Making Sense of Sky-High Treasury Yields

0:00This podcast is brought to you by HPE. Every business has a there, automation, transformation, scale, maybe all of the above. The HPE Self-Driving Network gets you there with a network that's self-optimizing, self-healing, and self-protecting, and only continues to get smarter. Whether you run it or rely on it, it's a network that gets you there. Learn more about this self-driving network at hpe.com slash networking. Hey, what's news listeners? It's Sunday, September 27th. I'm Alex O'Sullow for The Wall Street Journal. This is What's News Sunday, the show where we tackle the big questions about the biggest stories in the news. This week, we're serving up an episode of WSJ's Take on the Week, where host Miriam Gottfried and guest co-hosts say have goldfarb unpacked the recent moves in the treasury market. Specifically, what drove the 10-year yield up to 5% and where things go from here? If you like what you hear, listen and subscribe to WSJ's Take on the Week, wherever you get your podcasts.

1:09Hey everyone, it's Miriam. Tell us is out today, but I have a special guest joining me as co-host. I have my colleague Sam Goldfarb, who's a markets reporter, and covers US treasury markets. It's actually no accident that I invited Sam here to join me today. He is here because we are talking about the thing that's been the center of attention, the treasury market, and the fact that the 10-year yield hit 5%. Sam, welcome to the show. Thanks for having me. You may not think that the 10-year yield affects you that much, but you probably own 10-year treasuries through a bond fund or a mutual fund. You might own them directly. If you are thinking about getting a mortgage, the 10-year is actually the thing that determines what mortgage rates are, the primary factor that determines what mortgage rates are. We wanted to find out how we got to 5% and where yields could go from here. To talk about that, we have Megan Swyber.

2:11She is US rate strategist at Bank of America. In that role, she helps investors think basically about where yields could go from here, and how to trade around that. Megan was a previous guest on Take On The Week, and we enjoyed that conversation so much that we decided to have her back. Welcome to the show. Happy to be back, Maryam. It's really good to have you. I'm going to just kick things off with the big question. We all know the headline. The 10-year yield hit 5%. It was actually the highest level since 2007. Take us through the recent moves. How do we get here? Highest level since 2007. Pre-global financial crisis. Following the GFC, as we call it, yields were in this very low range. A lot of that was driven by Fed expectations. We had the Fed buying bonds through QE. We had the market really appreciating the fact that the Fed was going to be holding rates low. QE is quantitative easiness.

3:12Yes. Exactly. We've broken out of that very low rate environment, of course, in recent years, namely coming out of the pandemic. The big thing that shifted for investors was inflation. Having to incorporate inflation expectations and a Fed that was hiking, not just because unemployment was low, but also because the Fed was needing to cool things down to tame the inflationary environment. I have rates just been on an upward trajectory. They have been all over the place. It has been a volatile several years. We had rates climbing as the market was pricing in higher expectations of a Fed that was going to need to hike aggressively to combat the inflation that we saw coming out of the pandemic. What the Fed ultimately did, they got to a policy rate above 5%, so above where 10-year rates are trading right now, and thought that they were seeing some signs of cooling in the labor market. With that, they delivered subsequent cuts. We did see rates, particularly at the front end of the curve, come back down.

4:13But what's been interesting as the Fed had delivered on those cuts, 10-year rates stayed elevated versus what we've seen again, coming out of the global financial crisis. Now we're seeing more of this upward pressure on rates again, as the Fed is hiking rates. The big question is what level are they going to have to hike to? What really is anchoring the Fed on this path to hike right now is inflation. We do see the labor market in this tenuous balance, where it's a low higher, low fire environment, but we've seen unemployment decline over the past year. And if you look at real Fed funds rates, so where the Fed is setting policy less inflation, that number has been declining. So it suggests to the Fed that they do need to height combat inflationary pressures. This is of course not just a US theme, but it's a global theme. And a lot of that is driven, this global pressure that we're seeing on inflation right now by commodity prices, namely this big upward move that we've seen in the oil. But with the labor market really on this balance, and this is what we heard from Morse at the Fed meeting,

