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tv   Bloomberg Real Yield  Bloomberg  May 6, 2022 1:00pm-1:30pm EDT

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>> live from new york city to our audience worldwide, bloomberg real yield starts right now. ♪ jonathan: investors grappling with inflation risk. a week filled with volatility. we begin with a big issue, a missing market -- a messy market. >> volatility markets are incredibly high. >> volatility in the bond market has been going up. >> there is. little risk appetite. >> people are negative. >> it is all part of the same
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story. >> the mess in the market is about liquidity. >> tightening financial conditions. >> financial conditions are tightening abruptly. >> we have not priced liquidity risk, credit risk. >> higher rates, higher spreads, higher mortgage rates. >> yet got to be patients. >> people want to play safe. >> we are holding our cash with both hands. jonathan: joining us now to discuss is tony rodriguez and jonathan. let's just reflect on the volatility this week and equities and bonds. i am looking at the nasdaq 100 which is flat on the week. the s&p 500 is flat on the week. your reflections, your reaction to this week? >> the roller coaster is giving me motion sickness. i cannot keep directionality on
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rates or equities straight. like your introduction was saying, it is a combination of many fact. it's not just one thing, it is financial conditions -- every component of financial conditions is showing off tightening. it is higher real yield. it is across the board. it is hard to get a handle on what exactly is going on. i think the bank of england was the first central bank to a knowledge they might be heading into a stagflationary environment. the question for the u.s. and europe is are we headed the same way? jonathan: tony, what is your take? tony: week on week it is flat. the volatility is clearly extraordinarily high. liquidity is declining and i think all of that comes down to the fact that we are may be
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close to peak uncertainty around what the economic data is going to be telling us, particularly on the inflation front and uncertainty around what policymakers are going to do in response. we found out they want to 75. the market is pricing in two or three more 50's. we don't know if the fed be dialing back to 25 or continuing on this path where 50 is the new 25. jonathan: george? george: i think we also have to remember that many of us have not seen this sort of volatility before and the markets are changing. it is the liquidity, the financials mentioned, and knowing how to trade here. it is a different market. jonathan: it is a new regime and you don't see the fed blinking. what would make them blink? george: it would come down to the credit markets. repair meant has not happened
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yet. more drastic tightening. jonathan: some people think this fed made a mistake this week. here's what they had to say earlier on. >> i worry the federal reserve has tried to be too nice to markets, be it transitory inflation narrative that lasted too long, be it what happened on wednesday. you cannot come on tv and speak about all of the uncertainty and then rule out a search and policy response, 75 basis points. jonathan: he said it, the market -- quite quickly. someone said this this morning, powell's mistake was using financial conditions maturely. the markets rallied hard without sufficient information and conditions in which a rally could not state. subadra, you think chairman
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powell and this fed made a mistake with communication this week? subadra: not really. if you look at the division among the bank of england -- and i think their meeting was quite interesting -- there is a range of opinions about what the right policy prescription is going forward. that is exactly the debate i'm sure the fed is having even though we vote to raise rates by 50 basis points was unanimous. you're getting distance from people like powell. in the u.s., the economy is fundamentally strong. i think raising rates by 75 basis points would be an admission from the fed that they have actually committed a policy mistake and that they should have raised interest rates sooner. a more gradual 50 basis points at the next several meetings
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could accomplish the same as raising rates by 75 basis points. that is still an option for them. i don't see anything that came out of the press conference as being a misstep. jonathan: tony? tony: i don't define a fed policy mistake as what occurred in default. they missed how aggressively they would have to respond to inflation, they were missing the signs of how it was accelerating. what happened at the meeting was more a mistake by the market and its interpretation by the fed. it was confusing that we saw that big rally following press conference. obviously the reversal is incredibly aggressive. the mistake was in the fall. they are still digging out from that. they are trying to earn back from the market credibility which is crashing into the fact that there is a tremendous amount of uncertainty so
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forecasters are all over the place with regards to what they think the fed will be doing towards the end of this fourth quarter. george: i will have to go with mohamed. at this point, being top is how you fight inflation and they fell back into their comfort zone. 50 is frowned upon and they're going to deliver several of them. powell is still trying to thread the needle where the bank of england is much more transparent and they are realizing there is a risk of recession and the fed is still trying to be a strong economy. the fed is behind the curve, they have to hit it hard. if they don't, they have a risk of falling to stagflation or inflation. being realistic is operably the best at this point. jonathan: explain what is
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happening further down the curve , the fact that we keep breaking out yields higher. george: the market is calling the fed out by saying if you hold off on hiking, we will introduce more -- if the fed wants to use the front end of raising rates as their primary channel, they better hit it hard. trying to do that in little bit, real rates rising up. risk premiums are getting reintroduced to the markets. if the curve steepen's here, i think they have an issue. jonathan: this is where i have struggled, subadra, if you haven't. the fed is building rate hikes, we had a big today. the longer end, this is where things got confusing april into may. a lot of people got comfortable with the idea of a flatter curve, an inverted curve as we go into growth risk. the federal reserve gets more aggressive. that has not happened.
