Moody's Talks - Inside Economics - Yielding to Pressure

Episode Date: August 21, 2026

Top of mind for the Inside Economics team this week is the surge in long-term interest rates. Colleague Martin Wurm joins the conversation to unpack why rates have risen so sharply, assess whether the U.S. Treasury’s efforts to stem the increase will work, and consider the risk of a much more serious bond market sell-off. Fundamentally, the only real solution is for the nation to address its darkening fiscal outlook. Hmmm…. Guest: Martin Wurm Hosts: Mark Zandi – Chief Economist, Moody’s Analytics, Cris deRitis – Deputy Chief Economist, Moody’s Analytics, and Marisa DiNatale – Senior Director - Head of Global Forecasting, Moody’s Analytics Follow Mark Zandi on 'X' and BlueSky @MarkZandi, Cris deRitis on LinkedIn, and Marisa DiNatale on LinkedIn Questions or Comments, please email us at [e-mail]. We would love to hear from you.  To stay informed and follow the insights of Moody's Analytics economists, visit Economic View. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome to Inside Economics. I'm Mark Zandi, the chief economist of Moody's Analytics, and I'm joined by my two trusty co-host, Marissa Dina Talley, Chris Duretis. Hi, guys. Hi, Mark. Boy, we're doing a lot of podcasts. Are you getting podcast? Fatigue.

Do you have some podcast fatigue setting in? I don't say that because we got a lot more coming. I love it. Oh, good, good. I could do this every day. And you are. Literally. You know, this is our regular podcast that we do every Friday, although we're doing it on a Thursday because I'm going to be in D.C. tomorrow, I can't know. Tomorrow we've got a podcast, too, don't we? I got to look at my skies. Yeah. But we have an AI series. We've had two podcasts so far in the series. The first is David Otter. That came out on this past Tuesday. And then we had another conversation with Daryl Spence from Capital Group. I don't know when that's coming out, but relatively soon. And then we go to tomorrow.

We're having a conversation around data centers and on Monday a conversation around usage by businesses and kind of the adoption rate, that kind of thing. So a lot going on here. But today we're going to, I think the topic we agreed to kind of focus on is this sell-off in the bond market. Bond yields, long-term interest rates are up a lot, certainly since the war. And to help us with that, we've got one of our colleagues. I'd say pretty much a regular, no. Martin, Martin Worm, you've been on a few times now. I have been, hi, Mark.

Good to be back. I want to say five times, something like that. I'll have to say your background looks different from the last time we chatted. It's because I mirrored it last time by accident, and I turned that off. So my room is flipped from your view, but it's still the same room. No way. So what? I mean, really?

That can't be right because the other room looked like it was a cave. It looked like you were like a... Oh, that's because I live in Seattle and it's summer, so it's not raining. Oh, is that the only difference? Yeah, we're doing this call in one month where the sun is shining in Seattle. Oh, because the room looks bright and light and airy. And last last I recall, I felt like I was talking to a rock star, you know, in his dense... No, no, it's just a Pacific.

West doing what it does. Didn't the grunge? Isn't it grunge music came from? Is it grunge? Yeah. Yeah. Yeah. Is that right?

That's all been replaced by Amazon employees. So there's nothing. There's nothing of that left. That's the saddest statement I've ever heard on this podcast. Well, that's the truth. I mean, come visit and see for yourself. Yeah. I thought they were moving out.

Moving to Florida. Well, we'll see. Maybe there'll be another grunge moving in 10, 50 years. Okay. We'll see what that goes. Amazon is moving to Florida? I hadn't heard that. Well, because the top guy did, right?

Oh. Because of the taxes, right? Oh, taxes, yeah, right? Well, yeah, and hiring is not what it was, and it's been life. So, there is that. Well, it's good to have you on board. Of course, Martin is critical to all the financial work that we do, financial markets, financial institutions, and we do a lot of that,

along with Damien Moore and Chris Kramer, so got a great team there. Good to have you on board. So let me, oh, and of course, just to make it set the table, we're going to talk about the bond market, you know, what's happened, what's going on, what's the administration's response, what does it all mean for the economy, where's it headed? And then we'll at some point play the game, the stats game, and I got a reasonably good stat, I think. It's funny, I'll have to tell you, I used AI to get the stat. I just said, hey, give me a good stat for this great podcast called Inside Economics. I'm not kidding.

I almost did that because I was having a hard time coming up with a good one. You should try it. And it came up with this anodyne. First thing, anodyne, not a really good stat. And I said, that's not very good. Come on, make that better. You can make it more difficult. And then the second one, it came up with was pretty good.

I just wasn't ready to outsource that to AI yet. I checked it. It had sources. It had sources. It had sources. And I went directly to the source. I'll give you a hint. It probably made up the source and then it went.

It's the Federal Reserve Board. They've hacked in. They're writing the papers for the Fed now. Geez. Oh, my God. Anyway, look forward to it. And then listener questions. Well, I think we'll have some time for listener questions.

Okay, so to the bond market. So just to give the facts, ma'am, if you go back to prior to the war, Iran War, which began at the very end of February, the 10-year treasurer, yield, and we'll talk about the 30 year as well, but the 10-year treasury yield was below 4%. Kind of hovering around four, some days a little above, some days a little bit below, but we were below 4%. We're now, last I look, today, it's bouncing around all over the place, but I think we're at 470, 475. So we're up 70, 75 basis points, 0.7.75 percentage points.

The 30-year treasury yield, which we haven't historically looked at quite as much, but are getting a lot of attention because this goes to some of the reasons, because some insight is to some of the reasons as to why rates are rising. That's not, that's up from, I think, about before the war, probably four and a half-ish. And now we're at five-and-a-quarter-ish. And five-and-a-quarter is pretty high. Both the five-and-a-quarter and the four-75 on the tenure, you have to go back really to the financial crisis, the GFC, to find rates.

you know, kind of as high as they are. So, uh, we took a long, uh, period of much lower interest rates, you know, during the GFC and the pandemic and in the wake of the pandemic. And here we are back, uh, to, uh, to where they were before, uh, the GFC. Uh, that, that's kind of, uh, the, uh, you know, what's happened. Right. So I've pushed up a lot more recently. Uh, the other thing I'd say before I turn it over to you, Martin, to give your sense of things is, when I think about long-term rates and what's driving them,

the first thing I do is I kind of decompose the interest rate, the 10-year yield into three parts. Part one is inflation expectations. What are bond market investors thinking inflation expectations are going to be over the period, over the maturity of the bond?