5:16it allows the Fed to really just address the inflation elephant in the room. The Fed hasn't seen inflation come back to its 2% target in well over five years now, and it's the commitment that the market is hearing from Morse to address this inflationary pressure that really is driving yields up in the US in particular. So I want to unpack that a little bit, but first I have to ask, is 5% really that high? I mean, old people love to tell me about how their mortgage was 17%, 20% back in the day, and you young people know nothing about high rates. But here's the thing, Maryam, no one has a 17% mortgage rate right now. That is true. And what we have in the US is this incredible thing which comes back to the fact that home ownership was the American dream, and a lot of policy was implemented, such that we have 30 year fixed rate mortgages in the US. And there's very little new buying or housing activity, housing turnover that we're seeing at these very elevated rates right now. So if you look at the mortgage market as a whole,

6:19people have and we're able to lock in very low borrowing costs coming out of the pandemic. And so the fact that we have rates where they are right now, it's really slowing that marginal buyer in the housing market right now. It's slowing when we think about this, right? Housing construction, anyone's marginal cost for capital, deploying a new project, right? People are having to pay up for financing. We're seeing that in some industries, particularly this AI build out, there's this tremendous demand right now, even at these very elevated rate levels. So another aspect that we can think of is contributing to the upward pressure on the back end of the US rates curve is the fact that we have a lot of this very heavy IG issuance that's competing with the demand back. Yes, exactly. That's corporate bonds. Corporate bonds that are competing with treasuries. Because if investors are thinking, all right, well, we've got the 30 year yields above 5.2%, that's historically very elevated. I can go out and buy an investment grade bond with from a very highly rated

7:24debater that is 100 basis points over the 30 year treasury rate. So there is now this competition, I'd say more so than what we've seen in recent history for investors in the bond market. And that's one of the contributors that we've seen to longer term rates, in particular, moving up relative to just what the market's pricing for Fed policy. I mean, people, there are people out there who do have memories of where rates were in the 1980s, but it is interesting to think that a 10 year yield at 5% is quite unusual, even going back decades. It's spent some months there in 2006 and 2007, but it didn't spend that much time there in the 2000s. I was kind of interested to see that recently. Like, I'm biased, but we locked in a sub-3% mortgage rate coming out of COVID. I'm lucky you. And you let the best degree. I'm not one to hear it. It makes a right move. I have 3.12. I'm not bad. And I have nothing. As an interest rate strategist, it's my proudest trade.

8:26But we are going to die in our house. We're never going to leave our house. Because this is now an asset on our balance sheet. If you have free capital, you'll deploy it in the fixed income market, you'll buy bonds, you'll earn a higher yield relative to what we're paying right now for the cost of living in our home. And similarly, it's the fact that yields in the fixed income market are elevated, but we're also still seeing the equity market do very well. And this comes back to this point about what is it really going to take to get inflation down? If we think that inflation right now is certainly in part driven by the uptick and oil prices, but even ex-oil, it's still in part a demand story. And if the Fed is really trying to think about the impact, the pass-through of higher interest rates to the real economy, because there's not this total pass-through to many consumers, because we have this fixed rate mortgage universe in the US, the pass-through is really more broadly through financial conditions.

9:31And the biggest volatility component in financial conditions is what equities are doing. So the question we're all trying to ask ourselves is, well, how high do rates have to get to actually cause a slowdown in demand that's going to be large enough to moderate the inflationary pressures that we haven't really been able to see the Fed address in years? And that's kind of the big question right now. What is it really going to take to slow the equity market down to slow risk assets down? So I think this has all been a great overview at the same time. Maybe we should take a big step back and say, okay, what makes a treasury yield? Maybe you could just walk us a little bit through, okay, the tender yield is at 5%, why? 5%. Yeah. So, interest rate expectations, the most important component of where rates are moving. And it's been this huge adjustment over the past year from a market that thought there's no way whoever the Fed chair is going to be that they're going to be able to hike, because a lot of this