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you had a target of a tenure burned of 125 on a three year treasury of 325. can you help us to understand what you used to understand where the markets are going? subadra: that is a very interesting question. the curve had gotten way too flat. you are saying a steepening of the curve. you mentioned the front and is very -- so there is not that much room for yields unless the hiking of prices changes. it is like what happened to global bond yields. bun deals -- wound -- bund yields are starting to hit the 125 target of this year. you are to see that the bond yields in general are starting to fight their respective central banks and starting to push higher. bund yields have to move higher,
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then you see treasury yields move higher on the backend as well. jonathan: you agree with that? subadra: -- tony: i agree with that largely. when you look at the backend of the curve, you look at the mortgage market with an increase of over 200 basis points, you will see a more significant impact on the housing market from that as we move into the third quarter and the fourth quarter this year. financial conditions have gotten pretty tight which i think will ultimately put a little bit of a lid on how high we can go from here on the 10 year. we will end the year pretty close to these levels. we might see higher levels over the next couple of months. i think that will reverse back into a flatter curve and one that recognizes financial conditions have gotten tight relative to where long rates are. jonathan: when it comes to this topic, george, where are you now? george: i think we are in the process of topping out.
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325 was the former high in 2018. it is possible we go about 325. much more than that, we have a big problem on our hands. i agree that the global rate story is about the driving it. at some point, it gets to a point where it is really going to hurt. tony is right on the housing sector. i think there is going to be a where the real rate is basically the eighth or ninth inning. it is only catching up to equities and credit. once they finally go, then we have a rally in the long end. jonathan: you say the damage is already done here, we have made that move. now you say there is more damage to come in credit and equities, but ultimately it is done. the hard landing is coming, it is just a matter of time? george: i think that is right. if the fed blinks in the middle of december, they will only blink if the credit market gets
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hurt or predicates impaired. until then, the fed is going to keep going until they break something. we will -- jonathan: we will talk about that. the -- issue is going complete the assignment in months -- for the first time in months. that conversation, next. ♪
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jonathan: live from new york city, i'm jonathan ferro. this is bloomberg real yield. we kick things off in europe with one of the slowest weeks of the year. volume falling short of estimates. in the u.s., high-grade bond sales poised to missed
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estimates. ups issuing the biggest deal so far, volume about 60 billion. the u.s. bond market frozen following the slowest pay drop in over a decade. the first week without any new issues since mid-february. we caught up with like rock making the case for -- credit. >> subparts of the get come like investment grade credit, aaa asset backs, you don't have to take a lot of risk on equities, high-yield. we have been starting there. give me two year investment grade, three year investment grade, aaa at 4.5%. those assets are pretty good. jonathan: still cautious stuff from rick read. hold your nose, cover your face, dip your toe in. tony, how difficult this moment is, a very big cash position but
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he has looked at it back up in yields and seen an opportunity in the investment grade. do you share some of those views? tony: some of those views, for sure. we are advocating a very moderate risk posture and a versa fight exposure to risk asset. this is not a major buying opportunity. i think spreads could widen over the next few months. in terms of where they find that opportunity, i would agree with what rick said about high-quality asset-backed, short medium area. those are attractive. i think investment grade credit, short intermediate make sense. looking to the high-yield market, the leverage loan market, very cautious about down the stack. the higher segments of those markets have plenty of reasonably priced and attractively priced opportunities in our mind at this point given the strong
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fundamentals supporting them. jonathan: it is hard to say we have realized the spreads of the credit market. we are trying to figure out what keeps spreads so contained given what has been happening with equities and this whole fear about the future. you talk about fundamentals, people are gripped by fear. why are spreads still so well behaved? tony: i think it is two things. one is that the market right now in credit is still only rest for a soft landing or a very shallow short technical recession. that is because the fundamentals are so strong. looking at high yields is kind of the poster child for credit risk. now it is running below 1.5%. remaining below 2%. this is versus historical averages of three 5% to 4%. cash flow is strong, leverage has come down, debt service