And there, you get no explanation for the run-up and rates, because inflation expectations are today right where they need to be. right consistent with the feds target long run target of 2% on the PCE the consumer expenditure deflater and they did rise early in the war but they've come right back in and they're kind of exactly where they were when the war started so that 70 75 basis point increase in the 10 year yield none of it is related to the inflation expectations part two is a real short-term interest rates so after

inflation short-term rates and that is kind of a window into what markets expect the Fed to do going forward here. And there, they're up 30, 35 basis points, you know, from the start of the war. That reflects the market's expectation that the Fed is going to be raising interest rates here pretty soon. We've had some conversations on this podcast about that. And by early next year, the betting is in the markets, at least the last time I looked, maybe it was when we did our last podcast in the last week. The market, the market. are pricing in a couple rate increase, not fully pricing in, but mostly pricing in a couple rate increases, which would be consistent with that 30, 35 basis point increase. And then finally,

the third part of the long-term rate is a so-called term premium, and that's the extra yield that investors need to compensate for the risk they believe they face by buying a long-term bond compared to just rolling over with short-term securities. And that goes to a melange of stuff, you know, debt and the Treasury debt, all the corporate bond issuance, concerns about inflation, inflation expectation. It's really the volatility in inflation and the uncertainty around inflation, Fed policy, transparency, maybe safe haven status. But I don't want to go too far down that path because I want to hear, you know, guys, what you think. But let me just stop there with that as a kind of setting the table and turn it to you, Martin. And did I get that roughly right?

Would you frame it differently? Would you say it differently? Is that sound about right to you? And, you know, what do you think is going on here? What do you think is the fundamental, more fundamental drivers as to, you know, behind this run-up in interest rates? Yeah. So on the first part, I would break it down basically like that. You can further break it down and say what are all these components made of.

But I think in a broad composition, when I run these, I get roughly the same numbers. There's not much movement on inflation. a little bit of movement in rates, but it's really in the term premium, this long-term risk compensation and investors demand for holding a 10-year-old 30-year bond. You can decompose that further, and it seems like it's really on what financial folks call duration risk,

is the sort of long-term real rate risk, this risk that I'm taking at some point in the future, interest is a movement in the wrong direction. And that is linked to things like the deficit. It is linked to things like uncertainty, just about rates in general. And we can decompose that, I think, that's what we're going to talk about. But I think that's what I would frame it.

And I guess one thing to point out is that the term premium is not observed somewhere. It's not something you can go look at or measure. It's not based on a survey. It's teased out of the data using various econometric techniques. And there's different measures of the term premium, which can get to, different answers. But roughly speaking, it feels like at least half of the increase in long-term rates is the term premium.

You're suggesting it's a little bit even a little bit more than that. Well, it always, we could go into weeds here. I promise I'm not going to do that because it takes you into statistics. But generally speaking, changes are a lot more stable across different term premium estimates than level. So if you say, well, okay, there's a risk premium that's a percentage point or two, that's not as stable. but when they change over time,

they all tend to change in the same way. And really, since 2023, where the buildup has been is mostly in the term premium. There's a small effect that comes from inflation that's a little higher. There was in 2010, because inflation has been higher.

There's a small effect that comes from the rate, but it's really mostly in the risk premium. That direction is pretty much undisputable, I think. Got it. Okay, so of all the things that could be... So let's focus on the term premium. Yeah. Because inflation expectations are not what's going on here.

The Fed is the Fed, and we've talked about that. So let's talk about that term premium. What do you think is going on? What is in that – I gave a quick list. I could go on. But, you know, what would be at the top of the list of reasons why you think the term premium is gapped out? And by the way, just to give you a sense of that, term premium was negative not too long ago, meaning, you know, investors were paying up for owning a long-term bond.

Remember when we had negative interest rates. Here they're back up to something, again, consistent with what we saw all the way back in the front of the GFC, the global financial crisis over 15, 16 years ago. So they've come a long way. So what do you think is going on in terms? And they've risen a lot since the war started. So what's going on? Yeah.

So there's different ways to break it down. I think the first order problem is debt, just the rising, U.S. debt burden, and where we are. and I would break that down into conceptually viewable into three components. The one is this sort of default risk in general. There's a point to be running up more and more debt that someone in the future. The US Treasury is not going to be able to pay that back and would default. Theoretically, that is priced in, but the effect of that is actually very small. The US Treasury is rated at an AA1.

Historically, I think since the early 1900s, no one's really defaulted with that rating. So whatever small that chance is, that's not really driving the debt. But what's happening, or I should say the yield, what's happening is the Treasury is issuing more and more debt and someone has to hold it, right? So there's this absorption problem that debt has basically doubled since the global financial crisis as a percentage of GDP, and someone needs to lend to the Treasury to make that work. And as it grows over the next 10, 20 years, they need to be more and more investors to absorb that. And if demand can't hold up with the supply of these bonds, what that's going to do is going to drive up interest rates. it's going to make it more volatile, and that is something that markets are pricing in. So that's the first sort of component.

We can talk about this composition a little bit. The second big component that's in risk is the question, well, is the Treasury actually going to make do on its promise? This is sometimes referred to as debasement risk? Is there going to be a period in the future where, for instance, we're going to start to inflate away some of this debt, where we're trying to manipulate yields in order to keep that a little bit lower, and is that going to affect current long-term bondholders? And markets are clearly starting to worry about that, too. You can see this in the rise of the price of gold

and similar assets over the past few months as well. You said there was three aspects. Yeah, the first one is just sovereign default risk. It's just the treasury is going to default over in the next 10 years. Generally speaking, that drives very little of the actual movements in yield simply because the risk is small. The second is just who is going to be able to hold on this day? Is that going to affect movements in rates?

And we can't dive into why I'm saying that. And the third one is this risk, is the Treasury or the Fed going to start manipulating the debt? Are we going to see more active yield curve control? Is it going to be the attempt to perhaps inflate away that debt? Oh, interesting. I hadn't thought of that. Okay, so we'll come back and dig deeper into some of those things.

But that's first on your list. Broadly speaking, it's all of the Treasury debt that's being issued to, finance the government's large budget deficits and debt load. Any way you spin it, it all comes down to that. I was like, we can talk about all the specifics of what the Fed is going to do or how efficient the Treasury market is. Ultimately, the more debt there is, the more it's going to push up rates. It's basically a supply and demand argument.

I can shift that at the margins. I can make the market margin more efficient. But at some point, if there's more debt, the price of borrowing is going to increase. There's no way around that. Yeah, you're saying a necessary condition for this run-up in rates. It may not be sufficient, but definitely necessary is got a lot of debt out there, a lot of treasury debt out there. It is the primary problem. Got it.

And it's not, it's consequential, as you point out. I mean, our deficit is close to 6% of GDP. Our primary deficit, that's, you know, add up all the Treasury issue, and it's a couple trillion, divide by GDP, 32 trillion, you get 6%. The other is the primary deficits, so you exclude interest payments, which are now quite considerable over a trillion dollars on an analyzed basis. But let's exclude those. That so-called primary deficits, three percent of GDP, which is kind of way out of bounds when your economy is at full employment or something close. You know, the unemployment rate's just over 4%. That's just unheard of it.

And then your debt load, our debt load, meaning to take the stock of debt to buy by GDP, publicly traded debt. You know, we've heard these $40 trillion recently because we just reached $40 trillion. That's total debt, gross debt, but if you include just publicly traded debt, now I won't go through the reasons, the difference between the two, unless you think we need to. It's 100%. And you just look at the forecast under very kind of benign assumptions about the economy and fiscal fiscal policy going forward, assuming a lot of tariff revenue over the next 10 years, We're at 120% 10 years from now.

