Global Markets Podcasts

This week George Goncalves, MUFG Head of U.S. Macro Strategy, takes us around the world and back, discussing the latest changes from the Bank of Japan (BoJ), ahead of October month-end trading and the critical double-header events on November 1, when the Treasury releases its quarterly refunding announcement (Q.R.A.) for its Treasury supply needs. Then in the afternoon, the FOMC meets for its second to last meeting of calendar year 2023. 

In George’s view, so long as term premia stays elevated and 10yr rates do not decline back towards the low 4s, these higher long-term rates are doing the tightening for the Fed, and thus the Fed hiking cycle is likely over (where the July hike may end up being the last hike of this cycle). In addition, what is frightening about October 31, other than the spooky Halloween scenes, is that this means there are only two months left in the year and liquidity probably gets worse for markets from here on out. Lastly, George wraps up by providing his views for Fed day, expecting another “hawkish skip”, the second in a row, and that chair Powell will refrain from saying they are done by keeping December in play.

This week in a special edition podcast episode, George Goncalves, MUFG Head of U.S. Macro Strategy, is joined by Glenn Schultz, MUFG Head of Prepayment Modeling and Strategy, to go over a recently published and comprehensive Desk Strategy Report called “The State of Housing” where they explore the impact of high mortgage rates and affordability issues that are impacting the U.S., as well as the potential lasting effect on housing and mortgage macro fundamentals ahead. 

George walks through how these higher rates are unsustainable for a viable housing and mortgage financing market and unless incomes were to rise, and rise at a much faster rate, that something has to give (either house prices decline, and/or rates decline). Glenn threads in the implications to MBS issuance, CPRs, and how the market might be the most negative convexity it has been given the larger loan balances. George wraps things up by discussing how this might influence the Fed rate views and their MBS portfolio.

George Goncalves, MUFG Head of U.S. Macro Strategy, walks us through the latest price action where the normalization of rates out the curve has finally caught the attention of broader markets like stocks and credit. The so-called bear steepening of the curve (when long-term rates move higher in yields and in a quantum larger than short-term rate movements) is driving some serious financial conditions tightening. As George says, the bond market is tightening for the Fed. George still believes that the last Fed hike was in July and that all of these volatile market moves will result in them no longer hiking in 2023. That said, until long-term rates find stability (and better yet consolidate into a tradeable range) and until the U.S. dollar stops going up, these major swings may continue in his view. In the past, to see a quick reversal in U.S. Treasuries, there would need to be a much larger and deeper risk-off in stocks and credit. Overall George remains cautious and reminds us that it’s been “the same as it ever was”, higher rates do matter.

Today’s episode is an excerpt from a recent MUFG webinar hosted by Ehsan Khoman, Head of Research for Commodities, ESG and Emerging Markets (EMEA), and Dr. Tobi Petrocelli, MUFG Head of Sustainability & Transition Finance Strategy for the Americas. Tobi and Ehsan discuss the recent report about AI’s influence in scaling ESG’s maturation. Overall, MUFG holds conviction in the merits of the evolution of AI to solve an array of ESG trade-offs. On aggregate, this has the potential to transform the way we approach sustainability to foster a more equitable and just society.

George Goncalves, MUFG Head of U.S. Macro Strategy, returns to review the price action since the summer break and what to expect from the FOMC at the upcoming meeting. George views the current environment as the most challenging for bond bulls, as the longer the Fed stays on hold with all this additional Treasury supply hitting the market, the pull toward higher rates will remain a powerful force. Granted, George does not believe that the window that will be afforded to the Fed staying “higher for longer” will be one that is long enough to fully normalize the yield curve towards the current level of Fed funds (because we expect the policy lags to hit the economy hard in Q4 into 1Q24). That said, the Fed can still use forward guidance signals, such as keeping their rate forecast “dot-plot” higher as a counter-balance to a bond market that is always looking for the next reason to rally. In terms of the FOMC meeting, we expect a slightly hawkish outcome, where the dots will try to pave the way for the Fed to signal they want rates to stay higher. Lastly we expect no change in actual Fed rate policy, a hawkish skip (i.e. no hike at this meeting) is our base-case.

In this month’s episode, MUFG Head of Prepayment Modeling and Strategy, Glenn Schultz, discusses August's prepayment data and answers the question of whether the Spring/Summer selling season prepayment data indicate a structural shift in the agency MBS market back to the “old normal”. He also addresses the question “Who is going to buy Agency MBS?” and how issuance will influence the agency MBS basis going forward.

George Goncalves, MUFG Head of U.S. Macro Strategy, reviews the recent Fitch downgrade of the U.S. credit to AA+ and compares it to the first downgrade by S&P roughly 12 years ago. He believes this time the backdrop is different given that the debt loads are even larger now and the Fed has rates much higher versus back then when rates were anchored by the near zero rate policy of that time period. Market reactions thus far are also different versus the first downgrade too. The other issue is that the Fitch downgrade occurred during a week when the Treasury was announcing the need to issue more debt and increase the auction sizes of Treasury securities. George has been highlighting that the sequence from the Fed to the BoJ tweaking YCC and then more UST debt, all of which have largely come to fruition as per George’s views, should result in rates in the middle of the yield curve (known as the belly and/or intermediate rates) would do most of the adjustment higher. So far that is what we have seen with 10s now well above the 4% level. Lastly, George looks forward and discusses why NFP, which is always important, but unless it breaks the string of weaker NFP reports of late, than the Fed is likely to skip in September.  

In this month’s episode, MUFG Head of Prepayment Modeling and Strategy, Glenn Schultz, discusses July's prepayment data and gives the lowdown on the Spring/Summer selling season's turnover. He also reviews relative value across the specified pool stories highlighting those he believes offer MBS investors superior relative carry. Finally, Glenn reviews our basis forecast and makes the argument for our year-end target of 120 to 130 basis points for the 30-year agency current coupon.

George Goncalves, MUFG Head of U.S. Macro Strategy, expects the Fed to deliver one more hike of 25bps at the upcoming July FOMC meeting. The FOMC statement should not see major tweaks at this time of the year, largely given that it’s a July meeting that sits between Jackson Hole and the September FOMC meeting updates (and also because the June FOMC meeting saw the Fed upgrade its forecasts on growth, inflation and rates).  In order for the Fed to keep all options open and avoid hinting that this may be their last hike they need to keep forward guidance in place by keeping this phrase largely unchanged “In determining the extent to which additional policy firming may be appropriate.”  As George has mentioned before, until chair Powell strikes out the inflation concerns from the opening remarks in the presser, they are focused more on fighting inflation versus being overly concerned about the trajectory for growth. The presser is what ultimately determines how markets read chair Powell’s tone if this July hike was a dovish, neutral, or hawkish hike. We are leaning on the neutral to hawkish side.

George Goncalves, MUFG Head of U.S. Macro Strategy, reflects on the price action and economic developments of the 1st half and provides us with thoughts on some of the risks that may lie ahead in the 2nd half. George believes that the markets caught a big break on the back of overly defensive posturing resulting in investors having to chase performance and close out short-positions and underweight level to benchmarks during the start of the year. Granted economic conditions in the U.S. were more favorable than initially feared, the overall global backdrop, especially on manufacturing side continues to weaken. Meanwhile we have central banks that have returned to hiking and the Fed has signaled that they are not done either after having skipped at the June FOMC. In our view, after a somewhat muted reaction to Fed tightening we believe the long and variable lags may actually hit harder now as we go through the 2nd half. George remains skeptical the regional bank crisis is fully resolved and that coupled with off-shore dollar liquidity draining could serve as a catalyst for risk-off.