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tv   Bloomberg Real Yield  Bloomberg  August 13, 2021 1:00pm-1:30pm EDT

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jonathan: live from new york city, for our audience worldwide, bloomberg real yield starts right now. ♪ coming up, a transitory debate as prices start to wear on confidence. fed officials lining up. we begin with a big issue, no resolution for the big debate. >> used car prices coming down,. >> some of the inflationary pressures are moderating. >> it supports the fed's
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transitory narrative view. >> there's plenty of 2% plus inflation pressure out there. >> some of this will stick around. >> i just don't think we are quite through this inflation just yet. >> my sphere is on the labor side. >> we are still getting the inflation many people thought we would have to pass through. >> it will ultimately prove transitory. >> i don't think it is transitory. jonathan: i want to begin with you. have we resolved anything with the data this week? toriano: i think we have added -- victoria: i think we have added more uncertainty. there are transitory components and we saw that in the cpi number and some of the clips
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mentioned it. the car rentals have come down, airfares have come down, that we still have this other component we are not thinking of. that is moving higher. wages continue and you see that and the labor report and will continue to do so as we have this labor shortage. that is not going to be a transitory effect. are we going to back to that zero percent, 2% inflation, i think we are going to be higher than that. does it come down? yes, because you have the transitory spike that might come back. i am concerned. the supply side is where i am looking. everybody thought that was a transitory component. if the delta variant pushes that timeline out, and we kicked the can down the road, that is the
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big question, a year, 18 months, two years, i'm not sure we know the answer. jonathan: your view on that. >> i think we have learned a bit this week and have seen some deceleration in some of the most transitory factors. not all of the factors of inflation are transitory. there are sticky factors in those late -- relate to the housing industry. giving not only what has gone on with house prices but rent. labor is the wildcard and the season of kids going back to school and whether or not that is in person is absolutely critical. to the extent kids end up being more so home than virtual, if kids are home, parents are home.
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that could keep some inflationary and wage pressures higher for longer. jonathan: that speaks to the supply side story. tony, i want your view on this. it is what is happening in china whether we face a risk of a second wave and the idea that somehow supply chains would heal and maybe we need to push that out to q1 or q2, maybe beyond. tony: even beyond china, we are seeing it in indonesia and vietnam. the bottleneck will be with us longer than people expected. we learned this week that inflation is moderating. it is not transitory as people thought it would be behind us by the end of the year. we will have elevated inflation to the first part of next year and potentially into the second half it will be moderate and
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lower than we are today and the fed will be pleased that it won't be back below 2%. you may see core inflation levels into a two and a quarter, two and a half range as opposed to above 4% where we are today. not transitory not problematic for the markets and moderating throughout the next six to 12 months. jonathan: let's talk about what is happening, right here, right now. reopening demand was driving prices. now we are seeing prices way on demand. we had consumer confidence and sentiment and it was a weaker 2011. this is the quote, consumers have collectively reason that the economy's performance will be diminished over the next several months and it also reflects emotional response, mainly from dashed hopes that
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the pandemic would end. victoria, i want your opinion on this. victoria: we are in a situation where the consumer balance sheets are so strong that they can take a little bit of the pressure that will come along with that. maybe we don't see demand all off tremendously. for goods it will come down. for services, it will continue to be there. we look at the confidence report, it was the expectation component that dropped and some of that goes to what gene was mentioning in regard to school. if parents think, like it isn't going to go back school and things aren't going to get back to normal then perhaps they call back a little. on a planet insurance is going to go away are already has, does that mean i have to save more and does that pull demand back. it could and that will affect
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the margins. jonathan: is the analysis in the framework thinking about things at we -- as we look at these numbers. we hand -- we had a move down to 112 last year on a 10 year yield. today, we are at 130. all the things we are discussing, either they reinforce a treasury move, when it is behind this or this is another leg lower in yield. which one is it? gene: what we are seeing today with the disappointment in consumer sentiment, that could retest the 112 or 1% area and that comes back to something that the fed highlighted in their statement, which is that the path of the virus will be a critical variant in the path of
