Skip to main content

tv   Bloomberg Real Yield  Bloomberg  October 11, 2024 12:00pm-12:30pm EDT

12:00 pm
susan: where am i headed? am i just gonna take what the markets gives me? no. i can do some research. ya know, that's backed by j.p. morgan's leading strategists like us. when you want to invest with more confidence... the answer is j.p. morgan wealth management sonali: i'm sonali basak, to our viewers real wide comp -- worldwide, "bloomberg real yield " starts right now. coming up, attainment ppi print rings investor some comfort
12:01 pm
after cpi and jobless claims went in a surprise direction. fed speak leans towards cuts, maybe smaller than traders thoughts. and we are expecting a wave of issuance from wall street giants with big issues, deciphering the data. >> essentially, the economy looks pretty decent on our end. >> we have got a normal and good economy. >> inflation is slightly above the target, but falling. >> within that we are seeing continued stubbornness in the inflation picture. >> you are in the opposite of stagflation. >> looking at an accelerated story doesn't make sense. >> inflation is still last year's story. >> the last thing the fed wants to do is stoke the flames of inflation. >> this year, then four times next year. >> the northstar is that the fed is on an easing path. >> we are not sure that the fed
12:02 pm
has everything under control the way they want to. >> soft landing, no landing, rather than that how about a no landing? >> data always matters, but once per month does not change the narrative. sonali: this is the one chart funding policy makers. the white line is inflation in the early 1970's. you can see it cooling and heating up again. the blue line is the gamble. this is where we are today. there is always a risk that if we cut too far, too soon, we see what we saw back then once again. flipping up the board, the gamble plays out in the way that traders are behaving. you see the movement away from the idea of two 25 basis point cuts starting to change. it's a white bar with november expectations and the market starting to price in less than
12:03 pm
25 basis points worth of rate cuts, but we are still really hanging on the edge, here. billionaire investor ray dalio said he's not expecting significant breakouts going forward from the fed. >> i don't think that you will get significant cuts in rates. the economy, by and large right now itself, is in relatively good balance. looking at where growth is, where inflation is and so on right now, and you have a political year, the markets are getting ahead of themselves with expecting that and the risks are more on the upside than the downside. sonali: joining us now, matthew and george from bank of america and all spring. look at the way that market expectations are changing. what do you expect? 1, 2, or none? matt: to cuts this year, five next year, that's the forecast from the top of the house. but we want to be careful on that. we recently moved to a neutral duration position from a long
12:04 pm
duration position, because of all of the juice you can squeeze out of that orange. our trend belief is that rates will be flat to down, but we are not looking to put a lot of capital at risk on that believe. we'd want to at least be neutral, but is it neutral long or not being sure, that's our opinion. sonali: george, earlier this week we were talking to the head of citadel securities. the market turned tactically short in some areas. would you go short or do you think there is more room to run? george: we think that the fed is in the middle of a midcycle adjustment that is very data-dependent. as you heard in all of your clips that we highlighted, the pace matters quite a bit, there is still a lot of uncertainty. it's hard to say it with a high degree of conviction that they will be able to march the fed funds rate down to neutral in the next 15 months. they might, but it is difficult to say that with any degree of conviction.