So you're saying investors are looking at those numbers and saying, whoa, this doesn't, this is something's wrong here. This is something's going to break somewhere or potentially break. You got to comp, you, the Treasury, had to compensate me, the investor for taking on that added risk. Yes. That's a short version in a nutshell. Yeah. Okay. All right.

Chris, let me turn to you next. So, again, in that long list of reasons for why the term print. is gapped out here, which is driving the increase in long-term interest rates. Martin, I think, rightly put treasury issuance and our fiscal situation at the top of the list. What's number two? So I'd say it's uncertainty, uncertainty, writ broadly, right, in terms of, so it's uncertainly around that debt and deficit, right? That doesn't look as though there's any political will to change anytime soon. And if anything, you could make credible cases that it's actually going to get worse going forward here. If we hit a slowdown here, we could see expansion going on further.

And then just the uncertainty around Fed policy, new chairman, lots of uncertainty about forward guidance, and the Fed balance sheet, that's another pretty substantial factor here. If indeed, right, the Fed chairman has indicated he wants to shrink the balance sheet. That would work in the opposite a direction of bringing rates down. So that also is something that investors have to put in their calculations here in terms of the uncertainty of what the future could hold here as they're thinking over not just the next few months, but these are 10, you know, 20, 30 year debt obligations that they're looking at. Yeah, I would break what you said down into at least a couple parts. Farther. Okay. Yeah, you combined things on the list in my humble

opinion. Okay. Yeah, I'd put... I'm a macro guy. Yeah, I know, I know. It's not unreasonable to conflate some of those things because they're all related, for sure. But just to make it clearer from a didactic trying to explain what's going on, I would put second on the list, Warsh's perspective on Fed communication and the lack of, therefore,

the lack of transparency. and if you're not getting forward guidance, that by definition you're going to be more uncertain, right? So more fundamentally, you're right about the uncertainty, but more fundamentally, it's worse's perspective on communication. And he, unlike some of the other things he might want to do, and we'll talk about the balance sheet in a minute, on communication, he has some, it feels like he has some real latitude there, right?

I mean, he can decide what's in the, he really has a big influence on what's going to be in a statement after each FMC meeting when they meet to set interest rates. He can determine how many press conferences he provides, he does after the meetings, if any. He can have a big influence on the summary of economic projections. So if his view is, in its, he said this point blank that he wants the Fed to be, provide less information, no forward guidance, even to the point of not even providing some context around the reaction function of the Fed, you know, that just creates a lot of, I don't know. So what does that mean? Perhaps even fewer meetings now, right? That's the latest. Yeah, even fewer meetings, right,

even fewer meetings. And then the other aspect of uncertainty, I think, is around inflation itself. I mean, we kind of all, inflation went dormant for a long period of time, you know, for really 20, 25 years, we weren't even thinking about inflation. And what, you know, I didn't even, when we were doing our forecasts for many, many years, inflation was just an afterthought. We really didn't think about it

because it was 2% or something close to. But now, you really, inflation's hard to get your mind around. I mean, the mode of the distribution of possible outcomes on inflation is 2%. That's what the bond market is saying. and saying, I think you're going to hit 2%, but the distribution around that is now much wider

because I have no idea, you know, given all these shocks that are occurring and how, what's going on with fiscal and monetary policy and, you know, what does AI mean, you know, is it going to change? Is it inflationary now, but deflationary in the future? And what about globalization? That was such a disinflationary force.

I mean, if we're not, if we're de-globalizing, what does that mean about inflation? So it feels like what I'd say, say is instead of saying uncertainty writ large, I'd say inflation uncertainty, you know, is at the top of the list. Does that sound? There's a refinement on what you said. Does that sound right? I think, yeah, that's fine. I do think there are other sources of uncertainty that are packed in there as well. Can I add one thing to that, though, Mark? So I agree. I agree with that. But I do think that risk pricing of inflation is something that happened a couple of years ago. I don't think that's reasonable. I think that is something. And it came, well, it's sort of how the models come down on this when you do these decompositions. So if you compare really the nominal component of the term premium in 2023 to 2018, let's say, it is a good 50, 100 basis point higher. But since 2020, it hasn't really arisen all that much. And you see this really sort of naively, if you look at the tips curve, the tips curve is basically been flat.

It hasn't responded much to the Iran War. So there's a higher level in there. There's generally a higher sort of expectation. there's inflation risk. But in 2020, tips being Treasury, inflation protected security. Oh, yeah, sorry.

Yeah. So inflation index bonds. You see it in the UK has these kind of instruments. You see it there too. That is higher in terms of level than it was pre-pendemic, but it hasn't really moved up a lot in 2026, which is kind of telling because what that tells you is that bond markets generally don't expect the oil price shock to last.

They think that central banks are going to get that under control. Right. Interesting. But we still write about the risk. I just say the timing is a little different problem. God, I'm glad I'm good to be right. Thank God. But let me go back to Chris.

What other uncertainty are you talking about, whether the Phillies are going to win the World Series kind of uncertainty or what are you talking about? You kind of alluded to some of the broader uncertainties around AI and technology productivity or even demographics, what exactly does it mean for an older population? Are they inflationary deflation? There are lots of uncertainties.

Yeah. Yeah, yeah, out there. All you just look at our risk matrix. Exactly. Yeah, exactly. Terrorist attacks, cyber attacks, on and on and on. Okay, Marissa, sorry you're at the end of this. That's okay.

And we now may have exhausted the list, but things on the list. But would you want to, I've got one more, but I'll defer to you. What's next on the list in your mind? Oh, I wonder what one more you have. Okay, I mean, I had written down demographics, inflation, tariffs, AI, as all being recently inflationary policies that we don't really know so much how it's going to play out. So back to the uncertainty around inflation, I think that that is, I think those three things are very uncertain now and more uncertain now than they were even in 2020, right?

So I understand what Martin's saying, but I think there. There's been a lot of recent, even with tariffs, right, the renegotiation with Canada. There's a lot more concern recently about the inflationary impact of AI. So these things seem more recent and more acute to me right now. Right. So it's kind of in the, you're just giving other reasons for the uncertainty, premium. Yeah.

Yeah. Other factors. Yeah. Yeah. Makes total sense. I was going to say, I've got one, I feel, more strongly about one less on the more strongly safe haven status. You know, that's a hard thing to prove and show. But it does, the idea is that the U.S. Treasury bond has been a safe haven for

global investors that if times are tough anywhere on the planet, including here in the U.S., money comes flowing in the U.S. because it's money good. You know, if you put your money here, you get your money back and get your interest paid on time. There's no question. But there are some increasing questions around that and so that the safe haven status of the U.S. might be under pressure. If that's the case, then that would cause interest rates to start to push higher as there's a premium for that risk. Does that sound right to you, Martin?

Do you buy into that argument about safe haven't status? I think it's marginal. I would file that under what really called debasement risk, right? Is this sort of idea that somehow that treasury is going to not be as good on as a credit as it used to be. There's many different ways to do that, right? It's not just outright default. It could be letting the currency depreciate all these kind of things.

