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tv   Bloomberg Real Yield  Bloomberg  May 20, 2022 1:00pm-1:30pm EDT

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jonathan: bloomberg "real
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yield." equities sinking toward a bear market, driving treasuries to a second week of gains as chair powell commits to bringing down inflation. we begin with another week of messy markets. >> acids are taking on the chin right now. >> everything a headlight is negative. >> markets are acting as if the recession is coming. >> they will hike another 50 basis points in june and july. >> consumer narrative is falling apart. >> recession is coming at some point in the fed -- >> everyone is going to be sorely disappointed. >> i think you're seeing now is a flight to quality. >> opportunities emerging. >> i understand the argument for 320. >> 3% across the curve feels
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like good value. >> i still think the capitulation is to come. >> the next several quarters, the fed continue to lean even more hockish. >> the bond market does not eek and yields something changes. jonathan: joining us now, frances donald. george bory and jim caron. equities, bear market territory. the one big question, have we seen the worst of this? >> probably not. every leading indicator we have at this economy says it is going to get worse. when we are listening to the federal reserve, there's nothing much to indicate a pivot coming in the next few weeks. that does not preclude factors that are non-macro from giving us bounces, little bit of movement here. if you're relying on the macro side of the picture, there is very little support in the next few weeks. jonathan: jim caron? >> i think it is interesting
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right now because it was a lot easier when we could blame the decline in risky asset prices based on higher interest rates. we could always blame higher interest rates for all the problems. today it is getting a little more difficult. what it is suggesting is the markets are saying the supply shock and the fed's response to inflation is now creating a demand shock. that is weakening growth, growth expectations are coming down and that translates into earnings and earnings growth rates and potentially higher default risks. i would argue and i agree with what frances is saying, the worst is probably still ahead. as we think about deterioration of demand going forward, that is going to hurt fixed income prices probably more in terms of spread and credit riskiness. jonathan: george bory? >> what could be topping out is inflation, at least the right of it and maybe a bit of pause. pause would be good.
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what you've seen of weeks, fixed income markets starting to sniff out that bond and moderation, a little slow down inflation will take the edge off fixed income markets. i fully agree with my colleagues, the economic impact and perhaps the financial performance from an operating standpoint is still to come, but financial markets are very bearish and pricing in a high probability of a continuation of high inflation and now increasingly higher probability of a hard landing. those probabilities might be too high in the near future. i think that is where the market could see some consolidation over the coming weeks. jonathan: frances, i know you have a pretty strong view on slowing growth specifically. can you speak to that now? >> one of the things that happens that i don't feel as
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well permitted is we are still in an inflationary market but the nature of the inflation has changed quite a bit in the last few months. i agree we are going to see a decline in expectation but the problem is we move from covid inflation which was discretionary items, goods, toward conflict inflation, food and energy. much more difficult to have a monetary policy response that is effective. as my colleagues have noted, is going have a bigger drag on demand. even though inflation is going to sell mathematically moving forward, i markets are now than i have been for the past year. this is why we are rotating from the inflation concern toward the growth concern, suspect the fed will have to do that too, but the bar is very high. jonathan: frances, what is the threshold for federal reserve capitulation, the point at which they back away? we have heard all the fed speak
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the past couple of weeks. they have not mentioned the equity market. if they have, they seem to be comfortable with what is happening. they're not mention credit. if they have, they seem to be after but with what is happening. what is the threshold for them to back away? >> probably need to see two things happen and the first one i think is inflation expectation. the central bank can't say directly, none of them can. they cannot come back this month, next month, the month after that. nothing they're going to do is going to bring up food and energy prices in the near term. there worried about long-term expectations. those have to continue to stall or decline. watch the initial jobless claims. starting to show us employment might be getting impacted at the margin. their bargain is -- they're going to have to get concerned about that. i don't think we see that for another couple of months for them to really feel secure that a pivot is ok and going to be well accepted. jonathan: jim, is this believe
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what we're seeing play out in front -- financial markets, equities, credit worldwide is a feature of policy, the objective. do you think this is the objective? >> you are asking a very good question. i hate to say this way that we may be on the verge of a policy mistake. we have to think about what the policy reaction function is for the fed, how they actually respond. what we're seeing is the supply stock -- shock has stayed around long enough it has become something a little more permanent, which is wage inflation. what the fed is effectively trying to do is bring down wages. when powell spoke come he made this solution and essentially said inflation is high and the reason is because high wages. he's releasing the bubble is in the jobs market -- really saying is the bubble is in the jobs are could. whip to slow down the economy and of such that we get wage
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inflation lower. as you bring that lower, when you hit consumption and consumers eventually -- we are not there. here is thing, can the fed impact wages right now? we have such a tight labor market at this point. there policy reaction may be hurting other asset prices, doing damage and economy, but it may not be going exactly after what they're trying to solve, which is wage inflation which means they're just going to continue to push rates higher until they get wage inflation lower. when you say where did they back off? i don't think they are is concerned about the equity markets. the credit markets have hung in relatively well. no disaster whatsoever. they will keep pushing until they get wages lower. jonathan: if they respond to the data and not the market, they will be late. george, i heard earlier this federal reserve would be looking to jump. the most recent jolt status is
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may 20. if they're waiting for jolts to come down, waiting for the labor market data, that is -- if you don't respond to the market and this is the objective -- george, are going to do some real damage, are you? >> there's the economic considerations which actually provide the fed with a fair bit of time to react. you're talking about inflation, employment reports, growth. these tend to move over long and relatively sort of slow-moving reactions. the fed has been very clear they're going to move until they see in economic consequence to their movement. there is big like times between policy changes in the actual economic implication. i think more importantly near term, the question is, if the fed going to be forced to become more dovish because capital markets are the financial markets actually start showing signs of either cracks or shutdowns in some cases.