12:05 pm
the bias is to cut rates, that's where -- what the fed will ultimately mean, but they are very data dependent and the economy is in good balance. you got the employment and unemployment, relatively close to the targeted trend. we think that out of this steady state, that means that from a duration perspective it's not a great directional environment. up or down is still uncertain. however, the shape of the curve is something that is very monetize a bull. we still think positioning for steeper curves is the right trade. we have seen some of that kind of play out, we saw some of that play out earlier this year. a bit of reversal going into the fed meeting and then a meaningful reese steepening after the payroll report. we still think that curve steepen or is much better as a higher conviction view than the straight directional rate separates down. we are in a nuanced environment
12:06 pm
where the bond market is trying to figure out, just like the fed, where is the data and how should we be positioned? sonali: october 1 on the 10 year, 373. today, 407. how much more risk is there on the longer end of the curve? matt: it really depends on the timeframe you want to think about. on the technique -- technical side they are expecting more buyers to emerge and i totally agree. rate risk is not obviously clear, not obviously compelling here. we believe the trend will be flat to lower, but not nearly as much as that call for steepening. the rate risk, just being neutral feels like the right call at the moment. sonali: george, what are some of the issues behind the long end? a lot of people talked about the fiscal situation if you had not come -- report from the committee for a responsible federal budget, either
12:07 pm
presidential candidate would add a lot of debt to the economy. the degree of range is stunning. 3.5 trillion dollars for kamala harris. $7.5 trillion for donald trump added to the next decade, according to the report. what does that mean for where treasuries go? george: that's a great point. the long end of the technical market is very specific. buyers are out there for certain reasons, meaningful capital and funding for governments. the investors that invest out of the long end, typically it is not just a sort of traders market, but it is very, very technical. your point about supply, treasury supply is clearly high and going higher. one of the issues will be not so much the notion of the volume of debt that the government needs to issue to fund itself, but the duration that the debt is going to get longer.
12:08 pm
bill supply went up dramatically over the last 12 to 18 months. it is likely to come down a little and the government will have to refi longer duration positions. finding those buyers is going to be a little bit more tricky than it has been. and then you sort of layer on what is happening fundamentally, as we mentioned the economy is doing well and the fed is cutting rates. the long end is on the edge, so to speak. we haven't even mentioned the potential for the political changes that may spur further spending. we take a kind of cautious approach to the long end, which is one of the reasons why that steepening bias is a better way to sort of express fixed income portfolios then having a longer duration bias. the rulebook tells you to buy long in duration. that is what has historically worked. that is not necessarily the right decision in this environment, simply because the
12:09 pm
fed is not cutting in response to a slower economy, it is cutting rates in response to lower inflation. a different set of factors. sonali: i'm curious how these dynamics will work out. if investors don't want duration, at what point does the treasury market crack under the pressure? matt: we don't dismiss any risk, but we don't think that's a good big concern. there were four treasurers in the 1990's. now there are eight. rates did not spike, they didn't go up. the history of debt in developed economies over the last 30 years is higher than the federal government level, technically increasing supply in the short term but in the long term with slow economic growth it brought rates down. we think that rates are positioned for value right now. you can look at real yields, 1.6 to 2% across the curve. that's a lot better position
12:10 pm
then when there were -2%. the real inflation-adjusted yields are compensating investors for that and we don't want them scared of supply. being neutral over a longer amount of time can bring rates down and it might be good for the positioning. sonali: quickly, matt, how concerned are you about sticky inflation moving forward from here? matt: i thought that the chart from the 70's was excellent. go back to world war ii, the 1910s, we have seen three high inflation episodes in u.s. history and each time in spite three times. -- spiked three times. we don't think that is going to happen, but we think the risk is underappreciated right now. we think that neutral duration is the right call overall. sonali: george, do you worry about a 70's style scenario? george: there is certainly risk, as matt mentioned, that the
12:11 pm
