And now for the big story. Break down this morning. We're keeping an eye on energy prices. Oil in terms of WTI back above 100. And Brant topping 105. And not surprisingly given all the volatility. We're also looking at the ten year yield rising above the 4.92% level this morning. And as of now, the market's shrugging off the Treasury Department's $6 billion bond buyback announcement, which came out yesterday and has fallen short of Wall Street's expectations.
Now elevated government debt issuance, as well as heavy corporate borrowing for AI infrastructure, continue to put pressure on long term borrowing costs. Yet with yields at multi-year highs. Fixed income investors are seeing some of the strongest income generating opportunities. But joining us to break down what we're seeing across global bond yields as well as monetary policy is Michael Goosay, CIO and global head of fixed income at Principal Asset Management.
Well, good morning, Mike. Great to have you on the show. And as you and I were talking off air before we went live. We're seeing so much activity across energy today and that in turn is affecting yields. But the all important CPI report is coming out in less than 24 hours. So tell us what you're paying attention to right now and why.
Yeah. Good morning. Thanks for having me. It's certainly the geopolitics have taken front and center. Uh, focus of the markets. Um, we thought we were going to be talking about the Treasury, the the buyback in the long end of the curve and the re allocation of some of the issuance. But that's kind of immaterial at this point.
Uh, crisis with some of the geopolitical risks rising in the Middle East have certainly dominated the way the bond market views, you know what, how to price in near term risks and potentially long term risks. But to the specifics of the CPI report, I mean, we're really just on that razor's edge. Razor's edge, a 0.2 print, means a lot different than a 0.3 print in terms of market expectations of whether the fed will hike policy rates in September, or at least at some point during 2026.
Um, and so our expectations are inflation is continuing to be okay, and it should give the fed some flexibility to sit around and wait and see what you know, what unfolds in the Middle East, what unfolds with energy prices? How does the long end of the curve react to some of the announcements around the buyback program?
So, you know, it is a very important print. It's one of many very important prints, but the core of it remains that the fed is in this this a little bit of a predicament where all the noise would suggest higher risks to inflation. Um, but, you know, they really have shown some patience in, uh, in waiting until there's some more clarity about what is the health of the economy.
Is this a short term impact? Is is this really just a supply problem or is it a demand problem?
Yeah. And you bring up a very important point because we don't know what those CPI figures hold, but we have less than 24 hours, you know, before we get that data. And with oil prices elevated, yet once again there is concern about inflation, not just in the U.S. but around the globe. And right now we are looking at fed fund futures pricing in about a 70% chance of a rate hike next week.
But what can rates actually solve here in the US, whether we're talking about higher rates for longer or staying on hold?
So, you know, if you look you know, the ECB hiked interest rates today really give no clarity on what that would mean going forward. But, you know, the the likelihood of the fed hiking interest rates in our minds this year is somewhat muted because there is a lot of mixed signals that are coming out of out of the economic data.
That being said, if there truly is a real inflation problem, 1 or 2 hikes aren't going to solve that. You need to see meaningfully higher interest rates in order to truly crush inflation, which unfortunately at the same time does hurt economic growth. So that's why we think there will be this patient fed and unlikely to move on policy rates.
But that being said, you know, the the data is is is really going to dictate the path forward. Um, in our eyes, you know, there's still enough time for them to be patient. But if you have a point for print and CPI tomorrow, I mean, that does change the game.
Yeah, and of course I do want to bring in artificial intelligence into this discussion. Tech hyperscalers are flooding both investment grade as well as high yield markets with debt in terms of financing. So how is this massive AI issuance driving the bond market right now? And where are you seeing value seeing that.
Issuance. These very, very you know, previously didn't have a lot of debt on their balance sheet. And they've been really flooding into the investment grade market with all kinds of different structures that they've they've brought to market. A lot of it has been long dated. So it's put further pressure on the long end of the curve.
It's also put upward pressure on investment grade spreads. Maybe not a huge amount but but but some pressure. And that is also change the dynamic of that investment grade market which was very heavily around focused on utilities, on a financial companies. And now that that that AI issuance, those hyperscalers are dominating the duration of the investment grade market.
And so, you know, it's it's definitely been a negative. The supply that they brought to market is bringing the amount of issuance in the investment grade space to all time highs. Um, you know, it's a question of whether they need to continue to issue and issue debt in the investment grade market, but in the near term, it's not great for spreads.
Now, I will put a caveat around that. Earnings continue to surprise to the upside across all industries. We continue to see the consumer being relatively healthy. We saw that with the employment picture that came out last week. And so, you know, this is a this is a mixed bag of, again, information that is allowing us to say fixed income seems attractive, that this backup in yields is giving opportunities for investors to walk lock in income at rates that they haven't really been able to enjoy for a long time.
Yeah. And Mike, finally, before I let you go, speaking of duration, whether we're looking at the short end or long end of the curve. Tell us where within that curve is the sweet spot. When it comes to balancing yield and risk.
To answer this two different ways, the one way is traditionally, say the five year, the seven year part of the curve. You get the most amount of carry, the most amount of roll that's applicable for spread markets as well as the government bond market. From a sector perspective, what we're seeing is really attractive opportunities in the long end of the curve in some of these hyperscalers that have been issuing, because those have really underperformed relative to similarly rated cohorts.
So although I'd much rather, on average be in that better carry and roll segment of the market, shifting out the curve to take advantage of what has been an underperforming sector makes some sense to us.
Okay, Mike, well appreciate your time. Thank you so much for joining us this morning. And thank you so much for sharing all of your insights.
Thank you.
