tv Bloomberg Real Yield Bloomberg September 16, 2022 1:00pm-1:30pm EDT
inflation print. it sparks fears of more aggressive federal reserve. a short and yielded surging higher, but we begin with a big issue. a look ahead to the fed chair jay powell. >> u.s. inflation is horrific. >> it's a little warmer than expected and >> the price inflation remains high. very few hotspots. >> is going to not blink. >> 75 basis points. what we saw on tuesday. it puts the fed into overdrive. >> a hundred basis rises on the table. if they're in overdrive, they will make a policy mistake. >> central bankers do not understand money. >> they are feeling their way to how far they have to raise the number. >> tell me the last time the fed got it right. >> now they will have more reasons to go up. >> some of the voices we heard after that stunning inflation,
and joining us to talk about that, what to expect, and we can head, the bank of america joins us right now. let's start off with how surprised you were, not only by the inflation, but by the market reaction? >> >>. thank you for having me. we were surprised by the inflation print. we thought inflation and services and goods were going to be on a downward trajectory. what we saw is that they both will remain persistently and stubbornly elevated. that will be true on the good side and on the services side, especially with a -- an alarming rent print. as a result, it means the fed will have to do more. we are not surprised by the market reaction. we thought that was very reasonable, given the magnitude of the inflation, and what it means for the general direction of the fed, and it has to keep going. the concern is that the fed doesn't know how far they have to go.
the forecasts have likely been challenged, just like many private forecasters have been challenged and they will keep going until something breaks. it raises a risk that they will ultimately overdo it. the real conversation is, how far do they have to go? when do we reach a very -- breaking point. does powell believe in this idea of a soft landing be it we heard from those folks at deutsche bank, and other shops around the street. they talked about what that terminal rate could be. it put them somewhere in the neighborhood of 4.5%. some are going higher than that had you see it going? >> the view is the top of the range will be foreign to quarter. 4.25%. we acknowledge the risks on the upside, given the strength we are seeing both on the inflation data, and on the labor market. as long as these variables both remain strong and elevated, than the fed will probably have to keep going. the risk here is that the fed is just going to react to the data
that they see in front of them. they probably lost their confidence to have a high degree of conviction in where inflation and the labor market is likely going. that means that they are reactionary, and that increases the risk that they will likely go too far. given where labor market and inflation are right now, they both point to signs of imbalance. the fed knows they have to air on that risk, and if it means going too far, then so be it, because they know they have to get it under control. >> were in conversation with mark cabana. the head of rate strategy. anyone who watches bloomberg real yield knows that we have three guests, but jonathan ferro has some technical difficulties, so i'm pleased to say our second guest is now with us. moreno connor is joining us. ahead of high rate that, and mark cabana is sticking with us. let's pick up where mark left off. give us a sense of where you sort of model where the fed can end, and more portly, can the
end and a place that doesn't cause proverbial economic disruption? >> i think i agree with the points mark was making. i think the needle that the fed as the thread here has grown increasingly fine. the likelihood that they will orchestrate a soft landing is sort of a fleeting hope at this point read we do price in the likelihood that we will be looking at some stronger recessionary headwinds in 2023. again, we have a stubbornly high inflation problem, and the fed will have to continue on this path of aggressive rate hikes balance sheets unwinding, and that is going to be a drag on risk assets. we saw a market reaction to the print on tuesday of this week read we continue to see headwinds abound, and that will be impactful to equity markets, as well as credit product in the investment grade. >> are you paying closer attention to some of the moves
in and of itself, or are you paying attention to some of the movements and ripple effects from quantitative tightening? >> i think the two are married. the fed's training liquidity from the system, and that puts upward pressure on treasury yields. estate ratchet higher, it becomes more deeply negative. we have seen an acceleration of outflows from credit funds, and it puts pressure on spreads. i think the two are interconnected. arguably, the one area that has not gotten a lot of attention is quantitative tightening, and i think is the fed continues on a path of accelerated rate hikes, the russian becomes i will wait do we need to start pressing harder on that petal of quantitative tightening. that could be the next shoe to drop, so no question that the fed is working against us, but that will be a drag on equity markets and a drag on the credit problem as well. >>, stability is there in the markets to withstand a test that
is been put up against it? >> we see market liquidity and depth thin. in a notable way, we see that in the treasury space and we see that across other markets, as well. that is due to macro uncertainty. none of us really know how far the fed is going to have to go. none of us know what the path of inflation will be, but it is due to a lot of debt that needs to get moved around, a lot of risk that needs to get transferred, and the dealer community is somewhat constrained by the regulatory backdrop. that creates some concerns when you start thinking about, with the fed speed this up? would they consider mortgage sales. they would be doing so in a marketplace that is underlying fragility that gives us a sign of concern at b of a research. >> we talk about what the fed will do, or should do, a lot of talk about the 75 basis points with a potential in some corners of the market that we could see
