Episode summary
Warsh Will Face Challenges Shrinking Fed’s Portfolio, Citi Says
Bloomberg Businessweek Daily
· · Guests: Stuart Kaiser
Summary
Stuart Kaiser of Citi said the key issue around Kevin Warsh is not just a new Treasury-Fed accord, but what it would imply for the Fed’s balance sheet and the bond market. He said the long end of government bond curves faces a global risk, not a uniquely U.S. problem, pointing to recent stress in UK gilts, German bonds and Japanese JGBs. Still, he said U.S. long rates have not yet shown the kind of volatility that would signal a major break.
Kaiser argued that the recent equity rotation was less about a deterioration in the underlying U.S. outlook and more about positioning after two years of heavy buying in tech and growth. He said the selloff in megacap names forced investors to reallocate, while fundamentals such as solid earnings, strong economic surprises and expected tax refunds remain supportive. He also said the market is moving from rewarding AI spend to scrutinizing whether that spending produces acceptable returns.
On that basis, Kaiser said the winners in the AI trade are shifting toward firms that can show ROI, while companies with weaker balance sheets face tougher questions. He highlighted power generation and AI data-center buildout as one way to express that theme.
Key takeaways
- Stuart Kaiser said long-end yield risk is global, with recent pressure in UK gilts, German bonds and Japanese JGBs rather than just U.S. Treasuries.
- He said the recent tech-to-value rotation reflects positioning and market plumbing more than a change in the U.S. earnings or growth backdrop.
- Kaiser said the market is now rewarding AI spending only when companies can show an acceptable return on investment.
- He said megacap balance sheets can absorb heavy AI capex more easily than lower-rated names like Oracle, which face harsher scrutiny.
- Kaiser said power generation and AI data-center buildout are his preferred way to express the AI infrastructure theme.
Notable quotes
“I don't think really concerned about the impact of fiscal spending on the long end of the yield curve is unique to The US nor is it something that's kind of snuck up on people, but it is a risk”
“we're still pretty positive US equity risk in general. We've been pretty bullish on the cyclical parts of the of the equity market since the beginning of the year”
“what you're really seeing is within the tech trade, the shift has moved kind of away from the spenders and to the beneficiaries of that spending”
“If it looks like it's gonna be ROE destructive, then right now you're getting punished for that a little bit”
How the episode opens
Good to be here. Hey. We were just talking with our Stuart Paul about Kevin Walsh's past support of a new accord between the treasury and the Fed.
This has to do with, the balance sheet, which sounds like increased cooperation. We know in the past that Kevin Walsh has wanted the Fed to shrink its balance sheet. So we're trying to make sense of what it is.
And then we just talked about the Chinese regulators advising their financial institutions to rein in the holding of US government bonds. Are treasuries undergoing a reboot a reboot in your view on the world stage when it comes to, you know, The United States being kind of a a sure thing, if you will, in the financial world? And and if so, what are the implications of that?
I mean, look, don't I know if there's any real alternative for a lot of these, you know, countries to invest their reserves. Because of the size and the liquidity. Right?
Exactly. Like, hands down. And and look, there are there is a a risk out there in the long end of the the government bond curves, I think, but that's globally.
We've seen that happen in UK gilts. Seen that happen in German bonds. We've seen it happen in in in Japanese JGB.
So I I don't think really concerned about the impact of fiscal spending on the long end of the yield curve is unique to The US nor is it something that's kind of snuck up on people, but it is a risk. And if you look at what has triggered those kind of events in other countries, it's generally been things related to fiscal policy, tax cuts, things of that nature. So it's something that's on our radar.
It's probably been on our radar since about last July when all of those thirty year bonds globally got above 3%.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- fed portfolio
- yield curve
- treasury accord
- bond market
- fed chair nomination
Companies and tickers mentioned
- C
- Citi
Watch the episode
Watch “Warsh Will Face Challenges Shrinking Fed’s Portfolio, Citi Says” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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