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The speaker analyzes the impact of interest rate increases due to concerns about the tax bill and downgrades. They expected to see a steeper curve and increases in term premiums in the U.S. However, evidence shows a parallel shift in rates, with term premiums being evenly split between expected short rates and term premiums. Comparisons across jurisdictions also show similar increases in term premiums. The options market indicates investors are paying more for upside protection on Treasuries, rather than downside protection. Overall, the bond market seems unprepared for the worst-case scenario regarding the U.S. deficit. If the increase in interest rates owes primarily to concerns about the tax bill and maybe the downgrade, I'd expect to see a few things. One is a steeper curve. I would also expect to see most of the increases owe to term premiums instead of expected short rates. Since it's a local issue, domains the U.S., I'd expect those increases in term premiums to be greater stateside than in other markets. And finally, if markets were really sort of worried about a so-called lose-trust moment, I'd expect investors to be paying up in terms of options for downside protection in treasuries. And instead, I don't really get any of that. So let me go through the evidence. First, just thinking about the curve, and we fit our own yield curves, and the change in forward rates since the last FOMC meeting, say, is very telling in this regard, right? So you have – what I'm showing here is an increase in forward rates, and it's very much a parallel increase, not concentrated at the front end. So you do have a meaningful 21 basis point back up at the back end of the curve at the 10-year point. Now, this is one month forward ending in 10 years, but you also have the same up front, similar, exactly precisely a 21 basis point increase in rates, right? So it's not so much about investors demanding compensation for loaning to the government over the long term. Again, it's largely a parallel shift. Now in terms of the term premium component, you can see that the increase in blue here is about 20 on 18 basis points, strictly speaking, since the last FOMC meeting. And it's actually pretty much evenly split between expected short rates here in green, and this is about 10 basis points, so this is false precision, and eight basis points in terms of term premiums, okay? So it's not necessarily exclusively in the term premium component at all. This is an extension of the so-called ACM term structure model. And getting to comparisons across jurisdictions, you can also see that this increase in term premiums in the U.S. is about comparable to the increase in gilt term premiums, the term premium on Canadian government bonds, and actually really what stands out, and this is a whole other video, is the increase in JGB term premiums over this period, okay? So it's not very much kind of confined to the U.S. at all, which you would expect it to be if it's all about concerns about the U.S. debt set. I want to back up a little bit here. So here are spreads of U.S. term premiums over boons, JGBs, and gilts, and we've been kind of at this level for quite some time, right? So there hasn't really been much of a reaction to the news to date. So I suppose if it's not term premiums per se, what is going on? What I am getting is a meaningful increase in expected inflation across the curve. Now, it's a meaningful increase, but it's nowhere, you know, kind of worrisome in terms of inflation expectations becoming unmoored, but the bond market has marked up its expectations for inflation nonetheless based on my model, and as well as the real side, we do see an increase in the expected real short rate, so think of the expected fund rate minus inflation expectations, although I'm measuring this directly from TIPS, you do see an increase in expected real rates. So what does this mean? So, yes, term premiums are up a little bit, but we shouldn't ignore the fact that expected short rates are up in part because the bond market perceives or expects a higher nominal income. So that is part of the story. So turning to the options market, again, if investors were really, you know, kind of worried about some sort of real aversion to U.S. government debt, you'd expect options traders maybe down the line to be taking out extra protection for, you know, again, some sort of loose trust moment where the bond market just says no mocks, and you have a really big backup in rates. And so the way I go about this in diamond options is look at volatility and volatility forecasts, and you can see an increase in TLT volatility, you know, kind of recently, which is kind of meaningfully tapered off, but I have a forecast of volatility over the horizon, which is a year, and I use this to value options. And so what is the verdict where I'm really after is trying to gauge whether or not deep out of the money puts are expensive, okay? And so, indeed, they are, as usual, more expensive for protection against really big losses on government bonds than, you know, these close at the money. But the question is, are they commensurate with that volatility forecast? And the answer is kind of surprisingly no. I would expect investors to be really paying up more for the downside protection than the upside. And you can see here that the implied volatilities are about where they should be for big losses on Treasuries about 12 months out, whereas, interestingly, implied volatilities are higher than they should be for big gains on Treasuries. So I'm getting what is almost entirely counterintuitive, that investors are paying up for upside for Treasuries over 12 months instead of downside protection. To see this in terms of the distribution, I think it's fairly striking. And this has been fairly persistent over the last while, but you would expect, again, if investors were really worried about the deficit, that this wouldn't be the case. The shaded region is the option implied distribution of Treasury returns 12 months ahead. And you can see it's a pretty symmetric distribution, so investors expect as much – it has as much odds to, you know, big upside to Treasury as it has to downside. The green density is where it should be given the volatility forecast. And what that says, as you can see, the distribution should be skewed, but it's not. So there is too little downside priced in the options market for Treasuries. Again, that scenario in which people really revolt against U.S. debt, so to speak. And here you see a lot, meaningfully, too much upside, kind of puzzlingly, at least on TLT. And this is, again, of course, the back end of the curve priced at that horizon. So there you have it. I'm not – I mean, there's lots of good reasons to worry about the deficit. It is definitely too large. But I would say, based on this, that the bond market isn't quite priced for the worst yet, to be sure. So anyhow, please let me know if you have any questions whatsoever about any of this. And thanks very much.