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Welcome to Stocks in Translation Broadcasting from the New York Stock Exchange. I'm your host Alexandra Connell in for Jared Blickery, and with me today is the lovely Sydney Freed, AKA the voice of the people. Kindly like, subscribe, and comment on stocks and translation on Spotify, Apple Music, Amazon, or YouTube. And today we're here with Kelsey Barrow. She's a portfolio manager at fixed income at JPMorgan Asset Management. And Kelsey, you're the perfect voice to talk to us today because we've seen some volatile moves in the bond market, to say the least.So let's start big picture. If you were explaining what's happening in bonds, what we're seeing with long-term yields, what would be the simple way that you would approach that topic? Well,

unfortunately, it's not, it's not so simple, so simple, but the way I would break it down is there are short term, short term yields and long-term yields, and they are kind of operating in two different universes right now. So if I think about what's anchoring short-term interest rates, so think about the 2 year yield or the 5 year yields, those are.Actually remaining a little bit less volatile and more anchored by expectations of what the Fed is going to do in the next 12 to 24 months. The Fed remains on hold, but they have an easing bias. We still think that the next move from the Fed is going to be a cut. It may not come immediately, but we do expect a few cuts this year. Now that's the front end. I think the story there is fairly clear, right? You have the Fed, which is on hold, but remains remains with an easing bias, and that keeps short term rates.Rates stable biased maybe a little bit lower. On the other side, you have long-term rates. That's where you've seen a lot of the action of the 10 and the 30 year. That's where you're seeing a lot of the action, and that's being driven by what we say in bond speak it's called term premium. Um, term premium is really just a way to describe changes in yields that can't be directly explained by changes in growth or changes in inflation expectations, right?If you look at the moves we've seen more recently, you had a 10 basis point increase in 30 year yields followed by a 10 basis point reversal in 30-year yields all within the span of 2 days. Now, in those two days, did our expectations of growth really change? Not really. Did our expectations for inflation really change? Not really. So how do we explain that? That's called term premium. It's essentially an uncertainty premium. So what was the narrative over the last few days? A lot of uncertainty about the path forward.For the place of the United States within the global order and more specifically the headlines and the conversations and comments from President Trump about, um, you know, the performance of Chair Powell and, you know, where he stands within his book. And so that's where a lot of the volatility was being driven. Now, if I think if we can move past some of that volatility and I think about what's going to drive yields over the medium term, it's ultimatelyGoing to be our expectations for growth, inflation, and what the Fed's going to be doing. On that end, we see that there are probably more downside risks to growth that we're concerned about that supersede and the upside risks to inflation related to tariffs. Ultimately, we think the Fed is going to be cutting rates later this year, and that ultimately means, I think about a range for the 10 year yields of 375 to 450, we're on the upper end of that range right now. I think probably risks are skewed to the downside.

Why aren't the 2 and the 5 year bond treasury yield as affected by some of the uncertainty? It's just because of the time horizon.

It's the time horizon and the fact that in the short term, you know, what's grounding those yields is expectations for the Fed, which have been on hold, right? So the Fed is in a very patient, wait and see position. They cut rates 100 basis points last year after hiking rates 500 basis points at its fastest.And we've seen since the 1980s that has kind of now subsided and they're in a bit of a holding pattern which is allowing that stabilization in the front end of the.

I feel like in my like if it's a shorter term, I think like volatility in the short term

that's

why my brain is like kerfuffled by that.

Well this is an unusual environment because typically you do see more volatility in the front.And when the Fed is adjusting policy rates, when there's a lot of uncertainty about what the Fed's going to do, that's what drives the volatility.

How do you balance duration in that case?

