'Bloomberg Real Yield' (02/25/2022)
JONATHAN: FROM NEW YORK CITY, BLOOMBERG REAL YIELD STARTS RIGHT NOW. ♪ MARKETS WHIPSAWED BY CONFLICT IN UKRAINE. GLOBAL LEADERS AVOIDING ENERGY SANCTIONS. THE FED STAYING ON TRACK TO HIKE. WE BEGIN WITH GEOPOLITICS CLOUDING THE PATH FORWARD.
>> YOU HAVE THREE DIFFERENT PLOTS PLAYING HERE. >> HOW MUCH OF AN ECONOMIC IMPACT THERE WILL BE. >> THEY ARE ON DIFFERENT PLANETS. >> WALL STREET IS HAVING A DIFFICULT TIME AROUND WHAT IS THE FED'S PRIORITY.
>> THEY WERE ALREADY FACING A DILEMMA. >> NOW WE HAVE THIS INVASION. >> DIFFICULT BACKDROP FOR CENTRAL BANKERS. >> THEY HAVE ONLY GOT TRADE-OFFS. JONATHAN: JOINING US NOW IS MARILYN, MATT, AND SOMEONE FROM MORGAN STANLEY. WHAT CHANGED THIS WEEK? >> WE HAD THE WORST CASE
SCENARIO IN TERMS OF THE ON THE GROUND INVASION IN UKRAINE. LOOKING AT THE RESPONSE FROM THE U.S. AND ALLIES IN TERMS OF SANCTIONS, IT WAS CRITICAL THAT WE SAW THE MARKET BEING WHIPSAWED AROUND SANCTIONS, ENERGY LEFT OFF THE TABLE. DISCUSSION OF SWIFT. WE SAW CIRCULAR MOVEMENTS IN THE BOND MARKET. WE ARE SEEING GEOPOLITICS, INFLATION. JONATHAN: LET'S TALK ABOUT THE REACTION. ONE THING YOU HAVE TO ASK
YOURSELF THIS WEEK, OUR WESTERN COUNTRIES WILLING TO RISK THEIR OWN ECONOMIES TO COMPROMISE RUSSIA AND THEIR LEADERSHIP? WHEN YOU HEAR HEADLINES LIKE WE ARE NOT GOING TO DO ANYTHING THAT WILL CAUSE A DISRUPTION OF ENERGY TO THE U.S., YOU CAN CONCLUDE THAT THEY WILL NOT GO THAT FAR. CAN YOU CONCLUDE THAT THE FUNDAMENTALS OF THE U.S. ECONOMY HAVE NOT CHANGED THAT MUCH? >> I THINK YOU HAVE TO SEPARATE THE HUMANITARIAN PART OF IT OUT FIRST. WHEN YOU TALK ABOUT THE MARKETS, VALUATIONS CHANGED.
FUNDAMENTALS DID NOT CHANGE. I WENT FROM BEING VERY BEARISH TO BE IN BULLISH. THERE IS A RISK ON THE HORIZON BUT VALUATION CORRECTED. WE THOUGHT IT WOULD TAKE UNTIL LATE MARCH, EARLY APRIL TO GET TO THE SPREAD LEVELS WE WERE AT THIS WEEK BUT THIS ACCELERATED THINGS.
I THINK THIS IS AN ATTRACTIVE ENTRY POINT IN THE U.S. BECAUSE FUNDAMENTALS HAVE NOT CHANGED BECAUSE OF THE WAY SANCTIONS WERE LAID OUT AND VALUATIONS HAVE ADJUSTED. IT IS A WEIRD WAY TO SAY IT BUT IT IS A DECENT OPPORTUNITY. JONATHAN: WHERE ARE YOU LOOKING? MATT: ENERGY IS A GREAT OPPORTUNITY. IF YOU LOOK AT CREDIT SPREADS, THEY HAVE DONE IN LINE WITH EVERYTHING ELSE, WHICH IS BAD. YOU LOOK AT SOME OF THE BEST QUALITY COMPANIES, THEIR CREDIT SPREADS ARE 50 TO 75 BASIS ITS WIDER.
