Liquidity Strategy Update: Mid-Year Review and Economic Outlook

Matt Jones: Welcome. Thank you for joining us today. My name is Matt Jones and I'm the Head of Liquidity Distribution at Western Asset and I'm pleased to be joined by my colleagues, Michael Bazdarich, Chief Economist of the Firm, and Kevin Kennedy, who is the head of Western's Liquidity Portfolio Management Group. So firstly on behalf of all of us at Western, we want to wish you all the best of health and that you keep safe and well with your families. Today's webcast is titled Liquidity Strategy Update and Economic Outlook. And our goal today is to concisely review the impact of the COVID-19 crisis on conditions for US dollar short-term investing, which themselves have been shaped by federal government actions taken to support the US economy in response to the health crisis. Liquidity and short-duration investment management are core disciplines at Western Asset and as a result, the very significant economic and market changes that have taken place over the past six months have had a very direct impact on our liquidity investment strategies and our strategies of course across the Firm. Our aim in this webcast is to highlight the clear connectedness of economic policy to conditions for short-term investing. Michael is going to lead us off taking an economist's perspective in discussing the government's fiscal and monetary policy responses, including the impact of stimulus and the Fed's many actions to support effective market functioning. Michael will explore how the Fed's swift announcements of a number of emergency actions and programs supported the markets while highlighting how the uncertainty caused by the crisis caused corporations and other investors to accumulate large cash balances, resulting in a large increase in money supply. Lastly, Michael will review our outlook for short-term rates for the rest of 2020, and into 2021 and beyond. We'll then hand over to Kevin Kennedy, the head of our Portfolio Management Group, our Liquidity Portfolio Management Group. Kevin is going to take an investor's viewpoint reviewing the precipitous drop in rates as the Fed moved aggressively in March to the zero bound for the effective fed funds target rate. Kevin is going to discuss the impact on front-end rates of the increases in Treasury bill supply acquired to fund the various stimulus packages and how in turn Treasury supply has so far held up short-term levels. Kevin will discuss the volatility seen in LOIS spreads and finish by providing his views on market rates for the remainder of the year. While this is our broad agenda, our aim is to finish the main body of the discussion within about 30 minutes and then by taking a few of your questions and please if you can see the question tab on your computer screen, then please feel free to ask questions throughout. We'll do our best to answer, and if not on this call, then we'll follow up individually with you to address your questions. So we're going to aim to finish in about 45 minutes overall. And with that, thank you again for joining us. We greatly appreciate it. And I'd like to introduce and hand over to my colleague, Michael Bazdarich, Chief Economist for the Firm. Michael, over to you.

Michael Bazdarich: Thank you, Matt. Good morning to you and welcome to all our listeners. Glad to have you with us. In kicking it off and talking about the economy, I'd like to zero in on what's been special about this recession that we've had over the last four months. I know it's funny to talk about a special recession, but what we've seen really, it truly is unprecedented compared to past business cycle history.

Michael Bazdarich: So if you turn to page three, slide three of the handout, this chart here I think really drives the point home. The chart breaks down consumer spending into two components. Goods or merchandise and services. And you can see the difference first in the declines that we had in both of these measures in March and April and then the rebound that we've had in the last two months.