But I do think it matters. It's marginal, right? So we know that about 10 years ago, I think around 2000, about 70% of the world reserves were in dollars. And now it's something like less than 60%. But it's not something that changes from one quarter to the next because there's no real alternative. So I can try to not hold as many dollars, but what am I going to do? There's only so many Swiss bonds I can buy. do I really trust the European economy or a Chinese economy?

So it's a gradual process, but the errors are definitely gradually pointing in that direction. What would you look at to give a sense of whether that safe haven status is under some pressure? I mean, one thing that is consistent? You mean in the short term? Or sort of in trend? Because in short term, we'll look at the exchange rate. If the dollar collapses, that's a sort of a strong sign that is a problem, right? Right.

In the longer term, it's more to question what are the alternatives, right? And so one alternative is a set are countries like Switzerland, but there are supply problems. The Swiss government cannot, there's not enough Swiss debt to absorb the world's excess demand for safe assets. That's not a thing. You would see it in assets in trend like gold around certain events, because gold is at least as an inflation hedge. It doesn't pay you interest.

But if the US government say we're to start inflating his debt away, gold is an alternative. It's these kind of assets. But it's very, very marginal. I just don't really think that in the near term, central banks have a real alternative to the dollar at scale. What would that be? You can try to shift into a portfolio of currencies and that's happened to a degree. So they hold a little bit more euro. They hold a little bit more yen.

But in comparison, that pales. I think the euro reserve holdings are something like 20, maybe 30 percent in that range. Right, right. Do you look at Treasury auction demand? Can you look at that? Is that a gauge? you could. The problem of that, I mean, so you can look at treasury auction demand and say, well, in any given week, if the treasury auction is off a 30-year, what is the actual bids there are being placed?

But the treasury has some way to manipulate that by changing the rate it accepts, and that's sort of what it has done recently, actually. So if you look at the bids to the number of treasuries offered in August, they actually don't look that bad. But what the treasury did on the 30-year just paid a higher interest rate. Well, one other thing on the list, I just want to get, and it's towards the bottom, and listen, I'm not sure. And by the way, on the safe haven status, the one thing that's consistent with, you know, some impact, and I'm not talking tens of basis points. I'm talking basis points, which is real money, and even a basis points is real money, is the spreads with other bonds remains very thin. Like if you go to corporate credit spreads, they're very thin. you know, that may reflect less concern about corporate credit risk,

but it may also reflect that there's some kind of interest rate premium in the so-called risk-free rate, the 10-year Treasury rate, it's not as risk-free as we thought it was. No, I agree with that. I'm not really sure it speaks to that one particular risk. I think it's the entire basket of risk that we're speaking to broadly support that. Yeah, that's true. That's true. The other is, here I don't know. I'm just asking all of the bond issuance that's occurring to finance the AI buildout.

I mean, it's just massive, you know, both in the investment grade bond market and the high-yield bond market and private credit markets, there's just a lot of demand for capital, both equity and debt, and that doesn't feel like that's going to come in anytime soon. It just feels like that's going to become more intense. And, you know, investors are investors. I know there's people, investors invest in treasuries and investors are in corporates and there's some different, there's differences. But nonetheless, no, wouldn't that have an impact? No, I think that's, I mean, I think it's a fine argument.

Basically, what he's saying is there's competition for credit and maybe, you know, meta gives me more than the U.S. Treasury controlling for risk and such. And I think it's an okay argument. I'm not really sure it helps you with the 30-year much, though, because the sort of the maturity are different in the eye space, where you're looking more at that that is issued in a five to maybe 10 years range, you typically shorter than that. And where we really see the yields blah more recently isn't at very long end of the curve, it's not clear to me that that's as AI-related. But I do think sort of in the middle of the maturity structure, it probably is in effect. Okay. All right. Anything else on the, oh, go ahead, Chris. I was going to ask Martin,

what about the Japanese carry trade? We've seen weakness in the yen. There's this, there's this theory that, you know, Japanese might need to sell off treasuries to support their currency. Any truth to that? Well, I mean, if there's truth, that is at least a risk of it. And this brings me to this thing that I said initially, right? So I'm not actually that concern that the treasury is going to default in the next 10 years. But by virtue of there being more debt, it needs to find someone to hold it. And historically, who's holding most of the debt, you know this is the rest of the world.

So if you look at the statistics, you go back 10 years, about half of U.S. Treasury is helped by the rest of the world. That is the Bank of China, that is the Bank of Japan, that is the Bank of England and so forth. That share has fallen over the last 10 years to about a third of outstanding that. And that's not necessarily because of this getting away from the dollar as a reserve currency. It's simply because there's so much more debt, right? Outstanding debt as a percentage of GDP has doubled since 2007. So someone needs to step in. Who is going to step in? I mean, could be the Fed. The Fed did that at times.

Huey was mentioned earlier during the pandemic. In recent years, it stepped out. And who's now the second largest holder of US debt is private hedge funds, really. And currently the largest holder of US Treasury is Japan. Japan holds about a trillion a little bit more than that. U.S. bonds held domestically by hedge funds are almost in that range. So it's the same sort of demand. And they're very different investors. The Bank of Japan can just sit on this debt and hold it. If I'm a hedge fund and the tenure moves a little bit, based on the positions that I have,

I may have to fire sell it, right? And that can induce volatility. That creates additional uncertainty as I mentioned really. That will drive up the spread. Now, with Japan-specific case, I have Japan. Japan is holding all this debt. Now, you're asking this question,

what's happened is the yen has depreciated. The yen has been depreciating really since 2000, but it has done so very dramatically since the beginning of the pandemic. Part of the reason for that is very simply speaking that interest rates come up a lot in the United States. The Bank of Japan for many years has had a policy where it quote unquote kept the long-term interest rate. Basically, it bought bonds to keep that at 1%. It abandoned that policy in 2024 and interest rates in Japan have been rising. They just haven't been rising as quickly as they have been in the U.S. And that caused this intense demand for the yen early in the year. The yen had a

40-year low, and the Bank of Japan basically decided to intervene on that, and the Treasury helped it, which was sort of the unusual step here. Why is the Treasury doing that? Well, if the yen depreciates further, all of a sudden Japanese government bet looks more interesting, the Central Bank might have to sell some of its treasuries. That's going to put additional upward pressure on the U.S. yields. So that's really the reason why they step down. Is that a material risk, or what's your assessment? I mean, I think it's... What material risk of what material risk?

That the, that in this scenario where the, the Japanese government actually does sell treasuries en masse to prop up the end. Well, they won't now, right, because of the agreement with the treasury, right? I mean, they set up the FEMA, the credit facility that was established during the GFC. Was it the GFC or the pandemic? The pandemic. And now the Japanese Bank of Japan can go to repo their, their trade. treasury holdings with the with the with the with the with the treasury and not have to sell treasuries so i think that's why the fed did it right because they were they were

concerned about why the treasury did that took that stuff because they were concerned that the you know if the if the japanese wanted to intervene they would sell treasuries and by by yen and that would put on per surreys so but they that they put an end to that yes that's right there's sort of an additional leg to that the treasury also sold euro and bought the end with that to prop up the yen against the euro a little bit. It's not known how much that was, though. That number is not official. There's a league number.

