tv Bloomberg Real Yield Bloomberg August 20, 2021 1:00pm-1:30pm EDT
>> from new york city, i'm lisa abramowicz. bloomberg real yield starts right now. coming up, rising virus cases forcing wall street to rethink the economic growth outlook. the 10-year yield search for direction after slotting for five straight sessions, setting up markets for the fed's and move. let's begin with the big issue, mounting headwinds on the recovery outlook. >> we are really questioning the economic outlook.
>> a little bit of growth wobbles. >> treasuries are pricing in this growth fear. >> there appears to be a wall of worry. >> a lot of it has to do with what we are seeing with the delta virus cases. >> certainly the delta virus has thrown a wrench into this recovery. >> how that is translated in through high-frequency data. >> the delta variant makes that growth moderation much more than moderation. lisa: joining us now is greg staples, matt, and brian. just to let everyone know, we are waiting for president biden to make comments on afghanistan. we will bring those to you live. we will try to get through as much of real yield as we can in the meantime. let's figure out what we are looking at in terms of a growth slowed down, what is potentially
priced in. greg, what is your sense of what the market is saying when it comes to how much of a slowdown delta and the variance could be introducing? greg: there will be a bit of a slow down. retail sales were disappointing this week but it was more interesting to see the shift between consumption goods versus service. the recovery is pivoting from consumption of goods to consumption of services. if covid raises up and keeps people away from restaurants, shopping in malls, that means the service part of the economy will slow down. nothing to really stop the recovery, but it will slow it down. lisa: matt, what is your sense of what we are looking at, what is being priced in, what are the potentials on the heels of the variant? matt: i would say the data had already been slowing before the
delta variant picked up. this is accelerating things, put a pause on economic activity. we were anticipating things would come off of the sugar high. the last week, everything has come to a stop. concert tickets, sporting events, nobody wants to do anything. people just want to figure out where we go from here. near term, this is definitely an impediment. if you look at the data, it is still an unvaccinated problem, and that makes me feel good about a risk on standpoint. lisa: what do you think, brian? brian: the yield curve started flattening in may already, suggesting there may be some roadblocks ahead. our expectation is that we will power through at least in the u.s.. i don't expect anyone else -- widescale closures. perhaps the bond market is a little bit bearish compared to our economic outlook. lisa: also a question of how the
fed will potentially respond to the new variant. i will tell you what robert kaplan had to say earlier today talking about the response of the fed to the renewed virus concerns. >> if i saw that the delta variant was going to be persistent enough or unfold differently than it has in other countries, u.k. or india, and be more challenging to starts to affect demand, i have to take that into account and will adjust my views accordingly. lisa: to pick up on what you were saying, that perhaps the market is overly cautious when it comes to how significant this will be. will the fed also be overly cautious when it comes to delaying its taper? >> they are not making an announcement at jackson hole, most likely at the september meeting. no reason to deviate from the path they laid out, but to have
some flexibility. if things worsen between now and september, we could potentially see them delay that but that is not our expectation. lisa: matt, what about you? how much of that reaction function will blunt the effect from the pandemic? matt: i think they will hold off, they have to. i think that that is prematurely declaring victory if they think they can start to taper already. the economy has slowed down. from the feds standpoint, if you extra months will not hurt them. kaplan pivoting that quickly shows me that he has realized this. they really did want to taper, were on that path, but the world has changed a lot in the last week. lisa: the fact that robert kaplan, the most hawkish of dov fed chair's, highlighting how
little it would take to shift the margins. how likely is it that you have some of these hawkish members changing their tone on the reaction function? >>'s voice is one among many. we haven't even heard about them pulling forward. tapering is very much in the cards. it will begin around year-end. it would take a major event to derail it. longer-term, powell wants to get to tapering. i don't think he wants to wait until it is more potentially disruptive, but i don't think it will impact the market all that much. all the short term liquidity is going back to the fed in reverse repo. the long and is a bid for duration but the fed wants treasuries to climb at year-end. it is not that disruptive on that end as well.