Michael Bazdarich: Keep in mind, typically, when we go into a recession, most of the declines that the economy endures in a recession come in two sectors, goods and construction. Typically, the service sector slows down a little bit. The growth rate slows down during a recession, hardly ever even goes negative, let alone substantially negative. Whereas, you know, when we have minus five, minus six percent GDP growth, such as we did 10 years ago. Again, we would see 15 to 20 percent declines in the good sectors, construction sectors. Maybe zero, maybe minus a half a point at worst in the service sectors. That pattern is completely reversed in this current recession. Really the epicenter of the recession has been in the service sectors, specifically five services in particular that are affected by the slowdown, social distancing, shut down, etc. Those five sectors are health care, restaurants, hotels, passenger travel and then recreation (spectator sports, theater, live plays, amusements, that type of thing). We've seen dramatic declines in those sectors that really account for most of the decline in GDP that we saw in first quarter and second quarter. As you can see in the chart, we've rebounded pretty nicely in the last two months in the goods sectors. In fact, consumer spending on goods, on merchandise, was actually higher, much higher in June than it was in February prior to the onset of the COVID shutdown. In contrast, we've seen a bit of a bounce in services, but we're still, even in June, we're way below February levels for consumer spending. And just to elaborate a little bit in terms of where the service rebound came, we've seen a decent bounce in health care spending, a decent bounce in restaurants, but really not much in these other sectors: hotels, airlines, trains, spectator sports, still really no bounce to speak of in the last couple months. And we think this is going to be the case going forward. We would expect the goods sectors to continue to recover. Housing looking pretty nice. We would think that by the end of the year, the goods and construction sectors will be at or perhaps even above in terms of output where we were pre-COVID. However, it's going to take these service sectors longer. Again, some of them are still shut down. As you all know, you go to a restaurant, there's no indoor dining, at least in California. You go outdoors, there's much more spacing. The restaurants have much lower capacity than they used to. Hotels, airlines, not doing much. That's probably not going to change until we have a vaccine. And then a few months after the vaccine. So  one, the risk of COVID has declined. And then two, peoples' fears have to dissipate as well. So the takeaway for this is we can see a pretty substantial, hopefully even a pretty complete, rebound in goods and construction sectors over the next six months or so as we move into early 2021. Those service sectors are going to be slow coming back and that's going to have an impact on Fed policy. I'm getting ahead of my story a little bit, but we expect the Fed to be to keep rates low for quite a while, and the overwhelming reason there is they're not going to feel comfortable raising rates until you've seen a more substantial, nearly complete recovery in the service sector, and that's still a long ways off. Keep in mind, I think we've actually got a relatively optimistic outlook for the economy as well. I mean, we do see this goods sector recovery, the construction recovery continue. I'm reading a lot of press out there talking about the economy faltering again. We don't see that necessarily. But even if we're right, even if this goods and construction rebound continues, it's not going to pull the service sector back completely with it, in which case the Fed is going to remain accommodative for quite a while yet. So that's mostly the state of the economy. Again, a quick broad brush discussion of it.

Michael Bazdarich: But let's move on to slide four and start to assess the impact of Fed stimulus. Fed being both the Federal Reserve and also the federal government. So page the chart on page four shows you total personal income, that's the blue line. The red line shows you personal income once various government stimulus checks are removed. Basically, wage income, if you will. And this data is through May, we got June data last Friday, we didn't have time to put it in these charts. Really doesn't change the picture any. We saw something of a bounce in June in the red line, a little bit of a drop off in June in the blue line. But the red line, even through June, remained well below February levels and the blue line remained well above February levels. So what that's telling you is that wage income indeed has taken a hit and an ongoing hit from the from the COVID shutdown. But at least so far, government stimulus has more than offset those declines. Again, total personal income has actually been much higher over the last few months than it was going into the shutdown. Obviously, all of that higher-ness reflects government aid. First, the stimulus checks that came out in March and April, and then more recently, the unemployment compensation. And currently the government is talking about extending those unemployment benefits. We'll see how that happens. Keep in mind, there's been enough government aid already to more than offset about four or five months' worth of shutdown. So even if they don't do anything in the next few months, even if the government doesn't do anything, which is highly unlikely, I think we still, for the most part, got enough boost to income coming from the government to keep the economy going. So the federal government has been very active in terms of trying to support the economy. Let's move on to what the Fed's doing.

Michael Bazdarich: Slide five shows different aspects of the Fed's balance sheet, different aspects of their operations. The press has covered a lot of the unusual aspects of Fed intervention. So for the first time ever, the Fed has been buying corporate bonds. They've stepped in to aid the municipal bond market, the money market mutual fund market. They've been lending directly to businesses. All those special features are summarized on the bottom chart on page five. These are pretty, as it happens, these are all pretty small-potato operations. So the scale of these charts are the same. Both charts show operations in the trillions of dollars. With Treasuries, top chart, the Fed has bought a bit in excess of a trillion and a half dollars worth of Treasuries over the last four months and maybe about a hundred and fifty billion of MBS. At one time, the Fed had four hundred billion dollars of central bank liquidity swaps outstanding. That is money that it loaned to foreign central banks to give them dollar liquidity to support their operations. These the top chart shows pretty massive operations. These are all pretty traditional components of Fed policy. The new things, the special facilities, so to speak, are shown in the top chart. The largest of these was the money as of April was the money fund aid, which came to a little bit less than 60 billion dollars. Paycheck protection still growing, leveling off at about 70 billion dollars over the last few weeks. Notice the money funds have declined. So all the Fed's aid to money funds, most of it has disappeared over the last three months. Same thing with the aid to primary dealers. Munis leveled off, the aid to commercial paper market declining. We talked a second ago about the Fed intervening in the corporate bond market that's shown by the purple line on this chart and I'll elaborate on in a second. But again, for all the hoopla about the Fed buying corporate bonds, the Fed has bought a total of about 12 billion dollars' worth of corporate bonds through the middle of July. So, again, it garnered most of the headlines, but the real work in terms of what the Fed was doing came from basically pretty typical, pretty standard open market operations.

