Hello and thanks very much for tuning in to the latest of these webinar podcasts Mark Dowling here, BlueBay CIO. And as I have been doing in past months was just going to share with you, sort of 25 minutes or so, some of the key macro themes that are on minds at the moment, and our sort of thoughts therein. And then, at the end of the session, we have opened this up to questions.

Well, obviously, it's a midsummer. It's school holidays but look no shortage of stuff going on and things to talk about, and I guess the big, dominant topic of the day is all about trade.

Obviously, over the past month or so there's been a lot of focus on what happens around the Trump tariffs, and we had the July 9th deadline move to an August 1st deadline which is obviously falling towards the end of this particular week. But the really interesting thing as we approach that deadline is how we've seen a slew of countries effectively conceding to US demands under US pressure, effectively capitulating in order to get trade deals done.

We saw this last week with Japan in the face of 25% tariffs. They agreed to a 15% across the board tariff. There are further sort of measures imposed upon Japan opening their markets to US imports in areas like rice and autos and elsewhere. There's commitments to spend money in defence on US procurement, an NLG terminal in Alaska, and also a $550 billion fund, which in Japan's case, this was constructed in such a way that Trump and the White House would be able to direct where that was invested with the bulk of the profits, in fact, 90% of the profits actually staying in the United States.

And so, looking at the contours of the trade deal for Japan last week this did look very one sided to us. It did feel pretty much at the time, as if Japan had ended up capitulating on pretty much everything and giving the US administration exactly what it wanted.

Part of this came on the back of an election defeat in the Upper House elections for Ishiba, which meant that he was, politically speaking, feeling in a weak position, wanting to get a deal done in order to try and sort of save his remit.

And so, perhaps that sort of narrative was true in the case of Japan. But then, yesterday, we actually have seen the EU also conclude a similar sounding agreement with a 15% tariff across the board. Commitments to invest in US defence and make additional investments at the US's behest being agreed by the EU. With Ursula von der Leyen flying into Turnberry, where Trump was on a bit of a golf weekend, in order to conclude an agreement.

And so again, it actually looks like the EU has really sort of capitulated to a lot of the US pressure. And I think the overarching narrative here feels like Trump has won everything. Trump is a genius. He's getting exactly what he wants, and the rest of the world is folding in the face of US pressure.

Obviously, we're seeing some political blowback to that European deal from countries like France and maybe from the populist parties within the context of the eurozone. But it seems like the narrative that has really caught on in the last few weeks has been that under no circumstances was the US going to be prepared to end up with a tariff below 10%, because effectively, it needed to embed those tariffs in the context of the budget bill that it recently agreed. And that big, beautiful bill is reliant on 10% tariffs to ensure that the fiscal deficit doesn't continue to move higher and higher over time. It's already at 7%.

Meanwhile, this sort of observation that the US has been making that effectively tariffs can be viewed as a pseudo consumption tax, albeit one that exempts domestic consumption is something that has been reluctantly accepted. Obviously, the US doesn't have a federal sales tax. European countries, other countries have vat taxes and other forms of consumption tax, and so the US has been able to bully its way into getting others to accept that this is all fair and above board, and consistent with the idea of levelling the playing field.

And if 10% was the baseline, I guess ultimately countries then have had the question, do they agree at 15, or are they prepared to have a fight which obviously could be very messy and very costly for them? And therein we've seen the capitulation. I guess the solace is that if you're a European exporter, you're now exporting autos, for example, on the same basis that Japan has. So, you haven't lost relative competitiveness compared to the rest of the world. It's just towards the domestic production that, relatively speaking, you've lost out.

But this whole narrative of sort of Trump getting his way, Trump prevailing, I think, is certainly feeding into a bit of a constructive sort of tone in terms of the US over the course of recent days. We’ve seen on the back of the big, beautiful bill which obviously delivers a bit of fiscal easing, you're going to be seeing deregulation as well in 2026, which can be supporting growth.