Which, Martin, what? What was it? So the treasury is that basically the Japanese sold dollars and bought yen. That is the one sort of supportive action. It was the vicinity of that is around 80, 85 billion dollars worth. And the treasury at the same time propped that up with an offsetting trade exchanging euro for yen to pop up the yen against the euro. That trade is certainly small. I've been talking something like maybe five to ten billion, but the exact number is not known. And that's sort of an

additional support that came from the treasury. That didn't work. It hasn't worked, right? Nope. I mean, the yen was at 165 to the dollar. Now what 160 to the dollar? I mean, I don't know. Something like that. But I think there's a signal effect here. Basically, I think what the treasury here is saying is we are willing to help you, government of Japan, Bank of Japan, Bank of pan, if you keep buying our bonds. I think that's sort of the implied deal here. Well, I think that's absolutely the case. And that goes to the other thing that happened this week is the Treasury's decision

to up its bond purchases and its repurchase program. You want to describe that? I mean, it's a very similar kind of step. They're trying to shore up the demand for treasury bonds, but really on the margin. But go ahead. Can you explain that? Yeah, so it's right. So the news broke yesterday.

What the Treasury has been doing since 2024, they're buying $2 billion of long-dated treasuries from the market per operation. These operations are once or twice a week. So you're looking at something the vicinity of maybe $15, $20 billion a quarter. What the Treasury there is doing is it goes to a bond dealer and say, well, we have this existing outstanding 30-year bond that we've issued at some point.

We'd like to buy that back. And we'll give you cash. And that cash is usually funded with a shorter-term asset that the Treasury issue is like a T-bill, whatever it is. And yesterday the Treasury announced that it was going to double these purchases from $2 to $4 billion per operation. That was the big news of the day. And the idea here is to say, what is this outstanding 30-year debt and this is outstanding 20-year debt, and the interest rates, they really have increased.

So we're going to take some of this supply of the market to make these interest rates come in and we're going to replace it with shorter-term debt that we issue either now or sometime down the road. Right, right. So the move itself, just like the intervention to shore up the end, is small. I mean, we're talking billions of dollars, maybe tens of billions, but not, nothing more than that. It's really, though, I think, as you say, a signal to investors that Treasury has got your back. You know, we're going to step in and do what we need to do to make sure that bond yields don't rise, that you're the value. your bonds doesn't, don't appreciate. That was my take on it. But I'm not sure it's working. It doesn't feel like it's working. Are these credible signals, right?

Do they actually have the will and the firepower to do so? They might have the opposite effect. Because what the treasury here is really, what the treasury really here is signaling is like we don't like where the yield is. So we might actually intervene to push that down. We might actively start to try and control the yield curve. Now, if I buy a bond today and the treasury pool pushes the yield down at some point in the future, I'd take an additional risk. I said, this is what we really call financial repression.

You have the government step in, divert funding from wherever they can find it and directed to the public satchel. And that's not ideal. And markets have responded that way. As I said, gold jumped, I think, 3%. Bitcoin jumped. The dollar lost a percentage point in intraday trading. So markets did not like this move. Well, those are right back up.

Are they right back up? Yeah, they did it brief and then they go right back up. But there's a signal here too, right? So we might be doing more of this. We might change the maturity structure over auctions. We'll basically do whatever we can to keep these long-term yields low. And that's not unlike what the Bank of Japan did. I mean, this is one of the reasons why the yen depreciated so much is because the Bank of Japan prevented these long-term rates from rising over really a period of 20 years.

Well, it seems like with the Treasury's trying to play hedge fund, that's what it feels like. And the hedge funds are, as you point out, big players, now they're the largest marginal player in the market. They're the guys who absorb the additional issuance that's coming into the market. And, you know, it feels like a very tricky thing to pull off. And if hedge funds begin to question, you know, where you'll, you'll, you'll, you'll, are going to be, they could all run for the door at the same time, and we could have a really significant sell-off in the bond market. No, isn't that a reasonable scenario?

That is a worst-case sort of scenario. It would require pretty heavy, adverse, unexpected rate movements to create that. We've seen that. So in March 2020, lockdown period created that kind of thing. The Fed, in principle, can at least mitigate that a little bit and its facilities to do that, but it's definitely a risk. I mean, it would shake up markets, at least in the need of. term. Well, let me, this is in our risk matrix. I brought up the risk matrix before. I think listeners

know the matrix lays out all our downside risks on one axis, the x-axis is the severity of the risk in terms of economic loss if the risk were to occur. And the y-axis is the probability. So you look into the northeast part of the matrix for high probability, high severity, we've got the bond market meltdown. And we've had it there for quite some time. So it doesn't feel like, it feels like a consequential, you know, potential threat. Chris, if I asked you, what probability would you put on a scenario where we saw a significant sell in the bond market? And what I mean by that is 10-year yields go well into the fives, maybe close to six or so. What would you say?

Over the next year or something? Yeah, yeah, next six, 12 months. Yeah, yeah. It's hot. I've been bearish all over the place, so I'm very here too. But yeah, I'd say there's, what, 20 percent, 25? 25. Marissa, do you have a view on this?

I was going to say like 15. 15. Yeah. Martin, what would you say? Because you're the informed. Yeah. Yeah. You seem more sang one.

Well, the kind of event you're describing, I would also probably put in the 10-15 range. But you also then said 5%, and I think 5%, it can get there without a sell-off. I can see that too. Right. So it's just, you can just drift in that direction, right? Iran war drags on, inflation expectations soften a little bit. So to 5% you get pretty quickly, even without a significant liquidity event. Yeah, I said that 5, then I said quickly 6.

Yeah, yeah. So yeah, six is less likely, I would say. So you say 10 to 15? I don't want to put probabilities in your mouth, but just to get a sense of it. Yeah, as a gut feeling. And here's why I'm saying that it's the way that the hedge funds, these are not, the hedge funds do not have open positions that are longer short, but, these are complicated traits.

They exploit interest differentials between certain ass. It's not going to go into details on this. And while these seem very dramatic, the actual risk in that for them is relatively limited. So you need a sharp rate movement in one direction to really trigger that

where they need to put cash in these contracts and then you see these kind of sell-offs. And for that, you would need a significant, you kind of need that initial impulse and I'm not quite sure where that currently would come from. I don't think it's entirely impossible for sure. It's definitely plausible if something unexpected happens. Say AI repricing stock market collapses something like that.

But I don't think it's in my baseline. No, no, no, no, baseline. Yeah, the one thing that mitigates the risk in a meaningful way is the Fed. I mean, they just QE. They just start buying bonds again. And why wouldn't they do that? There is that. And I mean, the Fed, even beyond that, the Fed, after the COVID-Eableness,

episode established a standing repo facility. So you can just go and basically repo treasuries with the Fed. That's a possibility you have already anyway. The primary dealers can do this. So in principle, if there's these sharp selloffs, it should be more mitigated than it was in 2020. Of course, it hasn't been tested. And usually what happens, if a liquidity shock is large enough, it doesn't really matter what sort of facility you build. But yeah, the Fed can just go out there and support the market. And I'm convinced it would do that if there is a liquidity event. What's less clear is what happens with this sort of gradual buildup in rates and this trend

that we're currently on. Because that's not really an emergency from the Fed's perspective. Right. That's just a trend. Right. Well, no, no. I think in the minds of the Treasury Secretary, because of in the minds of everyone else that he reports to, this is a big deal.

