In this episode of Animal Spirits: Talk Your Book, hosts Michael Batnick and Ben Carlson sit down with Alex Morris, the President and CIO of FM Investments. The conversation focuses on the current state of the bond market, the mechanics of government debt issuance, and how FM Investments successfully scaled its asset base from zero to nearly $10 billion in just over five years.

Morris provides deep insights into the Treasury's shifting issuance strategy, noting that approximately two-thirds of government borrowing has moved to the short end of the yield curve. The speakers discuss the efficiency of corporate credit spreads, the structural advantages of Treasury Inflation-Protected Securities (TIPS), and the mechanics of corporate bond underwriting for mega-cap technology firms like Google and Nvidia.

Finally, Morris previews "FM Labs," a new initiative featuring a specialized, anti-hallucination large language model trained on 1,784 historical documents, congressional testimonies, and FOMC transcripts to analyze the policy perspectives of economic figures like Kevin Warsh.

The Mechanics of Government Debt and Short-Term Refinancing

The U.S. government has shifted its borrowing heavily toward the short end of the curve, with short-term T-bills now accounting for nearly two-thirds of total issuance.

"It's cheaper to refinance it today for 2 or 3 years than today for 10 years, but we think rates are going to go down, so we want to preserve that option." - Alex

A weak Treasury auction is characterized by a yield "tail," where the final issued yield is slightly higher than market expectations due to softer demand.

Why TIPS and Liquid High-Yield Bonds Offer Strong Risk-Reward

"TIPS are a great deal now," - Alex, because they historically outperform nominal bonds and cash by paying a coupon plus realized inflation.

The FM High Yield 100 ETF (ticker: Z-Top) avoids traditional underwriting risk by letting the market's liquidity dictate which high-yield bonds to hold.

"We just buy the largest, most liquid issuers... We let the market do that work for us, not the rating agencies." - Alex

Corporate Underwriting and the Stability of Mega-Cap Debt

Unlike the equity market, the bond market is three times larger and turns over completely every 7 to 10 years as existing debt is retired.

Mega-cap technology companies like Google and Nvidia face highly oversubscribed bond offerings because their massive equity cushions reassure bondholders of repayment.

"The bank doesn't come to you and say, well, you had a really great year, so we want a little extra." - Alex, explaining the strict contractual nature of corporate debt.

FM Labs and the Creation of an AI Fed Policy Model

FM Investments developed an anti-hallucination large language model running on Claude to analyze the policy views of potential Fed Chair candidate Kevin Warsh.

The model is trained on an exhaustive database of 1,784 documents, including Warsh's FOMC transcripts, congressional testimonies, and personal writings.

"The model starts with no response and then builds a response only from the transcripts and the data that we've given." - Alex

Resources Mentioned

Stuff I Absolutely Need to Remember But Probably Will Forget Journal For Anyone Who Suffers From Forgetfulness, Whether Men Or Women, Write Your Basic Information Here

rse, so we're kind of fine. We also are looking at, there's a, you know, a lot of 2-year, you know, paper that's probably going to come to market for all of the reasons that we just discussed. So ther

The Next Development in Man

, and that's 5 years ago. Now we're going to see 3 new trillion-dollar companies just burned out of paper in the next, well, 1 now and probably 2 or 3 more for the end of the year. All of this comes d

ETF Investing For Beginners A Step-By-Step Guide To Building Passive Income And Lifelong Wealth With Low-Risk, High-Reward Strategies + The 7 Best ETFs To Buy Today (Stock Investing 101)

y primary question is, Is it an auction similar to the way the government does it? How much of this paper ends up inside of ETFs? I have no idea how this works. So bonds go through an underwriting pro