tv Bloomberg Real Yield Bloomberg July 15, 2022 1:00pm-1:30pm EDT
a suit of data brings conflict to the federal reserve with long-term inflation expectations falling to the lowest level in a year. facing off with the highest current inflation and's 1981, we begin with the big issue, recession talks going louder. >> recession -- >> recession -- >> what type of recession would be? >> this idea of a hurricane is probably the wrong idea. >> we get a mild recession -- >> probably the right idea might be rain. >> the fed is in a sticky spot. >> right now they are almost solely focused on inflation mandate. >> unfortunately, it is a crude channel of lowering demand. >> a stronger federal reaction. raises recession risk. >> the fed is keenly aware of that -- >> the economy is slowing but the fed wanted to slow. >> you have an overheating economy. lisa: in the soup of recession talks, joining us to discuss is cameron dawson. -- dawson, morgan's are
presented, and a representative from goldman sachs. start with cameron. airing the swell of recession talks, has become an inevitability? cameron: given the fact the fed is committed to raising rates rapidly and tightening beyond -- it is likely recession is in the next all months. its import and we consider the retail sales data from today or jobs data from last week. those big come in stronger but they tend to be lagging indicators. it is likely we start to see deterioration of that data eventually but it does signal we are not already in recession. that the consumer has not fallen off of it yet. but again, because the fed is committed to tightening policy as much as it is, it does seem we have some kind of recession, be it shallow, if we get one. lisa: it seems like a number of fed members pushed back in the discussion for the quiet period
next week. elana fed president suggesting today he is not in favor of 100 basis point rate hikes, saying " moving to the medically well undermine a lot of the other things working well. we want it to be orderly. jim, is there too much conviction the fed is comfortable with this idea of the inevitability of recession? jim: i don't think this is a major risk. i think it is clear the fed understands they are trying to slow the economy on purpose. i call it a triple deed economy demand, destruction by design. some of this is messaging. when you have a cpi number like recently and epi number on the follow, they have to single something that's signal something. 100 basis point is on the table but i don't think that is my base case, 75 and then 75 in september. this is what the fed needs to do to instill some credibility or
confidence that they are on top of this and are trying to effectively rein in inflation risks. with all of that comes the baggage of that impacts other asset classes even more and i think this becomes a risk issue for the markets and creates volatility. i do not think that the course of the economy has changed just based on the ramped up rhetoric over the past few days. lisa: there does seem to be a consensus baked into the market this week. going to dollar and long bonds, mark cabana bringing down his treasury quotes saying we revise lowered following the ship to recession call announcing 2.75% on the tenure in 2022 and 2.5% next year. one important shift is quantitative tightening, the base case for the fed to seize qt with the first rate cut in september 2023. so much to unpack here, this idea that you can count on the rate hikes and the subsequent rate cuts as you try to gain recession and imagine doing the
mental gymnastics. do you agree to the consensus bet of long, that though securities is the right place to be? >> i think the value proposition of duration has definitely improved. if you take tenure as an example, it is oscillating around 3%. our forecast is 3.3%, but we are there in terms of the range. where there is more uncertainty in the front-end, as jim was saying, 75 basis points seems like a done deal for july and it is anywhere from 50 and 75 in september and after that, it depends on the trade-off between growth and inflation. should the trade-off be duration more, we moved toward value. our best guess is that is around three points to five -- 3.25 percent or 3.5%. lisa: do you agree there will be rate cuts by next year already? lotfi: on our baseline view,
there's a likelihood of a recession to 50% over 24 month period, but we continue to see a soft landing path here. that is obviously narrow, but we think that path is there and we do not see cuts in 2023. that narrative pushes the narrative that recession will be a reality by 2023. lisa: jim, what is your view? that is why some people are bullish on certain risk assets, as this will be a shallow recession, met with the same stimulus this market has enjoyed in the face of trouble. do you agree? jim: i do not agree with the view that we will have a soft landing. i think we will have a hard landing, possibly recession. we may be an recession already. with that being said, a lot of this is already in the price. what is interesting right now is that the fed is telling us they
are owing to 3.5%. the bond yields are refusing to move to those levels. i think what is interesting is if we roll the clock forward six months forward, let's say when the fed is at 3.5 or possibly higher than 3.5%, that means we will have a deeply inverted yield curve. what we are seeing is an inversion of the curve that has led primarily -- is led primarily by the two to 10 curve showing anything ahead. anything on the backend out 20 years to 30 years in particular say the market is baking in high-risk inflation premium. the two things communicated, we will have to slow down, we can't control fully inflation, you have a slower economy but inflation falling but not enough and that becomes the stagflation fears people get worried about. i think it becomes interesting on the curve if the fed goes to 3.5% but yet 10-year treasury yield cannot get above three, that communicates something very different to me. lisa: especially because right
now we see the deepest curve in version of that specific one that goes back to 2000. what kind of message is that standing? before i get you on this point, i would love to get your view, jim, on what that implies for what is getting mispriced elsewhere in risk assets. jim: i think what is getting mispriced at this point is people are looking at long-term interest rates in the market and they are not putting in enough inflation risk premium. even if we look at 30 year long bonds, around 3%. to have a 30 year long bond around 3% when the fed is going to hike rates likely to 3.5% or higher than that, what you're saying is we will have a really deep decline. i do not think that is what we will have. i'm in the camp we have a mild recession but what it also says is there should be higher yields in the backend and curve should steep out in the 20 and 30 year points. that suggests to me when you discount your cash flows in the
long-term, many assets could be equity, could be credit, could be other things, probably are not building an enough risk premium. they are vulnerable in moving lower and taping in this environment -- and cheapening in this environment. i don't think people accounted for the possibility we still have lingering, above target inflation for a longer period of time as opposed to inflation coming back to target, which is what the fed is telling us. i think we can get to target but i don't thickly stay there. i think we bounce off of it and stay higher. lisa: cameron, what is your view as people go into elongated bonds and trade risk assets and with a pretty sanguine brush relative to the pain in equities? cameron: if we look at the young -- long yields, the bond market believes the fed is going to be successful at controlling inflation and we can see that with long term inflation expectation from a market basis.