upside inflation could break out. but it does seem reasonably well contained. policy matters, as long as the fed moves slow and responds to the data rather than trying to anticipate it, we think that the economy can hold. a higher than it has been, but over a long amount of time, between two for that cent to 3% inflation is consistent with a well-developed and mature economy like the u.s. sonali: matthew, george, thank you both so much for your time. a lot to digest in this bond market. up next, the auction block. big u.s. banks kicking off earnings today and are expecting a barrage of bond sales that could start as soon as next week. we talk credit, next. this is "real yield," on bloomberg. ♪
12:12 pm
12:13 pm
12:14 pm
sonali: this is "bloomberg real yield." time for the auction block it, where some of the inflation went down in sales, with the eu investors bidding over 106 billion euros on the debt. it was a dual trench offering of three and 15 year notes with sales price tighter than early guidance. here in the u.s. we had treasury auctions, 3, 10, 30 year, each with the highest yield since july. the indirect award jumped to a record level. rbc, toyota, standard chartered helped to push weekly volumes passed 16 billion dollars, topping the high-end of forecasts. october volume is at $29 billion, on pace to meet expectations speaking of credit,
12:15 pm
at morgan stanley andrew said tight spreads are healthy. >> spreads should be tight. it's better than expected fundamentals. soft landing is an unusually good backdrop for credit. high yields are good for spreads and bring in more demand. from a lot of the buyers who have been driving the market over the last year, with yields going up to 4%, all of a sudden the same spread hits a lot more yield bogies for the buyers. sonali: we are bringing in peter and julia. you have expectations changing quite drastically when you look at the amount of expected interest rate cuts. peter, if we don't get a significant amount of cuts moving forward, what does that mean for anyone that needs to refinance next year? more stress
12:16 pm
in the market? peter: there's a lot of talk about where the economy is right now and everyone seems to be in agreement that it has performed better than everyone's expectations, including my own, but the question is rarely if ever asked, what is priced in? looking at high yield spreads, looking at cdx, it seems to imply that the fall rates would let you look at a 4% default rate right now with a speculative rate high-yield name. a real improvement on the ability of companies to refinance. certainly, lower rates make it easier to refinance, but the assumption has been that the rates are lower in response to the nine inflation, which i'm not convinced of, first and foremost, and secondly that the economy will continue to trend of it has. i'm quite skeptical. we are all students of history.
12:17 pm
typically, when the yield curve normalizes, you actually have a reaction from assets that is not favorable, because it typically is in response to an economy that slows because of long variable lags from the policy. i'm not convinced it is going to be any different this time. sonali: what do you believe is priced in and what is the tail risk here? >> absolutely, the way we think about it, we are generally in consensus with growth and inflation, but we have a more moderate view about the required depths and pace of cuts. coming into september the we were in the 25 basis point cut. 50 basis points that we got felt like an over hedging on behalf of the fed, who was concerned about pooling the labor market. but what we have gotten about the opposite, the labor market
12:18 pm
has been strong and resilient and it muddies the water in terms of the outlook of the next two cuts. looking at the totality of data right now, we think that we will get two more in november. inflation right now, it introduces an additional wrinkle, given the expected reflate -- inflation report. recently for us, that was a risk that looks like we will be low. re-acceleration will be more of a bump on the road for the fed and it will not dramatically change the way they look at the micro picture, more broadly. i will give the fed to credit, i think they have done a great job this year in terms of being a steady hand at the wheel. i think that the data dependency cut will continue and that some of those choppy, noisy data points we might be getting in
12:19 pm
the near term will not sway them in a dramatic way. i think it is nice that they have ample room and plenty of ammunition to potentially respond to the unexpected risks that might arise on the dual front, either the labor market pooling significantly or inflation re-accelerating from here on. either way, the backdrop is setting up for a pretty favorable fixed income outlook. sonali: going to the part of the market that a lot of people have their eyes on, you saw it in the data this morning, clearly americans are still struggling from the costs of shelter and the housing market has been pretty gummed up. jp morgan this morning really saying that one cut is not going to do a lot when you have so many mortgages below 5%. at what point does the housing market become a bigger problem? peter: it has been extraordinarily resilient in terms of price. a tremendous amount of home
12:20 pm