YOU CAN ARGUE THAT WHAT IS HAPPENING WITH RUSSIA AND UKRAINE IS GOOD FOR THE U.S. ENERGY SECTOR. YOU HAVE TO GET BY THE BETA. ONCE YOU DO, THERE ARE HUGE OPPORTUNITIES IN ENERGY. HIGH-YIELD ENERGY IS A GREAT PLACE TO BE. FOR ME, YOU JUST HAVE TO POWER
THROUGH THIS TRANSITIONARY PERIOD AND THEN ENERGY IS A GREAT PLACE TO PLAY THE MARKET. >> I WOULD AGREE WITH MOST OF WHAT MATT SAID. THE HUMANITARIAN SIDE OF IT IS DEEPLY CONCERNING, BUT IF YOU THINK ABOUT IT FROM THE MARKET PERSPECTIVE, THERE IS MORE GROWTH UNCERTAINTY, BUT IT FEELS LIKE THE OUTSIZED MOVES THAT YOU WOULD EXPECT, THOSE ARE BEGINNING TO BE PRICED OUT.
THAT IS ALSO TRUE FOR THE FED'S REACTION FUNCTION. THAT MEANS VALUATIONS ARE LOOKING MORE REASONABLE NOW DAVID IT HAS BEEN MORE OF A VALUATION PROBLEM THAT THE CREDIT MARKET HAS BEEN DEALING WITH FOR SOME TIME NOW. I AGREE THAT THESE ARE SETTING US UP FOR MORE INTERESTING ENTRY POINTS. JONATHAN: COULD I GET MORE CLARITY? YOU MENTIONED THE FED'S REACTION FUNCTION. SRIKANTH:
WHAT I'M TRYING TO GET AT ARE THE EXTREME SCENARIOS WHERE THE MARKET WAS UPPING THE ANTE WITH THE RATE HIKES. THAT DEBATE HAS PROBABLY SOFTENED A LITTLE BIT. YOU WOULD EXPECT THEM TO BE A LITTLE DEFENSIVE, NOT PUSH TOO HARD ON THE GROWTH NARRATIVE. THERE IS SOME INCREMENTAL UNCERTAINTY THAT HAS COME THROUGH. THE DEBATE AROUND THE 50 BASIS POINT HIKE, EXTREME SCENARIOS OF THE MAGNITUDE OF THE RATE HIKE, FOR THE NEAR TERM, THAT HAS ABATED A LITTLE BIT. JONATHAN: THAT IS THE KEY, THE NEAR-TERM TO THE LONG-TERM.
IN THE NEAR TERM FOR SOME PEOPLE, IT IS TAKING A 50 BASIS POINT CALL AWAY. GOVERNOR WALLER THINKS IT IS ON THE TABLE. MY PREFERENCE IS TO INCREASE BY 100 BASIS POINTS BY THE MIDDLE OF THE YEAR IF INFLATION IS STILL RUNNING HOT. A CASE CAN BE MADE FOR A 50 BASIS POINT MOVE IN MARCH.
WE HAVE GOT A BIGGER ENERGY STORY, POTENTIALLY A BIGGER SHOCK. WHEN YOU WORK THROUGH THAT, DOES THAT MAKE THE FED MOVE QUICKER, MORE SLOWLY? MARILYN: THE KEY HERE IS INFLATION. IN TERMS OF THE PATH AND THE OVERALL TRAJECTORY OF THE FED, I DON'T THINK THAT CHANGES. MAYBE IN TERMS OF TIMING, PACE MAY CHANGE SLIGHTLY.
IT LOOKS LIKE THE 50 BASIS POINT HIKE NEXT MONTH HAS BEEN EFFECTIVELY TAKEN OFF THE TABLE. I THINK WE WILL SEE A MORE CAUTIOUS INTRODUCTION TO RATE HIKES. THAT BEING SAID, THE COMMENTS HIGHLIGHT THE FACT THAT WE ARE SEEING HIGH INFLATION IN THE U.S., WE HAVE STRONG UNDERLYING
FUNDAMENTALS, LOOKING AT MAXIMUM EMPLOYMENT, OTHER ACTIVITY IN THE U.S. THE OVERALL TRAJECTORY WILL BE ON TRACK AND THEY WILL CONTINUE TO NORMALIZE, BUT IN THE SHORT TERM THERE IS MORE UNCERTAINTY, SO PERHAPS THE FED WILL BE A LITTLE BIT SLOWER THAN THE MARKET WAS ANTICIPATING. JONATHAN: DO YOU THINK IT WOULD ALSO SLOW DOWN THE ECB MORE AND BECAUSE OF THAT COMPLICATE THE FED'S ABILITY TO GO QUICKER? MARILYN: IN TERMS OF THE ECB, WE HAVE HAD COMMENTS COMING OUT OF AUSTRIA THAT MAYBE THEY WOULD SLOW OR DELAY ANY CHANGES TO THE NORMALIZATION, ENDING THEIR ASSET PURCHASES. HOWEVER, I THINK THE ECB IS ALREADY FAR BEHIND THE FED IN TERMS OF NORMALIZATION.