hundred basis points, and you have a contrarian view that maybe the fed will do 25 and pause. where you stand? >> certainly, the groundwork has been laid for another basis point hike. with a subsequent meeting. >> are you seeing opportunity out there? >> so, my function is really an advising issue of debt capital, and there is no question that this year has been a top work environment. with respect to investment grade primary market has remained the open throughout the year. there been some periods of market volatility where we've seen some supply dwindling, but
we have prices with a trillion dollars supply. we are sustaining some meaningful return losses as an asset class, and we have some a record-breaking outflows, but all of the while, we have fundamentals that are reasonably intact, and we have an institutional fire, particularly with our reliability investment base. pension funds, for example. we have been enthusiastically buying credit at new higher yields. the market has stayed operational throughout through. >> we want to talk about the yields we've seen in the credit space in just a minute, with marine, but we want to get back to you, and specifically, we have issues with the amount of cash we are seeing, looking for a home or maybe not looking for a home? >> we still do think there are
large amounts of liquidity in the system, and it's an excess amount of any, and we have, and the treasury market, there are couple of areas which have supply and demand imbalances. at the front end of the curve, you are seeing demand overwhelm supply. that is causing the front and treasury to be rich and it causes a lot of cash for the adverse repo facility with the sidelines, and there is a bit of a supply demand imbalance there. out of the curve of the market, you have somewhat the opposite issue. there is too much supply, not enough demand. you have seen very sharp movements out the curve, and you seen a 20 year point, and it is somewhat dislocated from the 10 and 30 year parts of the treasury curve area that gives us some signs of concern because elevated volatility at the back end of the curve with elevated duration risks and bill liquidity do help tighten
financial conditions. it can spill over to mortgages and credit. in terms of the cash in the system, we see that at the front end of the rates curve. the fed is moving aggressively, which makes them not want to own that risk, but it is a slow down that is making them somewhat owning the rest. >> sit tight. were in conversation with mark at b of a security. and of course, the wells fargo -- head. we want to get more sites -- insights on that. up next corporate bond sales are going cold. we will have an inflation print. the conversation is up next. this is bloomberg.
>> we kick things off with what is happening in europe. the primary market with total debt sales are popping 64 billion europe's and the biggest week since march. the long-awaited sponsor a-list kicking off, but there were some pickups following the upside surprise. the seat -- those numbers. they are back debt sales. it is falling 50%, with quick projections. we're sticking with credit. we heard earlier this week from jp mortgage. with credit markets, let's take a listen. >> the preferred mantra is that
the mature credit is not breathing on any net read it continues to make its way through, with fundamentals and profit margins. we are starting to see some of that stress. we will continue to see the credit markets start to catch up to the reality. still with us is mark and green. let's start off with the place we started off. it cool significant we were the last week. >> yes. i think, listen. september was always set up to underwhelm. supply wise, that goes back to the idea that august has upside in terms of supplies. you'll remember in early august, the treasury yield was lower, and there is an investment spread on investment points. if you are a borrower or you had
a funding need and the second half of the year, the august window looked like an opportune time to come, so you had a big issue. i hundred 15 billion, the second-largest month on record for august. i think some of that stole from the september window, but september is historically a very busy month and we saw it come after that labor day weekend with a huge amount of supply on that tuesday. 35 billion in a single day across 19 transactions, but that was always going to be frontloaded. we had cpi and fed data next week, all of which was encouraging our borrowers to de-risk. we were set to underwhelm in the fourth quarter. >> do not think that it will be an issue. do not think they'll try to get ahead of that? >> it's tricky to navigate. you have classic close windows,
so the window comes in october or november. this year, we are contending with midterm elections. it will be year and when we get something done, but with the treasury yield front, you might get a pull forward from the 2023 calendar, but again, the surety is pretty manageable, and in the absence of a big pipeline, we made not see the work quarter surprise on the issues that speak volumes. >> if the pipeline slows down, it will be a net positive it will be a challenge on a go forward basis. the fed will hike aggressively, markets will be volatile, and it is very difficult to have slower
economy. and you're going to likely see signs that the economy is slowing the labeler market will happen, but we are confident that the outcome is realized. that will mean that the earnings forecast it provides lower. we do think you will see more of those types of changes and net. that will serve to further tighten the conditions. it may be a bit of a positive if the credit issuance pipeline is not as aggressive. that will offset the financial conditions in the futures. >> will leave it there. always wonderful to catch up with you. mark at bank of america. marine o'connor over at wells fargo. still ahead, the finals read of the week ahead.