Michael Bazdarich: Let's turn to slide six. Home in on what the Fed's doing in the corporate bond market. I was one who thought it made sense for the Fed to intervene in the corporate bond markets. Back in March, we had very chaotic trading and corporate bonds in March, bid/ask spreads were ridiculously high. The difference between what a dealer wanted to charge for a bond and what he wanted to buy it at--bid/ask spread--the credit, the option-adjusted spreads or the yield spreads on corporate bonds were extremely high.

Michael Bazdarich: You could see on the chart on page six. The red line shows corporate bond spreads peaking a little bit over 320 basis points on March 20th. The Fed, actually March 18th excuse me, that's when the Fed announced its intentions to buy corporate bonds. And you can see that immediately corporate bond spreads started to come in. The corporate bond market, as it were, started to heal itself. That's with the Fed announcing an intention to buy corporate bonds, but without them actually buying corporate bonds. So as you can see on the chart, the Fed actually did not step in to buy corporate bonds until the middle of May. And by that time, we'd seen spreads come back, for the most part, pretty close to where they were prior to the crisis. So I think it's fair to say, based on our experience, the Fed's announcement of intervening in the corporate markets made a major stride in terms of restoring orderly trading to the corporate bond market. Since then, when they've actually done it and done the trading, it's been kind of an afterthought. I think they probably had to do something to fulfill their word. But the major impact was just, I think the market getting a hold of itself based on the Fed's announcements. I should mention one bug in the chart here. So we didn't have time to correct this. But the scale on the left scale is incorrect. It should be trillions of dollars, not billions of dollars. And again, the recent level is .012. So .012 trillion is 12 billion dollars, as I mentioned earlier. Again, this is very small potatoes compared to what the Fed's been doing in terms of open market operation. But merely the news that the Fed wanted to intervene in the corporate bond markets looks like it was enough to bring these markets back to some measure of orderly trading. Where has the Fed's stimulus gone?

Michael Bazdarich: Let's turn to page seven. A good chunk of it has gone to corporate cash. So corporations like individuals were very, I don't want to say panicked, but they were very alarmed by the shutdown. They took steps to build up cash balances, to tide themselves over during this period. We didn't know how long they were going to be out of business. Corporations were able to borrow about eight hundred billion dollars from banks, not to mention the corporate bond issuance that they've done in the last few months. So corporations built up a pretty huge war chest of cash to tide them over. As the shutdown has subsided, they've started to work that down. And as you can see on the lower chart on page seven, we've seen corporations pay down a little bit over 200 billion dollars of those loans over the last few months. Kevin will talk about this more in a minute. The companies did not spend this cash. They basically built it up as liquid holdings again. One area where they deposited a substantial amount of cash was in money funds. So if you look at the table on the left, the last line there, institutional money funds through July 13th had increased by 920 billion dollars from where they were in February. So a good chunk of the money that corporations have raised, they're sitting on it. And this will be important when we talk about inflation in a minute. The Fed has supplied a lot of liquidity to the system. So far that liquidity has been demanded. People want to hold it, both businesses and individuals. They haven't turned around and started spending it, in which case it's not working to increase inflation at this time. Down the road might be different, but at least for now, inflation's too much money, chasing too few goods. Well, we don't have too much money now. We've just got enough to what corporations and individuals have wanted. I should mention also that as the C&I loans have been worked down, these institutional money funds have worked down as well. Through the middle of May, the growth in money funds was up well over a trillion dollars. It was down around 920 billion as of July 13th. And in the last two weeks, it's declined another 80 billion dollars. So we've seen a big influx into the money fund markets. This is starting to subside here over the last few weeks.