IN THE SHORT TERM, I DON'T THINK IT CHANGES THE DIFFERENTIAL, CHANGES THE FED'S TRAJECTORY IN THE SHORT-TERM. MAYBE IN THE MEDIUM-TERM, DOWN THE LINE, DEPENDING ON THE IMPACT OF THE OVERALL EUROPEAN ECONOMY FROM TENSIONS IN THE UKRAINE, IMPACT OF SANCTIONS, DEVELOPMENTS YET TO UNFOLD, IT IS POSSIBLE BECAUSE SEE AN IMPACT FROM THE ECB ON THE FED. IN THE SHORT TERM, THE FED IS STILL ON TRACK TO RAISE RATES, QUANTITATIVE TIGHTENING, AND THE ECB IS BEHIND IN TERMS OF NORMALIZATION. JONATHAN: THE BOND MARKET IN GERMANY. WE OPENED UP UP 20. IF I EXPLAIN WHAT THIS WEEK LOOKS LIKES IN EASTERN EUROPE, YOU WOULD GUESS THAT WE WOULD BE BASICALLY FLAT ON THE GERMAN 10-YEAR YIELD. MATT:
BASICALLY ON IMAGINABLE. YOU COULD HAVE LEFT FOR THE WEEKEND NOT MISSED ANYTHING FROM THE MARKETS STANDPOINT. THE ECB IS IN AN EQUALLY TOUGH SPOT COMPARED TO THE FED.
I THINK THIS SLOWS THE ECB DOWN. THIS WILL BE A NEGATIVE FOR THE EUROZONE. FOR THE U.S., MORE OF A NEAR-TERM INFLATIONARY SHOCK. IF YOU ARE THE FED, WHAT THIS HAS CHANGED, WE WERE IN THIS CYCLE WHERE EVERYONE WAS ONE UPPING EACH OTHER HOW MANY TIMES THE FED WILL HIKE. I THINK WE HAVE BROKEN THAT CYCLE NOW. WE HAVE GOT TO A POINT WHERE EVERYTHING IS PRICED IN, THE MARKET IS READY FOR IT. I DON'T THINK YOU'LL HAVE
PEOPLE COMING OUT WITH 10 HIKES, BUT THAT TAKES THE TAIL RISK OFF THE TABLE. FINALLY A POINT WHERE WE CAN SAY MAY BE WORST HAS BEEN PRICED IN HERE. THE ECB, EVEN THE THOUGHT OF THEM HIKING RATES LATE IN 2022 SPOOKED THE MARKET, BUT THAT IS OFF THE TABLE NOW. JONATHAN:
THAT IS YOUR POINT, THAT THEY HAVE TO DO QUICKER, DO MORE. SRIKANTH: SPECIFICALLY ON THE PART OF THE ECB, THE BALANCING ACT WILL BE MORE DIFFICULT. THEY ARE A BIT BEHIND THE FED WITH RESPECT TO WHERE THEY ARE IN THE POLICY CYCLE. WHAT IS ALSO INTERESTING IS THE RESPONSE THAT THE BUND SPREADS HAD ON WEDNESDAY AND THURSDAY. THAT IS WHERE THE RESPONSE FUNCTION WILL BE DIFFERENT. THEY ARE MORE SENSITIVE TO WHAT IS HAPPENING TO THE PER REFERRAL SPREAD. IF THAT GETS OUT OF CONTROL, IT
HAS BROADER RAMIFICATIONS FOR THE CREDIT MARKET. JONATHAN: SRIKANTH SANKARAN IS STICKING WITH US ALONGSIDE MARILYN WATSON AND MATT BRILL. BORROWERS MOVING TO THE SIDELINES AFTER RUSSIA INVADES UKRAINE. THAT CONVERSATION IS UP NEXT.
