investment decision at the moment?

So when time's in high volatility, it's very important to say the cop out for everybody, which is time horizon.

So I'm going to give you two answers.

Time horizon in the short term.

I actually, as Arif mentioned earlier, just over the short term a very uncomfortable trade is being very long duration right now, just some curves that have sold off.

And this is, I'm talking about just a couple weeks here.

Effectively what you're talking about is a volatility trade.

Usually what happens in this goes back to lack of safe haven status.

Whenever your volatility spikes is when rates rally.

When inflation is high, it's the exact opposite ball spikes mean rates sell off.

So in the short term, I actually do think we could see some volatility being sucked out of the market.

The longer term more uncomfortable trade, and we've had a lot of debate about this internally is over the next 12 months I think you have the possibility of a pretty strong rates flattener globally.

I think what's not being talked about enough is that Xi Jinping has been the best Fed governor of our lifetimes.

Over the past 3.5 years, China has been exporting disinflation to the entire globe because they focused on the internal export driven model or national resilience and they don't care if the companies are making money or not.

They just keep exporting over and over again.

That is slowly coming to a close with the anti evolution measures.

Not saying that they're going to be cutting capacity like they were in 2015 and 16, but that disinflationary pulse was coming to a close before Iran happened.

Now Iran and now oil has a huge correlation with the underlying Chinese PPI.

So when you have that inflationary impulse, it tends to correlate and lead flatteners in global rates curves.

And I'm not talking about a bull flattener, I'm talking about a bear flattener where you have very uncomfortable conversations in central banks.

Now this is not something I think we're going to be talking about in the next several months, but I think over the next 6 to 12 months, there's a very high probability that we have some very, very uncomfortable conversations and maybe we get a little bit of buyer's remorse from Kevin Warsh going into the job at the time he did.

They're flatteners very rare.

OK, we'll see what happens in the next 6 months.

Arif yours?

So Adam already stole my stock response of time horizon.

So I'm not going to go there.

I actually think the most the most uncomfortable times for portfolio manager are when they are being proved wrong by markets, right?

And so put that into context.

I've been very vocal about higher yields, very vocal.

And actually it's playing out nicely.

So slightly contradicting myself, I'm really kind of uncomfortable with that view right now.

So not because I think the factors have changed.

In fact, as I said earlier, it's got more and more, you know, there's more and more strength behind the factors for higher yields.

Why I'm feeling so uncomfortable is do I use my risk budget there or are there better places to use my risk budget?

So actually where I feel most and comfortable is I have a very strong view of higher yields.

But actually from a portfolio perspective, I'm dialing down that position because firstly on the short term side as Adam talked about, but also because I think this dispersion idea, whether it's in currencies or different rates markets or even credit markets is just so powerful and is likely to be a much higher risk adjusted return over time.

So for me, the most uncomfortable thing is almost recognizing I still have a strong view, but actually saying there's something better over there.

So it's not, you know, it's just moving on.

OK. Speaking of moving on, that's all we've got time for.

This brings us to the end of our panel discussion.

Thank you to Arif for joining me here in the studio in London and to Robert and Adam for joining from Baltimore.

And thanks to everyone who took the time to join us today.

We hope you found the session useful.

As I mentioned earlier, there are additional materials that you can download and review.

And please do share your feedback with us.

We'd love to hear from you.

Finally, please do join us for our next webinar in the series in the Autumn, where Arif and I will be once again looking to answer some of your biggest questions in fixed income.