Michael Bazdarich: Bottom line, again, the Fed and the federal government have done what they could to ease the stress in the market. They can't remove it all together. These industries are shut down for now and are likely to continue to be shut down for a while until there's a vaccine and until people feel comfortable about going back to a ball game or a restaurant or a movie or getting on an airplane. As long as that doesn't happen, GDP is going to be substantially below February levels. The goods markets, construction, housing might be doing fine, but services are still going to be hurting. And as long as that is the case, we think the Fed will continue with an accommodative policy and keep short rates where they are and probably work on bringing longer rates down a little bit lower. We expect these types of conditions to last into 2021. I'm not going to give you the exact date or time. Again, this is our best guess. Obviously, a lot of uncertainty at the present. But, you know, until we can see a much more substantial recovery in the service sectors than what we've seen to date, until we've seen the virus subside dramatically from current levels, the Fed is going to be vigilant and work, be working, to keep rates low. Matt, Kevin, over to you.

Matt Jones: That's terrific, Michael. Thank you so much. Great overview of the backdrop from an economic perspective and from a stimulus perspective. So with that, you want to get a little bit more focused on what  conditions have been like to actually manage money at the front end of the curve. So very pleased to introduce my colleague, Kevin Kennedy, head of our Liquidity Portfolio Management Group, and Kevin over to you. Kevin, your phone may be on mute at the moment.

Kevin Kennedy: Yes, I'm sorry. Yes, hi thank you, Matt and Mike. Mike framed it very well, you know, the backdrop. And, you know, certainly I try to give the, you know, the portfolio manager perspective, which is acknowledging the harsh realities of rates remaining close to zero for quite a long period of time, you know, as Mike said.

Kevin Kennedy: On the chart of US short-term rates, page nine, just a brief look at where we have come from. Since the beginning of the year. And, you know, obviously it's generally a trend towards significant rate declines towards zero. In early March, the Fed started the ball rolling, with aggressive easing, lowering the fed funds rate target or range target by 50 basis points on March 3 and another 100 basis points on March 15. And, you know, certainly, the Fed was viewed as moving aggressively, quickly, proactively. And, you know, certainly it was viewed, I think, by market in general that they were, you know, certainly made the right move at the right time. You know, we did have a situation which if you look at, you know, the red line where you see us represent three-month LIBOR, you notice a steady decline in line with the Fed lowering rates and low rates moving lower. And then you notice a spike in the middle of April, in the middle of March, rather. And certainly that was a period that was certainly a bit uncomfortable. You know, clearly, as Mike mentioned before, there was a strong demand to remain liquid, to move towards the most liquid of securities, to build up cash, to make sure you had access to it should you need it quickly. And what that resulted in was a huge shift out of prime funds, out of less liquid instruments, into Treasury securities and out of equities to a certain extent. And, you know, during that point, it became impossible for banks, for industrials, CP issuers to raise funds. Really, they, in order to raise funds during that time, it was probably necessary to pay as much as two percent. You know, when you had a fed funds rate that was close to zero. And the Fed stepped in very quickly with a number of programs, probably the most important of which when it came down to, you know, reopening the short-term markets, rebuilding liquidity was the money market liquidity facility, which, you know, on a non-recourse basis provided financing for dealers to finance commercial paper, CDs, you know, with the Fed. And certainly that probably was the most important program that had a quick, direct impact on money markets. And that's when we start to see a steady decline in LIBOR, in fact a fairly rapid decline. And that was in conjunction with a number of the other Fed programs that, you know, Mike mentioned. Also, they were the market making. Sure there was limited pressure, you know, on overnight rates and funding rates in general and they announced programs, as far as, you know, purchasing Treasuries and MBS securities overnight and term repos. And certainly they did this in huge size. And you quickly saw a steep decline in rates down towards levels that would be considered more normal when you're in a zero to 25 basis point rate environment.

Kevin Kennedy: One thing of being--certainly one thing that was a one of the most incredible increases in supply over a very brief period of time that I think we've ever seen was the dramatic increase in Treasury bill supply, which began at the end of March. We may remember, you know, those who keep an eye on the short-term markets and the bill market, that there was a period of time towards the end of the first quarter, really prior to the time when Treasury bill issuance jumped higher. You know, right before then, bills did go briefly negative for a period of time or negative yields. And, you know, towards the end of March, those were trading as as low as -10 to -20 basis points. So that was an environment where I think you could look ahead, especially when the CARES Act was announced and it became clear that the Treasury was going to be raising funds aggressively in order to pay for this 3 trillion dollar program it would have been necessary to fund it in the Treasury market. And they focused on issuing Treasury bills. And you saw beginning at the very end of March, beginning of April, a very sharp increase in bill issuance. And, you know, today, so far, we have seen 2.7 trillion in net new Treasury bill issuance, which has roughly doubled the amount of bills in volume prior to the onset of the crisis and Treasury bills now represent about 26 percent of outstanding Treasury debt.

