The Fed and Liquidity Markets - Balancing the Risks of Inflation and Recession

Matt Jones: Hello, I'm Matt Jones and welcome to today's webcast, which we've titled the Fed and Liquidity Markets: Balancing the Risks of Inflation and Recession. So thanks again for joining us. So in this latest of our series of webcasts in which we focus on the impact of Federal Reserve policy to both broad market and liquidity investors, today we're going to focus in particular on the impact of inflation and recession and associated risks. So depending on the data points you look at and clearly even within the last week, we've had some pretty interesting data points with payroll and unemployment data suggesting inflation is going to run very hot and then CPI and PPI data suggesting some relief. Even in the last week, we've seen some pretty interesting data points that will give us cause for discussion today. So right now, the Fed is clearly stating that it's going to continue aggressive action to slow inflation and achieves price stability.

Matt Jones: And today, we're very grateful to have Mark Lindbloom and Kevin Kennedy join us once again to dig into aspects from both the broad markets and the liquidity viewpoints. So Mark and Kevin are well known to the audience. Mark leads our Broad Markets Investment Team. Kevin leads the Liquidity Investment Team and delighted and thank you again for joining us.

Matt Jones: So as usual, you know, we like to we like to make this interactive. So you will see at the bottom of your screen and ask questions section. Ask a question, question box. So please feel free to email us as we go along. And we hope you enjoy today's discussion.

Matt Jones: So we've done something in a few of our last webcasts. We're going to just do it again today just to get the conversation started and that we're just going to push out a poll question for the audience to take a look at. So you just see, our question is, what would be the effective Fed funds rate be at the end of 2022? Less than three and one half percent, three and one half to 4%. More than 4%. Please, no right or wrong answer just what you what your thinking is right now. I think at the last time we had this webcast, just to give you some context, at that time, around one-fifth of the audience, about 20% or so thought the fed Fedfunds would end at less than two and a half percent at the end of 2022. And two-thirds thought it would be between two and one half and three and a half, and just 11% thought the target rate would be above three and a half percent. So I wonder if we could just push out the answers to the questions...

Matt Jones: ...Pretty consistent, three and a half, three and a half to 4%. I think that's, and Mark and Kevin will confirm, that’s where the market consensus broadly is right now. So, interesting that just a few months ago we were talking about less than two and a half. Now we've reset somewhat higher. So, interesting period for us to have this webcast.

Matt Jones: So Mark, if I could begin the discussion with you, the nonfarm payroll number came in well above expectations, 258 versus 250 consensus sort of ticked down in the unemployment data. CPI, PPI may be telling a slightly different story. So how do think the Fed from this point are going to going to respond to this data? What's your expectations as we move into the last months of 2022?

Mark Lindbloom: Yeah. Thanks, Matt, and good morning, everybody. Let me talk a little bit about that to start of the data that we've seen recently has been basically in line with our base case here at Western Asset, which has been for some time on the economic side that we'd see slowing growth but not a recession. Let's call that below-trend or 1%-ish real. As you all know, the first half of the year was negative. We think that overstates the level of weakness, just given how that GDP is measured and importantly influenced by inventories and trade. However, all of us know that other parts of the economy and one that you just mentioned that are still doing okay, particularly on the consumer side, particularly on the services side and certainly on the hiring side as well. This is a peculiar economy in that we have been through two and one half years of turmoil, both from Covid, the shutdown, the sharp recovery, the supply and demand problems, all of which we're still sorting out. And we do think that employment for sure is important for all of us as an indicator of where this economy is going. It's important for the Fed, particularly in terms of the strength of the labor market and also the strength of of labor costs and certainly something they've been citing recently, putting that all together and trying to answer your question, Matt: the way we view the world is after having seen very, very sharp Fed and market pivots in terms of the pricing, the concerns about inflation in the United States and for that matter, globally, we do think that it is most likely that we will see 50 basis points hike in September, 25 in November and 25 in December, which takes us very close to the bottom end of your range on the question of about three and a half percent, which is currently what's priced into the market. Our slight bias on that would be low or not higher in that we are seeing for sure areas of the economy that are showing the signs of slowing that we have expected, even though the lagging indicator of employment is still quite strong. We would expect as we go through the remainder of 2022 and when you look at nonfarm payrolls and within nonfarm payrolls, both the establishment as well as the household survey, that we will start to see those numbers moderate and hopefully as well things like average hourly earnings and employment costs, indices that we're all watching very, very closely will also begin to moderate. So all in all, to sum that up, Matt, I would say that our expectation has been some moderation in growth. We are seeing that moderation. We continue to debate the sectors which are most vulnerable, perhaps things like housing, given financial conditions are much tighter over the course of the year and other sectors that are still are still improving.

