'Bloomberg Real Yield' (03/011/2022)
From New York City for our audience worldwide Bloomberg Real Yield starts right now. Coming up the diplomatic efforts accelerate the Fed not holding back on rate hikes pushing the yield curve to slowly invert. We begin with a big issue. Big plans make skeptical minds. The numbers don't add up. We finally got the first Freddie Fed
rate hike of this cycle. We have the dot plots that show about seven rate hikes seven hikes for this year. Two point eight percent by the end of next year. That just doesn't seem right. I can't add these numbers up and make any sense of them. It's all unrealistically hawkish. I think that's mission accomplished. Mission accomplished. It's fanciful to think that we don't see an increase in the unemployment rate. The Fed is not in a position to predict or forecast a higher unemployment rate. Do you really think that a tightening cycle is not going to have any effect on the real economy. Their growth forecast for this year. I don't really see this playing out the way that it was laid out. This is all fantasy land. What's fantasy land is that
you know people think that inflation is going to come all the way back down to earth. I still think there's confusion. Breaking news follow the money. Here's our reporting. Some Russian bondholders say they got coupon payment in dollars. Some holders of that Russian debt say they got those coupon payments and told us we followed the money from the state for the clearinghouses for the banks ultimately ending up in the hands of investors. Some Russian bondholders say they got coupon payment in dollars. That headline just crossing. Perfect timing. The guests join us right now. J.P. Morgan's Cassie Barrow moving
is Tony Rodriguez and Morgan Stanley's Eric Stein. Can't see the Fed had to put together some forecasts. Tell us what they're going to do with rates this year and next year. And we're dancing around week to week trying to work out whether IBEX sovereigns going to default or not. Is it likely the Fed can do what they said they'd do this week. I think it is likely I think that they are on a course to hike rates seven times at least this year. And there's a potential
for them to do 50 in the May or the June meeting. CHAIR POWELL He said at best he said we want to get rates back to neutral as quickly as practically possible. And that's what they're going to do which means that they need to get to at least 2 percent on the Fed funds rate. And they can do that by the end of the year. And if you look at the dot plot the the full of the committee agrees there isn't a dot in 2023 or 2024. That's below 2 percent. Let's look at that top floor. You can look at the front end for 2022. There's one dot sub 158. This one up north of 3 percent. We know who that is. The St. Louis Fed president Jim
Bullard said this earlier today. I recommended that the committee try to achieve a level of the policy right above 3 percent this year. This would quickly adjust the policy rate to a more appropriate level for the current circumstances. Tony is this achievable. Can I get Fed funds north of 3 percent this year. Guy Johnson good to be with you. Now I really don't think there's any opportunity let me go to 3 percent this year. If you look back a month ago the market was already pricing in shifting. The Fed did everything they could to talk the market
back down to 25 when they had an opening. They chose not to take advantage of it. So we see this as a fed that is clearly focused in terms their reaction function now solely on inflation. But they also are very very interested in making a gradual methodical well communicated approach. So we're thinking 25 basis points of meeting. Would we do 50 if it was up to us. Yes. We think that getting there a little faster the market can handle it. You look at the two year the five year they've all priced in the timings. So the opening is there. But we think the Fed will be more
gradual. Eric Stein you'll take. Yeah. Look I think the Fed is very much still intellectually dovish but cyclically hawkish. They are certainly in the mode to raise rates right now 3 percent seems very aggressive. I don't think the markets would take that but I very much agree with the first two guests. They are on a path to continue raising rates. It would take something really big for them not to continue with that. But keep in mind at some point in this rate hiking cycle if the economy slows a lot maybe they change course. So right now they are hiking full steam ahead. But I still think there is
a lot of intellectual doves on the committee that are just cyclically hawkish because of where inflation is right now. What that means both for the economy but also politically inflation as a hot button issue. And certainly that's got noticed at the Fed. If you're just tuning can a bit of breaking news in the last five minutes or so we've been following the money from the sovereign Russia all the way through the pipes to the end investor. We're reporting now here at Bloomberg some Russian bond holders say they've received the coupon payment in dollars from the Russian state. There was about one hundred and seventeen million dollars worth of interest payments on two dollar bonds early this week on Wednesday. We understand
according to some Russian bond holders they've received that money. The range of outcomes this year can see with all of this in mind just incredibly incredibly wide. There's a group of people who believe the economy is strong enough to take this strong enough to see higher interest rates strong enough for the economy to flourish. Even in the face of that Chairman Powell said exactly that. Then you have to downsize. Can't see that belief. One hike to hike three four hikes in. You get an inverted yield curve. They have to back away. Why are you not in that latter camp. Right. So we do expect the economy to remain strong enough to withstand these hikes. I would highlight we're coming into the
spring and the summer. There may be another burst of reopening as we've now made it through another wave of Covid. We also are looking at the consumer there extremely strong. They have high levels of savings. They are still comfortable with costs rising because wages are also rising. And on the corporate side we look at how corporates are positioned corporate America versus pretty Covid. And they have more cash on hand now than they did pre Covid. They have less leverage now than they did pre Covid. So one of the areas where we've seen value created over the last two months with all this repricing is investment grade credit.