Kevin Kennedy: Next slide. Short-term rates. What was the response to that huge increase in bill supply? And, I think many may have thought, well, that would put some upward significant upward pressure on short-term rates because obviously all these Treasury bills have to be financed, taken into position. We started to have some expansion and a number of bill auctions and, I think initially the concern was who is going to fill the gap here as far as being buyers of all this issuance? And would it lead to, you know, upward pressure in other money market rates as financing costs began to rise? That turned out not to be the case and not that the huge increase in issuance was met with demand from various sources. Certainly, some of the CARES Act funding itself went towards Treasury bills. It was a huge increase in bond issuance beginning when rates started to move a bit lower and markets opened up after the Fed made their announcement of a variety of supportive programs. Overseas investors, certainly with a negative rate, a largely negative rate environment in many areas of the globe, you know, the US still represented value, if only because there was a positive yield and certainly could be depended upon for excellent liquidity characteristics. And money market funds themselves, even though there was a period of time when after the really the pinnacle of the crisis, prior to the Fed's actions, there was certainly a building demand, more broadening demand from investors and money markets, certainly on the Treasury and government side. Even though investors, their fears were allayed somewhat as the Fed acted strongly, they still maintained very high levels of balances in Treasury and government funds. So, certainly it did peak around the end of March as far as the balances and Treasury and government funds. And you did start to see a bit of a decline as investors started to venture into other short-term alternatives or back into equity markets or corporates or other risk sectors. But still today Treasury and government funds are still much larger than they were prior to the onset of the crisis. Obviously, as time has gone on, we've noticed a significant flattening and yield curves in general, certainly the US Treasury yield curve has flattened significantly. And that certainly helped the bill market maintain its attractiveness as yield curves and the front end of the Treasury curve was virtually flat from three months out to three years at one point. So those who are generally Treasury investors in that one to three year area. You know, the Treasury curve certainly in some cases may have looked to take less duration risk since they really weren't getting paid a yield and they could get close to the same return in the Treasury bill market.

Kevin Kennedy: Looking at spreads in general and then touching upon where where money markets are trading today, obviously, once again, you see the sharp uptick in LOIS, which represents the spread between three-month LIBOR and three-month overnight index swaps. Overnight index swaps were basically a proxy for fed funds futures. And clearly in mid to late March, there was a very sharp spike in LIBOR versus fed funds expectations. And this once again mirrors the LIBOR chart to a large extent, and it returned to what you would call normalized levels very quickly. And that's where we stand today. LIBOR-OIS is, you know, has been about 18 to 20 basis points. And what we've seen in conjunction with what you're seeing on that tightening and spreads, that decline in LIBOR, we've seen a decline in yields in money markets across the board, whether it be commercial paper, both financial and industrial CP, the bank issuers have, you know, certainly fulfilled their funding needs by terming out their debt to a large extent. They've had a significant increase in their increases in their deposit base. So their demand for funding is not what it used to be. And industrial grade issuers themselves. You know, once again, similar to banks as we went into this crisis, have been and they were in good shape from a balance sheet perspective. And the banks themselves, obviously, as far as improving  their capital ratios, de-levering, much less of a reliance on rolling over very short-term funding. Bank issuance has certainly been not on a I would say, significant decline, whether it be commercial paper or banks. But but certainly, demand for funding has moved a bit a bit lower here. So we've seen commercial paper rates and in three months, an indicative rate today on three-month industrial commercial paper might be anywhere from 17 to 22 basis points versus three-month bills of 10 basis points. So once again, those spreads have come in sharply since the heart of the crisis. And we really don't see that changing very much going forward, especially since the Fed has announced extensions of the liquidity programs, extension of their swap lines, you know, through the end of 2020. And so certainly the Fed is doing everything they can to give every indication that they really don't want to deal with any type of funding issues. They want to make sure that the markets continue to work well. And basically, the extension of these programs ensures that into the beginning of next year.