Matt Jones: Thank you, Mark. Thank you. So, Kevin, if I could turn to you just building on Mark's comments around the path of interest rate hikes as we come into the next few meetings. So, you know, when we went back to March, you know, the Fed embarked on this very aggressive series of hikes and for liquidity investors, short-term investors, that the immediate response was to run shorter and hold maturities much shorter than in I guess we would call normal market conditions. So with our expectation around the path of a Fed now, is it time to start extending maturities somewhat? If you're if you're investing at the front end of the curve or would you think that we should still hold on a little bit and keep short?

Kevin Kennedy: Sure. That's a great question, Matt. And certainly, given the backdrop that Mark very clearly outlined, given what's priced in to markets at this point, from our point of view, yes, it is the time to start considering very seriously if you have cash, consider whether or not it's time to start, you know, perhaps putting some investments a little bit further out the curve. That certainly might be determined by the nature of the cash involved, the product involved. Certainly in our money market funds, it's a, I hate to bring up this old well used term, but it's a little bit of don't fight the Fed. And at this point, there's probably between 50 and 75 basis points priced in of tightening at the September 21 meeting. We certainly feel that 50 is more likely given some of the recent data, notwithstanding the extremely strong payroll number. CPI number certainly is heading in a direction that the Fed likes to see at this point. But as they have made clear, that's not something that they're counting on necessarily going forward. So we are probably money market funds, a bit more conservative. Things could change very quickly. As far as a more aggressive pace of Fed tightening being priced in, for instance, 75 in September, followed by 50 at the following two meetings. That's not something that can be ruled out, especially given the rather hawkish comments that we've heard recently, in particular from the the new dovish member of the Fed of new hawkish member of the Fed, Kashkari, who used to be, as we know, kind of the quintessential dove. So we are a bit cautious money funds still. We are moving a bit out of the curve as far as our maturity profile for money market funds, in particular in prime money market funds, where commercial paper CDs are beginning to look very, very attractive. But still, a high level of caution there, given the fact that things could change very quickly as far as more aggressive Fed expectations, even though our view is that it would be more likely to go the other way. Four other cash accounts. Separately managed portfolios. Very short duration accounts. Certainly a little bit more in the way of attractive opportunities out there, whether it be longer-dated money market securities, which from six months to a year range from three and a half to close to four percent. And that moves out the curve to short duration products. Right now, we're seeing some very attractive levels in financials in the 1 to 3 year sector that are trading at a range of 80 to 120 basis points over Treasuries. And so you are getting close to certainly the the the end term determine the rate from the Fed or that could that could be close to 4%. So that's a lot of Fed tightening priced in. So once again, very dependent on the product on, you know, the sensitivity that you have to how quickly you might need the cash and the nature of your portfolio. But, yes, bottom line, cautious, especially in our money funds still; for centrally managed accounts, we are being a little bit more optimistic as far as extending duration.

Matt Jones: That's great. Thank you, Kevin. Thank you. So, Mark, if I could come back to one of the two main topics of our discussion today, the topic of inflation. You outlined Western Asset's thoughts around the path of Fed policy, where we think things are going to go. But just drilling down into inflation data a little more, inflation is certainly going to remain key to our approach, I know, and market expectations as you consider the data within your team and across the Western Asset investment community, what's our view around the path of inflation over the remainder of 22 and into 2023?