And on the back of some of these trade deals being settled without major reciprocal tariffs coming the other direction, there is a growing sense that actually the growth outlook in 2026 is looking mildly constructive on the back of some of the recent developments. So that seems to be something that we've witnessed, and that's been partly responsible to the rally in risk assets that we've been seeing across markets in recent days.

Looking at the tariffs themselves, we still do think that in the second half of the year, as some of the tariff costs move from producers onto consumers, it is going to slow consumption in the US in the second half. And we can, I mean, economists have typically modelled this as a 1% hit on the growth downside and a 1% boost to inflation on the other way. And I think that sort of thinking is still largely prevalent.

But one thing that obviously, in speaking with the White House administration, they've been at pains to really highlight has been that ultimately, when it comes to monetary policy, the Fed should really be considering tariffs as a one-time price adjustment like a consumption tax. And so, when the Fed is delivering policy they should be looking at the price changes on non-tariff sectors, and here, underlying core prices continue to be relatively well contained.

And with monetary policy in the eyes of the administration still being in restrictive territory, they've been banging on this idea that the Fed needs to cut the Fed needs to cut. And not just by a little bit, I would add. Indeed, when we've been speaking to those around Trump, they've really been making the strong argument that interest rates in the US should be coming down by 2% or even more over the course of the coming year, which is obviously a major adjustment to fiscal policy.

Now, I don't see the Fed agreeing to this. The Fed has obviously got its mandate to deliver price stability at the same time to ensure growth in the economy. But I don't think the Fed is going to be wanting to take too much of a risk with inflation. That, said, I, do think the fact that you're getting some dissent within the Fed ranks with Waller and Bowman, both likely to dissent at this week's FOMC calling for earlier cuts. We think this narrative is only adding to the pressure that's on Powell.

And therefore, if we don't see a really big jump in inflation in the next couple of months, we are now thinking that a September cut is very much in play, and possible, along with a rate cut towards the end of the year.

I would say that's largely priced in forwards markets, so nothing really too much to get us excited around treasuries from a directional point of view. But the one thing that really does sit with us is that if we're looking at a world where actually the US growth narrative is looking a bit better, but we're actually seeing a Fed reaction function that is becoming more dovish again, that continues to look consistent to us, to an outcome where you should end up seeing a steeper yield curve.

And again, in conversation with the administration, a point that I made before there is a generalised, thinking that actually they would be quite comfortable to see a steeper yield curve within the administration. If this means that cash moves out of money market funds and can end up helping to support the Treasury market as overseas demand diminishes over time.

Also, there is this thought that if you can end up with a steeper yield curve, and you can get short rates down in a material way over the course of the coming year, is that factor that can actually end up helping to reduce the fiscal deficit. And obviously with debt to GDP above 100%, if you ended up with a 2% pointage reduction in the borrowing cost, that would bring down your deficit by a couple of points. And if you end up with stronger growth as well, that could be a world where a deficit of seven turns into a deficit of four, perhaps in the British thinking that's coming from White House.

But obviously that's a very optimistic way of looking at things and portraying things. But it certainly is clear to us we don't see anything in terms of this administration which is looking like it is going to be raising taxes or cutting spending otherwise. So, you are quite contingent on the idea of lower borrowing costs. Otherwise, the deficit is likely to worsen.

And so, for a host of reasons, we do think that the curve today is too flat and should steepen over time, even with the US looking to skew more of its issuance shorter in the curve. Bluntly, we're seeing reduced demand for longer dated securities in the US and for that matter globally. And so we're seeing a shift in issuance patterns, I think, on a global basis towards debt shortening and more issuance towards the bill sector.

If that's the situation in the US, in the eurozone, we had the ECB last week. They were relatively hawkish. Lagarde pouring cold water on hopes for further rate cuts. That's something that we had been calling for. We thought that having seen rates down at two, we thought that the ECB is largely done.

