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You're listening to Strictly Business
Podcast with Lindsay Williams.

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I read a piece of work the other day that
was entitled The Surging Price of Money.

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And it says here, if strategists at a
certain American investment bank, which I

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won't mention, are correct,

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the US bond market is now in the sixth
year of the third great bear market since

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1790.

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Let me say that again, since 1790.

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It goes on to say other nations are
experiencing a similar exodus from debt.

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The yield on 30-year UK gilts recently
touched the highest level since 1998.

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What is going on?

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Jason Bourb-Rasheen, co-portfolio manager,
income strategist at 91 in London, is here

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to enlighten us.

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Jason, it looked so good last year for the
bond markets, but suddenly there's a

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wobble.

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What's going on?

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Hey, Lindsay.

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Well, I think that's largely been the
story for much of the last four years.

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And we, as you highlight from that.

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that sell side piece have experienced, you
know,

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one of the most protracted periods of
consecutive bond losses and

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underperformance relative to cash

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over the last 30 years, at least.

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And yes, you can take the data back a bit
further and make it a longer case too.

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And ultimately, I think it's around
changing expectations for inflation growth

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and policy.

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More recently, I think it's been about
growth, actually, more so than policy or

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indeed inflation.

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And those expectations have been...

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revised up quite significantly based on
what's been going on in the US.

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Yes, so we've seen some good jobs data.

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We also recently saw a CPI print, consumer
price inflation, which was higher than

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expected.

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And yet there was a surprise sort of
reaction from the market.

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Can you explain that?

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Because it came in at 2.9%, which was
above the previous month and above

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expectations.

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Why did the market take it so beautifully?

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Well, the core measure of inflation, which
is what the Fed are focused on, came in

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below expectations.

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Obviously, the level of expectations
you're looking at depends somewhat on the

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sources from which you draw it.

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But if we take Bloomberg as the source for
that, then ultimately the core measure,

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which is excluding more volatile items
that monetary policy shouldn't have an

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immediate impact on, things like energy
and food,

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that core measure was below expectations.

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I think you can't necessarily look at it
on a month-on-month basis always, because

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there are various seasonal factors,

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particularly...

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after COVID that have made those
comparisons more difficult.

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I think statisticians are struggling with
how to adjust for seasonality,

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the fact that some things tend to move up
and down based on the time of year.

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But ultimately, I think that was a bit of
a good news story yesterday, the 15th of

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Jan.

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But the bigger story for the treasury
market, for bond markets generally,

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since basically September of last year.

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from when you've had around 120 basis
point increase in yields,

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which when you're running or when a
10-year bond has a sort of seven,

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eight-year duration,

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is a big capital loss.

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It's been about the fact that growth
expectations, growth data has come in

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above expectations.

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You mentioned labour markets there.

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I think they're the key force behind that.

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We're in a different cycle to those that
many would have been used to immediately

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after or before the GFC.

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And by that, I mean...

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Historically, cycles tend to be led by
borrowing.

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So you have this sort of confidence loop
coming from the fact that activity data is

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good, you borrow more, you deploy that,

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and you go round and round.

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And often the labour market is the thing
then that cracks eventually.

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I think in this cycle, the labour market
has been the thing which has led the

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cycle.

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So it's the fact that initially at least
there was this big supply and demand

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imbalance in labour markets.

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and you've had this quite virtuous cycle
instead of wage growth leading to activity

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data so consumers spending and that is
quite

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different i think to uh to previous cycles
but that's what makes the labor market so

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important yes indeed and also what makes
um

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the um uh

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the bond market uh prick its ears if you
like is um the the talk of tariffs in the

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united states for

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america and it's not just the united
states of america because it'll it'll

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it'll fan out uh throughout the world Are
people making too much of this?

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Is it so simple to say that if a 25%
tariff is slapped on a particular country

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by the

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new president of the United States, Donald
J.

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Trump, that inflation is going to go up
because it has to be passed on to the

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consumer, the price that is?

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Well, it all depends on whether that leads
to a trend.

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So if you take it in its most simple
format, you increase prices on one country

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by 10%.

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10%.

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but their currency then depreciates by
10%.

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Your inflation might go up by 10%, but
perhaps your consumption of those products

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falls by 10%.

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So you could end up in a place where you
essentially argue that tariffs...

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if done in that fashion, and that's the
sort of perfect economic model in a sense,

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don't really have any lasting impact.

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The difficulty is, I think, the
reflexivity of tariffs and the lack of

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sample size.