JONATHAN: LIVE FROM NEW YORK CITY, I'M JONATHAN FERRO. THIS IS BLOOMBERG REAL YIELD. GEOPOLITICAL TENSIONS LEADING TO THE SLOWEST WEEK OF THE YEAR. ISSUANCE FALLEN SHORT OF 17 BILLION EUROS AFTER A NUMBER OF DEALS WERE PUT ON ICE. IN THE U.S., HIGH-GRADE BOND
SALES HITTING NEW HIGHS. THE LARGEST OFFERING COMING FROM WELLS FARGO. THE U.S. JUNK BOND MARKET GRINDING TO A HALT AFTER PRICING IN MORE THAN $9 BILLION THIS MONTH, THE SLOWEST FEBRUARY SINCE 2016. TAKE A LISTEN TO WHAT HE HAD TO SAY ABOUT MAY BE A MARKET THAT IS NOT WELL PRICED. >> THE BAD NEWS IS I DO THINK THE BETA IN THE MARKET STILL HAS A WAY TO GO. BUT THE DISLOCATIONS ARE REALLY
BECOMING QUITE PRONOUNCED. WHAT WE ARE DOING IS RELATIVE VALUE. DEFINITELY NOT DIVING INTO THE POOL HERE. I THINK THIS IS A VOLATILE TIME AND WE HAVE NOT SEEN THE REPRICING. JONATHAN: LET'S PICK UP ON A COUPLE OF THOSE POINTS. WE HAVE NOT HAD THE BIG SHAKEOUT.
THERE IS THIS COMFORT NOT IN THE LEFT OFF OR THE PACE OF FED HIKES, BUT THE ULTIMATE DESTINATION. IT WILL BE LOW AND COMFORTABLE FOR INVESTORS. CAN WE PICK UP ON THIS IDEA THAT THE FED WILL NOT HAVE TO TAKE RATES THAT HIGH, THAT IT WOULD DISRUPT THE MARKET TOO MUCH? MARILYN: I THINK THAT IS RIGHT.
THE MARKET IS EXPECTING THE END POINT OF THIS NORMALIZATION WILL BE LOWER THAN PREVIOUS CYCLES. THERE ARE RISKS AROUND THAT, IN TERMS OF INFLATION, WHEN YOU LOOK AT THE PRICE OF OIL. IF YOU SAW THE PRICE OF OIL BE MUCH HIGHER FOR AN EXTENDED INTO OF TIME, THAT WILL FEED THROUGH INTO OVERALL INFLATION. WE ARE SEEING A LOT IN TERMS OF INFLATION EXPECTATIONS AROUND THE TRANSITORY NATURE OF IT. INFLATION IN THE U.S. IS STILL VERY HIGH, REMAINS HIGH.
ALTHOUGH WE EXPECT THAT TO COME DOWN, THERE ARE SOME SIGNIFICANT HEADWINDS WHEN YOU LOOK AT THE AMOUNT OF HOUSING STOCK YOU HAVE, THE IMPACT ON RENTS AND OTHER THINGS. WE EXPECT INFLATION TO REMAIN RELATIVELY STICKY FOR A BIT LONGER. IF WE SEE THE IMPACT FEEDING ON TO ENERGY, THAT COULD IMPACT THE VIEW THAT PEOPLE HAVE OF THE MARKET, THAT NORMALIZATION WILL BE LOWER. THAT IS SOMETHING TO KEEP AN EYE ON. ALL THE FED SPEAKERS WE HAVE HEARD OVER THE PAST FEW DAYS, DATA DEPENDENCY AND THE KENAI ON INFLATION, THE CORE ELEMENTS OF INFLATION WILL BE KEY IN TERMS OF THE TRAJECTORY OF THE NORMALIZATION GOING FORWARD.
JONATHAN: WORKING OUT THE DESTINATION IS THE HARD ONE, THEY DON'T KNOW. ONE OF THE BIG STORIES THIS WEEK IN THE BOND MARKET WAS WHAT HAPPENED IN NEW ZEALAND. THEY HAD TO TAKE UP A LONG READ AND THINK ABOUT THE END POINT.
