tv Bloomberg Real Yield Bloomberg May 21, 2021 1:00pm-1:31pm EDT
>> earlier this year, it was we should not even be talking about it. >> the fed has been consistent. now they are talking about talking about it. >> they explicitly put in there a discussion on tapering asset purchases. >> the fed is just sitting on the market. >> we have entered a different world where genuine inflation concerns are mounting. >> inflation is a real risk. >> a genuine concern about financial stability. >> the risk of policy is rising. >> they are running the same monetary policy as 14 months ago. >> move away from emergency conditions. taylor: joining us now is gershon distenfield and george rusnak. george, let me start with you. the fed is talking about tapering even though a few months ago, i thought we were not even thinking about thinking about thinking about tapering. where you surprised?
george: i was happily surprised. they should be talking about tapering. keep in mind, what are we talking about? we are not talking about tapping the brakes. we are talking about letting off of the gas and little bit. when you are buying $120 billion per month, you should be starting to talk about tapering. the timing around that is probably going to be around august, maybe in september and maybe toward the end of the year. if we do it sooner, that is better. it is important for investors to get in their minds, in the past where the fed has waited, they are waiting until they see inflation in the rearview mirror. that is the key point and the question is is the market going to allow them to do that. taylor: gershon, you have a similar point. you are looking at the fed to begin tapering.
how does the market respond to that? gershon: i think the fed did a really smart thing. they gave themselves optionality. as high as what the cpi was a couple of weeks ago, the near-term data is not the issue. we expected, as demand has come back, supply chains are still broken, we expected inflation. what the fed has done is let's see where we are later in the year. how are the markets going to react, who knows? i am mystified by the fact that they -- that it has gotten easier in that we have seen breakeven rates spiked without a change in yields. yields are lower as the economy is recovering. that is something the market is going to have to work out. taylor: noelle, what do you make
of that? i was surprised by the equity volatility and bonds appear to be well behaved. noelle: we have been looking at it over the bigger picture. in june, we thought maybe they will start to talk about tapering. again, they want options. if we look at history, even though we only have one taper to look at, they did not use several meetings to discuss it. they want to be able to announce tapering. we think the data for now will point to later, even though we expect strong growth. we think that the fed will not be quite confident. the discussion is going to continue and that will give them the option to say we are tapering, this needs to happen, and that is that. taylor: some of the about-face came from kaplan. raphael bostic weighed in on the
volatility, expecting more along the way. rafael: i am expecting a lot of volatility. in the last several months, we have had data points that have not met up with expectations. that is to be expected. we are going to have to do extra work. taylor: george, are you expecting volatility? how do you manage volatility? george: you have to expect volatility because your year-over-year comparison is low, but your baseline effects will be crazy. as we resume the normalcy, you are going to have on venus in the data. you are definitely seeing some pumping this in the data. overall, you are seeing positive growth, positive inflation. employment took a hit, but it is going the right way. that is what we are going to have to see. it is not each specific issue, but the larger picture and the
duration of the direction, which we think is positive. taylor: gershon, one thing that stood out to me is we had a chart showing correlations of equities to bonds. they are pretty high. how do you think about bonds in this inflationary environment? is it the appropriate hedge? is it to -- too correlated to hedges? gershon: the higher-yielding, corporate high-yield, emerging-market debt, is usually correlated. what is the definition of volatility? it was interesting to hear him say that. equity volatility has been muted in periods rising inflation while underlying government bond yields tend to be volatile as we do not know the magnitude of the inflation that is yet to come. and then, you look at the third leg of that school -- stool,
emerging-market debt is going to continue. rates will be near zero for a long time. there is an insatiable demand for yield. taylor: noelle, do you agree with that? does the 10 year appear to be risk-adjusted? is that an appropriate risk-adjusted reward where we are at these levels? noelle: we think it is going to be pressured higher and that is on our growth and inflation view. it is going to be pressured higher. the curve is going to be pressured steeper. we have quite a bit of room to go in the 10 year and that could potentially weigh on right-sensitive assets -- rate -sensitive as it. it makes sense to stay neutral
while taking incremental risk throughout. taylor: all of you are trying to front run democratic conversation, which is happening in the -- trying to front run my credit conversation. how do bond yields respond to a market that does not feel like it is transitory, but it seems it is? noelle: we continue to think it is transitory because we are looking at underlying data. it is largely coming from supply -changes option. if you look at out-of-town lodging, that is coming from a reopening and those are not things that we saw pre-pandemic. these are things that we expect over the summer as unemployed reduces, as we get the supply chain disruptions reducing. these are transitory things and
we don't have a lot of data or confidence in the data that these things are here to stay and that is what the fed is going to hang their hat on. taylor: do you agree? his inflation transitory? george: the bumpiness of the data will be in inflation. we will have some periods will things will spike and calm down. inflation will be picking up significantly. is it transitory? we think so. it could go even into 2022. taylor: in a bloomberg opinion piece, "not only does the u.s. central bank appear to be lagging behind developments and the consensus among other central banks, but it is being held hostage to monetary framework that risks being ill-suited for a covid disrupted
world." gershon, give us our final take. also writing that the fed's estimates seem to be off in a range of scenarios in which they could not enable the fed to be more flexible. how are you thinking about a fed that might be looking at a wrong estimate instead of a range of scenarios? gershon: the fed does not know if inflation will be persistent. i agree, it will be transitory. noelle mentioned used cars. it is flights and hotels. the supply-side, what it comes down to is is the supply-side of the u.s. economy resilient enough? we are betting it is yes, but the fed is saying -- they are not saying it explicitly, but implicitly, the fed is saying we are not sure, we want to keep