So, in terms of how we position our portfolios, we do prefer to have some duration portfolios. Duration is just essentially a word for how sensitive is your portfolio to changes in yields. When yields rise, the price of bonds fall, when yields fall, the price of bonds rise.So how much sensitivity do you want to have? Um, in our portfolios, we think there is value in having some duration in your portfolio because it does serve as a source of diversification. So looking more broader term, stepping back from the volatility of the last week, look at returns year to date, you have stocks down 10% or more, um, and you have your bond portfolio.is up a few percent. That's exactly what we want to see with the bond portfolio, right? It zigs when the equity market is sagging,

but that hasn't been the case in the past couple of weeks, right? We've seen this sell America trade, perhaps there's been a lot of talk about what could be driving that, whether it be foreign investors dumping their bonds, whether it be the unwinding of the basis trade. How have you really parsed through a lot of that noise to determine what's been the driver ofYields as we've seen them steadily creep up on the long end, right?

So I think what we try to do is differentiate between technical factors which we view as more short term in nature, not sustaining or lasting, and the fundamental factors that are driving yields. And I do think some of the volatility in the long end has been driven by technical factors, so you throughout the basis trade. Really, if you want to think about it very simply, these are.Crowded, levered positions, crowded, meaning their consensus, lots of people are already positioned in them, and then when they, when they move against you, there is a rush to unwind which exacerbates or exaggerates the price action. And so there were a number of different trades that needed to be unwound all at the same time, all of them that were centered around selling treasuries and selling dollars.

So if you are just getting started right now in the market, and I guess bless you if you are, because it's a volatile time, how do you like put together a bond allocation for your portfolio? Like where do you even start knowing where treasury yields are today?

Yeah. So I think that where you can start is by looking at government bonds and also high quality corporate credit. Um, so, you know, normally.We talk about moves in interest rates, we're talking about moves in treasury yields, so government yields, but there's a whole broader investment universe of bonds out there that are issued by companies that are issued by sovereigns outside the US, emerging market debt, securitized credit agency mortgage backed securities. How we build portfolios is we focus on diversification and we focus on bottom up.Security selection. So having the credit research analysts who can go and look at each individual issuer each individual security and help us determine, you know, who is most likely to pay us back. So if you think about it, right, in, in equity investing, it's all about return on equity, um, and you want them to take certain risks, and those risks may lead to higher returns and higher earnings over time and you're focused on that.Future earning stream in the fixed income world, what we're focused on in on is do you have the cash flow to pay your interest payments and to pay us back at maturity. So it's a little bit of a different, different thought process. Now the good news is despite all this uncertainty, we see that companies are actually very well prepared. They've essentially strengthened their balance sheets for the last few years, uh, so as a credit investor.or someone who's focused more on making sure that you have the cash flow and you have the balance sheet to pay back your debt, we feel very comfortable, particularly with investment grade credit, that you can get

that. So it's all about the ability to pay back your debt. In our government right now, we have a very high deficit, and we hear a lot about the bond vigilantes, whether or not they're making their return. How confident are you in US government bonds? Yeah.

That's a great question, and it's part of the narrative that's been driving some of the volatility and the increased term premium that we discussed earlier. Ultimately, I think that you need to recognize that one of the reasons why treasuries are the safe haven asset that they are.is because there's really no alternative out there. Um, it's highly liquid and it backs an extremely strong and healthy economy, um, one that's very dynamic and has some of the best, most innovative companies in the world.And so it would be very difficult in the short term to transition away from that. Um, and so ultimately we're, while there are questions about foreigners who own treasuries, which by the way, they treasury Holdings by foreigners are about 30% of all treasuries.

We relyon foreign buyers,

right? So we have about $29 trillion in treasuries, 8 trillion of them are held by foreign investors.Now, I don't think that you're going to see a lot of selling necessarily of those treasuries. We haven't seen the evidence of that, but the question is that incremental dollar that they receive, where are they going to put it? Are they going to recycle it back into treasuries or are they going to find opportunities elsewhere? Now when push comes to shove, if there were signs that the economy was really slowing down and the evidence was unanimous around a recession.I would say that I would still expect a flight to quality into Treasuries and then to continue to serve as that ballast within your portfolio, because again, there really is no alternative to the treasury market in terms of size, uh, liquidity, um, andAnd the dollar being the reserve currency,

andwe talked yesterday actually, and you had a great line about how US exceptionalism could be waning, but it doesn't mean the US is not still exceptional exceptional. And that's deep, deep, and I love it, but I think investors are really wrestling with that because we've been in this period where the US has been it. We love when all eyes are on us.when it's all about us, and now it seems like there are opportunities out there outside of the US. So how do you rationalize that push and pull between not being the only thing that everyone cares about to we still care about the US, but there's just otheropportunities.