i think people take advantage of the open window right now. it would take a major effort to derail that. lisa: if the fed were to announce they would begin tapering their bond purchases by the end of the year, what with the response be in terms of 10 year treasury yields, up or down? matt: [laughter] that is the trillion dollar question. honestly, i we think they would go down. depending on what happens with the delta very over the next few weeks, but if the fed were to move early, that would potentially put us into a recession or slower growth period. i am still optimistic because i think the fed will be extremely accommodative. if they announce only something like $10 billion less or so a month, no big deal. but the idea of getting through tapering in the first half of 2022 would be a mistake, sending yields lower. lisa: brian, what is your sense? brian: a couple things you need to look at. how is the economy doing?
if the economy is powering through, strong, and the fed tapers, i don't anticipate much yield impact. in fact, yields could rise a little bit. but if the economy weakens, delta becomes more of a concern, and the fed tapers, then clearly yields go lower from their. -- there. lisa: you were talking about how there are little bond purchasers at this point based on what we are seeing, the recycling of money. at the margins, what benefit will it have? i realize this is a philosophical question, but what benefit does the fed have continued with bond purchases given that it is not giving a boost to the employment market? greg: it has little effect on the market.
it is more a signaling effect. what does tapering due to yields? i think you are confusing because with effect. if the fed pulls back on their tapering schedule, it is because they see significant slowing in the economy. it is that slowing that will bring rates down overall in the marketplace, not the tapering. let's make sure we get the causality right. lisa: if the fed does taper, a question of the reaction function when it comes to credit. i want to finish on this question of how much it diminishes the appetite for risky securities that have enjoyed such an incredible boom so far until a couple of weeks ago. >> as you pump liquidity in the market, it forces people out of the risk effect from. taking on more high-yield risk an ig, more equities than bonds. if the fed were to pull back -- if they do it aggressively, it has to be a negative signal to markets. but my view is that the fed will
be very slow in the way they roll out the taper. lisa: brian, final thought? brian: regardless of what the fed does, there is tons of liquidity. it will continue to perform, have flows. the big risk there is some type of unknown event, if delta becomes a bigger concern than our expectations are, then credit could take it on the chin. outside of that, i don't think taper has much of an impact. lisa: coming up, we will take a look at this flow. global investors pouring into corporate debt. this is bloomberg. ♪
lisa: i'm lisa abramovitz. this is bloomberg real yield. time for the auction block. we kick things off in asia went dollar bond sales picking up. baidu issues a two part sustainability deal. high-grade debt fueling the action earlier in the week with investors piling in despite total sales missing estimates. the junk-bond rally losing momentum with issuers offering higher interest rates to lure investors. still with us are greg staples, matt brill and brian railing. one thing i found interesting wasn't underperformance of investment grade bonds, especially given the fact that this seems to have been a sweet spot not only mystically but internationally. brian, what is your sense behind the meaning of the underperformance of newly sold
investing grade bonds? brian: i'm a bit of a surprise. the market is still healthy, there is demand there. i would expect the lull to be temporary, probably just some concerns about the risk appetite with delta. our expectations here in the u.s. is that we will power through, it will not be as big of a dip as some are concerned about. lisa: brian, is this a buying opportunity, do you sense more skepticism? greg, were you weighing in? greg: it is the third week in a slow august. professional investors are on vacation. i wouldn't read too much into the move and you are seeing, even last week in the high-yield market. over all trend is still positive. lisa: what would you do with the
action? it might be an opportunity for some. greg: truth be told, i think it is an opportunity but we expect a pickup in issuance after the holidays. there is not too much issuance going on. if you wait until after labor day, there will be better opportunities then. lisa: matt, what do you make of the action we have seen on the margins in certain parts of credit? matt: a lot of the street is out. you know there will be a big calendar in september. we expect $150 billion of investment grade issuance. the mindset for us right now is let's wait and see what comes in two weeks. we are stockpiling liquidity, hoping there will be concessions in these new deals that we can take advantage of. we have backed up about 10 basis points in investment grade, 15 basis points in high yield, but usually you are better waiting
for the new market to do it. lisa: why is that, especially when it seems like companies are borrowing just because they can, they can do anything they want, whether it is buying back shares, paying executive dividends. why do you think currently issued debt will be a better opportunity than existing notes? matt: usually because of the liquidity you can get after-the-fact. we often find everyone uses their money and they run out of dry powder by the second week of september and then the concessions get bigger. in that regard, we think that concessions may be 10, 15 basis points, which can make up for the management indiscretion, what is bringing the bond in the first place. we are not worried about defaults, companies doing anything too outlandish, but there is certainly some pickup of debt being issued for dividends and mna. lisa: which raises the question,