And at a time where, if anything, the European economic data is trending a bit better, we've seen some better confidence numbers indeed, over the course of the past week. And with growth, estimates being pushed up on the back of planned fiscal easing coming out of the EU, and maybe now reduced uncertainty around the tariff hit that is coming Europe's way. We think that with that fiscal easing, it means that further monetary easing isn't going to be likely.

I think some people might ask the question whether the next move in European rates could be up or down. I think I'm open minded about this, but it does strike us for the time being that rates are largely going nowhere and ultimately it will depend on the data whether that ECB reaction function shifts in future meetings.

Otherwise, turning to the UK. The last week was a bad week for economic data, wasn't it? We've seen a situation where government borrowing continues to be on a rising trajectory in the UK. Looking at the June data in terms of the net cash requirement, I think this is really concerning because what we've actually seen here is, Rachel Reeves has ended up putting up taxes in terms of NI taxes partly to end up help to bring the deficit down. But it's actually made the deficit worse, largely because you put up NI and this is a tax that businesses will just pass on to consumers. It lifts inflation, which means you pay more on your inflation linked bonds, which are a 3rd of the UK's debt issuance. It also means you have lots of regulated prices and pensions and other things which actually move with a CPI reference.

And so, from that point of view raising taxes in this way isn't really working. And it's really again a reminder of the very constrained fiscal position that the UK is in. And I think in many respects we're kind of well aware that actually the UK needs to address its fiscal spending, the spending side of the equation that needs to be adjusted, perhaps more than taxes, because if you raise taxes in this economy, you may end up with fewer taxpayers. That's the fear that's the concern.

And so, tackling, spending commitments is more pertinent. But we're seeing how Labour has struggled to actually make any traction with the whole climb down over the welfare payments on the back of lobbying, coming from NGOs that arguably were funded by Motability, the big beneficiary of some of those PIP payments.

But I just think that going forward from here UK is facing stagflationary risk. We're seeing food inflation actually accelerate towards or above 5% over the course of the coming month. And so, I think inflation concerns are still present for me.

I think that we've seen a de-anchoring of price stability in the UK. Which is of a concern. And so, although when I visit with the Bank of England, they'll tell me that their models think that a weaker labour market should actually mean that wage growth comes down and inflation cools. The reality is if you end up with a de-anchoring of inflation, expectations, those wage claims, those wage desires keep coming. And that's what we're seeing, perhaps at the moment, with the doctors threatening to strike. And so, I do feel that the UK is still contending with a mix of stagflationary risk which makes me quite concerned about the outlook, albeit we don't have any particular risk positions that we're running in the UK in the here and now.

Quickly on Japan, we saw the elections. I mentioned those earlier. That wasn't good news for Ishiba. It looks like we may get a bit of fiscal easing, but I don't think there's going to be very much fiscal easing in Japan. There may be some temporary deferment of consumption taxes as they apply to food.

Partly, Japanese consumers have been really struggling with rising prices in daily staples. For example, the inflation in rice prices has been 100% over the course of the past year. But there are signs that's now starting to normalise and come down so Japanese inflation should come down a bit.

And so, I don't think we're going to see a big fiscal easing. But one thing that I do think we're going to see is now that the trades issue is settled, and now some of the fears around the US economy have been mitigated compared to what the BOJ were worrying about back in April. I do think we're going to be at a juncture where we start to see further ongoing normalisation of Japanese interest rate policy over the course of the coming months. So, although we won't see a move from the BOJ and Ueda this week, we do think that we may well see one coming at the October meeting.

Just a word on risk assets before I close on FX on risk assets. We have seen this ongoing rally in credit markets. Credit is getting compressed. The general macro fundamentals here look pretty constructive in a world where we are not worrying too much about inflation risk, sorry recession risk, and a world where actually the growth outlook into 2026 may look a little bit better.

The caveat, though, is on valuations and on valuations you're now within five basis points of the tights that we've seen since 2008 when it comes to the likes of CDX IG or the iTraxx Main index. So, there's not a lot to play for. You are picking up pennies in front of a steam roller, and we're still in a world where things can, and I would assert, will go wrong over time. So, chasing the rally, we don't think makes a lot of sense.