>> on the week of -- ahead, coming up, jay powell and the federal reserve are kicking things off on wednesday. a big decision, and then it's the bank of japan and the bank of england on thursday. plus we get another round of jobless claims, and we will round out the week with some new pmi's. europe manufacturing. let's get our next guest year. glad we could get to on the program. before we ended here, let's start off with a look ahead. were going to expect the 75 basis points out of the fed
here. do you have any sense of hope that that could be it. for that day, it's a big hike in november, but i think a hundred basis points are on the table, but more importantly, with the actuality, much more important. this week's numbers a game changer, and it reminded me of november of last year. it became clear that inflation wasn't transitory. this time, it's become clear that we have made a dent in the problem. it will be aggressive. and they will look at how much more they'll have to hike.
when you look at what it is signaling, when it comes to those higher yields, and relatively flat yields, looking further out in the 10, 20, and 30 space, does that mean the recession is priced in? >> it's hard to know what is priced in, and it depends how deep it is, and it could be that interesting that when in the past couple weeks, the real curve will start to revert did not just a nominal curve. that should tell you that recession could mean very different things. the question is, is a priced into markets. it's an interesting reaction. the equity market took a hard -- it hard. credit markets do not. speaks to the fact that there is not been a kind of access and the credit market over the past couple years that we've seen prior to downturns. the jury still out on that. >> we see that reflected in the spreads. with relative stability.
does that provide opportunities for investors, or should that be something to worry about? >> is very hard to call it the bottom, but given that were coming out of covid from two years ago, it really scared the daylights out of companies, and they haven't really been en masse taking advantage of leveraging opportunities. there has been a ton of m&a. there hasn't been a cash buyback. stock buybacks. or wrapping up capital expenditures. we have full cycle couple years ago, so i can say it will go while -- wider, but i think that investors to be there chosen to the markets, they will look back two or three years from now, and it is very unlikely that we will see the kind of defaults and losses that will way boy the extra spread. >> we spent the last 20 minutes focus heavily on the united states. i'm wondering if you could take us global, especially when it comes to europe and the inflation challenges that they have over there. i guess any potential opportunities for fixed income
investors are in that part of the world. >> is interesting. you mentioned is priced in. i think it's pricing to your. particularly in the credit markets. credit quality, for like versus the u.s. market, it higher. with a technicality, it is filled with triple c's. especially with the amount you can pick up as a u.s. investor from just hedging the euro back to the dollar, you are looking at yields higher than the u.s. for better credit quality. it will not be pretty in the short run, and there is a very big problem there. you saw the u.k. trying to address this this week with the energy prices, you will see more of that, and the ecb will have to hike more than they were thinking, six to 12 months ago. it will be a bumpy ride, but for longer-term investors, there is more opportunity than there is in the u.s.. with only a minute left, let's look at asia, particularly when it comes to japan.
the question is, are we out of the four year cycle. the jury is still out on that. credit is focused on the banking sector, and it is not diversified, so that's not something we are recommending read --. >> glad we could get you here. always wonderful insights. he is the cohead of fixed income, and our thanks to mark as well as marino connor. that wraps it up your for bloomberg real yield. jonathan ferro will be back next week, suiting -- assuming the queen gives him his passport back. this is bloomberg.
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>> welcome to first word news. the white house is offering state and local governments $1 billion over four years to fight cybercrimes. is part of an effort to beat back attacks from criminals who have targeted everything from pipelines to meet factories. this comes from an infrastructure bill that was passed last year. despite the somber mood, with the death of queen elizabeth, decisions to shut down the economy on the day of her funeral have drawn mixed reactions. this includes criticism and in some cases, widespread confusion. the u.k. government announced that monday would be a national bank holiday. schools will be close, but companies are left to decide whether or not to stay open. the economic
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