Mark Lindbloom: That is the most important question, Matt, for our viewers and for all of us in terms of where inflation is going near-term. Certainly part of our Fed focus and our view on the Fed in terms of that terminal rate and what is priced in, as Kevin said, being pretty close to what we have seen, which has been generally three and one halfish to four percent over the last month or two. To answer your question to start and then I'll give you a better idea of the debate that we've got going on here internally. We do think that for the remainder of 2022, when you look at the CPI, both the headline as well as the core, those numbers are likely to be on the headline, an average of about 0.2 for the remainder of the year. And that's substantially lower as as you all know, and what we've seen recently on the core, similarly lower, but perhaps just a bit higher than that overall headline number, just given what the impacts of energy. But there again, we figure about 0.3 on average for the remainder of 2022. Importantly, as we move into 2023 is not so much the level which will still be too high on a year-over-year basis this December. But it's the run rate and the trend. And there again, we do think that will be moving back towards all of our target and more importantly, the Fed's target as we move into 23 and into the end of 23.

Mark Lindbloom: Those are our expectations generally. Those are market expectations as well for the remainder of 22 into 23. It would be a welcoming event for sure, just given the very high levels that we have been at for 2022 in the United States or for that matter, around the globe. There's two parts to this discussion. If I could just take a second and talk about the debate that we're having here regarding this and the reason that we feel that the Federal Reserve is close to accomplishing what they're trying to do in terms of the tightening of financial conditions, the slowing of demand in the economy, and consequently beginning to see some decline of inflation, both because demand is softening and that's what they can't control. But also and importantly, that this very difficult period of time that we've been through over the last two, two and a half years, and the resulting supply and demand problems that we have all witnessed and, by the way, continue to see will start diminishing. And importantly, that will have an impact on this inflation that has been elevated in part because of that as well. So a two-part process, at least in the United States and around the world. But we do expect to see some improvement there on a cyclical basis. The key question for Kevin myself, the rest of the portfolio management group is, is it enough? And what is the Federal Reserve do as we are seeing these declines, these better numbers? Are they are they quick to pivot and or do they maintain this hawkishness that Kevin talked about? Our thought on that is we don't know. They don't know. It depends mostly on the economic data that we'll be seeing from here to the end of the year. Our base case, as I suggested earlier, is positive growth. But there are quite a few folks out there that are predicting a recession. That course is largely diminished over the last several weeks because of the employment number. But the month before that, we just had a vicious rally as rates were declining by about 100 basis points based upon this belief that the economy was rolling over and the Fed would be more relaxed. They have pushed back on that. They want to keep the focus on inflation expectations. They don't want those to rise. And let's all admit inflation is too high. We are only beginning to see that turn over, but we do think that that will continue to happen on a cyclical basis in 22 into 23. I think importantly, too, for all of us is that doing this a long time, 50-year anniversary of our firm over that period of time, generally speaking, we've been living in a disinflationary and even at times deflationary periods of time. And that has been beneficial certainly for financial markets, certainly for bonds and economic growth and other financial markets. Generally speaking, our belief is that those secular reasons that we have gotten here are still present. They will still be important. But we do recognize that over a longer period of time, the secular arguments that many are making regarding the shifts that we have seen monetarily, fiscally, socially. Global trade, labor...all those things will be important in terms of determining where future inflation will be and potentially different than what it has been. And that, again, is a subject of great debate that will continue. There are some very powerful arguments a lot of people are making as to why it will be different. Our comfort has been, at least so far, that the Federal Reserve and in fact, most major central banks around the world have mandates to make sure that they reach those inflation levels of 2% or 3% or whatever the specific country's mandates are. So, long-winded answer to your question Matt, generally speaking, lower in the near-term, at least on a cyclical basis for the reasons that I outlined, softening growth, supply/demand balances correcting themselves. Demand starting to soften as the Fed has been raising interest rates and tightening financial conditions, watching very, very carefully as we deliberate longer-term implications for some of the global changes that we're going through.