10:32political pressure that's been placed on the Fed, two cut rates. So, interest rate expectations have moved drastically over the past year. And they were at that level, like the actual Fed funds, short-term rates, that by the Fed has been around like a little bit under four, right? Yes, yes, yes, in terms of where the market was expecting the Fed was going to set, policy expectations over, say, the next 10 years as you noted Sam. But what's changed, right, is we've got a Fed chair that's clearly committing to combating the inflationary pressure that we've seen, wants to say that this has been an issue for the past five plus years. I'm stepping in here to address this. He's hiked in September, and now the expectation is he'll continue to hike until there is some pass through that we see to lower inflation or at least inflation that's coming closer to what the Fed's target actually is. So, you know, if Fed expectations are the dominant driver of the volatility that we've seen in interest rates, and I would say oil is a big part of that too, right? Yeah, we should talk about, you know, the Iran kind of. But I just, I want to just

11:34say like first and foremost, it's interest rate expectations. It's what the Fed is going to do with policy over the next 10 years. There's also what we call a term premium component. And the way I think about term premium is really how much compensation do investors demand to buy treasury securities? So basically, we sort of our most simple explanation was that the treasury yield reflects investors expectations for short term rates over the next decade. But the slightly more complicated version is that it's those expectations plus a little extra and extra we call the term premium. Exactly. And there's a lot of like when I was at the Fed, you know, there's many models that the Fed uses to try to assess where term premium is often a big part of that is just with the markets pricing for near term policy expectations were gressed on the 10 year, right? To get a sense of how much is the movement that we see in 10 year really related to policy expectations versus how much of it is really about the marketplace. What's going on from a supply demand perspective?

12:34The sort of the black box, right? The term premium is where things get fun and interesting. And that's why when there was a period of time when yields were going up this year, when like interest rate expectations weren't necessarily going up. And I think that's when we had this like flurry of debate and discussion about like what's going on with bond yields? What's going on? And so you had more theories like is it the deficit? Is it AI bonds? And I want wondering if like it seems like you're you know very much, you know, it's largely about like interest rate expectations person. But like so that's at the top of your list of why yields have been going up. But maybe you could like, you know, rank them in order of what you think is the most plausible. So even over this period that you're talking about Sam, a lot of it was still, if you look at very purely what the market's pricing, the Fed do over the next three years versus the 30 year versus the 10 year, there's still a very high relationship there. But totally agree. When you look at, we, we it be a runner-owned fundamental affair of value models, you look at Fed models for term premium,

13:39those have all suggested that long end is trading relatively cheap, meaning that yields are relatively high versus what fundamentals would imply. Because of course, there's an inverse relationship between price and yield in the bond. Right. Yeah. Yeah. She could be high yields. Higher yields lower prices. Exactly. Exactly. Exactly. Exactly. There has been this pivot in terms of what the demand landscape for treasuries looks like. A big part of that is I would say coming back to the inflationary picture. When we think about why people buy treasuries, it's really for a portfolio allocation tool. It's really a diversification benefit that treasuries present in portfolio construction. When we think back to the 60, 40 portfolio, you know, you can get a lot more return in theory, investing in equities, investing in EM, high yield. But you buy fixed income because when something goes wrong, we usually would expect the Fed to be cutting, rates to be rallying. And the utility that we've seen of treasuries in portfolio construction has really moderated a lot.

14:43And that's specifically true at the back end of the yield curve. When I was last on, this was shortly after quote unquote, liberation day, right, when we saw the tariffs announced, it was a big sell-off that we saw in equities. And at the same time, we saw a large sell-off at the long end of the US rates curve. And usually these things are not correlated, right? Stox and bonds are supposed to move in opposite direction. Exactly. And that's why it's such an important thing when we think about the overall demand landscape for treasuries is what is the utility? Why are people buying treasuries at the end of the day? It's conviction that rates are going to be moving down that they think that actually there's some duration return that they're going to get that they've got conviction in what yields are going to do, or it's because they play and have, you know, certainly in the past played this important role in portfolio construction, providing a return that is on Carlyden versus versus Aquities. Okay, hold that thought. We're going to take a quick break. When we come back, we'll have more with Megan Swiper of Bank of America.

