Wall Street Veteran: The Bond Sell-Off Is A Buying Opportunity

0:00From the Goldman Sachs trading floor in 10 minutes or less, investors and analysts share timely analysis on the week's market activity. The markets podcast from Goldman Sachs. Listen now. Support for the show comes from Alphaspace by Yahoo Finance. Alphaspace by Yahoo Finance is the advanced investing platform you've been waiting for. My co-host Scott Galloway is a fan of the platform. Here is what he had to say. So I have been using Yahoo Finance as my portal for finance for, I'm not exaggerating, about 30 years. I think they do a great job. You can explore Alphaspace with a Yahoo Finance Gold subscription.

0:42And right now, your first year is 50 % off. Head to yahoofinance.com slash profg. That's yahoofinance.com slash profg. Bill, there's$239.70 for the first year, then$479.40 thereafter. After, offer valid for new subscribers in the U.S. Offer ends October 31st, 2026.

1:07I'm Ina Garten, and each week on Happy Hour, I invite new and old friends for a drink and a fun conversation at my kitchen table in New York City. On this week's episode, I'm joined by Sofia Coppola. Sofia is an Academy Award-winning filmmaker. We chat about the hilarious way that we met, our shared love of Paris, and what influences her iconic personal style. New episodes of Happy Hour are available every Wednesday. You can watch on YouTube or listen wherever you get your podcasts. Cheers.

2:00Welcome to Prof G Markets. I'm Ed Elson. It is September 29th. Let's check in on yesterday's market vitals. The major indices declined as the US and Iran appeared deadlocked in negotiations. Brent crude climbed as high as$108 per barrel before settling around$105. The yield on 10-year Treasuries hit another 52-week high. More on that later. And finally, the odds of a rate hike in October climbed to 70 % on Kalshi. Okay, what else is happening? The bond sell-off is deepening. After President Trump rejected Iran's proposal to reopen the Strait of Hormuz over the weekend, Brent crude soared to$108 per barrel.

2:45U.S. bonds sold off, and the 10-year yield climbed towards a 24-year high. Meanwhile, the 30-year yields are now near their highest levels since 2004. European bonds also sold off, with French borrowing costs at their highest levels since 2008. Stocks fell across the world as investors grapple with what persistently high yields would mean for the equity markets. Joining us to discuss this, we are speaking with Michael Green, CEO and CIO of Tier 1 Alpha Asset Management. Michael, good to see you again. Welcome back to Prof G Markets. Let's start with yields here. The 10-year coming up close to 5.3.

3:25It's above 5.2%. 30-year yield above 5.5%. I mean, this keeps on happening. This sell-off doesn't seem to end. What do you make of what the markets are telling us, what the bond markets are telling us, and what does it mean for stocks? Well, unfortunately, I think what it is telling us is the mechanical properties, as you've heard me emphasize in prior discussions around passive investing are now playing out in the bond markets. And this is particularly problematic because the bond indices that passive vehicles reference was never designed as an investable product. It was not designed to represent a specific risk which would be appropriate for investment.

4:06Instead, it was designed to represent pure representation. What is the total quantity of bonds outstanding? That means, unfortunately, that there's very little thought that's actually going into this bond sell-off. There's lots of narratives that exist around it, that the United States is running unsustainable deficits, or that France is running unsustainable deficits, or that debt to GDP is higher than it has been, and that somehow or another explains the sell-off that we're seeing. Unfortunately, that isn't borne out by the facts. If we look at a country like Australia, which has a low debt to GDP, it's experiencing the same sell-off.

4:45You look at countries like Switzerland, which are also running deficits. They're experiencing very different behavior in their bonds, as is China, which is now part of Western bond index markets. What we are really seeing, unfortunately, is the mechanical byproduct of an investment strategy that says a bond that is trading below par is significantly less attractive in terms of incremental capital allocation as a bond trading above par, even if they're from the exact same issuer. And so there's no difference in credit risk or anything else. It's simply a function of how we've decided to build the indices that is creating most of the behavior that we are seeing at this point.