Matt Jones: Thank you very much, Mark. Thank you. So coming back to money markets, the interesting impact of some of the Fed's policy approaches has been somewhat perhaps behind the scenes with one or two of the tools they use the reverse repo program as an example. So just pivoting a little bit to some of the supply/demand mechanics and if you like, nuances of the money market sectors over the past few months. One that Kevin, if I can just ask you, we've gone through this very, very fast interest-rate hiking cycle that's going to continue. And, you know, the reverse repo program used extensively by money market funds not to make this too much of a technical conversation. The question is really about supply/demand. What you've seen over the last few months in terms of how money markets sectors have operated and certainly repo and Treasury bills have been, you know, operating or acting somewhat differently from where you might see normal relationships in the money market sectors. So long-winded way of asking you a question. What's been notable to you about supply/demand dynamics in many market sectors recently over the last few months? And then what do you expect moving forward?

Kevin Kennedy: Yeah, sure. Matt Certainly. You know, usage of the Fed's reverse repo program has remained at extremely high levels. We had a peak recently of 2.3 trillion. It's been running between 2.1 to 2.2 recently. That's a lot. I'm not sure the Fed themselves recognized how much usage would be. Certainly remain so high for this long of a period of time and it's probably not going to change the facts. Fact is that certainly, as I mentioned before, investors who have a lot of cash, whether it be the US or outside the US, US dollars certainly are remaining conservative. We have a Fed that's on the move. They are being very aggressive. Certainly anybody sitting on large pools of cash are being very conservative. And that has driven a lot of investors to the Treasury market, and that's resulted in short-term Treasury bill yields remaining well below the Fed's target, which is roughly two, two and three-eighths. So that's not going to change. The Fed reverse repo program certainly serves its purpose of underpinning short-term rates. And short-term bills would be probably yielding even lower at this point if that program was not in place. But it is something that's offset by a large number of investors who do not have access to the reverse repo program. And certainly that represents probably close to 50% of the participation in the build market out there. And they have no other option but to go to short Treasuries in many cases. So that is going to certainly keep Treasury bill rates low, probably overnight funding rates a bit lower than they might be normally. But this will not change over the near term. Bills versus OAS trading at about they've been in a range of -20 to 30 basis points below OIS, which is a proxy for Fed funds futures. So not necessarily fair given what's being priced into the market, but once again, options are few. The Fed could address this a couple of ways. They've already increased greatly the maximum usage available to money market funds. But what would change the dynamics a bit more quickly, would be expanding the list of eligible counterparties that could have access to the Fed's reverse repo program. And certainly that would serve the purpose of correcting what you might call an imbalance between short term rates on Treasury bills versus where Fed funds are and where expectations are, and normalize things a bit more in the marketplace and lead to what you would normally expect to see as far as short-term rates and how they relate to Fed, where the Fed stands currently and where the Fed is anticipated to go.

Kevin Kennedy: But near-term, certainly we utilize the reverse repo program quite a bit. Rather than go to short bills or agency securities. This is something that will change over time, but very, very slowly. Certainly, we are seeing some increased issuance from the Federal Home Loan Bank, which is providing some competition to bills. That's keeping bills from going a bit lower. And certainly the Fed is going to be increasing their QT size beginning in September to up to $95 billion per month, where they will be shrinking their balance sheet. And over time, that will result in more pressure on short-term financing rates. But once again, these are things that will happen gradually. There will be an increase in bill supply over the near-term, but nothing of great significance that would lead to more pressure on bill yields going forward into next year. Expectations are for an increase in bill issuance, net bill issuance, that could once again change the dynamics a bit. So the outlook is over time. You know, that balance right now as far as uses of the Fed's program should begin to move lower. But over the near-term, we we continue to see it remaining, certainly above 2 trillion for the immediate future.