This is a big, because now the mortgage rate is 30-year-fixed mortgage rates, what, for a six-and-three-quarters? It was definitely two. what? 7-2? 6-7-2. Oh, 6-7-2. Oh, wow. Yeah. So I don't know, Martin. I think there's like hair on fire. Look, but I'm going to come back to what I said initially.

The underlying problem remains the deficit trend or the debt trend. This is just going to accelerate. Of course. By the way, this is not a political problem either. It doesn't matter if you're Scott Bassett or Janet Yellen. Your job is to manage this, to navigate this. if it's stock buybacks or pushing stable coin or changing the auction maturity, every treasurer is going to do that.

They're going to do whatever they can. They say, we can't talk about these problems, and that's interesting, but they're not really the fundamental problem. The fundamental problem is you need more and more cash. Well, that's another reason. You're just arguing against yourself, Martin. I'm just pointing that out because they're not going to fix that problem, and therefore, you know,

and the strictures are still going to push higher. But look, I mean, it's physical deficits are not new. We have centuries of history around this. know where this is going to end. What's new is how big they are and how trend lines. Yeah. But it still always ends the same way. I mean, unless you rein it in, it's eventually going to implode.

I don't think that's going to happen tomorrow, but that is where it's going to go one day. Let me ask you a kind of a question you might not know the answer to. It's more of a procedural question. If the Fed wanted to QE again, is that, Chair Wars can't do that by himself, right? He'd have the, how does that decide it? Is that a committee's decision? Far as I recall. call it's the board that has to vote on QE.

Because it's under the Federal Reserve Act. Right? There was the, there's the two different things. One is changing to the ample reserve regime, setting the Interestate and Reserve balance. That I think is decided by the board. But because QE is under the Federal Reserve Act and unconventional monetary policy, it would require the entire FMC.

I'm not 100%, but I want to say, 85%. Got it. Got it. Got it. Hey, we got to move on. Just one other thing about this, our forecast, our 10-year treasury yield forecast, and let me preface this by saying for many, many long period of time we were being criticized because we had the 10-year yield between 4 and 4-5 percent, and people would say,

it's never going there, and it's not going to stay there for very long. Now we're starting the question is, are we too sanguine? Because we still have the 10-year treasury yield, I think it's between 4 and a quarter and 4.5 percent. going forward. Do you think this is baseline, you know, most likely scenario, do you think that's too low, Martin?

I know yields go up, they go down, they go all around, but not, so not in a given quarter. Yeah, yeah. I was actually just sort of just going to say that.

So the, um, there is an effect here that runs from the Iran war. I think we want to see through that. So I think part of the elevation that we've seen in the first year is going to come in once that uncertainty fades. That's broadly what markets are pricing in.

What we have seen is this uptick in the real term premium. And that's been consistent since 2023 and it hasn't stopped. And as long as that keeps pushing up, we'll end up being on the low end. I don't have a good sense of how to replace it at this point. So I think I would probably wait a couple of months before I make a change. That's what uncertainty does. When you're uncertain, you don't change anything. No, because you're making it.

Just like interesting. Because in a sense, you're making it work. If you're saying it's 4.5% now and 5% next month and then we say it's 4.5% that just creates more uncertainty. Oh, yeah, yeah, yeah. No, no, we've got to be very sure if we're going to change it in any substantive way. We're definitely on the low end. So I think it is worth keeping an eye on the risk premium. But I do think before we really make that change, I want to see what happens with the Iran war on oil prices and the effect. Spoken like a true central banker. Give me more data. Fair enough. Okay, so I want to play the game, but before I do, did I miss anything? Is there anything else about on this issue topic that we should discuss before we move on?

There's one thing we didn't get in, and I'll do it in two sentences. We haven't really actually taught about the question what the Fed is going to do on the balance sheet side, because the Fed could step in here, right? And it has not. By increasing its bond per queue. Yeah, we could just go back and, you know, buy longer term bonds and all this problem with the way. The Fed has not commented on this. my sense is that while Kevin Warsh is running through his task force on this, the Fed is not going to comment on it at all. Unless they get pressure to really act on the bond market, I think we're not going to hear from the Fed around this topic, not very explicitly. That is my sense.

Yeah. Yeah, I suspect right. The other issue, which is too median deep for the moment because we've got to move on, is what does this mean about the blurring between fiscal and monetary policy? Because didn't the Treasury just step into the monetary policy space with this move that they made this week? I mean, it feels like monetary policy, not like fiscal policy. But it's trying to get direction. It's less effective, though.

I mean, the bond moved a little bit because we said we changed maturity. If the Fed goes out and buys billions of bond, that has an immediate effect, right? This is just step one, though, Martin. Why do you think this is the end of the story? I mean, this is the beginning of the story. No, I agree. And, I mean, financial repression is many forms. I could force a pension fund to buy treasury

as countries have done that before. It is many ways to do this kind of thing. Sure. It does seem like yield curve management is the objective future. Agreed? Yeah. Okay.

All right, let's move on. Let's play the game. The stats game we each put forward to stat. The rest of the group tries to figure that out with clues, questions to Dr. Reising. The best stats, one that's not so easy. We get it right away. One that's not so hard that we never get it.

And we always begin with Marissa. It's tradition. Marissa, what's the stat? My stat is minus 10.6%. Related to the topic at hand? Indirectly. Yeah. Yeah.

Yeah, it is. Remember the rules. There's no, it is or it isn't. Yes, it's related. It's related. Is it fiscal something in regard with the fiscal situation? No. It's not an interest rate?

No. No. Interest rate minus 10.6. Good one. That would be tricky. Well, you know, I'm sure there has been a bond out. Japan's interest rate. Yeah.

Something regarding bond issuance or debt outstanding? No. Is it a year-over-year percent change? It is. Okay. Oh, all right. You're down minus 10 points. And it's not bond or bond holding related, you said.

No. Is it housing related? Yes. Pending home sales? Is that how is that related to the topic at hand? Oh, my God. Oh, mortgage rate. I think interest rates are very related to housing.

Okay. Oh, completion. Housing completions are down. No, no, starts. No. Starts? Sales? Nope.

No. Hermits. Not prices. Nope. We give up. Mortgage applications. There you go. There you go.

All right. We were circling. It's the mortgage apps composite index that's both refi and purchase applications is down 10.6% year over year. That's the latest as of last week. And, you know, mostly refi activity, obviously, given where mortgage rates are. Right. Both purposes and refi are down over the year. Nothing but bad news coming out of the housing market, right, Chris?

Nothing. Yeah. No positives. When it's stable. The pricing is stable. I guess that's the best you can do. I know, but you see single-family housing completions, which goes to GDP, goes to growth. I mean, that's the most direct link between housing market and the overall economy.