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So we really only have the 1930s for a
protracted, meaningful tariff policy.

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And that occurred against the backdrop of
the Great Depression.

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So it's very hard then to have a great
deal of sense of what tariffs mean for

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inflation.

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And then I think you have the difficulty
that, well, how do the...

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counter parties to your tariffs actually
respond to that.

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I take a pretty simple approach, which is
I think we need to see a little bit more

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of the policy itself and how it's
impacting data.

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Clearly, markets are going to try to
appreciate that in advance.

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But nevertheless, I think that's a more
cautious or defensive approach to take.

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But I actually don't think that much of
this move has been in that sort of

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September move up in yields about

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tariffs.

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I think it is a part of it.

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people are concerned that the new incoming
US administration will be inflationary,

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they'll be more fiscally lax,

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and that clearly is adding to some
concerns in bond markets.

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But I do actually think mostly it's about
the fact that labour market data has been

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stronger.

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We went through a phase in the summer of
last year where it looked quite weak,

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it then appeared to appreciate or
accelerate in from September, and I think

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bond markets are just reacting to that.

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Predictions are predicated on previous
data and also present data, of course, and

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I notice

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One bank that thought there may be as many
as three interest rate cuts from the US

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Federal Reserve in 2025.

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They've gone back a little bit and said,
OK, we'll probably get one in June,

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given the recent inflation data and labour
market data.

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It's very, very difficult because it's a
month by month change.

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As far as I can see, there's a lot of
volatility.

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How do you distance yourself from this
sort of noise that I've just spoken of?

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That's the issue is the market is.

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as you put it, you know, getting its ears
pricked up by one piece of data.

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And the issue is that you miss the bigger
picture to that.

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The approach we take is to try and combine
three things.

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So the first is fundamentals.

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You're trying to look at how that's
changing and how it might change in the

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future.

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So we're trying to look at forward-looking
measures of labour market supply and

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demand dynamics.

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Some of those are higher frequency than
others.

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but generally what we're looking at is
things like sentiment towards the labour

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market and that is painting a mixed
picture.

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Having deteriorated it's now starting to
look somewhat more bright so we are aware

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that that could be a headwind to

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bond markets.

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Generalised activity data looks fairly
stable and then we complement that by

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looking at things such as what we call
market price

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behaviour.

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It ultimately means where is sentiment and
where's momentum alongside things like

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positioning and these are

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quantitative and qualitative aspects.

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So that tries to keep us aware of how we
might be wrong, tries to keep us a bit

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more humble, I think.

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Fighting momentum is difficult.

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And clearly that has been a one way street
for the last four or five months.

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But perhaps it's gone a bit extreme now.

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And then valuations and for the bond
market, they they look fairly compelling.

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I think you have to have a sort of shorter
term and longer term view on that, because

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in the shorter term, yes, yields have
risen a lot.

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Real yields.

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So adjusting them for inflation
expectations have further risen, I think.

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But you have then in the back of one's
mind the fact that things can move a long

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way if we are, as you introduced the
piece,

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in this great bond bear market now having
undergone 40 years of bull market moves.

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So we're not anchoring to any one thing.

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But I do believe when you balance that all
out, that the balance of probabilities

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favor bonds for a while.

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And when I think about the sort of
strategies you run, which are quite

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defensive, income based strategies.

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Yields have risen significantly.

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Many investors are sat in cash.

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I think when it feels most certain that
this has been the sort of lesson over the

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last four years,

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that the economy and markets are moving in
one direction.

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And I think increasingly people think,
right, the US is in a very strong place.

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It's outperforming other areas.

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Rates aren't going to come down.

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Almost at that point, you need to be
willing to go against that intuition.

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and start to think well actually could the
narrative completely turn on its head and

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that's where i think you know starting to
deploy into slightly

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longer dated bonds i'm not saying you know
you buy a 10 year but maybe you start

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looking at between three and five year
dated bonds in high quality

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markets starts to make a lot of sense and
that helps you avoid the reinvestment risk

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if now actually yields start to come down
from

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holding cash and it also helps you you
know navigate the fear of missing out

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ultimately bond markets are going to
significantly outperform cash

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if now we start to see a reappraisal of
growth prospects, particularly given that

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bond curves,

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so the difference between longer and
shorter-dated bonds, are quite steep.

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I've led you along a very US-centric
narrative during this podcast.

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Jason, but I want to go to the United
Kingdom because that's where you're

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sitting at the moment.

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And I said that the yield on the 30-year
UK gilts has recently touched the high

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since 1990.