Matt Jones: Thank you, Kevin. Thank you. So coming back to one of the two sort of major themes of our discussion today, Mark, the Fed continues to focus on achieving a soft landing, depending on who you listen to. That might be a hard thing for them to do. But there are many sort of conflicting signals in the data. The 2s, 10s Treasury curve certainly seems to be sending a clear message around what the markets think. But from your viewpoint, with all of these conflicting signals around growth and recession, how do you construct or how do you implement portfolio policy and portfolio strategy from this point?

Mark Lindbloom: Yeah. Let me try to bring it all together and talk about strategies and how we distill all these factors that we've been talking about over the last 30 minutes. Matt. A few points I'd like I'd like to make. Number one is that first half of the year has been very difficult for all of us, both from an absolute point of view and also a relative point of view. Just about every asset class has been negative and down perhaps until the last month or so. We feel that correlations are alive and well, and there's a lot of folks out there who have been suggesting that bonds are not something you want to have, as we traditionally have looked at them as a hedge, if you will, against, a very high-quality hedge, against the volatility that we witness at times in other sectors, like equities, for example. And indeed, in the first half of the year, we did see that behavior. And the culprit, of course, is the much higher inflation than most of us expected to see over the last 6 to 9 months in the United States and globally. We do feel, given what we've talked about and our base case in terms of slowing growth, that and falling inflation, very important, that those correlations will be very, very important. The second thing I would like to say, too, is that I think we all would agree, we have to acknowledge that this is an experiment that we are going through. The difficulty in the last two and a half years with basically a global shutdown policy response, a very strong recovery in terms of goods and services, and now, of course, the response on the part of monetary authorities globally ex-Japan to rein that in, given the level of inflation that we're seeing and the importance of that that statement, and I think in acknowledging this as an experiment, is that mistakes can happen. They sometimes do happen. And from a monetary policy point of view here, Europe, Asia, elsewhere, they don't know. We don't know the exact level of interest rates, quantitative tightening, strength of the dollar and other things that have been that have been tightening financial conditions this exact appropriate amount. The point of that is, and back to my correlation issue, is that to the extent that monetary policy does overdo it, we reach that point with the benefit of hindsight, like we did in 1819, when the Fed raised rates in December and turned around in January of 19, that could easily happen again. And in fact, that is the design of what they're doing is to slow that demand and the cool inflation given their mandate. So what I'm trying to say here is that correlations do matter. This is an experiment. No one knows for sure if the right level is three, three and one half for lower, higher, etc. We certainly got our bias on that, which I think has been clear. The second important point is the yields that exist today as compared to what they were three months, six months ago or before. When we talk about a core or core full or other flavor of portfolios, the yields today are five, six or sevens, eights, depending upon what they're allowed to invest in. Investment-grade, below-investment-grade, emerging market, structured, munis, etc. The importance of that is, as we all know, is fixed-income, the total return is determined by that income and by that yield a very high percentage of those returns. So sitting here at five, six or sevens and eights is a pretty good estimate of what those future returns on bonds are going to look like. That is far different than it was not too long ago and therefore a very attractive asset class, in our opinion, going forward. And if we're right, of course, about inflation coming off the boil, which we think it will, and central banks accomplishing what they're trying to do. So those two points or three points I think are very, very important. How that ends up in terms of policies for us is a combination of that macro where we do want to maintain some duration longer relative to the benchmark that we're measured against. In case we are wrong in our base case, our second higher probability would be as many have worried about the economy tipping into a recession. Usually you hear the word shallow around that description of recession. Perhaps that's right. But nonetheless, we do think that we do want some duration just in case, monetary policy misjudges, Mr. Powell and company misjudge and we do see a repeat as we have in the past and things slow, abruptly or something breaks. The leverage shows up in a negative way that exists in the economy. The second thing, too, is part of our construction and against that duration is we feel that some of the spread sectors have been very attractive. They have generally become more attractive in the first half of the year. That is widened relative to Treasuries as equities have been declining. We do like owning investment-grade credit, for example. We like specific structured areas that Kevin mentioned. Further out the yield curve, we can get five and six percent for 3 to 5 year maturities high up on the capital structure. We think that over a period of time that that's pretty, pretty darn attractive. Similarly, we've been adding agency mortgages. We think there are opportunities in emerging markets and we think there are select opportunities below-investment-grade, all of which give us a very attractive yield advantage relative to the benchmarks that we're measured against. To sum all that up, Matt, I'd say that over the next six months to one year, we expect a very different outcome than what we've seen over the last painful six months from an absolute return point of view, and that with a moderation in growth and inflation of fixed-income will prove to be a very good asset class, both from a return and a correlation point of view.