almost $29 billion pricing before petering out amid rising volatility. companies selling nearly $13 million of debt in the u.s. jumped on market this week. demand remaining for new issues ranging from acquisitions to long repayment. noelle corum, gershon distenfield, and george rusnak still with us. everyone is pushing into the lower rated sector. is this a risk on signal or is it fomo? noelle: a lot of this has been happening because we have been seeing lower rate volatility. if you look at the fed differential between single b and triple c, they are at very extreme loans. -- extreme lows. all of the upgrades are priced
in at this point so it does not make a lot of sense to put your best there. it makes sense to put them in double bees, which have lagged this year. we can talk about why. they have lagged this year and we think there is price appreciation for not only crops, id investors, crop investors, but also high-yield investors. taylor: george, do you agree? we have a chart showing what noelle is talking about. performance has lagged on a year-to-date basis. are the appropriate risk-adjusted returns still there? george: in our case, they are not. we are -- we have pulled back on high-yield. we were favorable at one point. we moved to neutral on them. it is important, it is a credit specific market. we agree that the double b's might be some good
opportunities. you get into more challenges. we are looking at from 285 to 310 this month. we are looking at lows that have researched -- reversed from last month. we are seeing tremendous demand. that demand is the lifeblood for high-yield and will allow us to go forward, which is the reason why we are neutral on it. it is still good, it is just not as attractive as it was several months ago. taylor: gershon, square something with me. some of the calls i have been hearing is a lower modified duration and with investment grade, you have to take on that duration risk. while i know that the spreads are compressed and you are not getting as much of a return, is it the lower modified duration at play and that is the case for high-yield? gershon: the lower profile helps if rates will be rising, but it
raises an important nuance. let's call it the double b and triple c segment. you have a lot of older issuance, but you also have lower dollar price. that has much better convexity. you want to buy the much lower dollar priced paper. it has over $300 billion of that paper in the triple b lens that has better total return prospects over time. investors have to pay attention, especially in high-yield. i know it is not like mortgages, but most bonds are callable. one of my pet peas, i think the spread relationship between triple c's and single b's is irrelevant. it is distorted. all of a sudden it looks like your spreads have tightened,
even though the quality of the overall universe has gotten higher. i am not going to make the case that they are incredibly cheap, but we think we are cleansing out of lower rated companies. a lot of restructuring, the weaker players are gone. it might not be as dangerous as some might think. taylor: where do you go? what do you like? noelle: we like the triple b play. we also like leveraged loans. we think the upgrade cycle is still going to be relevant there and demand is there. they did underperform in april when you saw a rates pullback, but still posted positive returns and the demand has been there throughout the year. we think it is a good play, especially if you are sensitive to that rates duration. 0.25 relative high-yield is over three. some did you think about --
something to think about. taylor: is there a risk that all of the supply that was going to come has already come because yields have been so low? i have been saying this for the past decade. yields are so low, everyone has issues already. is there a risk that the supply is gone and demand continues to outweigh? gershon: you are always going to find issuance when there is demand. we think that is going to continue because you are seeing a tremendous amount of demand. if that pulls back, that is where concerns start to happen. from an issuance perspective, i don't think there's anybody that will look at their ratio and say that at these levels, it is not opportunistic to potentially issue debt. taylor: final comment, do we still see a lot of new issuers come to market to take advantage of these low yields? gershon: i agree with george. when there is demand, supply gets created.
when that happens in abundance, bad things tend to happen. it happened in the mortgage-related market. it happened in the energy space. there was a lot of demand in 2014, 2015. existing triple c's might not be so bad. you have to be careful because, because of the strong demand, marginal companies are going to be able to come to market and you have to be careful about where you invest. taylor: we still have one more block and that will be the final thread. the week ahead featuring a virtual meeting of g7 finance ministers and central bankers. that conversation is next. this is bloomberg.
brussels. the fed remaining in focus. plus, there is no shortage of economic data in the united states. new consumer confidence, durable goods, jobless claims, personal income and spending all throughout the week. noelle corum, gershon distenfield, and george rusnak still lets us. let's go down the line. anything have the ability to potentially move the markets here? noelle: i think the fed rhetoric will sound similar. there is not of data to change -- not a lot of data to change that picture. consumer confidence is something we will be watching. we have jobs in the week after, which will be important to make sure we are seeing that progress towards lower unemployment. over the coming months, the main thing we will be looking for out
of insulation is in the underlying data, making sure that data is still looking to be transitory related to the reopening of the economy. all of those things. if we do see a bump in wages and shelter, we will pay attention to the longer-term trends and we think it is sustainable, which is something to note. taylor: gershon, what are you keen on hearing? gershon: i don't think a lot will come out from the data. the big issue is not what the data tells us today. we are expecting high inflation, robust recovery. is the economy going to get to some equilibrium? what we should be looking for on a global basis is more of a divergence of central bank policy. for a long time, all of the major central banks were keen on keeping longer-term bond yields low and using yield curve control to do that. that will be the case in europe and japan. it makes sense.
but the fed has made very clear, it has not made it clear explicitly, but what they are telling us is we need optionality, the ability to bid it -- to fit -- pivot. taylor: george, i want to ask you a rapid-fire question. do we get a 10 year yield percent by year end? george: we think it is likely to get to 2% to two point 25%. gershon: closer to two and a quarter. taylor: that was boring. george: i would stick with triple b investment grade right now. taylor: noelle? noelle: high-yield. taylor: gershon? gershon: i like high-yield.
taylor: an odd inflation, are yes across-the-board? that goes down in history as the worst rapid-fire ever. noelle corum, gershon distenfield, and george rusnak thank you for joining us on this friday. that does it for me. jonathan ferro will be back with us. this was bloomberg "real yield." this is bloomberg.
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