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It's very much a domestic issue as well as
having international influence, obviously.

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It's to do with a new Labour government.

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It's to do with what I see as a relatively
inexperienced Chancellor of the Exchequer.

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And it's to do with a controversial
budget.

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Can they get over that?

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So I take a slightly more nuanced view
than that.

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And the reason for it is if you look at
the various differences between UK assets

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and international ones,

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you don't necessarily arrive at a
conclusion that everything that's

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occurring in gilt markets is due to the

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fiscal lack of orthodoxy displayed in the
budget in October.

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Instead, I think if you look at the
difference between UK bond yields and US

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or German,

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it hasn't really moved out significantly.

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In fact, it's probably flat since the
budget.

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That's very different to when Liz Truss
did spook the markets in 2022.

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If you look then at the currency actually
against things like the euro and other

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non-US currencies,

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it's been fairly strong over the last
year.

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Very recently, it's weakened, but
generally it's had a pretty strong

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dynamic.

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And then if you look just at the change in
bond yields in an absolute sense after the

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budget,

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it doesn't look dramatically out of line.

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with previous budgets going back over the
last 20 to 30 years.

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So I don't think it's helped the UK that
the

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Chancellor issued what felt to be an
expansionary budget and was looking for

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more borrowing.

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I'm not sure that it's the sole driver.

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I actually think the UK is in a difficult
position.

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It has, you know, big current account
deficits.

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It's very heavily indebted, and it relies
on a lot of foreign lending to it.

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And that when you have the sort of
reappraisal and bond markets of

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expectations as we've seen in the last
three to four months that's a very tough

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place you know the uk takes that on the
nose but

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actually the currency has taken it in the
shorter run at least more so than the bond

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market relative to other bond markets if
that

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makes sense so i

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think they can regain control by issuing
some probably more um strength uh you know

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strong or

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orthodox and fiscal approaches and rowing
back on some of those ideas that they put

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forward in the budget

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But it does require, I think, a settling
in broader bond markets for UK gilts to

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come down.

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You sort of hinted at a couple of
instruments that you like.

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But let's talk about your overall strategy
as we end this podcast.

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How are you positioned at the moment?

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And is there any likelihood that that
positioning could change,

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given the data and the volatility of the
data that we've described earlier?

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Yeah, so we are...

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slightly increasing our duration across
portfolios from a pretty modest starting

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point.

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We do see some value, as I've said, start
to occur.

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We think there's a risk that narrative
could change, but this is a very

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incremental move from us.

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What would then cause us to reverse that
would be signs that actually the labour

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market is truly accelerating.

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Alternatively, it would be that inflation
and general growth activity is starting to

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pick up once more.

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And on the latter two, the more recent
data...

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has given us some conviction that that's
not occurring, but we just need to be

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aware of that.

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Otherwise, from a hedging perspective,
what we've been using is optionality.

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And we think that's broadly a good way to
diversify portfolios rather than relying

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on more traditional asset class

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correlations.

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Instead, you use options.

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And in particular, we've used currency
options to try and reduce when bond yields

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have been rising,

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our capital losses and actually owning the
dollar.

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over the last few months has worked fairly
well in that context.

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We still like that idea slightly less than
we did before.

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And then I think in terms of credit, we
prefer non-traditional credit markets,

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which look quite tight,

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look quite expensive, and don't
necessarily offer you much protection from

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any rising default risks

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or slowing earnings dynamics.

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And there we like things such as
mortgage-backed securities or

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collateralized loan obligations,

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where ultimately you've got a probably
less economically sensitive asset.

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but ultimately one which is offering you a
compelling level of yield for its quality.

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So put together, I think we are in a
pretty uncertain environment.

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We're prepared to take a bit more duration
risk because the narrative has moved in

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one direction for so long.

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But I don't think anyone should be maxing
out their risk budgets at the moment.

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Jason, thank you very much for your
analysis.

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That was Jason Bourb-Rasheen, co-portfolio
manager, Income Strategies at 91 in

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London.

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The views and opinions expressed in these
podcasts are those of Lindsay Williams and

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various contributors and do not reflect
the policy,

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position or opinion of any other agency,
organisation,

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employer or company associated with
StrictlyBusinessPodcast.com.

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Assumptions made on the analyses are not
reflective of the position of any other

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entity other than the speaker or the
author

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and since we are critically thinking human
beings, these views are always subject to

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change, revision and revision.

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and rethinking at any time.

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Please do not hold us to them in
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