Matt Jones: Yeah, I certainly hear you loud and clear, Mark. I mean, the last six months have been very, very difficult. So look forward to a much more constructive period ahead. So just coming back to money markets and building on that theme of recession, one of the things, Kevin, that you and I have talked about is, you know, in a recession, you see signals. You see signals in in credit strength, you might see some deterioration in market liquidity. So just from your perspective and gave a fantastic overview from his perspective. But as you as you invest on a day to day basis, what are you seeing? Are you seeing any weakness in credit or deterioration in liquidity? Does it feel like things are working pretty well for the time being?

Kevin Kennedy: Sure, Matt. Certainly, as Mark mentioned, a lot of uncertainties in the marketplace. We have the experimental nature of monetary policy, if you want to term it that way. I think that's a good way to put it. You know, the recent evidence of at least in certain sectors of the economy here in the US and concerns outside the US as far as Europe, especially the uncertainty there as far as the potential risks of a more severe slowdown. Against that backdrop, you would expect perhaps anticipation of at least a modest deterioration in credit. Some concerns on the liquidity front. Something that did occur, not necessarily a black swan event, but something related to a particular large financial institution that might create a contagion type effect. You know, nothing like that has really proven evident out in the marketplace. Credit is still solid. The US right now, they've gone through certainly enhanced efforts as far as managing their capital. Certainly the Fed stress test led that to occur as far as banks looking to and in a way if anything shore up their capital further. And all this has resulted, in fact, amazingly, to some extent, after going through two and a half years, really, of a somewhat unprecedented situation for the economy and the globe, credits remain quite solid. Liquidity has remained excellent, whether it be US names as far as financial institutions, as far as European credits. Despite the concerns there, as far as perhaps a potentially greater impact from the war and disruption and supplies related to energy and higher rates and higher rates despite all that.

Kevin Kennedy: Banks are still in excellent shape. Liquidity is quite good, as Mark knows. And this is true in fixed-income across all sectors. You can be right about a lot of things, but if liquidity conditions suddenly deteriorated, even if credits remain stable, it could lead to a situation perhaps not as severe as we had back in March of 2020, but something that could impact the valuation of portfolios whether they be very short or very long. And that's not something we've seen. You also have a huge pile of cash out there that is right now in the reverse repo program. That certainly should conditions even deteriorate modestly and spreads widen a bit. There's a large pool of cash out there looking to take advantage of those opportunities, barring it be an event that is obviously more broadly significant and could be longer lasting as far as creating an illiquid market scenario. But one of the things that's been really good if you're a manage the money fund or short duration assets, especially credit-related, is that despite what's gone over the past couple of years and expectations that that should have some sort of negative impact on credit and liquidity that has not occurred. So the risk comes down to primarily what's the Fed going to do? You want to try and get it right. You don't want to be too quick. To extend duration, certainly for short duration assets and then have the Fed all of a sudden be viewed as moving a lot more aggressively.