But we have seen this rally being driven very much by strong technicals, strong demand to buy credit. Partly this has been coming from yield targeting buyers. People are just looking at the all in yield, and as government yields, move up, people are just sort of locking in yields. They like to see when it comes to corporate bonds. But were we to see government bonds starting to dip, then obviously that technical could turn.

So that's something to watch for something to be mindful of, we would suggest. So, although August can often be a month, a quiet month of wanting to earn carry, we know that supply will come back in September, and we don't think now is a good time to be chasing the rally in spreads.

Similarly, in FX we've been sounding warnings about chasing the trend towards a weaker dollar. It does strike us that a lot of people have got themselves very short of the dollar over the course of the last couple of months, buying into the idea that we're seeing a big secular shift in FX preference. The one caveat to that in the short term is the idea that the US is winning.

The idea that Trump is ascendant, the idea that us growth, exceptionalism, may not be at an end is actually something that could potentially give a bit of a bid back to the dollar in the short term. And if you end up with a bit of a capitulation in terms of some of the dollar shorts there could be a retracement we think over the course of the next couple of weeks.

We don't want to be short, the dollar just here just now.

But ultimately, if we do see that short-term dollar strength, we do think there will be levels where we will be interested to sell the dollar again. Because yes, the US has won the trade war in the here and now, but there are going to be some really important and really profound longer-term implications of the behaviour of the US, which really shapes the way in which investors allocate assets, and the way the world works on a forward-looking basis.

For example, we were recently with EU policymakers, and it was interesting when we were talking about things like the future of a digital euro. One of the ideas being worked on at the moment by the ECB is the idea of a digitized payment system in terms of a digital euro, in as much as this will then end up being offered to consumers free and charge, and effectively completely displacing the likes of Visa and Mastercard.

Again, the European thinking we can't have US firms responsible for effectively controlling the payments mechanism in this part of the world as we move towards more digitized currency. And it's an example of the sort of thing that we're looking at that we wouldn't have countenanced a few months ago, and it shows you how the world is changing and how the world will continue to change. And so there will be no doubt in my mind, some backlash to

what we're seeing in the US policy agenda at the moment, and so Trump may want to think that he's won the trade war. Maybe he's won the battle, maybe the bigger war is still yet to come. Who's to know? But we wouldn't be surprised to see more partners turn away from the US in the future than obviously has been the case in the recent past.

With that I'm mindful of time. I was just looking at my watch. We're about 20 min after the start of the hour, so I wanted to just turn to some of the questions on Slido.

So, the 1st question is, how much of an impact is the basis trade? And here there's talk about how hedge funds have been sort of leaning on futures prices and arbitraging those against some of the off the run treasuries.

Well, yes, this basis trade, I think, has been an area that has been responsible for some gains for some hedge funds, and it's been an area where we've seen a build-up of leverage taking place. And so, for some funds which will take a lot of leverage, it's been quite a lucrative strategy to play that sort of basis trade.

Obviously, the risk is when you run very levered positions, they can work incrementally. But then, if risk sentiment turns like it did back in April, that flipping of the risk sentiment dial can certainly lead to a big, unwinding leverage in short order. And anything that gets made there in some of those basis trades can quickly be eroded if markets turn.

So, I don't think it's actually a strategy which really makes a lot of sense over the medium term to play, but it's something that has been prevalent. But I'm not sure it's something that has macro significance. It's not something that I think is really driving the level of yields, or the level of FX, or the level of spreads in markets in a broader sense.

A second question has been, are you seeing relative weakness on the long end where passive indices are structurally underweight?

Well, I think here I think the question is saying that some bond indices obviously don't include ultra long debt. And so, some of these assets may be off benchmark for some investors. I think the more relevant thing is less to do with the passive funds here. It's more the underlying demand pattern for the very long sector is starting to change. We've seen, for example, the Dutch Pension Fund reforms which is actually turning what was a big buyer base of long duration euro assets actually into a bit of a net seller over the course of the next coming months.

