Bond Volatility and Energy Flows

Tobin Marcus · Wolfe Research

Midterms look closer to a coin flip than consensus, as polls likely overstate Democratic strength.

Consensus is moving toward Democrats winning both House and Senate, but he sees the race as closer to a coin flip leaning very slightly Republican, and says he is taking the under on a Democratic Senate win. His reasons are the polling pattern. Past midterm polls were good nationally but missed states, and this cycle shows larger blue shifts in redder places, the same pattern as past polling errors. Democrats also look strong in Upper Midwest states such as Iowa, Michigan and Ohio, which were ground zero for polling error in the Trump era. Some individual results look facially implausible, such as South Carolina not being a one-point race, which makes him doubt other numbers.

“We think it's closer to a coin flip, probably leaning very slightly to Republicans and some expectations for Democrats”at 17:47

Tobin Marcus · Wolfe Research

A Democratic midterm win would bring little concrete policy change, so it is not a big market catalyst.

He does not expect the midterms to be a giant market catalyst, even apart from his view on the odds of a Democratic Senate win. The concrete policy agenda a Democratic Senate could pursue is limited, and the House majority already limits what Democrats can do. A Democratic win would change the vibes and could shift market narratives, but he sees no real change in the policy outlook. Traders have likely already priced in a blue wave, and policy differences are small.

“I don't think it's going to be a giant market catalyst... I just don't see much from a concrete policy perspective, really anything from a concrete policy perspective.”at 18:49

Virginie Maisonneuve · Maisonneuve Global Advisors

France's fiscal stress is a multi-year failure to consolidate, now showing in bonds trading tighter than sovereign debt.

French budget deficits are high and demographics leave little room to fund promised pensions and benefits. France's corporate bonds now trade as if safer than French government bonds, which she reads as a verdict on the government's ability to fix public finances. Successive short-lived governments have brought little traction on consolidation. She calls this a result of about fifteen years of drift, and notes France's spread versus Bunds is unprecedented and that the old periphery problem (Greece, Italy, Spain) has inverted. She also flags transmission risks: a diverging France and Germany complicates ECB policy, French banks hold a lot of French debt, and a weaker euro (about minus 4% year to date against the dollar) raises imported energy costs that feed inflation.

“I think what it means is the perspective on government and the ability of the government to deal with this situation. We've had quite a few, as you know, governments in the last few years and really very little... traction in bringing the country together to put the finances together.”at 4:11

Virginie Maisonneuve · Maisonneuve Global Advisors

Rising populism and Marine Le Pen's strong support reflect discontent in a France lacking fiscal discipline.

She says the trend toward populism in Europe is the key political fact, pointing to the coming French election and to Marine Le Pen's strong polling. Her argument is that Le Pen is the vehicle for voter anger at a country that has not found a footing in fiscal discipline, so budget pain such as proposed public-sector pay freezes feeds into voting. She compares France unfavourably with Sweden's shift from socialism to conservatism, saying France's path is harder to read.

“what we know is the trend towards populism and ... Marine Le Pen having such a strong support is the voice of discontent from a country that hasn't found its [footing] in fiscal discipline.”at 6:02

Kay Herr · J.P. Morgan Asset Management

Bond selloff is not a repeat of 2022, since high starting coupons cushion losses and yields attract buyers.

Clients are nervous because they are losing money in bonds again, and ask whether this is 2022. She says it is not, for two reasons. Starting coupons are far higher than in 2022, when Treasury yields were near 2%, now about five percent, giving a coupon cushion against price declines. Yields are attractive enough that flows into fixed income are still positive, with interest in core, core-plus and flexible or total-return strategies. She also says falling bond prices can create buying opportunities, since yields rising means prices fall.

“We feel pretty strongly this is not 2022 again for a couple of reasons. The first of which is starting coupons are much more attractive. Got what we would call a coupon cushion.”at 11:40

Kay Herr · J.P. Morgan Asset Management

AI capex above 3.5% of GDP, at least a third debt-financed, is creating a supply glut that crowds out bonds.

Responding to the debt-funded AI borrowing binge, she says AI-related investment runs at more than 3.5% of GDP, and at least a third of it, possibly more, is debt-financed. That creates a glut of supply in credit markets, which combines with heavy government issuance to crowd out other borrowers. She still calls the spending a productive use of capital in a resilient US economy as rates normalise from zero. Her caveat is that investors must be discriminating about which companies will earn a return on that spending and which will need their money back.

“it's running like north of three and a half percent of GDP. That's a big investment. And at least a third of it, if not more is being debt financed. So that's a glut of supply on it.”at 15:22

Leslie Palti-Guzman · Energy Vista

European gas could turn bearish before winter as Qatari LNG reaches Europe via Hormuz and US supply ramps.

She says anxiety in Europe ahead of winter could turn out too bearish for prices, because Qatar has two cards to play. First, a trickle-through scenario in which more LNG cargoes move through the Strait of Hormuz on a US-protected route, as the UAE has been doing. She thinks Qatar's earlier holdback was political rather than technical. Second, Qatar Energy's Golden Pass LNG project in the US is likely to ramp up, though sales so far have disappointed. Further supply comes from US projects such as Corpus Christi and Plaquemine ramping and a new wave of US LNG projects into 2027. Suppliers all want to max out capacity while prices are high. Weather remains the unknown, but on supply she sees more volume coming.

“I think that we could be more bearish because Qatar has two cards to play. And the first card is the trickle through scenario where we're going to see more LNG shipments going through Hormuz through The US protected route.”at 23:22

Leslie Palti-Guzman · Energy Vista

A US LNG or diesel export ban would raise prices and hurt the economy; the price spike will fade.

Responding to the debate over a possible diesel or LNG export ban from the Trump administration, she says many voices warned it would raise prices. She thinks policymakers now understand that whether it is an LNG ban or a diesel ban, the effect would be even more negative for the US economy. Higher fuel prices are real for now, but she expects them not to last, because the world has an abundance of energy in LNG and oil.

“I think momentarily prices are higher, but it's not going to last because globally we see an abundance of energy on the LNG or on the oil side.”at 28:22