It's underperformed versus other across asset like high yield. And the fundamentals there are still strong and you can start to see all and yields are much more attractive now than they were a few months ago. We're looking at over 6 percent on high yield in the US and over three and a half percent on investment grade yields. Kelsey is that a bet on a soft landing. Well in the near term yes I think that there is just a lot of momentum in the US economy and the Fed is determined to continue to go. But that doesn't mean that the yield curve isn't going to flatten because we actually do expect the yield curve to continue to flatten. And I think we actually have to expand our minds and and envision a yield curve that actually could become severely negative as we move into the second half of this year. And the yield curve we're all fixed income investors here. You
can not ignore the yield curve. It is telling you that growth is going to slow as a result of the Fed tightening but that the reason that we're doing this is because the economy is running very hot. Demand is far exceeding supply and this is what they need to do to start to bring that back into equilibrium. Tony let's go through the yield curve three a yield right now two
fifty five a yield to 15 7 year to 18 10 year to 15. We're already inverting here Tony. 1. Hi kid. You've got Governor Wall around CNBC this morning talking up 50 basis points. And that was fed President Jim Bullard talking up 50 basis points. Tony isn't this the direction of travel now of the next couple of months. Is it inevitable we just invert the yield curve just a few hikes in to this rate hiking cycle. Well we would think that it's pretty likely that you'll have a Monson version as I said earlier I think what you're seeing and twos three sides and setters that they've already priced in the hikes. So the Fed is way behind still in terms of a 50 basis point hike today would have been acceptable to the market. It's
already priced in. Having said that we definitely think we're going to continue to see flattening potential inversion the curve if going to be very concerned about inverting the front end meaning the funds rate the three month bill rate versus the 10 year as rate that starts to become come into play later this year. That's when I think you're going to have to recalibrate to whether or not the soft landing is achievable. We think there's some possibility of that. But clearly the historical record is
not very positive about that or you're going to see a more significant slowdown that causes the Fed to have to be more aggressive. And that's when you have your 20 23 recession outlook come into play. Eric that yield curve right now. Those numbers on that screen have a reason enough for this fed to back away. If they get worse than it already looks if the king starts to kick in even more we start to see a more pronounced inversion is not a reason to constrain this fed and its ability to deliver more rate hikes. Yes. I don't know if it constrains the Fed from hiking. As I said before I think they're going to continue doing it. It may constrain them from doing 50 basis points. It may push them more to use balance sheet as a way to reduce monetary
policy accommodation as opposed to going 50 basis point on a rate increase. But I think it's a really interesting point. Looking at the shape of the yield curve because lots of talk that the Fed has lost credibility. Look at where inflation is today. But if you look at the U.S. yield curve as flat as it is as flat as a pancake you just said three years out the 10 years and 30 years only 25 30 basis points higher in the 10 year. That shows me that the Treasury market is not particularly concerned about inflation. I certainly agree with what others have said. The shape of the yield curve matters. I don't think it stops the
Fed from raising rates but it maybe makes it harder to go 50. And I also think it brings into play the Fed's balance sheet. Maybe they're a little more aggressive on balance sheet reduction a little less aggressive on the rate hike path. We'll pick up on the balance sheet story in the next segment and talk about risk assets more broadly. I was surprised more people in the news conference didn't ask him about it seeming seemingly how willing he was to deliver the response to those questions. Ceci Tony Rodriguez IBEX writes They can with us coming up on the program. Up next the auction block fed lift off fueling the big banks to come to market. That conversation. Up next. A flight from New York City on Jonathan Ferro. This is Bloomberg Real Yield. It's time now for the auction block where we kick
things off over in Europe issuance exceeding expectations and topping 28 billion euros. Financial is doing the heavy lifting with JP Morgan Deutscher and Credit Suisse pricing the bulk of supply in the US. High grade bond sales gaining momentum after the Fed's rate hike. Thanks America and Wells Fargo leading a wave of deals boosting supply for the week to twenty nine billion and the junk bond market stalling game for the second straight week this month. Borrowers staying on the sidelines
posting the slowest first quarter since 2016. Some breaking news in the last 20 minutes just to get you up to speed. The team here at Bloomberg reporting the following that some Russian bondholders say they got coupon payments in dollars. We are reporting the following. Bondholders say they were notified of the credit on their accounts on Friday. The one hundred and
seventeen million dollar interest payment on two dollar bonds of course with you on Wednesday. So hopefully that clears some of that up for now. Of course we're gonna be dealing with this again and again and again the next few weeks and months. Still with us Kasey Barrow Tony Rodriguez and Erik Stein. Kasey as we fully realize the risks associated with this story yet. And if you were to draw that conclusion what data points would you identify to do that. There is still a lot of uncertainty. Some of the uncertainty is you know related directly to the epicenter of what's going on.
