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Here with more and how to play the bond market ahead of the Fed's first rate cut, expected rate cut. We want to bring in David Rogal, he is portfolio manager at BlackRock's fundamental fixed income group. And David, it's great to have you here on set. So just your first reaction to this print, largely expected. Bond market not reacting too much, but what's your big takeaway?

Yeah, well thanks for having me on the show this morning. It's great to be here. Um, I think what we're seeing is a continued moderation in the inflation trajectory. Specifically in the last three months, we're seeing services inflation improve from a pretty high pace in Q1. When you go back to the second half of last year, we saw core inflation running about 2% on PCE, um, and then we had a setback in Q1. Uh, recently we've seen services inflation moderate uh from those levels. And so I think what this does is it sets up the Fed to recalibrate the monetary policy. Um, the Fed does not want the real interest rate to rise passively as inflation comes down. So they're going to need to bring rates down and we think it's more of a recalibration cycle. We also think that um as far as the labor market goes, you know, the Fed's mandates become more two-sided. So we've seen a 70 basis point rise in the unemployment rate, most of that being driven by inflows into the labor market, not necessarily by layoffs. But the fact that inflation has come down and the labor market is more balanced, we think the Fed will start to get going with a recalibration.

And so how will that impact the fixed income strategy part of people's portfolios out there?

Yeah, we think it's a really significant change. Um I think the the important thing to take away is that fixed income, we we think it's incredible time to be in fixed income today.

Even if the Fed begins cutting because typically it's if if the Fed raises the federal funds target rate, that's when you want to lean further into fixed income and bonds. But you're saying something a little dissimilar here.

Yeah, what we see is that real yields in the bond market are are pretty high. So we look at real yields, the best way to look at that is in the tips market. You can lock in a 2% risk-free real return. You look across most of fixed income, you can do that. We've also had this historic inversion in the yield curve. And what we should see as the Fed starts to cut rates is we will see the curve steepen. If you actually look at forward forward curves, they're significantly steeper. 2s 10s is maybe 60 basis points steeper two years forward. So we think you're going to see inflows into the bond market as a result. There's been a historic rise in cash assets and money market funds. We think you're going to see more money come into the bond market. Uh we've been talking to investors about our total return strategy. We run almost 50 billion in total return assets. We've recently launched our active ETF BRTR, which is now approaching um 100 million in assets. We think it's a great time to be an active. Uh in in our in our total return strategy, you can you can beat the yield on cash, which is not the case for most indices. Uh if you look at most bond indices, um we've seen treasury weight weights rise in recent years because of the fiscal deficits. So the treasury weight in the Ag is over 40%. Um and that's going to continue to rise as deficits continue to grow. Um if you look at the yield in the Ag, over 90% of the yield is coming from the risk-free curve. If you look at our total return fund, we hold half the weight in treasuries. Uh we have over 30% of the portfolio in non-ag assets. Um and we're beating the yield on the Ag by around almost 100 basis points. So we think that's a great way for investors to start stepping out of money market funds and going into fixed income.

David, I'm curious as we take a step back and try to assess where we are in the economy right now. Uh there has been opportunity in bond market, even if you just take a look at the at the action that we've seen play out over the last one or two weeks here. But what does that tell us, or not so much the bond market reaction, but these data prints that we have been getting, the risk of recession? I think that's still very much debated just in terms of what the odds of soft landing are, whether or not we could see a hard landing. What do you see as the most likely outcome at this point? Or is it too early to tell?

Yeah. No, it's we need more data on this topic. I think we've we've had a more benign view on the economy. We've generally been in the soft landing camp. I think the important thing to realize is that that became the market's base case earlier this year. And I think what you saw with the payroll report is that people started to increase their odds of recession as a result. Um the unemployment rate has gone up. I think it's there are mixed messages around it. You know, it's we're seeing um a lot of inflows into the labor market. If you look at the household survey, we think the household survey is probably underestimating both population and employment. But what we've seen is that the household survey hasn't created any jobs in the last year, but we've seen over a million people come into the labor force. So it's not a layoff driven rise in the unemployment rate, but it does reflect um you know, kind of looser conditions in the labor market. So I think the Fed's got to be very careful. It's I think the market has uh, you know, gotten to the place where it thinks the Fed might be a little bit behind the curve after they they didn't move in July.

If they don't cut in September, does that significantly raise the risk of a recession?

I you know, it's it's hard to say it's one meeting, but I I think I think the market would react very poorly to that. I think actually the debate on September right now is whether or not the Fed does 25 or 50. We're pricing actually a pretty high probability of 50. The Fed has kind of ruled that, Powell ruled that out in his press conference. I think if we get another weak payrolls, you could see that. Um but I I think the Fed will probably deliver the 25 would be my base case.

David, we got to leave things there. Uh we're getting close to the start of our next show, Morning Brief, but we appreciate you joining us here on set. David Rogal, who is the portfolio manager over at BlackRock's Fundamental Fixed Income Group. David, great to see you.

Thanks for having me. It was great.