15:48The AI race isn't slowing down. Spectrum Business helps you set the pace by removing the infrastructure roadblocks that can slow AI adoption. With high capacity network performance, nationwide reach, and coordinated planning from the start, you can launch faster, scale confidently, and stay focused on what's ahead so you don't get left behind. Learn more about the Spectrum AI Accelerator at Spectrum.com slash AI. Welcome back. I mean, Sam mentioned the war in Iran. And obviously that's played a big role in fueling inflation, especially with oil prices. And concerns about future inflation. Because we don't know when it's going to end. We thought it was going to be a short term conflict. It seems to be dragging on. What if the war just ended tomorrow? Like, would that change yields? So I think it's certainly what? Because when we consider expectations and also some of this

16:49uncertainty element, part of the reason why we see longer term treasury is trading cheap right now is coming back to the conflict that we have in Iran, the geopolitical uncertainty right now, the fact that in an environment where oil is going up, and we see similar to today, more pressure on equities, we're not seeing treasuries perform that important diversification benefit. They're selling off as well. So if we get back to a place where let's say, you know, the war is resolved, we don't have to worry about this anymore. We get a more free, free flow of oil. You know, we don't have to worry about the tremendous issue that this is presenting to Europe right now. We certainly can see rates fall pretty meaningfully. But the question is still about US growth and about inflation that we're seeing in the US that is not coming from higher oil prices. Super core inflation. Super core, potentially coin by our own Sam Goldfarb. Definitely close to that Sam Goldfarb. But you don't regard this like the data that we've been getting.

17:51And really what it's just suggesting to the market is that rates are not restrictive. Growth in the US is still quite strong on nominal basis and that the Fed's got more work to do. Because this data showed what exactly? So when we see PMIs that are coming in above 50, 50, 50, much more. Pictures, managers, index. It's a sentiment survey. Right. And it's all kind of relative to the prior month. But when we see the number that comes in much higher than expectations, it's just suggesting that sentiment is a lot stronger than what the market was expecting. That companies are still seeing a lot of demand. They're still hiring. And these numbers are important to the Fed. A lot of them do, a lot of these regional feds do their own surveys to get a sense of what's going on their own local economy. But what it's suggesting is that the manufacturing sector of the US economy is still quite strong despite a lot of the shocks that we're seeing right now from a commodity perspective. And one of the amazing things that we get to look at at BFA, we get a phenomenal consumer set of data, is that the consumer has been

18:57so strong despite this gasoline shock that we're undergoing in the US right now. And we've seen that really over the past several months, the consumer is still very much so spending money. Again, this is all nominal data that we're looking at rather than real or inflation adjusted data. But the consumer is okay to keep carrying on despite the shocks that we're continuing to see from a gas. So that means the Fed has more room to go. Exactly. And it's kind of interesting because I think when we write stories about yields rising, they tend to lean a little negative. And there are bad reasons why yields are rising, namely inflation concerns. But there is this kind of like positive side too, right, which is basically the strength of the economy. Yes. And so it's not it's not all bad. I guess. That's a really good point. I like thinking about it. But I mean, speaking of scary things, I couldn't help but think that some of this move in yield might have been fueled by the headlines that we all saw about the gross US debt reaching 40 trillion.

19:58The deficit is important. And let's just get that out of the way. What Treasury is doing right now is also very interesting. And I think the big story that we're seeing from Besen and you may have read about this or heard about this, but the buyback program that the Treasury is doing right now. Yes, buying back bonds, which means that it's reducing the amount of supply of longer data treasuries in the rates market. And when we think about just very simple supply and demand, you reduce the supply, the price should ultimately go up. But even as Besen has unveiled this higher amount on buybacks, prices have not gone down. Yields have continued to go up at the back end of the yield curve. So it does suggest that Treasury is going to try other things. Other means to get longer term rates down. When we look at the weighted average maturity of Treasury's issuance right now, Treasury's debt outstanding, it's quite long. Treasury instead of issuing more longer term bonds over the past

21:05couple of years has instead been issuing more Treasury bills. A lot shorter terms. Much shorter terms. Yes. One year or less. And there's tremendous retail demand for that right now. Many of us likely have Treasury bills in our own portfolios right now. If you have any money and a money market mutual fund, that's buying bills at the end of the day. So there's a lot of demand for bills, especially when rates are higher. People don't want to take on duration risk, which is of course accounting for a lot of the volatility that we've seen in U.S. rates. Right. Right. Moning longer term bonds. They're more sensitive to changes in interest rates. Exactly. And if you own very front-end of the curve, you're really just picking up the yield and rolling it over and not taking on any of this duration risk. That's why there's been such good demand at the front end of the curve. And Treasury knows this. So they're trying to come up with what the right mixes relative to demand. So they've been issuing more and more bills. The market's been totally okay with that because there's plenty of demand at the front end. And now the big question is, is Treasury going to actually reduce the issuance that we see at the back end of the curve?

