00:00 Speaker A
Well, you saw bond yields on the long-dated bonds on the 10-year Treasury going to the highest level in 18 months. Last week, you also uh saw the 30 year going to the highest level since 2007. and this was all really in reaction to Kevin Warsh’s uh presser to the Fed decision to hold rates steady. And then the presser which Wall Street largely saw as dovish from his commentary in that presser, basically giving little information, the little information that they did give, uh they thought was uh dovish. Um because they’re saying that this was a confusing hold for the market. So they sort of rattled the markets and that’s why you saw the bond yields going higher and that’s investors saying, hey, if we’re going to lend money, we want a higher risk premium for that. And so therefore those bond rates went higher. Now Wall Street is saying that the Fed has a credibility issue on its hands. And in September, they’re going to have to uh hike rates. I mean, you’ve got B of A that was calling this an inflation credibility shock to the likes of emerging markets. So, what does this mean though when bond yields go higher? It means that, well, uh then you’ve got mortgage rates that are going higher, then you have loans that are going higher, then you have credit that is more expensive, debt’s more expensive. So this certainly, um, is um isn’t great for the economy as far or stocks, I should say as well. Um, but at the same time, what you’re doing is is the market is basically giving a signal to the Fed like, hey, you’ve got to tighten.
01:21 Speaker B
Historically when bond yields move at this pace over a short period of time, it gets factored into stocks in the form of stocks just don’t do well. Yet the market seems to be uh overlooking this or ignoring it. How long could this continue?
01:34 Speaker C
Well, the answer is not very long. If rates stay at this level, then what you’re seeing is exactly what your guest was just talking about and that the cost of capital goes higher. And even companies like Google are having to raise more capital at this point in time. They’re issuing debt, they’re issuing more shares, that cost of capital is going to impede their ability to drive future earnings. It makes profitability in the future more difficult when the cost of capital goes higher. There’s no question about that. So, the market is adjusting in real time to what they believe is a riskier environment driven by inflation. So, when you could argue on the counterpoint, and I’m not saying it’s right or wrong, but simply financial conditions are tightening on their own without the Fed having to intervene because now they have to assess risk in the moment rather than leaning on forward guidance from the Fed. That’s the argument. Who’s going to be right and who’s going to be wrong will be dictated by the market in the future, but in the moment, there definitely is more of a risk to invest in capital, you’re have to pay a premium to do that. and if you need to borrow, you’re going to have a heavier financing cost on the far end.