they've gone from 2.6 this year down from 2.6 today and line from the fed's 2.6 target. the bond market thinks this is a cyclical inflation episode and not a secular one. on the question of high-yield, we have been trimming back high-yield exposure into the recent rally with the notion that as long as the fed continues to deliver on this policy tightening, it should be a headwind for high-yield as liquidity gets removed from the system. people have been stepping into this market, looking at the juicy rates that we have seen the fed from 250 basis points but we think there is more spread widening coming in high-yield, mostly with a spend that has left options to come and bailout to those problem borrowers like it did in 2020 because of inflation remaining so high. it boxes them in a corner to not be able to provide the same
liquidity they did in prior high-yield selloff episodes when inflation was benign. >> which answers the question about liquidity events and this is something michael shall listing on bloomberg earlier this week. i would love do you to weigh in on this. are we careening towards some sort of liquidity issue or some sort of fissure in the market functioning as people reset their expectations for credit? we have been dealing with people saying people have priced in and basically dated maturities so long it will not matter. lotfi: so far i would describe liquidity conditions and more generally the state of the market microstructure as strained but not stress and not nearly close to the levels of stress we had in the first quarter of 2020 and hopefully we will not be there. but yeah, that is definitely the number one risk focus on here. whatever structural -- we had,
those are not gone. they may have been masked by the significant amount of excess liquidity that easing monetary policy pump into the system but they are not gone. one of our key messages in terms of relative value has been you are only up in quality and also up in liquidity. lisa: everyone is going to stick with us. cameron dawson, jim caron, lotfi karoui. . we got a lot of next. including the auction block. corporate debt stalling again. i will talk about that and talk about what is going on in europe. this is bloomberg. ♪
yield." time for the auction block where we kick things off in europe with corporate bond issuance set to the slowest july on record. sales from the regions nonfinancial firms falling short of 2 billion. in the united states, high-grade issuance low again, missing weekly estimates despite pepsico's on sale on thursday. just the second high-yield bond sale of july. sticking with credit and the lack of issuance, blackrock's reader put cash into work. >> the credit markets, we started to let the line out a little bit on some of that cash. you think about if we are going to be run rate inflation over the next five to 10 years, you could buy high yields at 9.5 -- 9%-nine point 5%, investor great quality at 5%-ish. that is a good real rate. there is stuff to do now. lisa: some people might be
getting optimistic and other staying away. cameron dawson, jim caron, and lotfi karoui still with us. citigroup lowering combat -- corporate bond sales. we revised down of the predicted range of 1.2 trillion dollar contingent on more stable secondary market conditions toward year-end preventing a lock above the ig primary markets. i want to start with you, lotfi karoui, how much do you see the slowdown in the issuance market. with companies not needing to borrow and deciding not to lock in rates that are not conducive to business versus not able to access financing at all. >> it's all an interesting debate, does it reflect the unwillingness of companies to go to a primary market or reflect the inability to do so. we believe towards the former explanation, that this is by enlarging mobile response to higher funding costs, elliott --
elevated volatility, and the unwillingness of companies to go to the primary market because you don't need it. keep in mind we had two back-to-back record highs for years, 2020 and 2021 in terms of issuing volumes. the bulk of the proceeds from the debt raised back then is still sitting in the form of excessive liquidity on balance sheets. companies have done a good job terming out maturities so you look at the maturity wall and there is little to refinance in the near term. i think the second half of the leader -- year will play out like the first half of the year until you get full parity on work going in the cycle. i do think the primary market activity will remain fairly muted. which is, by the way, has been an incredible source of support for the secondary market because it provided a very meaningful offset to the league demand technicals we received. lisa: when did this become a problem for the fed, for others to start to see this as a breakdown in the functioning of capital markets if companies no
longer have access to capital? lisa: that is the thing that could certainly get the fed to pivot but we are not at a point of strain liquidity at that is anywhere near the prior fed pivot. if we look at high-yield spreads, the 570 today, they peaked at over 800-2016 -- 800 at 2016, 11 hundred 2020 and that got the fed move supported and the fed has told us they want to see financial conditions tightening. that has been an express purpose of the tightening cycle and credit spreads are part of financial conditions as are equity valuations, as our interest rates as well as the dollar, so though we have seen the fastest tightening of financial conditions on record during a tightening cycle, i still -- we are still on an absolute basis, relatively well contained. it speaks to the starting point
where we were in the tightening cycle where we were starting from such incredibly loose and accommodative types of policies so yes we have seen rapid tightening but we are not at the point yet that supports a fed pivot. lisa: this raises the question of when it becomes the issue of a functioning for markets. we were talking about that earlier but it comes back to that, is it by choice there is not as much issuance or civilly by the scenario where companies cannot raise financing? how do you draw that distinction? jim: as a lot of people are saying, the companies do not need to rave as much -- raise as much right now. we had back-to-back years of record issuance. this is one of the reasons why we think it is likely we have a more mild recession because there is no liquidity strain apparent at this point. many corporations have already funded themselves so even if interest rates rise in the front end, it is not like they're short finding themselves creating stress in the markets. i think this is all very positive at this point.
