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Fed is 'driving the narrative' on inflation-fighting policies: Strategist

Global Bonds Portfolio Manager at Janus Henderson Investors Jason England joins Yahoo Finance Live to weigh in on Fed policy and how bond yields are reacting to recent rate hikes.

Video Transcript


DAVID BRIGGS: Welcome back. Stocks ending the day to the downside, the NASDAQ the worst performer of the afternoon, once again. But the big move on Wall Street today, the bond market, the 10-year yield hitting 3.7%. Let's bring in Janus Henderson Investors Global Bonds Portfolio Manager Jason England. Jason, good to see you. What is ahead in the fixed income?

JASON ENGLAND: Yeah, thanks for having me today. Obviously, a turbulent couple of days here. We saw a pretty significant bull flattener where the 2s/10s curve inverted beyond 50 basis points. Now we've seen about a complete reversal of it today.

So I don't know if it's shaking off the news of what the Fed's doing or not, but it definitely seeing more pressure in the long end today. Yesterday, it was front end, and that's kind of-- you know, kind of seeing that again today. But you-- really, you're just seeing that the Fed is driving the narrative now on this fighting campaign against inflation. So rates are going to remain elevated for the foreseeable future.

SEANA SMITH: Jason, I guess, do you think this reaction then makes sense because some were saying that it was actually an overreaction compared to what the Fed was telling us? But do you think that this is actually in line with what makes sense just in terms of the current moves?

JASON ENGLAND: Yes, I think-- you know, I mean, obviously, it's violent moves that we've seen over the past two days, so it's maybe a little bit of overreaction. But I-- really, I think it's what the Fed wanted to get across with their message is that they still have a lot of work to do on inflation and that until that job is done, they're going to continue to be hawkish and lean hard on these rate hikes. And by repricing the dot plot up to 4.4% at the end of this year and 4.6% next year, that's going to, obviously, continue to put pressure, at least on the front end, of US yield curves. And with the 2-year rate at 4.11% today, it probably has more room to go higher.

RACHELLE AKUFFO: And, Jason, Powell was clear that he's not just relying on one data point, he's looking at the 3, 6, and 12 months when he's looking at core inflation data. Do you think markets, though, are keeping pace with that? Or are they sort of wavering with every single bit of data that's coming out?

JASON ENGLAND: I think they have started to get a little bit in line with that thinking that Chair Powell has given us. We saw that back in June, the overreaction to the CPI print from May, and that's why they did the surprise 75 basis points. But now they're kind of telling you this, is that they're data dependent, meeting to meeting, and they're not data point dependent.

And that's when you shouldn't overreact to every data point. It's hard not to because you see that in the markets. But I think it's starting to get a little bit clearer and across to the market that the Fed means data dependent, and it's several months of seeing inflation improving and even seeing some softening in the labor market.

DAVID BRIGGS: At this point, we're not seeing one month of softening inflation. You said there's still room to run on that 2-year. How much more room? And do you expect, at this point, to your prior point, that we're looking at another 75 point hike at the next meeting?

JASON ENGLAND: Yeah, so historically over the last five cycles-- obviously, this cycle is a little different, like they all are because we have such elevated inflation-- but 2-years have tended to peak out about 50 basis points above where the Fed stops hiking. So that would lead you to believe that we could get much higher if they're pricing in a turmoil at 4 and 1/2% in the market right now, you could get as high as 5% on 2-years. So we're not calling that yet. But I mean, there is that room to run there.

Yeah, and then I think on your second point there, I think the Fed is telling us that there is the possibility they'll do another 75 basis points. If you heard Chair Powell say that they're pricing in about 125 over the next two meetings for the end of the year, there was this-- about a little less than half the group that still is looking at maybe only 50 at the next meeting.

So that's going to be the debate. And I think it's all going to hinge on where we see inflation going over. And they only have one more print before then, so is it going to be enough to move them off 75? My odds would be that, to the high side, they probably continue with another 75.

RACHELLE AKUFFO: That seems to be staying the course, indeed. The Janus Henderson Investors Global Bonds Portfolio Manager Jason England. Thank you so much for joining us this afternoon.