Schwab's Jones on Bond Yields, Markets, Election

Great day to have you given the moves that we've been seeing in the treasury space, not just today, but really over the last few days. And kind of interesting too, coming out of that big Fed meeting where we did get that jumbo cut, there didn't ever really seem to be a ton of conviction that we were going to get additional jumbo cuts despite what the swaps market was trying to tell us. Yeah, I think that what we've seen in this cycle is just a number of surprises and twists and turns because we haven't had a pandemic cycle in our lifetime. And so every time we think we've caught the direction, it changes course. But the underlying trend is a pretty healthy economy, defying gravity, despite all the constraints that have been thrown at it with tight monetary policy, weak global growth, wars and conflicts around the globe. And consumer sentiment being really poor and yet consumers spend money because they have jobs. And that's a great point too. I mean, despite all the hand-wringing about that jobs report, I thought it was a relatively encouraging report. Now I understand for certain traders who are positioned a certain way, it caught them off guard, but it raises the question as to where yields go. Are we looking at big directional changes, either up or down, or should investors maybe prepare for this idea that we could just kind of be in kind of this range bound area, given what you said about the economy? Yeah, we think range bound. So we had for a long time about 375, 380 as a fair value on the 10 year. Now markets don't trade at fair value all the time. So you expect a trade around that. But directionally, in order to get further down, you really would have needed confirmation from much weaker economic data, especially the jobs data. And we didn't get that. We have the inflation numbers going in the right direction. And I think it's wrong to assume that just because we have growth, we're going to get inflation. Not all growth is inflationary. But it does mean we're sort of range bound here, I would say between, you know, maybe 360 on the downside and 410, 415 on the upside in the 10 year. I like what you said about that. Not all growth is inflationary. Yet, that's the thinking that if we get a no landing scenario, inflation is kind of inevitable. What kind of growth are we in for if it's not inflationary? Oh, it had really a big increase in productivity. And that's just output per unit of, you know, labor input. And so what we've seen is goods prices have come down. And service sector prices are kind of leveling off. And the labor market's probably in good balance right now. It's not accelerating to the point where we're seeing big wage gains and big shortages of workers. So we're kind of in balance here. But if you get productivity growth, you can grow at a faster rate without inflation. And that's kind of a Goldilocks, you know, never, never land a world that you don't see very often. But it's the world we've been in now for quite a while. And you think that's going to show up in this week's CPI and PPI reports as well? Yeah, we do think we'll see some soft numbers there, you know, maybe 0.1% on the CPI overall. And that continues the three month and six month rate of change numbers continue to come down really pretty fast. So we do we are encouraged about inflation, and that's probably going to cap yields. But as long as growth is strong, they're not going to fall too much. When we talk about the state of the economy, and particularly what's been going on with interest rates, there's been a lot of focus on the bond market, the public bond markets, I should say, I am curious about corporate debt, and whether we're going to see a more attractive environment, particularly for the less than stellar names that I think a lot of people had avoided for most of the year. Yeah, the high say the high yields of investment free market bank loan have done very well, those spreads are very tight. And that's partly because we've been in a sort of benign environment. So even though the lowest quality credits are defaulting at a higher rate, it's not exorbitant. And the yield has been so high, that they've been able to to continue to sell their bonds or to have people hold on to their bonds. They've also done something called distressed exchanges. So before they default, they just do a workout ahead of time. Now, if you're holding the bond at par, that doesn't do you any good. But for some people, that's a way to avoid the default rate going up. So I'm still a little bit cautious, because valuations are so high for the lower part of the high yield market, I'd be a little bit careful there. Yeah, it's interesting to to see some of the quote unquote refinancing that have gone on I do have to ask you really quickly about the election cycle. You've been covering the financial markets and fixed income markets for a long time. For some reason, everyone's telling me that this election cycle is different. It will have a major impact on financial markets, primarily because of fiscal policies. And I want you to tell me whether I should be worried or whether some of these people who are raising these concerns are maybe just being a little bit too polyamorous. Yeah, you know, we we get this with every election cycle. And there's no doubt we have a fiscal policy challenge. We have a deficit that's rising. But markets, the bond market does not really care that much about this. And I think we'll probably find that out. Historically, it hasn't made that much difference. And not only that, we have to get past the presidential election, find out composition of Congress, and then find out what they decide to do. There's a lot of steps between here and there. And there's a lot of ways it could go. So I'm not really factoring it in as a big as a big thing to worry about. You sound pretty calm about everything. I'm wondering what you're worried about as we head into the election and into the year end. Oh, well, there's plenty to worry about. But I tend to be calm anyway. But I can't you know, the thing that bothers me is we have so many conflicts around the world. You know, you wake up every day and you don't know what market has been hit, whether it's a conflict in the Middle East, a conflict in Ukraine, and or global, you know, climate change crises. You just don't know where it's going to come from. And it seems like it's always coming from somewhere. The other thing that concerns me from a political point of view is this trend we're seeing towards trying to influence the central banks. So from politicians and central bank independence, to a great degree is really important to the integrity of the market. And if the market loses confidence in that, that would be a game changer.