22:08Which is kind of crazy to think about in an environment where deficits are continuing to climb. Another important component of the fact that we see rates at these elevated levels is interest rate expenditures on all of this debt is going up and up and up and becoming a higher share of the deficit. If you look at any of the CBO projections on this, it will give you nightmares. And this is just using baseline expectations for what interest rates are going to do rather than any of this upside risk that the market has to account for. So would you say like the deficit picture was just like a kind of background, like constant pressure upward on yields or did anything change recently that made people more concerned? The change Sam really is demand. If I've got it account for, do I want to buy, do I want to buy a Treasury security where I'm lending to the U.S. government with a lot of deficit issues right now or do I want to blend to an AI company and get paid even more than

23:09than when I'm getting out of Treasury bond? There's been more demand going into that. And people are demanding more compensation to own treasuries because of a lot of the volatility that we've seen in interest rates. And again, kind of coming back to this, if I'm not buying a Treasury security because I think rates are falling, I'm buying it because it's a portfolio tool and it's not really playing that role either. So people are demanding more compensation given all of this uncertainty whether it be geopolitical, whether it be what the Fed is going to do at the next meeting. I'll say there's been definitely a pivot that we've gotten from Worsh over the past several months and coming out very hawkish on inflation at the June meeting, you know sounding less in that, the sounding less hawkish for sure at the July FOMC meeting and then really pivoting back to looking to fight inflation at Jackson Hole and then what we saw at the September Fed meeting. So there's been a lot of volatility in these expectations for what the Fed's going to do. We talked a lot on this podcast about how people are trying to figure out how to read Worsh and he's

24:13you know been very clear that he's not going to be giving us as much guidance and not going to be giving the market as much guidance. So maybe he's giving more guidance than he said he would. But I think that you know he there was no question that Trump said I want a Fed chair who's going to cut rates and so people thought oh maybe Worsh won't raise rates, maybe Worsh won't deliver on that, maybe Worsh won't be somebody who fights inflation. So was that uncertainty about Worsh and his decision making part of what pushed up you? Oh it absolutely was and you can see that following the July FOMC meeting there was a notable what we call twist steepening of the yield curve where the market was pricing. Yes, steepening twists. Which means that front and rates were declining because the market was saying well wait a minute this guy maybe is not going to hike rates which is a problem because we see all of these inflationary pressures but longer term rates are moving up because of this huge element of uncertainty around what the Fed was going to do

25:18the fact that it was being viewed as a policy error where a later Fed chair would likely have to correct for that and a lot of a build up of inflationary risks longer term because if you have a Fed that's not going to address inflationary pressures today it will become a worse problem tomorrow. But that's changed, do we think maybe? Yes and it has so and we can look at that from the markets response following the Jackson Hole and also the September FOMC meeting where we saw the reverse we saw a twist flattening of the yield curve where front and rates were moving up to account for expectations that the Fed was going to hike more aggressively and back end of the yield curve actually moving down on just immediately following those events. So do you think that story is done now? Is that chapter over? We think that there's more room for the curve to flatten. So more room for the market to price higher Fed policy expectations at the very front end of the curve but what we did hear from Worsh at the September FOMC meeting is that he doesn't think that rates are restrictive. It really stood out to me that he's that he characterized the hike

26:21as removing policy accommodation rather than restricting policy or tightening policy and he also very much so throughout any framework for thinking about neutral rate. Basically we think about the Taylor rule, we think about using the summary of economic projections that the Fed publishes to get a sense of where they think rates need to be in a neutral setting. When inflation is a 2% when unemployment is at long run equal to brion levels, he basically said forget about that. His focus really is on the market. It really is on the overall financial environment and whether or not that is slowing demand. And again you look at equity, you look at risk assets. There's very little signal to the Fed right now that anything is slowing down. But if the Fed is waiting for the market to send that signal, what we probably will need to see is more upward pressure in front end rates and less upward pressure at the long end of the yield curve. We tend to see as the Fed and likely some correction in equity. Yes, because

