Fidelity's Jurrien Timmer Talks AI Powered Bull Market

Jurrien Timmer · Fidelity Investments

Treasury supply outpaces non-economic buyers like central banks and banks, pressuring yields higher.

Economic buyers, such as ETFs and mutual funds, have bought bonds as heavily as equities. Timmer calls a near-3% real yield on the 10-year Treasury attractive. Non-economic buyers, including central banks and bank-regulated institutions such as commercial banks, have not bought. Debt has grown by about $17 trillion since COVID, and that growth has not been offset by non-economic buying, which keeps pressure on yields.

“investors through ETFs or mutual funds have been buying bonds just as much as they've been buying equities. ... The noneconomic buyers, central banks, institutions that are regulated by central banks, commercial banks, for instance, they have not been buying.”at 4:07

Jurrien Timmer · Fidelity Investments

Recent Treasury selling is mostly technical MBS hedging from mismatched durations, not an economic signal.

Mortgage holders are not prepaying because rates have risen, so the duration of the Bloomberg MBS index is extending while Treasury duration shortens. That mismatch forces mortgage-related hedging that sells Treasuries. Timmer says this is the reverse of the 2020 negative-convexity dynamic, which pushed yields lower than they should have gone. He says a lot of the recent action is technical, but he doesn't know when it ends or whether yields reach six percent.

“I would say a lot of the action has just been technical. It's hedging. ... you sell treasuries because your durations are mismatched between treasuries and mortgages, and it's just the opposite of what made yields go down even more than they should have back in 2020.”at 6:20

Jurrien Timmer · Fidelity Investments

The AI boom isn't a bubble because P/E ratios have fallen while earnings grow faster than prices.

A year ago Timmer's hope was that the AI boom would not turn into a bubble like the internet boom did 26 years earlier. A year later he says it isn't a bubble, because P/E ratios have only been falling since then. Earnings are growing so fast that the market can't keep up with them, so price is the residual of earnings and valuation.

“At least I can say that it's not a bubble because PE ratios have only been falling since then because earnings are exploding so much that market can't even keep up with it.”at 2:27

Jurrien Timmer · Fidelity Investments

Stocks depend on earnings growth; if earnings stall, a 2022-style rate-driven selloff could return.

Timmer's current hope is that the earnings train keeps running. If earnings stop growing, the market risks an echo of 2022, when a reset in the cost of capital knocked stocks down 28% purely because of interest rate increases. He says the market is in that same dynamic now, with bond yields rising.

“the earnings train continues to chug along because if it doesn't, we run the risk of sort of an echo or aftershock of 2022 when, of course, we had this big reset in the cost of capital that knocked the stock market down 28% entirely because of interest rate increases.”at 2:50