Kevin Kennedy: Second half of this year, looking forward and trying to touch a little bit upon, you know, what type of strategy might be appropriate. This represents the LIBOR yield curve that has flattened over time, 3-month LIBOR today is roughly 25 basis points, fewer out to 12 months. One-year LIBOR roughly at 43 basis points, we expect that to continue to flatten. One of the positives when it comes down to being comfortable that yields won't drift too close to the bottom end of the the Fed's target range or too close to zero is that there will continue to be an increase in Treasury issuance going forward. Certainly expectations are that there will be another another stimulus package and perhaps by this week. And the size is a bit up in the air and anywhere from I guess the best guess would be, 1.5 trillion or somewhere in that range. And that will certainly impact Treasury supply and that there will be the need to increase, you know, supply of Treasuries going forward, whether that be in the bill sector or the longer end of the curve, given the fact that they focused on bills early on and the duration of the Treasury's debt has shortened to the extent they might be a little bit more comfortable extending that a little bit further out, that issuance going forward might be more spread out across the Treasury yield curve. But still in general net new issuance Treasuries will continue to grow. It will keep some floor under funding rates going forward. So I think we will see overnight rates perhaps remain fairly steady, provide a bit of a floor. But with Treasury bills yield and then therefore a bit of a floor for where money market instruments are trading.

Kevin Kennedy: The yield curve, when you're looking at the LIBOR-yield curve, given the you know, once again, the extremely strong state in general of financial sector and the fact, as Mike mentioned, that it's extremely clear that the Fed's going to be on hold that close to zero rates through next year at the very least. Given the outlook that we have, which is for certainly not a V-shaped recovery of any type. Certainly Mike mentioned some of the challenges that are out there. But certainly I think from a credit quality perspective that we are fairly comfortable that given the the Fed's response, given the fiscal response and given what is generally, I think, a bit of a positive outlook for some progress made on a treatment/vaccine, you know, by the middle of next year at the latest, hopefully, the economy should grow steadily and take some quite some time to get back to where it was prior. The progress will be will be evident. And therefore, I think as a portfolio manager of a prime fund, I'm certainly looking to take advantage of whatever the yield-curve steepness there is. Might be a bit more selective from a credit perspective on banks and industrial issuers further out the curve, some that might be a little bit more impacted by some disappointments. On the economic side or certainly on the other side of public concerns that there might be some sort of a delay in an eventual answer to COVID next year. But in general we see a flatter curve and we'll take advantage of of what is available in a yield curve by investing into investing in some solid global money center banks out the six to 12-month range. Treasury government fund, once again, a tougher story, yield on Treasury bills from one month to 12 months or anywhere from 9 to 11 basis points. So not much to work with from a yield curve perspective. And the same can be said as far as government agencies which trade pretty much on top of of Treasuries. So they're a little bit more challenging, a little bit more dependent on money market technicals and where overnight rates are trading and thankfully, we will have some steady increase in supply over the second half of the year, which might provide a bit of a very modest uplift in Treasury yields. And yes, I think that that's all I have.

Matt Jones: That's great. Thank you so much, Kevin. Thank you so much. So, again, we appreciate everybody joining us today. We're up at around 11:45, so we want to be conscious of people's time. We'll take one or two questions. But if I could just ask everybody, we would really appreciate if you could answer a poll question. We love to get your feedback on how things are going or how you enjoyed this webcast. So hopefully you can see a pop up if you can just let us know what you think, then that would be great.

Matt Jones: Ok. First, we're at 11: 45. It's been tremendously informative, so we appreciate, Mike, your insights, Kevin, your insights. One very, very topical question, Michael, if I could just start with you, around yield control. And you know what, so from your perspective are the Fed aiming to achieve yield curve control, how does Western see the Fed implementing it in the context of this discussion? What is your opinion about the impact of curve control on the short end market?

Michael Bazdarich: Sure, Matt. Yield curve control is just one more way for the Fed to try to stimulate the economy. So what can the Fed do when the funds rate's zero? Historically, when the funds rate was five and the Fed wanted to stimulate the lower to four, three, what have you. Now with the funds rate essentially at zero and the Fed having said that it doesn't want to go negative, in order to further stimulate the economy, it's got to work on the longer end of the curve. And that's really all yield curve control is--it's just a different form of what we've seen previously called Operation Twist, where the Fed has worked to lower longer-term rates with--in the past the Fed would sell shorter-term bills and buy longer-term maturities, try to push down the long end and maybe push up the short end, which is why they called it Operation Twist. This time they're going to keep the short end anchored and try to lower the long rates. I think in order to do this, they're going to have to buy--really concentrate their purchases at the parts of the yield curve where they want yields to decline.