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the economy. it is how much are we changing consumption patterns and what we thought a clear path to recovery? our research team put something together that we call the return to normal index, how close are we to 20 levels of activity across various sectors of the economy? we were at 86 sent two weeks ago. have taken a -- 86% two weeks ago. we have taken a little bit of a hit to 84%. that could affect that path. gene: -- jonathan: when you push to the treasury markets, your opinion. tony: if you would believe that the numbers would be lower spending, but if you look at the spending numbers last summer, they bottomed out at the pandemic and stayed in a 75% to
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80% in the second half while spending rebounded very quickly over the summer as vaccines became more prevalent and the economy opened up. as for politicians with consumers, watch what they do rather than what they say. while think they are going to remain at double digits in growth and spending, we think it will be mid single digits there there still a healthy balance sheet at the consumer level. jobs seem to be increasing. consumer spending is moderating. it is still at a healthy level which means we will see upward pressure on rates rather than recasting the lows. we see the tenure at around 1.8% would be our target. jonathan: i heard 180, i heard politicians and spending. there was a letter from moderate democrats to the speaker of the house pushing back against spending even more before we even agreed to spending $550
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billion. now there is a real conversation, victoria, that maybe this whole thing -- in washington. is that low enough in the bond market that we are going to respond a lot more than perhaps downside surprises on spending? victoria: spending is always a big issue, and we just had all of these stimulus packages over the last 18 months that really has driven yields. when we look at these pressures right now, i think it is going to be more of a surprise to the upside good if we get the half a billion that we are ready to vote on, then we have another $3.5 trillion coming behind that. i don't think people expect for all that to get pushed through. if it does, then perhaps we see more issuance into yields and yields push higher. let's look at the auctions we had him of the 10 year was an
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incredible auction -- we had of the 10 year, it was an incredible auction. jonathan:gene, i want your view on this. from bank of america, they say the following, using positioning for risk of a further rally with expectations for interest in spending rather modest, it has the potential to drive rates higher. do you agree? gene: i think it is possible on the margin. this is much more the long game than the short-term. supply is difficult to map movement in treasury yields in real time. if we think about last year, supply was increasing but demand was exceptionally high for treasuries. if deficits are going to be significantly larger to fund long-term investment in large-scale structure, that should have the impact over a long period of time of raising
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the real interest rate, but i would put a big short position on the treasury market today based on what we are hearing right now. jonathan: up next, the auction block, debt values pushing high yields to the second busiest on record as the rush to procure funding continues. that conversation, up next. from new york, this is bloomberg. ♪
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jonathan: time for the auction block where we kicked in's of in the united states with strong demand for tenure paper, three basis points. bidders climbed to a record
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high. hybrid leading the charge with 30 borrowers issuing $36 billion in today's and high-yield issuance hosting another week of heavy sales with the rush to secure funding. sales above $10 million for the week. still with us, tony rodriguez, victoria fernandez, and gene tannuzzo. i hear a lot we are price for perfection what is the difference for you? gene: the difference is that when you look at the fundamentals, we have outstanding fundamentals. we have a second quarter earnings story that was a blowout in earnings paid when you look at upgrades, downgrades, significantly higher upgrades. when you look at default, we are seeing forecast for year and default rates -- for year end
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default rates below 1%. the fundamentals are telling you that corporate credit health is very strong, cash flow margins are high, etc. valuations were certainly full and we don't expect to see much opportunity tightening from here. we think the yield earnings are well supported by strong credit fundamentals. therefore, price for reality rather than perfection. jonathan: that comes down to the eye of the holder. victoria fernandez, your opinion on that. victoria: i like the way they address that, i think fundamentals are strong we have had spreads remain tight year to date. we have seen high-yield in the last couple weeks move wider and the gap between high-yield and investment-grade is a warning sign and is something we want to
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watch and see what happens with the spread between those two. if we bring the quality back because of the gap, we think the fundamentals are there, strong balance sheet for corporations. jonathan: we are starting -- are we seeing more discrimination in the credit market? gene: a little bit, but they are expensive. fundamentals are strong but we need to recognize we are in a unique, unsustainable growth environment. we have had jobs added in that is not normal in the last few months and that says there is pent-up demand while we get people back into the labor force. fundamentals are strong and credit spreads reflect that. we need to be careful how companies are using that cash. we are seeing an uptick in dividends and buybacks.