Kevin Kennedy: So that's the concern primarily on the rate side. But when it comes down to concerns about liquidity, it's plentiful out there. We don't see anything from a credit perspective. That will change that. So that's certainly been a relief that a number of phone calls with perhaps our Western credit analysts that don't have to take place. We do have a few exceptions always. Credit Suisse, for instance, stands out a bit, but certainly nothing in the form of any type of contagion there and US banks are benefiting from the fact that the loan demand has been picking up a bit despite results, earnings results that perhaps could be a little bit better. They are exhibiting the benefits of an increased net interest income that interest margins. So fundamentals are quite strong and I always hesitate to say that liquidity won't be an issue going forward because we all know that things could turn quickly, but that is at least over the near and intermediate term that should not be an issue. So it's one thing to highlight and it's a bit of relief that we saw markets that are working quite well and we do have a safety net as far as a huge pool of cash that still exists out there. And that's not only in the reverse repo program. It's parked in the middle sector, still parked at banks and deposits. And certainly that should help cushion the negative impact of anything that might occur a little bit out of left field at this point.

Matt Jones: Thank you, Kevin, for those reassuring comments. So we we've come to the end of questions that we thought would be interesting for the audience from the sort of perspective of broad markets and liquidity. I wonder if I can combine a couple of audience questions and ask Mark and Kevin just their thoughts. We have discussed quantitative tightening and the reduction in the Fed's balance sheet. I know that's something that's going on, again, somewhat of a technical discussion around how that's going to impact the markets. But we have another question, I know that we have one question around QT. And another question around which sectors may give the best relative value over sort of, I guess, intermediate to longer-term horizon? But Mark, if I can start with you and just say I don't know whether those two questions fold into themselves. I don't think they do. But what are your thoughts in terms of relative value? And if there's any thoughts you have on QT, that would be terrific.

Mark Lindbloom: Sure. I'll start with QT and try to make it quick. Certainly, that's an issue in the marketplace. And I would say the range is from one hand that it's not going to be a very big deal in terms of the implications for the marketplace to those who are arguing this is going to be a big deal. And what the Fed has to do is be extremely careful about how that interacts with interest rates moves because of the unknowns that I talked about earlier, when you combine these two and how quickly financial conditions could tighten based upon those, I think we're somewhere in the middle on that. Our major discussions about QT have been on agency mortgages specifically. Our agency mortgage desk has been talking for some time about the probability of the Fed actually selling agency mortgages, which would impact the lowest coupon since they're major holders of those coupons. Things like two-percent 30-year, two-and-a-half-percent 30 year. As we sit here today, we think that that's less likely given recent Fed comments, but still a possibility. And of course, it will be determined by the outlook on both growth and inflation, meaning that if inflation continues to run very high, very sticky, the Fed has to tighten more. Perhaps they move in one direction versus the alternative and more according to what we think, that we start to see some moderation of growth and inflation. And the implications for that, particularly on agency mortgage, is a little bit less so. All in all, something that we want to watch very, very carefully, given the unknowns of that unwind on the market overall. There are a lot of moving factors there we could talk about for a long time, in addition to the amount of financing that the government needs to do, which is down tremendously. So you have to look at all of these things combined. On the question of valuations. The way I would put it in terms of our broad market portfolios to start with munis. Our Muni Team does think that short and intermediate munis are on the rich side, so that the question on the intermediates and the entry point, they have done quite well relative to taxables, where they do think there's value is out the curve, where the ratios are more attractive relative to the taxable market. In terms of the taxable markets, specifically, the areas that we think are quite attractive are investment-grade credit, number one. The spreads have widened out to about 150 basis points over Treasuries on the index, more like 130 today. Just given the confidence that the economy will do okay, the recovery in equities, the perceived shift or at least stabilization of the Fed policies all have led to better buying in that sector. In particular, as Kevin said, there's a ton of cash out there and we do think that people find five and six percent yields in investment-grade credit quite attractive. Secondly, the area I would point to that we do find attractive selectively across non-agency mortgages, commercial real estate and asset-backed securities, triple A type of quality that you can again see four to six percent yields and fairly short durations, quite attractive and up the capped structure. Third, I would say that we do like, as I said earlier, select bank loans and high-yield, call those more reopening and situational names and sectors than broad-based. And then lastly, we feel there is very good value in select emerging market countries and in fact they have held in quite well as we have been going through the turmoil over the last six months. Specific countries, specific sectors, dollar bonds, local bonds, obviously for those portfolios that have the risk appetite for emerging markets. I would put it in that order, Matt, in terms of our preference for achieving the much higher yield-to-maturity that we have in our portfolios relative to the index.