So as you mentioned there will be more Russia debt payments that need to be made over the next few months. And this is not going to be the first time that we're discussing it. I look at the market I look at the cash. Russian government sovereign bonds what they're pricing versus the CBS. I see there's a large basis there which means that there is still a lot of uncertainty about settlement. This story is absolutely not over. But when I look more broadly at the rates market I think that what's being
priced in is fairly fairly rational. I look at yields. They're higher. That's because the Fed has told us they're going to look through this. They're going to focus on inflation which is still high. But rate volatility is elevated and that makes sense in it. In this situation and in an environment where there is certainly a lot of uncertainty. Tony do you think the market is starting to look through this. I look at the incoming information and then from my position the cheap seats look at how the market responds to the incoming information that it feels like over time over the last week specifically things like Tony the market participants have become somewhat desensitised to the incoming information. The incoming headlines certainly signal their auto. John you make a good point. I mean we've seen the VIX fall.
We've seen a little bit of a recovery in credit spreads. We've seen the equity market clearly had an credibly great three day strength yesterday. So I think market participants are starting to come to grips with the fact that these situations that we're dealing with high inflation tightening fed Ukraine Russia crisis they're not going to go away overnight. They're going to be with us for the balance of the year. So having to position yourself for that is what I think investors are coming to grips with. The
initial reaction is very. Rascoff very access liquidity quickly. Now I think people are settling in to try to say we're seeing maybe value created given some of the moves we've seen and how do I want to be positioned for a market environment that's going to remain uncertain and tricky through the balance of the year from our perspective. Eric Stein your take. Yeah look I think it's it's a good point you make Jonathan that market participants maybe this week as we're 22 days or so into this are a little more desensitized than they certainly were when it happened. You know a little over three weeks ago or so I really think there's three things that have been driving markets over the past couple weeks. Obviously what's going on in Russia
Ukraine the Fed as we've talked about a lot. And China as well. If you go back last week it was all talk of de-listing of 80 yards. And this week Lou he came out with you know maybe more bullish or pro market comments. And you saw Chinese markets go up a lot which I think helped broader risk sentiment. So I think maybe market participants are getting
slightly desensitized even though it's incredibly uncertain and obviously you know tragic humanitarian situation. And then the Fed meeting while the Fed was hawkish wasn't so hawkish that that the bond market particularly at the back end didn't sell off. It actually rallied by the end. And then the news on China which has generally been negative was actually a little bit more positive this week. Dare I say complacent. Cassie Barrett when I look at the long and if you get a rally on the long bond the 30 years then another 4 basis points today and a two year sun enough that doesn't sound like the sign of the kind of world that I'm hopeful about with a two yield rising and a 30 year yield falling. And that's what we've got today. Again the interesting thing about this week for me is that they talked about balance sheet and no one's really responding to balance sheet and counsel. It reminded me of December. We had the news conference. Everyone ignored what
Chairman Powell had to say. The minutes came out which basically repeated what Chairman Powell said back in the middle of December. And if one woke up to what was about to happen could we repeat that this time around. The chairman pointing to the Fed minutes for the cue tape and a sheep run off conversation. So I think that could happen again. And the reason being not that Chair Powell is going to say the exact same thing that the minutes are going to say but the minutes may actually give us more detail on the actual piece of the balance sheet rundown. So Chair Powell has been very quiet on that. He's indicated that
it's going to start very soon. We think it will start in May. But what they really haven't socialised is the sizes. So we're anticipating around 50 billion per month in Treasury run down and 30 billion per month in agent CMBS rundown which gets you to an annualized piece of rundown of about a trillion a year. So what we need to see is what does the Fed think about that. What is there piece that they think is appropriate. And I think that may be revealed in the minutes. And if that is materially different from what the market is currently pricing you could see a surprise a trillion dollars acutely. Tony how do you factor that into your outlook for the