Michael Bazdarich: I mentioned earlier that the Fed, just through talking, was able to get corporate bond spreads down. That's different. When you have a chaotic market, really traders not, you know, shorting corporate bonds, figuring they couldn't lose. And then the Fed comes in and  gives them something to think about. It creates a two-sided market. I think in a chaotic market condition, verbiage alone can work. We don't have chaotic Treasury trading presently. And so if the Fed wants to lower those longer ends of the curve, talk is not going to be enough. I think they're going to have to really focus and maybe step up their open market operations at the parts of the curve where they want long rates to go down. What parts are those? Well, they'd like to get mortgage rates down further. So if they're going to do a yield curve control, probably work on the 10- to 30-year yields, also maybe work on yields where the bulk of corporate bond issuance is. So, again, yield curve control just another way for the Fed to try to lower different aspects of interest rates to try to stimulate the economy.

Matt Jones: Great. Thanks, Michael. Thanks. Kevin, if I can just pose a question to you, you know, we've talked about the Fed being on hold, lower for longer. Clearly investors are going to think about the return that they achieve on their cash now and whether they should go into short duration investments, take some extension in duration, maybe try and stretch a little on credit risk. What would your counsel be to investors now? What are the pros and cons as you think about that?

Kevin Kennedy: Sure, well, what we're doing in our portfolios now outside money funds is taking advantage of short-duration investment-grade credit, one- to five-year part of the curve, trying to take advantage of any issuance that that does take place. Certainly the opportunity in the front end of the curve is certainly not what it had been. There has been strong demand for high-quality investment-grade credit in the front end by those types of investors who who generally, you know, are in short duration or in money funds and certainly are conscious of the fact that credit quality still remains quite, quite solid in general in the US. So spreads have come in quite a bit. We were at a wide of and if you're looking at the Barclays one to three year credit index investment-grade, certainly in March, we were as wide as 390 basis points versus Treasuries. And now we're, you know, we're back to 50 to 55 basis points, on three-year index. And if you dig a little bit deeper into the real solid credits in that range, those spreads are even tighter. We saw Google come to market yesterday with five-year new issue, obviously very strong AA credit, household name, extremely liquid. And that came at 25 basis points over Treasuries. So you're certainly looking at an all-in yield of under 50 basis points for a certainly a solid liquid credit. But that is where you begin to think about relative value and perhaps look at money markets from time to time. But in general, that's the expensive side of what's out there. But if you're looking at the financial sector, certainly if you do your bottoms-up work, and especially when it's related to a financial issuer who might have certain exposures that might become a concern. If you had certain problem issues become extended, that's where I think you have to do your homework. And that's where we rely quite a bit on our our Credit Team. But, yeah, we are certainly looking for opportunities and that one- to five-year space, whether it be fixed or floating. And, you know, certainly there would be no home runs from where we are now. A significant spread tightening is not very likely, but still, if you look at the carry versus being in overnights or in the money fund, that 5 to 15 basis points, certainly over the investment horizon that we're looking at, which might be the next few years with the Fed on hold, we think it makes sense from a carry and roll-down perspective. So, we're being selective, but we are taking advantage of opportunities and short duration IG and also in, short mortgage-backed and asset-backed securities, which once again, those spreads have also come into very narrow levels. But, you know, still it's additional carry from a credit perspective. It's really the type of holdings that we feel we can have for our client base that, you know, allows everyone to to sleep at night.

Matt Jones: Terrific, terrific. Well, thank you and thank you, everybody, for joining us. You know, we'd love to hear your thoughts through your future contacts at our firm, and we'd love to help you wherever we can. So please stay in touch. Thank you again for joining us. You know, we're probably running out of time today. Excuse me. Just put it on the right slide here. So to say thank you. And for additional commentary, insights, please visit our blog at WesternAsset.com. The slides in this presentation are going to be available for download. You'll be able to access reply through this link. And again, if you if we didn't answer everybody's questions, please reach out to us. And it would be we'd be glad to to answer in detail. So thank you again. And with that, we wish you all a good day and keep safe and well.

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