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tv   Bloomberg Real Yield  Bloomberg  February 11, 2022 1:00pm-1:31pm EST

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jonathan: live from new york city, bloomberg real yield start s right now. coming up, inflation data center yields higher, teeing up even more rate hike calls, send a consumer sentiment to freshen decade lows. we begin with fed calls ramping up. >> inflation at 7.5%. >> the fed is way behind. >> what is the fed going to do from here? >> just get on with it, let's do 50. >> a 50 basis point rate hike in
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march. >> just do it. >> the market has already discounted it. >> seems very likely that the fed will go 50 in march. >> this is their chance to establish some credibility. >> on top of that, a lot of political pressure. >> all options are on the table. jonathan: all options on the panel. victoria fernandez, jim bianco. let's start with you, victoria. as your call for this fed changed in the last 24 hours? victoria: it hasn't. i know there has been a shot with bullard coming out saying 50 by march, 100 by july. i don't think we should take what he says as gospel. other members have pushed back on that. i am starting to feel like i'm on an island. i still feel like we only get 25 basis point hike in march.
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anything the fed does in march not expect inflation this year. that will affect next year. you have policy which affects economic activity. economic activity affects the inflation component. what will affect inflation right now? not the march meeting, it's what happens with supply chains, rents, wages. we see the ism dropping. 40% of that was because supply delivery times were better than they have been. that is a positive for inflation to come down. new cars for the last nine months were moving higher, now they are flat. yes, you have wages, rent going higher. i have a college student in new york that i'm looking for an apartment for her. i understand rent is going higher. there is so much data in the next five weeks before that march meeting.
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i don't think begin set in stone it will be a 50 basis point hike. next week you have ppi, retail, housing data, industrial production. i think the fed will wait, get more data, and just to 25 in march. jonathan: 10 basis point upside on core cpi. 50 basis points from citi. 50 from deutsche bank, hsbc. nomura was already there going into yesterday. 7.5% inflation in america. how big is the gap between the facts on the ground and where this fed is right now? 0% interest rates but still buying bonds. >> i think the way inflation is heading is higher.
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we are now thinking 7.9% for for the cpi print and that is taking into account a number of things that have happened. clearly some mark to market as well as where i would disagree with victoria here, i think the shelter inflation is playing a big role. at the same time, if you look at the phillips curve sensitive portions, and nonsensitive, we have sinned an uptick in both of those things. that is why we think inflation has not peaked, we will see it pick up further in february. jonathan: jim bianco, the floor is yours. jim: i will agree with mohamed
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el-erian that you had on this morning the fed has lost control of the narrative. we are talking about 50 or 25. are they trying to raise rates to show that they care about inflation but not really deal with the issue? or are they intent on seeing a 40-year high in inflation, the number of people complaining about it -- according to political polling, number one issue in the country is inflation. are they intent on dealing with that? if they are, they will start with 50, and they will go and it will hurt. that is the only way they can bring inflation down. yes, it is part supply but it is also part demand. what is the fed trying to do here? i am not sure that they know yet. they seem to want to make inflation come down, the stock market go up, and everybody is happy.
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unfortunately, they have to pick one. either they will have to deal with inflation, which is where i think they will go, or they will say they cannot risk growth and let the stock market run back to new highs. consumer confidence from michigan came out today. they were not good at all. 50% of the people in that survey said they expect their standard of living to fall in the next year because of inflation. are we going to ignore that? they are losing on their standard of living because we cannot let the stock market have a 50% correction? which way does the fed want to go on this? jonathan: they have to pick their poison. this market has adjusted. we had a move at the end of the yield curve. we have adjusted the pace that we will travel at in this journey. let's talk about what we have not adjusted, the destination.
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let's take the goldman sachs call. looking for 25 in march, looking for a hike at every single meeting. listen to the end of this. this is what got my attention. " and to reach the same terminal rate of two five to 2.75 but we just do it earlier." we are going to do this sooner, get there quicker, but the destination does not change. what do you make of that? victoria: that doesn't surprise me, what a lot of people are thinking. the quickness that they want the fed to move at, slamming on the brakes, hurry up and do something to make an impact, all that will do is pull everything forward. terminal rate is still around 2.5%. that has not changed and i don't dissipate it will. it's a matter of timing. to they do it slow and steady or do they something very quick, which goes to jim's point about
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the volatility we will see in the market if they go quicker. i think powell is trying to avoid that and not affect growth too much. the new york fed's economic index is saying on an annual basis, first-quarter growth is north of 6%. that is much higher than what people were saying weeks ago. i think you and up at the same point, it is the path that gets you there that will be the determining factor on how the market reacts. . jonathan: vishwanath, if the destination doesn't change but the pace introductory does, can you tell me how you push that through a yield curve slightly differently through the credit markets, to frontload rate hikes instead of spreading them out? vishwanath: it is very tricky. what the fed has on their hands is a tricky problem to tighten financial conditions, but not so much that growth tips over.