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coverage shows are attractive. we are going into this fed tightening cycle in the strong his positions in numerous cycles from both a corporate credit standpoint and a consumer credit stand. jonathan: george, you give me the impression there is more -- you think there is more pain to come here. why is that? george: we have had a terrible q1, q2 has not started off that great. the question is, where does the capital come from and there are still outflows? everybody talks about the rebalance. the fed is not making treasuries and mortgages more attractive also to all of the other credit products. i have said before, they are breathing life back into these high quality assets at the expense of other assets. once there is a big capital
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formation and distressed buyers show up in ig, i don't think it is -- enough. high-quality names makes a lot of sense. other than that, it is still defensive mode. jonathan: you since this is a whole new world have not gotten our hands around yet? george nudged us in that direction about 10 minutes ago, that we have broken out into a new market regime, that the story of the last 10 to 15 years in the market is lower yields. do we have to get used to high in the treasury market just for the next six months but maybe for the rest of the cycle? subadra: it is really hard to know right now where things stand, that we are actually going to shift into a new hire rate regime. i think oddly speaking i agree with what tony was saying as
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well as what rick mentioned. four months -- for once you are getting a decent amount of return to put money back in fixed income. we discussed ad nauseam about the 50-40 portfolio not working anymore. if you are fully invested in equities, it might be time when yields start to be very attractive in the bond market world. you might want to allocate away from risky assets into higher-yielding bonds. of course, there is risk associated with this. credit spreads could continue to widen as the fed raises rates. i don't see this yet as a credit crisis of sorts. corporate profit margins are still healthy. balance sheets are strong. i think this might be any opportunity to buy. jonathan: to that went, most people come on the show and talk
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about a fed that is being retired, buried, one not coming anytime soon. does that speak to that, that this fed will not speak to financial conditions yet because there is not a reason to? subadra: i think it is too early in this cycle. the u.s. is not facing -- the fed means for a meaning slowdown in growth or recession the next 12 months. their task is to be focused on inflation and to try to raise rates as quickly as possible. down the line, say september, you sense a meaningful slowdown in growth, the way they -- they're going to be concerned about employment as well as financial conditions. right now, it is optimum for them to continue to raise rates. toward the end of the year, they
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will have to rethink and see if the current trend -- going forward. jonathan: a quick final word, george. george: all i know is that the fed is sickly faulting on their third unofficial mandate which is financial assets. they use qe to really engender recovery in the last cycle. they have the problem of inflation being high and i think this is challenging them in a way they have not done in decades. jonathan: still ahead, the final spread and the week ahead. a busy week with a big one coming up. cpi is just around the corner. ♪
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jonathan: live from new york city, i'm jonathan ferro. this is real yield.
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next week gets busy with a ton of fed speak. the final spread look something like this, plenty of fed speak with mr. bostic, all on the docket. we get cpi data out of china and germany. germany getting even more interesting with ecb official after ecb official talking up high interest rates. then watch as u.s. cpi comes on wednesday. i have the estimates in front of me. the median is 8.1. bfa at 7.9. marquis at 8.1. hsbc also at 8.1. let's get to the rapid power -- rapidfire round. really quickly, have we seen the two year high for the -- have we seen the high for the two year yield? subadra: no. tony: no. george: no. jonathan: this is one i ask
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after week, will the fed speak with a 1, 2, 3 handle or higher? george: two handle. tony: three. subadra: three. jonathan: cpi next week where will we be your end? pick any number. george: 12.4. >> tony. tony: core cpi, 4.25. jonathan: subadra. subadra: about 4%. jonathan: if three of you, thank you so much. enjoy your weekend from mcgurk city. that is it for us. we will see you sometime next week. this was bloomberg real yield, this is bloomberg tv. ♪
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>> i'm mark crumpton with first word news. the risk of lingering symptoms after covid-19 may depend on
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which strain of the virus you got. a new study found the odds of reporting fatigue, shortness of breath, and other symptoms after recovery were 50% lower than people who had the omicron variant compared to those who were infected with the delta strain. officials say most long covid symptoms do not seem to be life-threatening. russia may soon be facing more sanctions from the united states and its allies. bloomberg has led a group of seven leaders will discuss potential new measures on a call on sunday, the talks, as the european union is preventing -- is preparing a package of sanctions that would block russian oil imports by the end of the year as well as band vessels and services such as insurance needed to transport oil to third countries. israel is set to advance plans for the construction of 4000 seller homes in the occupied west bank. it


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