market. How do you even begin to do that. Guy Johnson I think you have to factor in one. The reduced liquidity so risk premiums have risen quite a bit. They need to be higher than where they were to factor in a tightening Fed liquidity reduction from the balance sheet. I think the other thing is that right now the uncertainty from what the caps are going to be how are they viewing it as is 500 billion run down this year equivalent to one tightening. So that basically
reduces some risks. They become more aggressive. I think gonna be an issue as to how they're calibrating the tightening that occurs from the balance sheet. But overall that means tighter financial conditions lower liquidity. So you clearly have to have a view for kind of an our in our opinion risk premiums have cheapened. There are much more attractive but we're not expecting a recovery back to levels we were we think you could see still some modest winding from here as the actual implementation of that balance sheet runoff takes place. Eric give me the pitch the sound. Tell me why I'd want to invest in risk assets in a world where the long bonds rallying the two years sell enough they're going to raise interest rates. The
inverted yield curve cutesy of a trillion dollars a year. We're cutting growth forecasts not kicking them higher. We're raising inflation forecasts not cutting them. Why do I want to put money into risk assets into high yield credit corporate credit America. If we correct it enough to even think about doing that yet. So look I think we've corrected a little bit. Who knows if you've gone enough if you want me to play ball and take the bull side. I would say you know the Fed's going to raise rates but likely we're still going to be in a negative real yield environment. The U.S. economy is quite strong. Global economy obviously dealing with the geopolitical shocks and oil prices
all that come down a lot over the past week. We could a half or so but still kind of recovering from various waves of Covid depending where you are on the map. So I still think we're in an environment where on an on a relative absolute basis risk risk assets could be attractive relative to a year ago when the Fed was trying to keep financial conditions as easy as possible for sure. Not as attractive as then. To me the real open question is the Fed wants to tighten financial conditions. That's clear. How much pain can the Fed take if markets start to sell off. I think it's more than before but I don't think it's unlimited. Can't
say final word. I agreed with the with the the real yields being negative continuing to be negative. We have just started this move away from accommodative policy. We still have a lot longer to go. This is more about relative value. For instance it's it's not always about where we're going to buy. We've seen a repricing in European credit for instance it's underperformed U.S. credit. And this is an area where we're still going to probably stay
away from because with the new information we have the ECB is still planning to step away to focus on their price level stability target. This is an area where valuations have become more attractive but that doesn't necessarily mean it's time to step in. Cassie Barrow sticking with us for Toni Rodriguez and Eric Stein. Coming up on the program still ahead the final spread the week ahead featuring a host of Fed speak and President Biden heading to Europe. That's next. This is Glenn Beck.
It's time now for a final spread the week ahead. Coming up through next week a host of Fed speak kicking off with Chairman Powell and Bostick on Monday Williams Daly master all on DAX Tuesday. Plus we'll hear from ECB President Legarde Bank of England Governor Andrew Bailey. They speak through the. The president heading to Europe. And you get some data to close things out on Friday. Let's squeeze in the rapid fire round with our guests and get straight to this first question. Pick a
number. How many hikes this year. Pick a number. Cassie Barrow at least seven. Eric. Seven Tony. 7 Where does the Fed funds pick. Take a number. The peak in the Fed funds rate. Tony. Two and a half. Eric. Two and a quarter can see two seventy five year and twenty three. The Federal Reserve has unemployment at three point five
percent year and twenty three. Higher or lower unemployment higher or lower year and 23. Kelsey. Lower. Interesting. Tony. Hire Eric. Higher to the three of you thank you. Cassie Barrow Tony Rodriguez Eric Stein from New York City. That does it for us.
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