price appreciation. people have an awful lot of equity in their homes. in particular it's one of the reasons we are seeing such a bifurcation in our view between the subprime consumer and the non-subprime consumer. home equity is a big part of what is sustaining consumption for the higher fifo borrowers and homeowners. because of the short supply in the housing market, we are still relatively sanguine on home prices. that is an area that we have been investing in for the past several years and continue to remain pretty constructive on, even as the economy slows. sonali: yulia, wondering how you are trading around the mortgage market at this juncture. yulia: i would echo the same themes that peter brought up around the consumer. 2020 two, we have gotten more concerned and stepped away from the deeper subprime sectors of
12:21 pm
the market across auto, personal loans, credit cards. we have seen a rise in delinquencies that have been sustained and that homeowner aspect is, i think, crucial to the equation right now. affectively, anybody who has been a homeowner in the u.s. has benefited from the strong house price appreciation and benefited from that tremendously favorable low mortgage from the fed. they are well-positioned into the future, which is why we favor any sectors that have direct or indirect exposure to the u.s. homeowner. the flipside of that is actually the low income renters are the ones that are probably going to suffer the most, particularly if the inflation spikes from here on. they have not benefited from the hpa growth and have in fact actually been hurt by the resetting rents that have been
12:22 pm
spiking higher, you know? [no audio] on top of increasing costs. if you look at the university of michigan data, shelter costs on the rise far outweighs any optimism around a potential increase in future wages. sonali: only one minute left, would love to hear from both of you. peter, your favorite trade at this juncture? peter: mid july we liked it long duration, extending portfolio duration. we didn't like the trade with the 10 year quite as much. backing up to 410, we think that's a good place to be. we like buying the 10 year. sonali: that seems to be the sweet spot. bank of america said something similar. yulia thomas favorite trade? yulia: -- yulia, favorite trade? yulia: credit is quite the pick
12:23 pm
up on plain vanilla corporate, supporting strong performances in the asset class. we are on track to record issuance post gmc with new issuance abs volume surpassing 300 billion for 2024. there is very strong risk on sentiment that has been fueled by very strong insurance company appetite, which has a strong bid for probably -- public and private assets. sonali: peter, yulia, have a great friday, it's a busy week ahead. still ahead, the final spread. more on what to expect with big bank earnings on the way. this is "real yield," on bloomberg. ♪
12:24 pm
i can't believe you corporate types are still at it. just stop calling each other rock stars. and using workday to put finance and h.r. on one platform. tim, you are a rock star. using responsible ai doesn't make you a rock star. it kinda does. you are not rock stars. (clears throat) okay. most of you are not rock stars. oooh. data driven insights, and large language models. oh, that's so rock roll. it is, right. he gets it. yeah.
12:25 pm
sonali:sonali: i'm sonali basak and this is "bloomberg real yield."
12:26 pm
monday, u.s. bond markets are closed and fed speak it kicks off with governor waller. the paris auto show gets underway. more big bank earnings rolling on, goldman, bank of america, citigroup, and mary daly. wednesday, my interview with stanley druckenmiller. and more with morgan stanley as well. thursday, ecb rate decision with a double dose of jobless claims. building permits in china, gdp, that's friday. thank earnings come bank stocks have been on a tear since the jp morgan results. investment banks are writing higher on promising results from the biggest of the investment banks out today. we will get a better read on the consumer from bank of america and citigroup. those large credit card businesses. let's see if we can keep it going with less rate cuts than expected. after the first, this is the first set of results. from new york, that does it for
12:27 pm
me. same time, same place next week. this was "bloomberg real yield," this is bloomberg. ♪ it's our son, he is always up in our business. it's the verizon 5g home internet i got us. oh... he used to be a competitive gamer but with the higher lag, he can't keep up with his squad. so now we're his “squad”. what are kevin's plans for the fall? he's going to college. out of state, yeah. -yeah in the fall.
12:28 pm
change of plans, i've decided to stay local. oh excellent! oh that's great! why would i ever leave this? -aw! we will do anything to get him gaming again. you and kevin need to fix this internet situation. heard my name! i swear to god, kevin! -we told you to wait in the car. everyone in my old squad has xfinity. less lag, better gaming! i'm gonna need to charge you for three people.
12:29 pm
12:30 pm
sonali: welcome to "bloomberg markets." scarlet: a record rally, big bank earnings lifting the s&p 500 to a record high. as i mentioned, the s&p 500 is at the highest level ever for now, the 45th record close this year. nasdaq 100, gaining .1%. we should mention that within the s&p 500 is the big banks leading the way out. for the 10-year yield, moving up just slightly, at one point it roseo as high as 1.5% and we had a h

2 Views

info Stream Only

Uploaded by TV Archive on