clearly prices are readjusting to the risk of a slowdown and slowing recession but what we also have to remember is the reverse repo facility of the fed is over $2 trillion. this is a lot of excess liquidity trap effectively in the system right now that is geared toward high-quality, liquid, short dated assets. every time rates pop up a little bit, these assets get box -- but aggressively. we are coming from a technical strong point. where i think we ought to look in terms of where we may find stress, i would thing about the emerging markets a little bit. the reason is the dollar is getting strong, commodity prices are coming off, yet interest rates, the fed continues to hike them. those three things create issues and we could see some relative funding issues may be in those markets. as far as domestic u.s. market from a liquidity standpoint, i do not see this as a primary risk. even in emerging-market space, lets me be fair, it is not the
primary risk at this point either. it is something to watch out for as we get a global slowdown in growth and commodity prices continue to move lower and interest rates move higher. this could create dollar funding pressures. lisa: jim caron, cameron dawson, lotfi karoui, you are all sticking with us. still ahead, a host of u.s. data and other data. that is next. this is bloomberg. ♪
lisa: this is bloomberg real yield and time for the final spread. the week ahead, big bank earnings continuing monday followed by a host of u.s. housing data through the week. we get eurozone cpi data thursday, consumer confidence wednesday, and a busy thursday featuring the bank of japan and ecb rate decision. still with us are cameron dawson
, jim caron and, lotfi karoui. the ecb decision might be one of the most interesting decisions we've seen in a long time. how much can they address the push poll accelerating and splintering european region? lotfi: this situation is challenging. you are facing an energy crisis and you have the likes of italy in the periphery. that is an incredible he difficult equation for the ecb to solve. what we think that will do likely? in the near term, that a look through some of the supply chain issues and the gas market and proceed with a lift off in july. after that, we think they go with 50 basis points in september. at the same time, we like many others expect to announce some kind of a backstop facility to deal with what the ecb has been calling fragmentation risk.
that is something that is meant to essentially put a ceiling on how widespread spreads can go. after that, it does get more complicated and we will learn a lot between now and december. any sort of further deterioration in that's growth, inflation trade-off will likely go with the ecb slowdown with the normalization of policy, possibly push the terminal value of rates lower, but in september we will learn a lot. lisa: my favorite part of the program, rapidfire around. i want to go time -- give time to this. i'll give you time to think about it as slowly as i can. number one, do you think the fed will cut rates next year? cameron? cameron: yes. jim: yes. lotfi: no. lisa: number two, what is the worst trade right now, buying emerging markets debt or european bonds? cameron? cameron: emerging-market debt. jim: european bonds.
lotfi: e.m. debt. lisa: number three, our u.s. investment grade corporate bonds a buy or a sell? cameron: by. -- buy. jim: buy. lotfi: buy. lisa: three for three at the end. my thanks to all of you, cameron dawson, jim caron, and lotfi karoui. it seemed like this we can bonds there was one consensus trade and it was to go long-duration come along bonds, you saw a huge rally in trades as the dollar surged. for next week, we will see if that holds as the ecb tries to respond to the region and frankly of people take a look at the prospects of inflation. we will also take a look at the risk appetite as we take a look at some of the underlying measures of the consumer. from new york, that doesn't from us, same time, same place next week. this was bloomberg real yield. this is bloomberg. ♪
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mark: i'm mark crumpton with the first word news. president biden is in saudi arabia today. bloomberg has learned he will leave the middle east without any public announcements on increasing the oil supply. president had hoped to come away with something that could help lower soaring gas prices in the united dates. mr. biden is meeting with mohammad bin salman. he will talk with other leaders from the oil exporting persian gulf on saturday. in the president says the time is in his words, "not ripe," to restart negotiations with palestinians and israel. after meeting with palestinian authority president m