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you lay it on top of this the balance sheet issue. it is important how quickly not only the fed stops tapering, but also when we start to unwind, qt kicks in. there is really not a tremendous amount of historical precedents to base what the market reaction will be, or what the economic reaction will be to the changes. we cannot completely ignore that we are in fairly uncharted territory to this point. we have such massive policy support. when we take those training wheels off, it will be a substantial pickup. that means the risk assets from the valuation perspective across the board need to readjust for a greater amount of risk premium. whether it is in the term premium, term structure of the yield curve, or in credit
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spreads, or equity markets for that matter. valuations need to readjust. that is the key message we are telling them. jonathan: jim, i want to come to you on treasuries. balance sheet reduction in the mix as well. we will talk about bank of america later. but $1 trillion of balance sheet reduction this year, one trillion again next year. my first thought is, if we are going to go seven hikes in the way that bank of america are, and you put on top of that $1 trillion of balance sheet reduction this year and next, what does this yield curve look like? jim: it will invert. you can do a trillion dollars a balance sheet this year and next year without the fed doing anything. they can let bonds mature. they buy about $100 billion a month just to keep the level of the balance sheet the same. what i think the terminal rate, seven rate hikes, what that is
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telling us, we will probably see the yield curve invert by the second half of the year. that has always been a signal that something is wrong. it is 8-8 in predicting recessions over the last 50 years. if it inverts in the middle of the year, the recession could still be two years away, even longer, or four months away. as we go forward, with all of these aggressive rate hikes, if the fed is intent on attacking the inflation problem and with qt, that does not require selling. you will see the front end of the yield curve move substantially higher, probably have an inverted yield curve, and that will be your signal that something is wrong and we probably broke something along the way. jonathan: jim bianco sticking along with us along with vishwanath tirupattur and victoria fernandez. primary markets going quiet with issuers navigating the volatility. that conversation is around the corner.
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this is bloomberg. ♪
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jonathan: i from new york city, i'm jonathan ferro. this is bloomberg real yield. a flurry of deals in europe. volume reaching 40 billion euros despite end of the week with another zero deal friday. surging volatility weighing on u.s. corporate bond sales. falling short of weekly estimates despite recording its busiest day in a month. the high-yield market remaining strong. not just rate hikes we need to think about, it is balance sheet reduction as well. bank of america got our
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attention in a big way this week. >> the balance sheet production will start in may, and it will go pretty aggressively. the fed will likely have 100 billion redemption caps on treasuries and mortgages, 60 billion treasuries, 40 billion mortgages, and that will be over a three-month period. the fed will see the balance sheet shrink by a trillion dollars in 2022, and another trillion in 2023. jonathan: pause, that was my first thought. one trillion dollars this year and next year? can you give me your case about balance sheet reduction, what you think it will do to this credit market? vishwanath: i would be on the side of less than the numbers that we just heard. caps would also be lower on the balance sheet reduction. the key to focus is with there
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be any eventual sales, when, and how would that affect? the key point to the transition to the trade markets is, people may underestimate how being the role of the fed has played in the market. one third of outstanding are held on the fed's balance sheet. if this is their highest number, if the fed is not only no longer buying but what i would call supplying negative supply to the market,mbs, the private market, nonprogrammatic, hedging counterparties, the private market has to absorb the highest
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number that the market would have to absorb at any time. that means this has to get significantly wider than where they are today. that puts pressure on the investment-grade part of the markets. might we see now is, it is more of a fundamental issue. relative value, valuation issue, not a fundamental issue a credit. investment-grade spreads will readjust to higher mortgage spreads to get incremental allocation. that is the transmission mechanism that i'm most interested in watching. if there is any talk of sales, or putting floors as opposed to caps, any of that kind of discussion would make this widening more pronounced and happen faster. jonathan: how does that bleed out into credit, whether high-yield comes along for the