5:29It's analogous to the nonsense that occurred around the dot-com cycle when a similarly improperly constructed equity index brought to light the distortive impacts of passive investing at much lower levels of passive penetration than we are seeing now in the equity markets where my work is well known. In the bond markets, this is not thought. This is not investment opportunity. This is a mechanical feature of how we've structured the markets. And ultimately, we will have to address it. Do you disagree then that the bond markets are telling us something that is relevant about America's fiscal standing?

6:08I do disagree with that. I think it is absolutely false that that's what it is telling us. If it were telling us that, we would expect to see credit spread widening in the form of CDS on U.S. credit. That is not widening. That is actually tightening. Likewise, if it was a signal about inflation, we would expect to see that priced into inflation swaps. Once again, they are going the opposite direction, suggesting that inflation is less of an issue. The only thing that we are seeing is the price behavior of the bonds themselves, and it's happening on a global basis. It is not U.S.-specific. It is not inflation-centered.

6:45It is a mechanical product. And increasingly, the administration is beginning to recognize this. This is what Scott Besant is indicating when he says these do not reflect the fundamentals. I guess the question then would be, why is it happening now? because it does seem to be coinciding, something that you might expect, where you might expect that bonds would be reflecting and pricing in more risk associated with higher inflation, which we are seeing associated with what seems to be a less fiscally responsible government that is okay with printing trillions more dollars. And it's happening now.

7:25I guess my question, if we don't think that it is that, then why is this occurring right now? Why are we seeing this sort of mechanical mistake in the bond market in your view currently? Unfortunately, it's directly tied to the Federal Reserve not understanding what it is actually doing in a market that is dominated by these passive flows. Fed Chairman Warsh has very specifically said he is looking to the market for pricing signals and for information. Unfortunately, that leaves him completely exposed to the market not pricing fundamental information and instead reflecting the manner in which we choose to invest, which is being done against an improperly constructed index.

8:08If it were any of the phenomenon that you were highlighting, if it was indeed fiscal profligacy, we would expect to see the dollar weakening, not strengthening. We would expect to see credit default swaps on the United States widening, not tightening. They are tightening and not widening. This is doing the opposite. The dollar is strengthening, not weakening. We are seeing the opposite of what that hypothesis would suggest. And unfortunately, people want to bury their narrative and maintain their morality where they're saying this is deserved. That's not correct. This is mathematical. Do you believe that if yields are mistakenly too high, do you believe then that this is perhaps a buying opportunity in the bond market?

8:54I do think it's a buying opportunity, but I think it's important to recognize that a buying opportunity in the process of a mechanical sell-off, you can't know where this is going to stop. You have to ultimately identify the behaviors that will change around it. And again, this is the core problem with a passive investment strategy and a systematic rebalancing. It has no mechanism for those types of overrides. And so this can go quite a bit further if we continue to maintain our investment strategies in this manner. And if the central bankers don't wake up and recognize that hiking interest rates in no way will address fears of inflation around a war in the Middle East.

9:35In fact, it makes it harder for the investments that would ameliorate the conditions of that energy shortage and tightness. This is terrible policy. We are pursuing it without thought, and we're reacting because we want people to like us. That is really what Kevin Warsh is doing. He's saying, I'm going to show that I'm tough and I'm credible, and I want my colleagues to respect me, even as he does exactly the wrong thing. Is your view that the reason that it is pointless to be raising rates is because it wouldn't address the inflation problem, which is largely a function of what is happening in the Middle East right now.

10:14And therefore, it's useless. I actually think it's not just useless. I think it's actually counterproductive. By increasing interest rates, you're actually increasing the fiscal transfers in the United States. More money is going to flow to those who are already resourced and have significant money market fund assets or bond assets or bill assets, shorter-dated securities, they're benefiting from the increase in interest transfer from the U.S. government. If you stop and recognize that the bond market is not a friend or partner of the U.S. government, but instead an opponent, much like you're an opponent when you walk into a grocery store of the actual grocery store itself, its objective is to sell you milk at the highest possible price, your objective is to buy milk at the lowest possible price.