27:28if the Fed's waiting for that to happen, they're probably going to keep hiking until they get that signal back from the equity market. Which is not great news for stocks. Not great news for stocks. But the idea is right or not great news for bonds. I'm not sure where to go. It actually brings back memories of 2022. Exactly. And so when we have a Fed that's really looking to combat inflationary pressure, it tends to be a very notable curve flatener where front end rates are moving up, longer term rates are still moving up, but just not to the same degree as the front end of the yield curve. And just coming back to like what has really changed over the past several Fed meetings, what's changed post-Jaxon hole, I think that the Fed is in a really difficult scenario right now where let's just kind of fast forward a few weeks. Let's go kind of closer to October Fed meeting. If the market is pricing this expectation that the Fed delivers a hike in October, that we get the inflation day that that's generally supportive of a hike, the labor day

28:32that's generally in support of a hike. If we don't have Worsh wanting to guide the market to one decisive conclusion ahead of the October Fed meeting because he doesn't want to give forward guidance, if the market's pricing a hike in October and the Fed doesn't deliver a hike, then the Fed is easing financial conditions. The Fed really risks also this similar occurrence is what we saw following the July FOMC meeting where they are losing control over longer term rates because the market's pricing this risk. So really leaving a lot up to the market right now. I want to pause right there and take a quick break. When we come back, we'll have more with Megan Swiber of Bank of America. When you're ready to take AI further faster, your infrastructure should be ready too. Spectrum Business delivers the network and the tools to help you expand at the rate innovation demands. Learn about the Spectrum AI accelerator at Spectrum.com slash AI.

29:41I did want to make sure that we talked a little bit more about buybacks because the fact that the Treasury Secretary saw yields rising and it made the surprise announcement that he was going to buy more bonds pretty clearly in an attempt to push them lower and that then yields continued to go higher, has made what would have been otherwise a pretty fun story for the Wall Street Journal with yields rising to their highest levels since 2007. That would have been a good enough story, but the fact that we now have this character who's trying to battle the bond market and not necessarily succeeding or has even succeeding, what's your take on like the efficacy of these buybacks? So when I was at the Fed, I actually worked with the Treasury to do these test buyback operations. And they've been doing these buybacks for decades now. A lot of debt management offices globally do these buybacks, but historically buybacks were used when the US government was running a surplus.

30:41And they'd go out and they'd say, well, we've got this cash on hand so you might as well buy back these bonds that are trading pretty cheap. We'll save the taxpayer some money. So that has been the historical use case of buybacks. So where's the money coming from now? So over the past several years, we at BIAV and several other market participants were advocating for the more active use of a buyback program to keep off the run Treasury securities where there's less liquidity, where there's generally less and user demand. Yes. Older, mustier, toucher. They don't really have a home. They don't really have a structural end user demand because they're old, they're off the run, they generally tend to trade with more of a liquidity discount. That's nothing new. But what we've seen in periods of time, because the Treasury market has gotten as big as it has, because there's many, many Q-sips, because Treasury reintroduced this 20-year point. Q-sips are like the unique ideas for each. But basically just to say, the bond markets, the US Treasury markets, enormous,

31:42right? Treasury can more actively manage its debt by doing these buybacks. And it's kind of like a weeding mechanism. So if they see something out of whack where there's not an end buyer, they can go to the primary dealers like Bank of America and say, let's get this security off your balance sheet. You give us a good price on it. That's trading relatively cheap versus what we assess on our own fair value model. We'll take it off your balance sheet. We'll buy it at a discount. And in theory, say it was the taxpayer so many because they're buying back these cheap securities that don't really have an end user home to begin with. But what Treasury's been doing to fund a lot of these buybacks when they buy back an old 20-year bond, an old 30-year bond, is instead of issuing at that same maturity point, they're really issuing more Treasury bills. So this is why Bessons called this more of a buyback twist program. But the big issue with why this is not really lowering bond yields is it's not QE in the sense that the market is getting guidance on