I mean, it's a great environment for active managers, right? Because we have the ability to pick and choose where we want to allocate.incremental dollar and diversification in a market of a lot of uncertainty is also, I think, going to be very valuable to you. And so we see opportunities outside the US, whether it be in emerging markets, whether it be incorporate credit outside the US and Europe, um, you know, we are seeing a lot of investment and fiscal.From places like Europe, Germany, and even China, where sentiment has been extremely negative for a long time and talk about consensus trades, the consensus trade, you know, for outside the US has been negative for a very long time and people are starting to, um, starting to reconsider that.

Hold that thought, Kelsey. We have to take a quick break, but keep it right here. We'll be right back with more stocks and translation.Welcome back to Stocks in Translation. We're talking all things fixed income. We're talking bonds, and I want to talk a little bit about economic data because that filters through into the bond market. We've seen this juxtaposition between soft data and hard data, hard data like our retail sales, or unemployment reports, our inflation reports. So far they've been solid, of course, that has it fully priced in all the tariff risks. Then we have soft data, the survey data that's come in worse than expected. How is the bond market react?to all of these various data points.

Yeah, worse than expected on the soft data is probably an understatement. The soft data, so the surveys of consumers and businesses show really concerning levels of uncertainty, really concerning um responses in terms of people don't want to make plans, whether it be uh for capital investment, whether it be for employment, um, all the things that drive our economy seem to be potentially on hold.Now you would expect that to eventually translate into the hard data, right? But the question is, is there a disconnect between what people say and what people do? And that's something that we have experienced um in the post-COVID era. Actually, consumer sentiment has been quite negative for a while, but that hasn't stopped people from spending. And so I think people are a little hesitant to rely solely on the soft data without seeing the evidence and the hard data.And the hard data is giving us tons of cross currents, so specifically the retail sales data, we dig through that, we look sector by sector, where is the strength coming from? It's coming from autos. Now we think that the autos, auto sales, that's probably a pull forward. People are buying cars. Maybe they are nervous about their job prospects, but they're buying cars because they're concerned that tariffs are going to raise those prices, and there's only a limited number of inventory.That's already in the US that they can, they can get before prices start to rise and so that's something that is going to to muddy the waters. It's also something that's going to keep the Fed potentially on hold for for longer because they are another one of those people who are in the camp of we need to see the evidence that the economy is actually slowing materially um before we act now.I will highlight that growth in the first quarter is already tracking pretty weak, around 0 to 1%, but again, it's a little bit of a mixed bag because what's driving the weakness in Q1 GDP is net exports. Net exports, that's a function of the fact that we've imported a ton into the US in anticipation of tariffs, and that is a detraction.from GDP growth, right? So it's a little, exactly, exactly. So if I was the Fed, I wouldn't necessarily look at that as my, um, you know, clear indication. I think what they're waiting for is to see things like the jobs report, and they're waiting to see things like initial claims every single week that comes out, that's our our most real-time indication.And as a bond investor where we talked about one of the driving forces of yields, particularly in the front end is going to be the Fed, these data points, they all matter, but I think at this point, given how terrible all the survey data is, that's already in the price. What's not in the price is starting to see that hard data roll over.

So I have a question on the soft data. I've got a question on the hard data with the soft.Data with these surveys, does it, can you see like lower income earners versus higher income earners, and is it the higher income or is it the lower income earners that are skewing the data down? Like what's what's the, what'shappening there?