IT WAS 2.50, THEY POSTED OUT TO 3.25. CAN YOU IMAGINE IF THE FED HAD TO DO THAT ON MARCH 16? 75 BASIS POINTS. MATT: FORTUNATELY, I DON'T THINK THEY WILL HAVE TO. THE MARKET IS TELLING YOU
LONG-TERM RATES WILL NOT GO OUT THAT MUCH. YOU ARE LOOKING AT 2% ON 10S. THAT WOULD NOT BE GOOD FOR RISK ASSETS. THE MARKET HAS GOTTEN COMFORTABLE WITH THIS IDEA OF A SWIFT MOVE BY THE FED, 6, 7 HIKE THIS YEAR, TWO OR THREE NEXT YEAR, AND THEN ONE OR TWO MORE AT MOST. THAT GETS YOU TO
2.25, AND THAT IS IT. I AM SEEING A LOT OF THINGS OUT THERE THAT ARE PROVEN TO ME THAT THERE WILL BE A LOT OF TECHNOLOGICAL INNOVATION THAT WILL DRIVE WAGES. YOU WILL ALSO SEE A LOT OF INPUT COSTS BE IMPACTED BY IMPROVED TECHNOLOGY.THAT IS WHAT IS EVERYONE IS SPENDING THEIR MONEY ON.
THE FED, I DON'T THINK THEY HAVE TO WORRY TOO MUCH ABOUT RUNAWAY INFLATION. WHAT I AM SEEING RIGHT NOW IS JUST GETTING BACK TO NORMAL. THAT IS WHAT EVERYONE NEEDS TO DO, GET BACK TO NORMALIZED LEVELS FOR EVERYTHING.
AFTER THAT, I DON'T THINK WE WILL HAVE TO TAKE IT MUCH FURTHER. JONATHAN: THERE IS A BIG BET ON THAT, THAT THAT WORKS OUT. I KNOW LOAN INVESTORS HAVE BEEN SHOUTING AT YOU. IS IT TIME TO LEAN THAT WAY? SRIKANTH: OUR VIEW IS WE WOULD STILL PREFER LOANS OVER HIGH-YIELD BONDS.
IT IS STILL EARLY IN THE HIKING CYCLE. THAT IS WHERE THE DEBATE OF THE TERMINAL RATE IS, HOW FAST THEY GO, ETC. THAT MATTERS BUT THERE WILL BE A TIPPING POINT WITH RESPECT TO THE MAGNITUDE OF RATE HIKES, BUT FOR NOW IT FEELS LIKE MORE OF A DURATION PROBLEM RATHER THAN A CREDIT FUNDAMENTAL PROBLEM.
FOR NOW IT IS THE RIGHT CALL TO HOLD ONTO LOANS OVER HIGH-YIELD BONDS. JONATHAN: MARILYN, YOU AGREE? MARILYN: WE LIKE LOANS AT THE MOMENT. WE ALSO LIKE INVESTMENT-GRADE.
IN THIS ENVIRONMENT, WITH A TECHNOLOGY THAT MATT MENTIONED, THAT WILL BE KEY WHEN YOU LOOK AT AREAS OF TECHNOLOGY THAT WILL WORK TOWARD TAKING SOME OF THE HIGHER COSTS OUT OF PROBLEMS IN THE LABOR MARKET. WHEN YOU LOOK AT CASH GENERATING BUSINESSES, LIQUIDITY, THAT WILL ALSO BE KEY IN THIS ENVIRONMENT. JONATHAN: JUST SOME HEADLINES. THE BRITISH PRIME MINISTER IS READY TO SANCTION PUTIN AND LAVROV. VARIOUS REPORT THIS MORNING. SEEING A LOT OF REPORTS AROUND THAT.
JOE BIDEN DID HOLD A SECURE CALL WITH THE UKRAINIAN LEADER TODAY FOR ABOUT 40 MINUTES. JUST A SET OF THE HEADLINES ON MY SCREEN AT THE MOMENT. STILL AHEAD, THE WEEK AHEAD FEATURING CHAIRMAN POWELL AND THE PAYROLLS REPORT. JONATHAN: LIVE FROM NEW YORK CITY, I'M JONATHAN FERRO. THIS IS BLOOMBERG REAL YIELD.