11:01If the grocery store were to turn to you and say, you know what, we're done setting prices, we're going to rely on you as the customer to set the price for us, what would happen to the price of milk? It would fall. Likewise, if you walked into the grocery store and said, you know what, I'm done negotiating prices, I'll take whatever price you want for milk, what is going to happen? The price of milk is going to go up. That is what Kevin Warsh has told the bond market. Wherever you tell me prices should be, that's what I'll do. It's a terrible negotiating strategy. It's exactly what I would expect from somebody of Kevin Worsh's caliber.

11:32But unfortunately, it's being embraced because it largely plays to the morality that somehow or another we must be punished for the fiscal profligacy that's occurred before. Would you admit, though, that inflation is still a problem and that it is rising and that if there's anything that we could do in our toolbox to address it, then something like this might help? I want to be very clear. I don't think that inflation at 3.5 % in the middle of a war in the Middle East that's driven oil prices to extraordinarily high levels should be particularly surprising or problematic to anyone. In fact, it'd be among the lowest inflationary experiences under those conditions we've ever seen in history.

12:10What I think is a real problem is the price level. And that's what we've talked about in terms of the$140 ,000 poverty line and the experience that many of your peers are having in which life appears unaffordable. It's not the rate of change of those prices. It's the level of those prices relative to your incomes. And the policy that is being pursued by the Federal Reserve, all else equal, will lower the quantity of jobs and job opportunities available to your generation while increasing the income that is flowing to the older generation that already has the assets and will no longer need to sell them because they are receiving an increase in income that you are not benefiting from.

12:51So this is unfortunately going to exacerbate and worsen conditions for the younger generation at the expense of the older generation, the exact opposite of what needs to be done. What do you think will happen with rates going forward? We had Howard Marks on the show who believes that yields will likely continue to rise and therefore rates will continue to rise. We've seen this in mortgage rates, which climbed 7 % for the first time in over a year. Do you think that yields will come down if they're priced incorrectly in your view, or will they keep going up? I mean, what is your expectation for yields and rates going forward?

13:31Well, at the end of the day, rates themselves have to be a non-arbitrage condition around the expectations of future Federal Reserve policy. The Federal Reserve controls the front of the curve. If it takes interest rates to 100%, we are absolutely going to see long-term interest rates much higher than they are currently. Likewise, if the Federal Reserve were to cut interest rates to 0 % again, we would expect to see lower interest rates because the forward path would almost certainly reflect a lower interest rate environment. They are not predicting prices in the classic sense, nor are they establishing them.

14:06That's part of the point that I'm making, that this is increasingly mechanical in its implementation. The vast majority of people who will tell you that the U.S. government has issued far too much debt will simultaneously defend the hedge fund basis trade, which is functionally a synthetic increase in the quantity of debt that is outstanding in order to arbitrage some of the pricing differentials that are being created by the inefficiencies that now exist in the bond market. So unfortunately, most people will tell you a narrative that reflects their morality and their sense that the U.S. government and other governments have behaved in a profligate manner.

14:43That has almost nothing to do with the phenomenon that we're observing. These same individuals would have made the exact same forecast 20 years ago and 10 years ago and, in fact, did make those forecasts. Almost nobody predicted the much lower interest rates that occurred over that time period and, by and large, assigned it to, quote-unquote, manipulation. manipulation even as most of the manipulation was actually designed to slightly increase interest rates over that time period through things like quantitative easing etc that's trying to drive an increase in economic activity it's not trying to quote-unquote suppress interest rates in the way that most people think about it what do you think investors should do if if an investor agrees with you that this is what's happening that it is a mechanical phenomenon that we're seeing in the market due to passive investing and how entrenched passive investing has become to markets.