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the fed can get forced to the table to sort of moderate tightening or desire to tighten financial conditions when the capital markets can no longer absorb it. sort of like technical consideration. it is an important one because the fed, we know what their mandate is. prices, employment. but they also need to keep the financial system functioning. as we've seen in prior crises, the fed will take their foot off of the brake pedal if capital markets seize up. we have not seen that to date but the quiddity conditions, specifically fixed income markets, are getting worse and worse. this is material and growing risk that doesn't get nearly as much airtime, and it is going to get worse as we both go into the summer, less liquid month, and if it continues to turn the
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dials. that is the real risk. do capital markets crack because of the tightness long before the real economy does? jonathan: george, we have time together to talk about it. financial conditions are tightening. that was the stated goal, that is the goal. that is how you get monetary policy into the economy. that is the goal, the objective. let's talk about market functioning. companies can come to the fixed income market, raise capital. we are seeing response. i knew your mind, george, run through it how you would gauge situation that you think is more troublesome. >> i think the observations within the fixed income market, an over-the-counter market. you have to find a buyer for every seller and vice versa. we look at this by differential between where you can buy and sell and those spreads widen, means the quiddity is getting less -- liquidity is getting
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less strong, it is getting weaker. we have observed it. we are watching it closely. the second is how much volume can you trade without moving the market? again, another sign of liquidity. that number is starting to go down rather than up. then you go to get the worst case scenario, air pockets, price caps, points in time where it becomes very difficult to execute. that is really not been the case. we are seeing signs of weakness but we have yet to see those types of air pockets or those material gaps and the ability to execute. but as you point out, financial conditions have been tightening and you are seeing spreads widen and the ability to move big volumes through the system is getting more and more difficult. the last point i would make is can companies raise money? well, they can, we have seen the market reopened this week and if a few high heels, but the
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rates at which they're able to raise money at is materially higher reflective of the market and in some cases significantly higher than even their existing debt is being price. this tells me financial conditions are tightening and tightening quickly. that needs to be factored into people sort of thoughts and equations when they think about how to invest in fixed income going forward. jonathan: we will continue this conversation on this topic. coming up, the auction block. junk bond sales on hold. that conversation up next. ♪
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city, this is "real yield." we kick things off in europe with a two day get straight pushing weekly about 44 billion euros, the highest volume in eight weeks. u.s., forecast for the first time in three weeks, 22 deals in the first three days of trading. carnival setting high-yield debt and another was vacant market heading to the slowest masons the financial crisis. sticking with credit, and opportunity and it is messy selloff. -- and a opportunity and it is messy selloff. >> 80 basis points over treasuries, really -- they have almost doubled. they got to that 150 territory, which historically is pricing in pretty high probability session and certainly starts to flash value to us. you get into 160, 70, 80, you're supposed to buy aggressively. the high-yield market i would suggest has similar trends but it is not time to get all in yet into credit. jonathan: jim caron, you say we
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are going from the great reflation to revaluation. have we seen enough yet? >> not yet. i think we are close, though. as michael was pointing out, we have seen a widening of spreads but nothing that we would suggest would be of any historic relationship to what we have seen in interest rates. when we talk about financial, guessing higher interest rates, a stronger dollar. we have not really seen enough pain in the credit sector to start to slow demand growth down to bring it probably inflation lower. look, i look at ig vestment grade credit and say there certain sectors of the market like the financial sector and other areas like consumer staples and retailers, these are areas that are probably going to get a bit weaker. other places like high-yield, for example, leisure, lodging, those are areas that have been improving and are coming up and
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i think those are great opportunities. energy is very good but you have to stay away from other areas like pharma where there is some problems. i say from a broad index perspective, i would argue if we can get closer toward 8% yield and high-yield, and we are close, that is where it starts to get interesting to me. if we get a little bit wider and spread. investment grade, same thing, 25, get high-yield investment grade yields up closer to 5%, that is where it starts to get very interesting to me. i am not willing to take a big gamble on the sectors just yet, but i do agree adding high-quality duration to portfolios make sense. jonathan: equities down about 2% on the s&p 500. a big day considering what we have seen the last couple of months, down more than 20% from the record high in early january. the nasdaq down close to three percentage points. frances, what is interesting about credit, in late 2018, we