There's just intrinsically less demand for 30, 40, 50-year debt, a time when a lot of investors have actually matched their liabilities. You should also bear in mind as well that historically, I think people wanted to own duration because duration was considered as a good equity hedge, wasn't it? And this is where risk parity funds were obviously very successful for many years, certainly in the back end of the last decade.

And they did very well, as Bond yields came down, and equity markets went up at the same time. You won on both sides of the trade. But what we've actually seen in the more recent past is, we're not in a world where we're just looking at growth shocks. Actually, we're in a world where, if there are inflation shocks, you can see bond markets and equity markets drop at the same time.

And so from that perspective, owning duration, just as a hedge seems much less attractive today than maybe it has done in points in the past, and I think that is structurally limiting some of the demand for owning lots of duration on the part of some investors, particularly at a time when in cash rates in dollar cash, you can earn 4.3 on dollar cash. You can have floating rate debt, paying you 6% quite happily. Why do you need to extend? Why do you need to own a lot of duration?

I guess intrinsically it's the same sort of argument as making the argument that the term premium has been too suppressed, and we think the term premium should grow under a steeper yield curve going forward over time.

I have another question on the long-term, economic and political impact of the US securing one side trade deals. I think I've already covered some of this question, I think, yes, you've won the battle, but you're doing a lot of harm. A lot of damage to established relationships.

When I speak to the Japanese, the deep-seated sense of betrayal that Japanese policymakers and Japanese society feels the behaviour of the US, can't be understated. We saw this in the Upper House elections with the rise of the right wing, populist party Sanseito in terms of the Japanese Upper House elections, so that anger and resentment is something that is threatening what has been a relationship that goes back since the Second World War. It's really changing the long-term established order.

The same is true here in Europe as well, and of course the other thing to highlight is the US has been a big beneficiary of the existing world order. They rip up that world order at their peril.

And who's to know whether history will actually look back and judge some of what Trumphas been doing over the course of the last few months through the lens of his political genius, who has been able to out negotiate everyone and all of these other idiots. They should have read the book, the art of the deal. They would have known a bit better what to deal with.

But we've got a load of weak leaders in other countries who just can't stand up to him. We don't know if that's going to be the way history judges it, or whether it is going to be more of a secular turning point in a less favourable direction for the US over the longer term.

And then the last question I had was, you sound bearish on all, but from the perspective of a spread trade which 10-year bond do I see outperforming in the next few months.

So, in terms of 10-year bonds as I said, I don't have a strong directional view. If you think the interest rates are fairly priced. I think that 10-year yields probably trade in a range. I think the conviction view is on curve steepening, more of a 230’s view, I think, is the view where you see that profound curve steepening view.

I would say that actually owning the belly of curves is more attractive than owning the 10- year sector, but if you ask me where to pick, I'd probably be more inclined to pick the belly of the US curve and the front end of the US curve right now, particularly if the Fed goes in a more dovish direction. Whereas I'd be more reticent in Europe, more reticent in Japan, and certainly very wary of owning that risk in the UK. But I don't think now is a time for big directional trades. It's a time for curve trades and spread trades.

It's also a time when again I've said it before, you need to beware complacency if we do end up with a sense of everyone rushing to celebrate the success of Trump as the master negotiator. It could be that markets push too far to the upside too quickly, and then the opportunity is to fade it and go in the other direction. We will see how that plays out. But I would say that I'd be quite wary of chasing too much in the short term.

With that I'll leave my comments. Great to participate in this forum. As always thanks for joining. Look forward to hopefully you joining future sessions.

If you've got questions in the interim, please do get in touch with us, and let us know your thoughts, your opinions, your questions on some of these topics. Otherwise, I wish you all well in markets, and I hope that for many of you, you do get to enjoy a really good summer break. With that thank you very much. Bye now.