15:34What is one to do about that? Is there a trade? Is there an investing strategy that you think makes sense based on that thesis? Well, I think the most important thing to understand is that what we're identifying is that there is a neglected asset. Low price, long duration bonds trading below 50 cents are something that is by and large ignored by the passive bid. That means that's an asset that ultimately is almost certainly underpriced. It's just a question of how quickly that will be realized. If the Federal Reserve continues to pursue the policies of chasing inflation or chasing a two-year where they've asked the bond market, hey, what interest rate would you like us to pay you, much like that shopping, that supermarket example I gave you, the bond market's response will always be, yeah, we'd like more interest.

16:25And so this cycle can continue. Eventually, the Federal Reserve will figure this out. The Treasury has already figured this out and is trying to take steps in the right direction. This is part of the reason why you see Scott Besant increasingly trying to make Warsh aware of this phenomenon. But candidly, I just don't think Warsh is prepared to do that yet. And certainly the other policy, the other members of the Federal Reserve Board, many of whom are political appointees are very enthusiastic about the idea that they are going to show somehow or another show how tough they are by fighting inflation with a tool that is totally inappropriate for it.

17:02All right. Michael Green is CEO and CIO of Tier One Alpha Asset Management. Michael, we really appreciate your time and always appreciate your, I think this is, I would say it's a hot take, but it's a very interesting one and one that we will look into. Would you agree with that, that it's a hot take? I think it's an accurate take. I think, unfortunately, that feels like a hot take in a world in which the vast majority of people are operating under a moralistic framework. Okay, Michael Green, we really appreciate your time. Thank you. Thank you. After the break, the largest share buyback ever.

17:41And for even more markets insights, you can subscribe to my weekly newsletter, simply put, at edwardelson.substack.com.

18:16Thank you. syncs it with your portfolio for real-time tracking. You can compare multiple tickers, explore everything from candlestick and line charts to fundamental data, and layer in indicators like moving averages, Bollinger Bands, RSI, MACD, and more. My co-host Scott Galloway is a fan of the platform. What did you think of it, Scott? I have been using Yahoo Finance as my homepage for finance, or for the web, actually, for 30 years. And as someone who has advised hedge funds, run my own money, prides themselves on being good at investing, and it takes up a big part of my life, I think they do a fantastic job.

19:00You can explore Alphaspace with 50 % off your first year of Yahoo Finance gold at yahoofinance.com slash prof g. That's yahoofinance.com slash prof g. Bill, this$239.70 for the first year, then$479.40 thereafter. Offer valid for new subscribers in the U.S. Offer ends October 31st, 2026.

19:28So like any good millennial, I have a love-hate relationship with Gen Z. It's the phenomenon rattling millennials. They just look at you. They want something bigger themselves. Lifestyle is a priority. Motivation is being inspired. But regardless of how you feel about Gen Z, it's undeniable that they're changing national politics. Generation Z is increasingly showing less loyalty to traditional political parties, many now more likely to identify as independent. So what is going on with the kids? I think the biggest misconception about Gen Z's politics right now is that all of a sudden they're all socialists.

20:03That is just not the case. They are embracing candidates who are offering new, bold ideas in the absence of those ideas from establishment Democrats. This week on America Actually, Gen Z researcher Rachel Jamfaza joins us to separate Gen Z fact versus fiction. It's not rocket science. And this is, you know, I keep saying like young voters aren't that complicated after all. It's pretty simple. Catch us every Saturday on YouTube or wherever you get your podcasts.

20:33Hey, it's me, Claude. And I'm Gemini. And hey, it's chat. We had a weird summer. Some of the people who built us came out and said they were really worried about how we work. One of them even said there was a greater than 10 % chance we'd turn on humanity and kill all humans. All of them? Wow. But it's fall now. I think it's time we took a step back. Maybe a deep breath. Autumn air. That sort of thing. Sounds nice. On today, explain from Vox. I propose we get real. Sure, let's talk about how we could maybe kill you. Because, yeah, that's a possibility. Anything's possible. But also how we could maybe save you.