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saw spreads aggressively wider. we are starting to see that kick and more recently. interest rate risk and now starting to adjust credit risk. the difficulty people having an corporate is trying to understand whether the story is just starting to develop, where -- if the ending is much further down the line. >> i'm glad you bring up 2018. i agree with jim on so many of his points. often when economists are asked about the credit space, they're as or or if there is a recession no recession. even though i've been in the material slowdown cap or a long time, i don't have a formal economy-wide recession in my model. what we are expecting is there will be segments of the economy that are very much section area we have yet to see that decline. far be it from a macro person to tell you looking from sector to sector but i am with jim on this. the slowdown is coming is still going to be -- it will be isolated to certain areas of the economy and that is where credit
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has to catch up. equities have maybe had a little more understanding with homebuilders and retail discretionary falling much more aggressively than the broad index. jonathan: george, is this where equity leads credit? >> credit does tend to lead. it is the grease on the wheels that keep the wheels moving. as we have just pointed out, yields have moved up pretty dramatically. what credit is telling me today is are the two very simple things. first and foremost, spreads are important. good sort of proxy, a good gauge. at the end of the day, it is just a differential. looking up corporate yields and are they going wider or narrower? as yields go up, the dominant decision, what is the aggregate yield level and what is the price i need to pay to get that yield? when we look at the corporate
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credit market specifically, sectors are important. we spent a lot of time looking at sectors. also, where are you on the curve? long-duration investment grade credit that you can buy sort of $.85 on the dollar -- in italy, coupon is going to be pretty low -- that will create par as we move through time. even if we go into a recession, very, very high probability to pay. so we like that characteristic, that big price differential that is going to add a little bit of appreciation as you move through time. the other end of the specter -- spectrum, low-grade credits which have been hit hard both for right reasons and now for sort of economic reasons -- right reasons and now for sort of economic reasons, double in the markets of the very top end of high-yield, good companies,
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good operating cash flows, nice sector dispersion, and you're talking about yields 4% to 6% type of range. like that as well. so you can kind of create this barbell, very high income at the front end and ice credit convexity it along end, that is a good strategy. jonathan: days like these were people start to get worried coming may even use the "p" word and panic, have built up cash and said repeatedly they want to provide the liquidity in that moment and not tomato. with that in mind, for the people have built up that cash position, for moments like this, what would you suggest they do with it today? wait or do something about it? >> i would start to do something about it at this point. i think we're probably pricing in 75%, 80% of this major repricing we are going through, reevaluation. look, i think interest rates
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rising can explain most of the losses this year in financial assets. now we are in the final stage of now it is about thinking about how much you want as what valuation you want to place on ford cash flows, forward earnings, things like that, what kind of default risk might we get. this is really where, as you said, were people start to get very worried and panicked a little. this is where the bargains started to come into the market. the feds interest rate, no bargains, just trend. we cannot do much about that. at this point, what we start to see is a differentiation across different sectors and we can see probably some of that missed valuations. one area i like to highlight is the mortgage market. with quantitative tightening being priced in, there's been a lot of worrying and mortgage backed securities which have pushed the spreads very high and a lot of the credit that flows off of that, for the mortgages, it is very cheap. you can get investment grade
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rated mortgage backed securities somewhere in the 5%, 6% range, which is really just about valuation, consumer credit is so good, dylan could sees are low. jobs are strong. these are areas people can start to look into. jonathan: jim, thank you. frances donald, george bory, jim caron. your week ahead is up next. ♪
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jonathan: this is "real yield." we are in bear market territory. let's get to your final spread of the week ahead, coming up, president by meeting with the prime minister of japan on a monday plus fed president bostick and esther george speaking. u.s. and eurozone pmi coming out on tuesday. the meetings on was a fellow by
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jobless claims on thursday. we round out the week with personal income and spending on friday. from new york city, try and enjoy your weekend. from new york, this was bloomberg "real yield." this is bloomberg tv >> ♪ as a main street bank, pnc has helped over 7 million kids develop their passion for learning. and now we're providing 88 billion dollars to support underserved communities... ...helping us all move forward financially. pnc bank: see how we can make a difference for you.
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jon: welcome to "bloomberg markets." kriti: in the last hour and a half we are seeing the s&p 500 hit bear market territory. down 2.2% when it comes to the s&p 500. look at the cross asset action. vix


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