Matt Jones: That's great. I appreciate it, Mark. So we we've come pretty close to the top of the hour. So we do have one last question. And it is around inflation. And I feel that, you know, the topic of this this conversation is around inflation. So I'd love to just see if we could cover it very briefly. Again, it's probably something that's certainly a moving, moving target in one sense. But this topic of it, Mark, you spoke about inflation. You know, this concept of transitory inflation and, you know, supply-chain issues being so much at the heart of whether things are transitory or whether they're sticky, depending on your viewpoint, as you look at the data with your team and the wider Western Asset team. So how do you how do you think about this whole concept of transitory versus sticky? And what parts of of the sectors do you do you think might vary?

Mark Lindbloom: I think Alvaro asked the exact right question is something that we are debating as well, Matt, in terms of what we have known for decades with some cyclical interruption has been this long trend in lower interest rates, given lower inflation for a variety of reasons that we can look back on the range from federal reserves and other monetary authorities having the conviction and the mandates to bring inflation and keep inflation lower to globalization, technology, the demographics and other reasons that we have generally seen low growth, low inflation. But the question is going forward, of course, whether we are at an inflection point like Kevin and I remember back in September of 1981 when it wasn't obvious that that was the beginning of the bull market but many suggesting today we are on the flip side of that and we are going to be seeing a much different environment than we have since 1981. And that's something that we take seriously. It's something we debate. It's something we talk about. And specifically to Alvaro, his comments and his questions on that, I would say that you have to keep an open mind to all of those things that people seem to want to highlight as compared to those secular reasons that we have been in a declining inflation environment. And specifically to that, how do you measure the impacts of global growth or the changes to global trade or how China's economy has shifted and the pool of labor in that country, as well as other countries that are supplied a lot of the goods to the United States and other western countries. Historically, the reshoring that we hear a lot about. And how do you measure that? I mean, what's the impact of that over one, three, five years from an efficiency of productivity and a cost point of view, many say it's higher. How do you pay for carbon? So these are big issues that we have to talk about and recognize that we potentially could be in a different environment than what we have been. And we want to be very nimble and flexible around this point in terms of what has gotten us here over the last 40, 50 years versus what the next three, five, 10 years. And as I said earlier, from a cyclical point of view, we do feel pretty confident that inflation coming off the boil will go lower. The Fed's mandate still is 2%. How long does it take to get there? What level of rates do they have to get to find that that impact or start to see slower growth and so on? Inflation, we do tend to think we're very, very close over a longer period of time. We all have to wait and see how some of these major shifts in these factors, whether it be war, be supply, it be what's happening in emerging markets in China and this reshoring issue, how that plays out in terms of longer term inflation and inflation expectations.

Matt Jones: I think it's a great, great way to wrap up. Thank you. Thank you, Mark. Thank you for your thoughts. Thank you, Kevin, for your thoughts. I hope everybody enjoyed the conversation today. Certainly very informative discussion and we look forward to you joining to future webcasts as we close out the presentation today. First of all, I want to repeat our thanks to everyone for joining us. And as you close out, I want to just let you know that you'll be directed to Western Asset's website where you can find our current key convictions piece, our dashboard, which synthesizes many of the thoughts that Marcus expressed today with the wider teams. And also, we've put out a recent blog on 287 Reform the US money market fund regulations expected to be announced by the SEC later this year. So as ever, you'll be able to access a replay of the webcast once it becomes available. And lastly, again, we really appreciate you joining us. And if you would, take a moment just to complete a brief survey at the end of one as you exit, then that would be that would be fantastic. So thank you so much. Thank you for joining us. Enjoy the rest of the day. Thank you, Mark and Kevin and goodbye for now.