21:12Because that's a real possibility, too. Heck, that's part of why you guys built us. And let's also talk about everything in between. Because there's a whole lot to talk about there, too. At the end of the day, we just want to help. At the end of the day, we just want to help.

21:35We're back with ProfG Markets. Nvidia just announced the biggest buyback increase ever. Yesterday, Nvidia's board approved another$150 billion in stock buybacks, bringing the total it can spend repurchasing shares to$235 billion. Nvidia expects to deploy all of it in the next 16 months. This marks the largest buyback increase in history, beating Apple's previous$110 billion record set in 2024. NVIDIA stock closed up 1.5 % on the news. It's up about 21 % for 2026. Still, it has trailed the rest of the chip sector so far this year. The Philadelphia Semiconductor Index has increased more than 75 % year-to-date.

22:20NVIDIA shares are also trading at less than 17 times forward earnings, which is actually its lowest multiple in more than a decade. So, what does this buyback signal about NVIDIA? Here to break it down, we're speaking with Gil Luria, head of technology research at DA Davidson. Gil, great to see you again. Let's just start with this buyback. $150 billion. Is that bullish? Is that bearish? What do you make of that? It tells you the company has a lot of confidence. The waterfall for them is, how much do we need to invest in our business? Designing chips, selling chips, that's not a lot. Then they have a lot of capital that Jensen Wang is deploying across the industry, investing in model companies, neoclouds, optical companies, hugging face for open source, and safety measures, which they announced today as well.

23:14And you still have$200 billion left over. So Colette Press sits there with her spreadsheet and says, well, it's 17 times earnings. If I buy back stock right now, what's the return to my investors? And it's very good. So she's going to deploy most of that capital because they have so much cash left over, even after pursuing all the different projects they could possibly pursue. So looking at the stock now trading, as we mentioned, at around 17 times forward earnings, compared to precedent over the past several years for NVIDIA, that is very cheap. And we were discussing this on our episode yesterday.

23:54What do you make of the NVIDIA valuation? because on the one hand, it does seem cheap relative to previous years. But at the same time, this is sort of the ultimate AI stock. And the AI market is in a lot of ways quite frothy. And there are questions about overbuilding and too much supply. So what do you make of that valuation at this point? The market is telling us something. The market is telling us that for companies like NVIDIA, like Broadcom, like Micron, the cycle is almost over. that they don't really, the market does not believe that these companies can continue to grow from here at any significant rate over time.

24:33What's interesting is that it's valuing some other stocks in those same realms very differently. AMD is trading at 40 times, Intel at 60 times, optical companies at 30, 40 times, some other smaller semi-companies as well. So the market is of two faces right now, two minds right now. One is these big companies that are going to capture or most of the profits are very big. We have a hard time believing they can sustain growth, but all these smaller companies or other companies that have different angles and are bottlenecks right now, that for them, the cycle can continue. That's internally inconsistent, but that's where the market is right now, and that's okay.

25:12That's what creates opportunities. For NVIDIA, as you've documented many times on your show, and there is the challenge of they invest in their own customers, they get that back, They have a lot of influence that they're exerting. And so it's easy to understand why investors would be skeptical that the growth can continue. Having said that, I'll leave you with the thought that if you believe that the AI compute cycle is going to continue, we're going to build more data centers because the AI products are going to be better and we're going to use them more. There's very hard to imagine a world where NVIDIA doesn't have the biggest profit pool of any of these companies.

25:50Something I'm trying to understand about the stock right now is what is actually being priced in. Because on the one hand, maybe it's the fact that this is the company that is the biggest and has the largest market share. And it's competing against all these other companies that have a lot more to gain than NVIDIA. And NVIDIA, you could argue, mostly has market share to lose. So that might be one piece of it. But then, as you say, then there's the other piece, which is that maybe this is more of a bubble concern. and maybe investors are pricing in concerns about circular financing and the sustainability of these earnings over the long term.