That's really, that got nailed in the month of July. July, by the way, this is a point. I'm just going to throw it out there, bomb. July was a really bad month for the economy, I'm saying. We lost jobs, retail sales failed. The housing market got crushed. Do you see Walmart's numbers? I mean, Walmart.

I was thinking of making that my statistic, actually. Yeah, that would be a good one. Yeah. I mean, it just feels really uncomfortable. And I hard to imagine August is going to be much better. I'm just saying the second half the year feels like it's going to be pretty tough. Especially in the context of rising rates, right? With the rates rising now, I mean, it's going to make life difficult.

That's not help. It does not help. Martin, you're up. What's your stat? Yeah, so I'm not really sure how to present this. I have two numbers. The first one is 1.1% and the second one is negative 0.42%. And they're related.

And they're related. 4.2 or 0.42? 0.42. You said negative. Negative. Are they interest rates? Are they interest rates? Nope.

They're not percentages. Are they percentages? They are percentage. The year over year growth rates. Year over your growth rates. Related to the topic at hand, I assume. Oh, here we go. Less than Marissa.

If my rissus didn't count, then less so. Oh, geez. That's weird. Is this a statistic that came out this week? Came out on August 10th. It's about 10 days ago. That's a long time ago. I can't even remember yesterday.

10 days ago. Geez. Last week. I can give you an additional hand. So this is a year-over-year growth rate for the second quarter. It's not an official release, but there is an official equivalent for 2025. And those two numbers are of one point. 0.27% and 0.32%.

Oh my gosh. So about 1.5 and 0. Not official. Is it related to GDP in any way? It is related to GDP very fundamentally, actually. Is it GDI? Some estimate of gross domestic? No, profit.

Now it can't be profits. No, it's even more fundamental than that. More fundamental than that. Consumption. even more fundamental than that, I would say. Really? Really? It goes to the core.

Goes to the core. Is it some component? It's productivity, yeah. Ah, very good, Marissa. Very good. Nicely done. And so the BLS publishes the official figures, but they're very laggy. Total factor productivity in 2025 grew up 1.27%.

And if you adjust that for capacity, utilization. That's how much more are workers working, how much more machines are working. It's actually smaller than that's about 0.32. The San Francisco Fed updates these and the numbers have fallen. So what they're actually finding is that what productivity growth there is is not yet AI driven. It seems to be more driven by workers working more, machines being used more, that kind of thing. Hold it, hold it. So you're saying total factor productivity in 2025 was 1.3%. And based on the San Francisco Fed's work for 2026 so far, it's actually flat. Yeah.

There is noise in these estimates. So I would say on average, 1.5, if you take this over a few quarters, but that's the most recent update. I'm sorry, 2026, what's they're coming up with for total factor productivity growth? Quarter over quarter, second quarter, is 1.1%. Okay. And if you said negative, what was the negative? That's if you adjusted for capacity utilization. That if you take into account how much more our workers working power

is how much more do we keep the machines running? Oh, I'll have to think about that. That's interesting. It's like the intensity of labor and capital usage that you're adjusting out. So what that is suggesting is we at Moody's do so much better now because we all work more intensely. That's what that is suggesting. Oh, so interesting.

That is so interesting. So it's a convoluted statistic, but I thought it was interesting. That's why I grabbed it. I didn't even know there was such a statistic. Did they just make that create that? No, it's actually the Bureau of Labor Statistics publishes it too, but it's with a lot of lag and they just update it more. It's basically kind of a real-time estimate.

And what is it called the capacity utilization? Adjusted. Adjusted. T-FPA? T-F-P? Interesting. Yeah, yeah, yeah. That's really good.

good. Chris, you want to go? Sure. 0.2%. I'll like a nice simple number, like 0.2%. Related to the topic at hand? No. Ah, geez. Not related.

Geez, and I got a lot of crap. It came out. It came out this week. Actually, it even came out today. Oh, it's the conference board's leading economic indicator. Correct. Did it actually rise? It rose. This is the six-month change. The first time it's risen since April of 2022. So what do you guys all worried about? Everything's fine.

Yeah. Has that been right in the last 10 years? I mean, it's been predicting recession for 10 years, hasn't it? Well, you know. Okay. It's going to happen. Yeah. So for 10 years, it was early. No recession. Now it says no recession. Man the boat. Recovery. Recovery. Not lead, right? Oh, yeah. That's funny.

Okay, very good. Okay, I got a statistic. Let's hear your AI-generated statistic. Yes, and it is related to the topic at hand, and we did talk about it to a meaningful degree. I will make one other hint. It's inconsistent with one of the numbers that Martin brought up, so we have to reconcile that. But 8.5%. 8.5%.

And to put it into dollar terms that make it a lot easier, $4 trillion. Oh, it's the holding of U.S. Treasuries by Japan? No. Japan's a trillion. Hedge funds.

Oh. Hedge funds. So Martin, you got to go look at this. This is a new Fed study. You got to take a look at it. Is that cash or is that including forward positions? Oh, geez. I think that's their net holdings of treasury debt outstanding.

Is that from OFR? Let me take a look. Yeah, it's a new study. I just saw it today. I had not realized. And they dug deeper into the data, the financial account data, and teased out other sources. of demand that are they view us being hedge fund related.

No, no, please, I'll take a look. I can't reconcile the number because I said about a trillion. That number is basically cash treasuries. Cash treasuries. Yeah, I think, let's go take a look. But there's other positions, right? So you can calculate, because it's, you know, it's contingency trading.

So what you're actually exposed to is maybe different from what you have on your balance sheet. Yeah, I don't think that's, I wanted to say gross, notional amount, but I think, it's net nation. I'm making stuff up. So let's, you know, kind of like AI. What was I going to say about that? Oh, it's up a lot. You know, if you go back, I think 10 years ago was even less than that, five years ago was four and a half percent. So it's risen quite considerably. That's the stock of debt outstanding. So that just gives you a sense of how big a player the hedge funds are in these,

in scarfing up the new issuance. They are now the marginal play. meaning they're the guys that step in. And that highlights, in my mind, the fragility of the bond market and why there is such a significant threat that we could see a sell off in the bond market. Because it's not – the debt's not being held by the Fed. It's not being held by the banks. It's not being held by, you know, global institutional investors, central banks. It's being held by these hedge funds. And they are obviously in the market and out of the market en masse all of the same time.

They have to be so quickly that there isn't even time to work out some kind of deal. So the sort of option you have with the Bank of Japan where you can say, well, we support your action. With hedge funds, you don't have time to do that. If they have to get out the market, the instantaneously have to get out. Right. Do you think that that's part of the reason why it seems bond yields are more volatile recently and moving around? I mean, there's a lot going on in the world, obviously, to react too. but given that hedge funds can just dump treasuries really quickly, right, dump and buy.

I mean, does this raise some volatility risk here? At baseline, I would think no, but around sharp rate movements, yes. And the reason why I'm saying is because, again, this sort of offsetting differentials based on which the hedge funds do this, which is usually a repo. It's a short version. And if they have some sort of forward exposure to say, well, I'm going to sell you up on that interest rate act, and the interest rate moves in the opposite direction, then they have to put cash down on margin. That's usually when I have to fire a cell.