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it improved a bit in the second quarter but we need to be diligent, because spreads are coming at a level that does not provide a cushion. jonathan: let's explore when the fed holds back. this is from the boston fed president saying this about point back on qe, if you continue to purchase assets, the action primarily is in pricing, not so much employment. i don't think asset purchases are having the desired impact in promoting employment. that is a fed official questioning the value of qe, the value of it, and suggesting what we have all been talking about for the last 10 years or so, what it actually does. what happens when that gets pulled back? they have lined up one by one to signal that in some shape this week? >> most would say they don't it
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is directly but trying to impact overall conditions the story of that, the qe a year ago was quite necessary to support financial conditions in the broader economy but today it is not necessary. the issue is the fed doesn't want to wake up overnight and begin a taper. they have a communicate -- take munication issue. -- they have a communication issue. when they announce in the november and december and early january that the market does not have a significant impact. our view is that it will not have a significant impact and the certainly is not going to affect the labor market because it is not helped it. there has been a transition from a weak economy to a reopening economy to a strong consumer to what we think is a stable growth picture in 2022. jonathan: they are keen to say,
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even those who were dovish. here is a question for you -- you mention on the pockets of tension within credit. can we expect credit to be the canary in the coal mine anymore when the fed is giving credit a gas mask? gene: i think it has to be because of that. tony mentioned the critical term which is financial conditions. that is exactly what quantitative easing affects, financial conditions. financial conditions are about asset prices, access to capital, animal spirit. those three things are very strong right now and as the asset purchases change, it will influence financial positions and the variable that is most mostly correlated our credit spreads. i think by virtue of the fed moving toward the exit come if
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they don't influence credit spreads, i don't think they are making any change at all to their policy or they are almost saying they have to include it. jonathan: victoria, final word. victoria: i think you can always look at credit spreads and they give you an idea of what is going on the market or what the anticipation is. i don't take tapering is going to have a huge effect either way. there is so much liquidity in this market. companies are flush with it, individuals are flush with it. i do think you still watch spreads because that is going to be your first clue to when we need to have a warning. jonathan: still ahead, the final spread, the week ahead featuring a speech from the fed chairman, jay powell. this is bloomberg. ♪
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jonathan: live form new york city, i'm jonathan ferro. coming up, jay powell set to speak at a town hall. fomc out on wednesday a 20 year treasury auction and more fed speak from the dallas fed president. final thoughts, victoria, what are you looking for in the chairman next week at the town hall before we get the speeds -- speech at jackson hole? victoria: i am not looking for a lot. i think he will look at the story that he thinks inflation continues to be transitory and you might say they are on track for substantial progress. i don't think it will be next
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week, the meeting will be an interesting one because we will have the jobs report which i think will be maybe a downside surprise for most people. victoria -- jonathan: victoria says we can skip it. rapidfire. jackson hole, do you take a vacation or stand and watch this play out? gene: get your popcorn. we need to learn or about further progress. victoria: take a vacation. tony: i think you can take a vacation. jonathan: i am taking a vacation. september taper announcement, november or december or beyond? when do we get it? victoria: november is the announcement. tony: november. gene: september is not off the table even what the fed has been
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saying but november. jonathan: 10 year treasury year year yield, the lowest or the highs? tony: we have seen the lows. gene: lows. victoria: we have seen the lows. jonathan: great to catch up with all three of you. tony rodriguez, victoria fernandez, and gene tannuzzo. we will see you next week, same time, same place. this was bloomberg real yield. this is work tv. -- this is bloomberg tv. ♪
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mark: i am mark crumpton with first word news. new data suggest that the u.k. is emerging from the latest wave
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of the coronavirus pandemic. virus reproduction numbers published today indicate covid-19 is in retreat, and -- in five of england's seven regions. numbers, as a boost to boris johnson who faced criticism from scientists when he proceeded with the final stage of his plan to lift pandemic rules. a federal judge in washington has ruled that a temporary u.s. ban on evictions in parts of the country hit hardest by the coronavirus can continue. it is a major victory for the biden administration's efforts to expand protections as a delta variant spreads. it marks the latest twist in a month-long legal saga on how far the government can go to protect renters from their home -- to put checked renters in their homes. nine moderate house democrats sent a letter to nancy pelosi threatening to withhold support from a $3.5


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