COMING UP, PRESIDENT BIDEN'S STATE OF THE UNION ADDRESS ON TUESDAY. PMI OUT OF EUROPE, THE U.S., AND CHINA. FED SPEAK, PLUS CHAIRMAN POWELL TESTIFIES BEFORE CONGRESS ON WEDNESDAY AND THURSDAY. CLOSING OUT THE WHEAT WITH YOU AS PAYROLLS REPORT ON FRIDAY. THE UKRAINIAN FOREIGN MINISTER HAD ON TWITTER MOMENTS AGO SAYING HIS CALL WITH HIS ITALIAN COUNTERPART, FULL SOLIDARITY WITH UKRAINE. ITALY WILL SUPPORT BANNING
RUSSIA FROM SWIFT. THAT EFFORT IS STARTING TO BUILD A BIT MORE. LET'S BRING IN THE PANEL FOR SOME FINAL THOUGHTS. CAN WE START WITH NEXT WEEK AND WHAT YOU ARE LOOKING FOR FROM THIS CHAIRMAN AND HEARING? MARILYN: WE ARE LOOKING TO HEAR IF HE MENTIONS ANYTHING ABOUT UKRAINE, RUSSIA, IF SANCTIONS WILL HAVE AN IMPACT ON POLICY. ALSO LISTENING FOR ANYTHING ABOUT INFLATION AND THE TRAJECTORY OF THAT. BECAUSE WE HAVE THE FED COMING UP, IF HE HAS ANY THOUGHTS AROUND THE PACE, TIMING, IF ANY OF THE ISSUES OVER THE LAST TWO WEEKS WILL IMPACT THEIR TRAJECTORY. SRIKANTH:
I THINK IF THERE IS ANY MEANINGFUL DISCOMFORT WITH WHAT THE MARKET IS PRICING IN, THAT IS THE LAST OPPORTUNITY THAT POWELL HAS TO EXPRESS THAT. TO THE EXTENT THEY WANT TO PUSH BACK MORE AGGRESSIVELY AGAINST 50 BASIS POINTS OR TALK ABOUT THE MAGNITUDE OF RATE HIKES, ANY KIND OF INDICATION WITH RESPECT TO WHERE THEY ARE VERSUS THE MARKET WOULD BE THE SIGNAL TO WATCH OUT FOR. THE SECOND ELEMENT IS THE BALANCE SHEET SIDE OF IT. DEFINITELY WORTH WATCHING FOR ANYTHING ON THAT. MATT: ALL OF THE ABOVE AND THE
BALANCE SHEET WITH SOMETHING I WOULD LOVE TO HEAR MORE ABOUT. THE BIGGEST TAKE AWAY NEXT WEEK WILL BE 50 OR 25. YOU COULD SET THE TABLE FOR 50 BASIS POINTS IF YOU WANT TO.
IT IS RIGHT ON THE COST ALREADY, YOU MAY AS WELL PUSH IT OVER TO 50. JONATHAN: THREE QUICK QUESTIONS. THREE QUICK ANSWERS. MARILYN, 50 OR 25 NEXT MONTH? MARILYN: 25. MATT: 50. JONATHAN: INTERESTING. SRIKANTH: 25. JONATHAN: WILL THE ECB HIKE BEFORE THE YEAR IS OUT? YES OR NO? SRIKANTH: YES. MARILYN: TOUGH. MAYBE YES. MATT: NO.
JONATHAN: FINAL QUESTION, THE LOW FOR THE 10-YEAR JUST OUTSIDE OF 1.50. HAVE WE SEEN THE LOW FOR THE 10-YEAR THIS YEAR? MATT: 100%. SRIKANTH: YES. MARILYN: YES. JONATHAN: THANK YOU VERY MUCH FOR BEING WITH US. MARILYN WATSON, MATT BRILL,
SRIKANTH SANKARAN. SEE YOU AT THE SAME TIME, SAME PLACE NEXT WEEK. THIS WAS BLOOMBERG REAL YIELD. . THIS IS BLOOMBERG. ♪
2022-02-26 16:38