But that really only happens at scale if there's a large movement in the rate already. So it's sort of a secondary problem. It responds to movements in the market. It's hard to see how it would create that movement. Okay, so it like exacerbates whatever's going on in the market. Yes, likely. That's right.

You know, I was talking to a bond portfolio manager, a major institution, and he was making the point that bond market, market volatility is actually not particularly high by historical standards. I mean, it's high relative to... It seems like it is, right? It seems, but if there's an index called the MOVEE move index, and it's not signaling a lot of volatility.

It doesn't do that much. It more as a normalization of volatility. Yeah, I think there is something to be said about that. Also keep in mind that we have, a lot of these bond trades are supported by what's happening in these sort of overnight markets where the Fed... plays a lot where the Fed funds rate is established in these short-term lading arrangements. And these rates have been very, very stable over the last four or five years. And that in itself reduces volatility, you know, sort of offsetting trades.

Which is one of the reasons why that Warsh communication thing will be interesting, because the funding markets don't know what the federal funds rate is going to do. You're going to see repricing in these markets. And that has effects down the yield curve, for sure. And you see that if you go back to the old monetary regime and the Fed actively would try to manage reserves and intervene in these markets. You see a lot more volatility in the rates. Hey, you know, one other thing or the way of looking at all of what's happened in the bond,

going back to the bond market, is that this is just a normalization that, you know, we're five and a quarter on the 30 year, we're at 475 on the 10 year. Go back before the GFC. That's kind of sort of where we were. And, you know, post-GFC, then you had the pandemic, and then you have the pandemic. and then you've got all these supply shocks, you would expect that that's the weird period, that that's the anomaly,

that that's when the Fed was queuing, and we had Daryl Spence on from Cap Group, didn't he say something like, was it 45% of all the days? The Fed funds rate was at zero, and that's over the past 20 years, I think he said, something like that? I mean, that's weird, right,

compared to his longer-term history. So that's the weird. And all that's happening here is that the term premium is back to something that's more typical, you know, 75, 100 basis point kind of term premium. What do you think of that argument? I mean, I don't believe it, but I mean, it is an argument. I mean, it's unconditionally, it's correct. As if I'm just looking at the rate and what the term premium is, yes, we basically were in the early 2000s. But the question is, what kind of risk does it represent? And I do think there are differences here. As he come from the 90s and the 80s at high inflation at a higher term premium. So inflation is a factor, but it's not a factor like it was in the 1980s, for instance, or even in the 90s. At the same time, you do have this vastly changed debt situation that's global, right? It's not just the US, it's Japan, it's Italy, it's many other countries. And I mean, I can say maybe that doesn't matter, but that seems, it doesn't seem right to me.

I'm better in terms of level and risk, sure, I mean, the risk compensation is roughly the same, but I think it's lumping together different risks, as we initially had discussed. I'm going to end by saying, I actually think there is going to be a bond market sell-off event, high probability, you know, over 50% probably, in the next 6, 12, 18 months, you know, in the not-too-distance future.

But that what's going to happen is it's not going to, that's consistent with our baseline of no recession because what's going to happen is the Fed is going to step in and it is going to start buying bonds. Treasury is going to come up with other ways of trying to, you know, alleviate the liquidity issues. And there is going to be financial repression. We're going to be back to financial repression. And hopefully that scare that will occur will be the catalyst for generating the political will necessary to do something.

They may conflate with some other forcing mechanism like Social Security running out of its trust fund money. I know that's down the road a little bit further, but there's something along those lines. And that it's impossible for us or anybody really to generate the political will to address these long-term fiscal situations if the world's okay. If nothing's happening in the world, if there is no forcing mechanism, if there isn't any pressure, how can you connect the dots in the minds of anybody that you got a problem? You're saying, what do you economists you've been talking about debt deficits from the beginning of time? You know, Rogoff and Reiner told us if the debt to GDP got over 90%. the world would go off a cliff. Remember that?

So, you know, what do you talk guys talking about? So it's almost like we need to see those bond market vigilantes come back out and really, you know, create havoc. And that would be the catalyst. What do you think of that? So debt ceiling gets hit in midsummer next year, 2020. Is it 27?

Yeah, right? Is it? Oh, is it? Pushed it through the midterm, right? Yeah, I thought it was 28. Is it really 27? I thought it was, what, I think it's next. It could be.

But even if it's 20, is that related to your timing? That could be the forcing mechanism, yeah. I kind of sort of. Is that why you have that 12 to 18 months or is it? Yes. You're just thinking in general. Because 12 to 18 months is the length of the current administration's term. I see.

I see. You know, it could be longer. It could be longer. You know, it could be longer. Anyway, just to leave you with that thought. But anything else to add before we call it a podcast? I know I talked about listener questions. We just don't have time.

We'll do that the next time we're without a guest. But with that, you guys, anything? Anything else that we missed? Anything you want to bring up? It was a great podcast. We actually have several listener questions about the Fed's balance sheet. And what's going on? Are they QEing?

Are they QTing? Are they just letting things mature? Can we just take our stock of that for just a second? Yeah, sure. Fire away. Because we have the benefit of Martin. Yeah, exactly. No better time.

Yeah, what's going, what are they doing with the balance sheet? Are they actively managing the balance sheet? Well, so the short version is QE in the sense that people think about it. The Fed buying long-term bonds has ended. That ended after the pandemic, the Fed has allowed some of the debt to expire. It continues to do that. what the Fed started doing last December, it started buying larger amount of very short-dated treasury bonds, T-bills, that kind of thing.

Last quarter, I think there was around $250 billion and around $100 billion of longer-term assets matured. There's a different reason why it does that. It has nothing to do with supporting outstanding debt. It just provides enough liquidity to financial markets so that banks and other financial institutions can do that daily work. There needs to be enough liquidity in the market. And that's what the Fed is doing that. It's not QE, not QT, but the balance sheet is expanding because sort of very simply speaking, as the economy is growing, the Fed needs to provide more liquidity to banks to

accommodate transactions in the economy. Okay. And that's not the kind of expansion that Kevin Warsh is concerned about, correct? Or is he? Well, he also sort of questions how the Fed is currently setting interest rates. it's not QE is the short version. So it's not this the Fed is actively gone out there in the supporting long-term treasury bonds. It's not doing that. Great. Thank you. Any other related questions, Marissa? There are, but I think it would expand the discussion. I mean, there was two specifically

about just a status update on the balance sheet. There's another about the Fed's inflation target and whether or not they should consider actively stating that it is higher than 2%. Maybe it should be a three percent. Yeah, that's a big discussion. Yeah, we'll get Martin back, talk about that. And we're at a minute 10, which is kind of the law of inside economics. You know, we end at 110. So something bad is going to happen if we don't.

No, just kidding. But we're going to call it a podcast. So with that, dear listener, I hope you enjoyed this. We'll talk to you soon. We've got a lot of podcasts coming. Please avail yourself with those podcasts. You've got any additional questions far away.

And with that, we'll talk to you soon. Take care now.