The best the Bloomberg intelligence hybrid jersey of course puts out this chart maybe a day or two ago when I think what's
interesting Katie especially when we think about the bond market sort of the big impacts. We've talked a lot about the impact
from midterms or the election here though the debt ceiling. I think what's interesting is that no one really talks about how
the Treasury Department has about eight hundred and thirty billion dollars of borrowing capacity under the debt limit. But
we could start to reach that starting at the end of the fiscal year 2023 heading into fiscal year 2024. So how do we think
about that big event and the impact on our world of treasuries. Let's get more perspective on this. With average Jersey teeth
U.S. rate strategist here for Bloomberg Intelligence I saw your chart took it from myself and published it under the terminal
for all to see. What do you make about the debt ceiling. Something we really haven't talked about maybe since about that
2011 time period. Yeah it's been pretty nice actually not having to worry about the debt ceiling the last couple of years because
it's the dumbest debate that Congress has quite frankly. I mean it is. So they don't talk about how much you going to spend.
They don't talk about how much are going to tax. They just talk about whether or not they're going to repay the bills that have
already been accrued by the government. But but it is what's interesting about this Taylor and why the midterm elections this
year might matter for this is that we're already very partisan. We could get more partisan if the Republicans say control of one
House of Congress or the other or both. You could have another debt ceiling standoff kind of right at the beginning of 2024.
And that might be the last time that members of Congress have a chance to kind of you know lay in their their spending plans in
particular. And they're there. They're kinda primary goals for the deficit before the 2024 presidential election. So I think we
could have another contentious debt ceiling crisis. It's still a long way away. It's still a year and a half away but it's still
something that's looming out there on the horizon. Something we have to worry about was a little bit more close to home in the
midterms. And I'm interested as to whether that has any issue. Do you think.
The midterms in terms of what I mean what are you thinking in terms of more as a build towards political anxiety as we look
towards coming up against this debate that we continue to have. Were you thinking more about the Federal Reserve as the more
focused point for you right now. And how does that sort of look into the into the near-term future. Yes. So I think I think
really the midterms could affect certainly markets and the Treasury market a little bit particularly if we have stagnation.
And interestingly risk assets tend to like the government not doing anything because I think there's a certain amount of
uncertainty. But but really you very rarely have big moves in the Treasury market during midterm election cycles. And in fact
the only two times that you've had in the last 25 years or so any big moves were in 2002 when the market rallied a lot because
interest rates are going down because we're heading into a recession after 9/11. And then in 20 2016 after Donald Trump was
elected you wound up getting a significant sell off in the bond market. But those really were the only two times that you saw a
significant significant moves. And other than that other than that it's really just the noise. It's been almost like day to
day normal volatility in the market. So so the markets look past that. The details will matter because if if we do get more say
the Democrats retain both seats in both houses it's possible the deficit will be slightly larger. Because typically when you have
one party Congress and the presidency deficits tend to be a bit higher than when you have split government. All right. I love
what you said that the debt ceiling debate is the dumbest debate that Congress has. It's a big call. But I do want to switch
gears pretty dramatically here and talk about the yield curve because I'm looking at the two cent spread right now. We've got
below low negative forty nine basis points earlier today. It's bumping around there. And at this point we're at the most
inverted levels since 2000 or so maybe even further. And at this point how far can this inversion go and what the Fed start to
get worried about this at any point. Yeah I think the Fed kind of anticipated that this was likely to happen just with the idea
that they're going to be raising interest rates to fight inflation. Now they want inflation to be lower later. So that
means interest rates should also be lower in the future. So you're going to see some inversion of the curve that now I do
think that we'll get we'll get even more inverted probably to to maybe 60 negative 65 basis points on the 2s Ten's curve. One of
the reasons for that is really I think that the market is still mispricing how far the Federal Reserve is going to hike too. So
I do think that they're going to hike to above 4 percent which means that two your yields are probably mispriced by between 40
and 100 basis points depending on how far the Fed goes. So the end and I don't think that that 10 year yields are going to go
much much past where they've been over the past couple of months. So you could see really a continued flattening and
deeper inversion of the yield curve. Does duration of the inversion or magnitude matter more to you.
Yeah probably. That's a good question. Probably the duration overall because if we stay inverted for for longer than then
that's probably signaling that the market is really thinking that that we're going to have a more significant slowdown later.
Whereas if if we get you know if we touch like negative 80 basis points or something like that that's probably just noise and
intraday volatility. A lot of stops getting hit things like that whereas if it persists for a longer period of time. That
suggesting that the Fed is going to keep those short end interest rates and the Fed funds rate higher for longer. And
that's that's kind of the Mary Daley statement that you heard her say just a couple of weeks ago. And if that if that occurs
and I think the market's going to price for an even deeper recession.