32:48where to set policy expectations. So I've written a lot about this. You can kind of try to quantify what the 10-year rate impact should be using some of these Fed QE rules of thumb for a unit of duration supply that Treasury is basically taking out. We should see yields coming down. But importantly, we're not getting this guidance from the Fed that they're going to hold rate steady or bring rates down. It's the opposite. We have a Fed that's hiking rates. And importantly, from a Treasury perspective, they're only going to be buying these bonds if they're cheap. Unlike QE where the Fed has a mandate of a specific amount that they're going to buy, whatever price that they get for it, Treasury is going to be price-sensitive. And they've shown that in terms of how the first larger buyback operation went. We think so far, that's what they've been sticking with. If they change it, they're not doing a buyback. They're doing a more direct form of QE. And I think it also changes the dynamic too, Sam, because then

33:48Treasury would be paying up for these securities and not saving taxpayers money at the end of the day. So I have to ask, what does this all mean for investors? I mean, I write about wealth management and investing for individuals. And people tell me all the time that they no longer own bonds, because bonds have done nothing for them. They have all their money in money market mutual funds. I wrote a story about how retail, cash, and money market mutual funds is at an all-time high. What would you say to those people? I think that for a lot of investors, fixed income does present opportunities, but those opportunities are more approachable at the front end of the yield curve in bills, in two-year treasuries, two to five-year part of the Treasury curve, where you're taking on less of this duration risk, and you're able to capture more of that in theory risk-free yield that we're seeing quite elevated the front end of the yield curve right now. To buy 30-year treasuries, 20-year tenure treasury securities that are trading relatively attractive levels versus what we see as fundamental fair value, you need to be looking at this from

34:50a longer-run approach, be more so positioning for risk that we end up in another global financial crisis or another pandemic when rates have to fall very meaningfully. And without that happening without there being a very massive growth hit in the US, it's hard to really have confidence that those rates are coming down and will actually generate positive returns. And what have you already owned treasuries? Your yield doesn't change, right? Meaning if you own 10-year treasuries. And you'll just do one. And yields go up. So if you own tenure and rates go up, you will incur losses on that position if you market to market. If you're a buy and hold investor and you hold that tenure treasury security over the next 10 years, you'll get your payment back, but if you're looking to reinvest that payment and rates are higher, you'll basically be losing money on that position. Right, because you do get people saying, hey, higher yields are good, right? I'm getting paid more for my right, because some people are really are buying through. And that's very much true, especially if you have a lot of that money sitting in cash at the front end of the yield curve, you're investing

35:53in a money market mutual fund. If you're a big deposit base, like a lot of companies are, and you're seeing rates on cash move up, that is a positive thing for you. The real risk is if you have more of a duration allocation where you're owning more longer term debt and you're marking your portfolio to market, you'll see losses on that. Right. But some people consider themselves like buying hold investors. And so they're like 5% to 10 year yield. That's good news. Now I can get, you know, I can buy a new tenure note and get more for it. Get a higher yield. Yeah. Although, I mean, that assumes that they that you can't that you will be able to hold it to maturity. I think sometimes people assume that then like they'll actually need to get that money sooner. And then they'll find that treasuries actually can lose money too. Do I have that correctly? Yes. Yes. Yes. So if you're looking to mark your portfolio to market effectively, you know, you've been vast money in a fidelity account, right? You take a look at it at the end of the day. If yields have gone up and you want to turn your treasure security, you'll see that that portfolio return down.

36:57Well, this has been a fascinating conversation. It sounds like we have maybe higher yields on the horizon. I think that's the upshot. And we'll have to have you back if that proves to be the case. Six percent. Six percent. Yeah. We'll have you back for each six percent. That sounds great. Thanks so much for joining us, Megan. Thanks for having me. The AI race isn't slowing down. Spectrum Business helps you set the pace by removing the infrastructure roadblocks that can slow AI adoption. With high capacity network performance, nationwide reach and coordinated planning from the start, you can launch faster, scale confidently and stay focused on what's ahead so you don't get left behind. Learn more about the Spectrum AI Accelerator at Spectrum.com slash AI.