Bond market: ‘We’ve got to bend through the capitulation trade,’ strategist says

Jack McIntyre, global fixed income portfolio manager at Brandywine Global, joins Yahoo Finance Live to discuss treasury yields and bonds, the possibility of further rate hikes, and the labor market.

Video Transcript


JULIE HYMAN: Yesterday's CPI report, and of course, this morning's PPI report show that inflation is running hotter than ever, 9.1% for consumers, 11% for companies on the wholesale basis. Now attention turns the Fed, another rate hike is on the horizon. How big shall it be? Our next guest says, why stop at 75 basis points?

The Fed may indeed need to move by 100 basis points. Let's bring in Jack McIntyre, Portfolio Manager at Brandywine Global. Jack, it's good to see you. So you say in your notes to us, "something's got to break here between inflation and the economy." Seems like the market's leaning towards the economy breaking.


JACK MCINTYRE: Yeah, you're absolutely right. So if you're a Rocky fan, you remember Rocky [INAUDIBLE] Clubber Lang was asked about his prediction with his fight with Rocky became one word, pain.

BRIAN SOZZI: Pain. Pain, good one, love it.

JACK MCINTYRE: Pain, yeah. It's pain to the equity market, it's going to be pain in the real economy to break inflation. But it's really, is Powell going to be like Volcker and kind of take us through that? And if we do, hey, the recession might be more on the mild side. My concern is that if they don't, inflation expectations become unanchored, then that means we're just going to have to have a worse recession over the course of the next couple of years.

BRIAN SOZZI: Jack, do you think the Fed will take a sledgehammer when it comes to trying to tackle inflation? I would argue they have not done that yet, but now we're talking at a potential 100-basis point rate hike at this meeting. Do you think they could do two of those back to back?

JACK MCINTYRE: Ooh boy, that is tough. That's tough. Clearly, and you know, I mean, the markets were leaning towards 100. It's going to be interesting because we're very close to the quiet period.

I don't know if we need to get Waller today to send us a message that the Fed is open to 100. Back to back 100, boy, a lot can happen between now and September. So I'm not quite there yet.

JULIE HYMAN: So even with the potential 100 basis point increase at this meeting and further increases thereafter, you guys are long treasuries, which is sort of continues to be a counterintuitive trade. I mean, it sort of has been the counterintuitive trade that has worked this year, right? That we have seen yields not really rise as much as you might have thought given the increase in rates.

JACK MCINTYRE: Yeah, Julie, so my gut tells me we've kind of been through the capitulation trade in the bond market. I mean, on some metrics, it's the worst bond market performance in we're talking hundreds of years. I mean, the reason being is because basically bonds didn't have a coupon.

Well, now with the backup in yields, hey, they do pay a coupon, so you have the benefit of coupon return impacting total return. And again, when I say we're buying treasuries, we're nibbling, we're getting to sort of neutral or slightly overweight. What I really would like to see is some weakness in the labor market. If we see weakness in the labor market, boy, then I would be more inclined to be loading up on treasuries.

BRIAN SOZZI: Do you think that's the next pain point for markets, weakness in labor market?

JACK MCINTYRE: I do. The challenge, though, is that we know labor is a lagging economic indicator. I feel, though, it's extra lagging this cycle. Because we companies have struggled to get workers, the shortage of workers.

So it might be that it takes a little longer for the labor market to kind of start to really show weakness. But then again, you look at the weekly jobless claims we just got. There were some signs of weakness in there as well. So we're watching it very closely.

BRIAN SOZZI: I like that Clubber Lang reference. I indeed like that "Rocky" movie. In fact, we will watch it again this weekend. Jack McIntyre, Portfolio Manager at Brandywine Global. Good to see you.