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ride? how much have you lightened up in taking risk and credit, more broadly in fixed income in america? vishwanath: this is a duration issue. if you look at what has happened you to date, longer duration has underperformed lower quality. lower quality has outperformed longer duration so far. that is something we would expect moving forward. our call is leveraged loans. a floating instrument. high-yield credit. leveraged loans over high-yield bonds over investment-grade. that is what we are telling clients to do. we expect for high-yield bonds and investment-grade credit, spreads will be wider, excess return will be negative for the year. but where there is greater value is in the part of the market where it is predominantly credit
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risk, not duration risk. jonathan: at least you're willing to put money into the market. if you think about q4 2018, that is a market that i don't want any part of. what is the risk of a repeat of seeing the back end of 2018? jim: there is a risk there. that that is the biggest player in a lot of these markets, and they are going to leave. i have been fond of saying the bond market will find funding. it will force other markets to fund it by making those markets unattractive by seeing them increase volatility or falling as well. this will be a big problem as we go forward from here. before we started the taper, the fed was buying $1.5 trillion worth of bonds a year, 125 million a month. if we are going to produce about $84 billion a month, we are
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going to have to find a trillion dollars from somewhere else to fill that hole that the fed had. it will be a challenge. it was a challenge in 2018, it lasted for about two weeks, then we had the famous powell pitted where he said the fed would be patient and flexible. this time around with seven point 5% inflation, i don't know if we can do that if the markets get messy. jonathan: this sounds like challenging stuff. victoria, i think this will work with you, from rbc. the current pricing is close enough to the hawkish extremes. if i'm to say that things are going to turn out ok, we will get that soft landing, the window is small but the fed can nail it. if i can guarantee that scenario, what you do you do in the market? victoria: i love a good guarantee. if you are going to guarantee that, i think you have to turn
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around and put all of eggs in the market and say, we have our balance between growth and cyclical and value stocks. let me get some exposure to some lower investment-grade quality corporate's, bbb names where i don't have to worry about spreads widening out and causing me pain there. i would go ahead and go all in. right now, you have to look at the support we are seeing. understandably with the fed not buying as much going forward, we have to have some other parties come in. you had the 10 year option this year with indirect bidders at extreme levels. it actually traded through the win issue deal. there is demand out there. i think the market will be a little surprised that we don't have as many hikes as what people are pricing in. that gives you maybe a little more steep is on the yield
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curve. i think you can get into those fixed income components, especially on the short end, and you are in good position. jonathan: still ahead, the week ahead featuring plenty of fed speak, and the fomc minutes. that conversation is coming up. this is bloomberg. ♪
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jonathan: live from new york city, this is bloomberg real yield. what a week we have had on the two year yield. up 85 basis points in a year. 20 in a single day. the biggest move since 2009. that curve is flatter. we have gone from 90 basis points 2s vs. 10s. think about the moves we have had in a short amount of time. over the next seven days, ecb president christine lagarde speaking on monday.
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uscp i on tuesday. then retail sales on wednesday. jobless claims on thursday. a host of fed speak throughout the week. maybe that will be the big event ended up itself. keep an eye out for all of that. back with us are victoria fernandez, vishwanath tirupattur ," jim bianco. just enough time for the rapid fire around. art 16, the federal reserve meeting. a 50 basis point hike, yes or no? victoria: no. vishwanath: yes. jim: yes. jonathan: what is higher at the end of the year, the two year yield or the 10-year yield? vishwanath: -- jim: two-year.
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victoria: i will take the opposite, 10-year. jonathan: final question. given it is super bowl sunday, and this is my home now. rams or bengals? victoria: go bengals. vishwanath: rams. jim: bengals, and it will not be close. jonathan: i appreciate it. what an historic week in this treasury market. victoria fernandez, vishwanath tirupattur, jim bianco. see you at the same time, same place next week. this was bloomberg real yield. this is bloomberg. ♪
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mark: i'm mark crumpton. welcome to the bnn bloomberg audience. this is first word news.
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in a letter to his counterparts and 37 countries, russian foreign minister sergei lavrov says he is waiting for a response from each nation individually. he also called for nations to respect the principle of what he called indivisible security in europe. you will eventually be able to pay for your uber ride with cryptocurrency. we spoke with the ride-hailing ceo. >> as exchange mechanism becomes more expensive, less environmentally friendly, i think you will see us lean into crypto a little more. we are watching it. is uber going to accept crypto in the future? absolutely. at some point, but we will. mark: he also says inflation is here to stay, but fares are coming down.

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