No, that's a really great question, and a lot of them do break it out. They break it out by income earners. They break it out by education levels. They break it out by political affiliation.I think what you'll see, you see a pretty large divide in terms of political affiliation, so things like expectations for inflation, very low for those who register or state themselves as Republican, very high for those who associate themselves with the Democrats. So there is a large divergence. The other theme that we see and we see this kind ofAcross the board, um, whether it be in the hard data, also when we talk to our securitized credit research analysts who look at, um, the consumer from the perspective of credit cards is there's something called the K shaped recovery, which is that the recovery has been much more um robust for higher income earners and, um, much less robust for the lower income and that also.Translates through to sentiment where it's been lower, but I will say regardless of those categories, all of them have turned lower more recently. It's just a question of magnitude and from what level they startedat.

And I want to get to a segment that we like to call lost in translation, and this is the perfect time to talk about this. What are investors or the markets getting wrong? I know you mentioned inflation expectations might not be as they seem.

Yeah, so that that is one that I think people are surprised when I talk to them about inflation expectations because the focus has been on tariffs being inflationary, which they are, but we need to think about how they're inflationary. The way that we think about tariffs is it's a one-time price increase. It doesn't necessarily mean that you're going to see persistent inflation. For example, I just think about this with one item, one good, right? Like if we increase the price of some.Thing, um, but there's no one there to buy it at that higher price. Companies are not going to continue to increase that price. If anything, they may end up having to lower that price back down to encourage demand. Um, and so what I've been looking at is market-based inflation expectations. So there's treasury yields and there's something called tips, which are treasury inflation protected securities. And what you can do is you can look at the difference in yields between the two, and that represents inflation expectations or inflation breaking.And what those are telling you is exactly what I just described, which is short-term inflation expectations. So inflation in the next 1 to 2 years are going up, but beyond that they're actually going down. 10 and 30 year inflation expectations in the market have been falling. Why? Because ultimately the market is voting with their feet and saying that tariffs are ultimately going to destroy demand and bring prices lower over the medium term.And so that's one that I think is really important to realize um because it has implications for the Fed and if they're able to respond. The Fed is only able to respond to negative growth shocks if they believe that inflation expectations are well anchored. And what the market is telling you is that inflation expectations are still well anchored, and that's what's going to allow them to be able to cut rates later this year.

Some positive news and a sea of bad news. Now we spent a lot of time talking about yields, but I also want to talk about another safe haven that is related, and that's the dollar. You say that the dollar smile has now turned into a smirk. Yes. Can you explain what that means?

Yeah, so I have to give credit to our head of currency for taking the dollar smile and converting it into the dollar smirk.So what exactly does that mean? So if you think about a smile, um, there's the two sides of the smile, and those are the scenarios where the dollar outperforms. The dollar outperforms when the US is exceptional, when the US is doing really well, and the dollar also tends to outperform in a hard landing or a crisis, right, because we're the safe haven currency. So you have that dollar smile where in bothStreams, both the US exceptionalism and the hard landing where we're in a crisis, the dollar performs well. Now the environment we think we're in now is called the dollar smirk, which means the US dollar still performs well when we're exceptional, but in a hard landing crisis situation, the dollar may not get as much support as it used to.Now one of the reasons why we go back to talking about these imbalances and crowded trades is that there are a lot of foreigners out there that have been investing in US equities and also doing it on an unhedged basis, meaning that over recent times when the stock market has been going down and the dollar has been going down, it's a double whammy for those people.And then they need to hedge, hedge that that risk back, meaning they, they're going to sell dollars to hedge their exposure. Um, and so that's one of the reasons why in this most recent weakness in the equity market, you haven't seen the same dollar strength.Um, that normally you get with a $1 smile and instead you have that dollar smirk.

All right. Well, Kelsey, we have to leave it there. There's so much more we could talk about about Giles, the dollar, but thank you so much for joining the show. That's it for stocks and translation. Thanks for tuning in. We'll see you next time.