brian, when do you start to get concerned about the really easy borrowing conditions and low yields for investors? the deck is stacked against people who want income. we understand the fed is sticking their thumb on the situation, but at what point does it become concerning? brian: i don't see it going anywhere. i think people have to reset their yield expectations. i know we will have a little bit of an inflation pickup which may concern some inflation investors, but that is temporary. i don't see a spike in interest rates coming anytime soon. i think you just has to allocate to your portfolio, own what you have to own, and i would not be waiting around for significant higher yields in the market. lisa: greg, on the one hand, i hear what everyone says, you will not see a default cycle as you have in the past, and certainly not anytime soon. yields will be low, inflation
seems contained. you can own credit. even if some of the purposes for the cash are not great, go for it anyway. do you basically go with it? it has worked for a decade. greg: overall in terms of general themes, you are right. particularly in the high-yield market and will spill over into the ig market, up until now, you buy anything and it works. now what we are seeing in the high-yield market is a little bit of differentiation. some businesses were able to get funded and i don't think their long-term business plans will be that successful. they have gotten some funding but longer-term you wonder where they will survive. now it is a time when doing your homework makes a difference. that will differentiate the outperformance from the underperformers. lisa: do you think the market is still a full market, where people are doing price discovery
to determine fundamentals? greg: i think so. i'm happy to see there is some differentiation going on. all of the securities markets are fully priced, whether you are in equity or debt. i don't see anything that will change it anytime soon as long as the fundamentals for the economy stay strong. lisa: matt, do you see enough discretion to give you comfort? matt: i do on the margin. one thing i would point out, valuations are tight, but you have seen corporate credit get better from a fundamental standpoint in the last 18 months. the numbers are coming in in the second quarter, 2021 earnings, and financial leverage is better than in the fourth quarter of 2019. that is the first time we have been able to say that. all through 2020, we talked about the $1.8 trillion of issuance and the debt borrowed, but they have grown their way out of it and have paid down some of that debt.
but there were certainly be some bad apples that we will have to screen for. lisa: brian, final word? brian: the market, for over a year now, and will continue going forward, is driven on liquidity. the fed tapering a little bit. i don't think that upsets the liquidity picture. as long as liquidity remains, people have to buy something. they are just flooding into all assets. lisa: everyone is sticking with us. we have the final spread, featuring u.s. pmi data, jackson hole symposium. that conversation is coming up next. this is bloomberg. ♪
the week ahead. the white house -- the house of representatives returning on monday. u.s. pmi, the fed taking off its annual jackson hole symposium on thursday. we will hear from chair powell. personal spending numbers closing out the week on friday. greg staples, matt brill, and brian rehling is still with us. does data matter anymore?that is a question i look at as people look past data points and give reasons for -- what data point will be most important to you determining the path of yields? >> it is all about jobs. over the near term, hospitalizations. if jobs continue to print at 600,000, 700,000, we will be in good shape. the fed will eventually taper and that is good for the economy. but if you start to see
hospitalizations, places a.d., 90% occupied, that is not something we tradition look for, but that is something you have to look for. brian: i am most focus on jobs and the economy. there are lots of temporary disruptions in the supply chain, etc., which distort inflation and some of the other data. the economic picture, the jobs picture on the most important. lisa: greg? greg: i would look at the intersection of jobs and inflation. average hourly earnings, sought competition -- composition of the data. one thing that was strong is the on appointment rate for black americans full by a full percentage point, hispanics, as much. that is what powell is looking for. lisa: right now it is time for everyone's favorite part of the show, rapidfire. three quick questions, three
quick answers. when the fed announces its planning to start tapering monthly bond purchases, will long-term rates rise or fall in response? greg: rise. matt: they rise. it will be a while. brian: rise. lisa: european or u.s. investment grade corporate bonds, which do you prefer? brian: u.s.. matt: u.s. greg: u.s., if nothing else because the opportunities are bigger. lisa: chinese bonds, buy or sell? matt: buy quality. brian: tread carefully. buy quality. greg: same thing. lisa: but stay in china, all of
you agree that you have to stay in china although it is a bit concerning. my thanks to all of you, have a wonderful weekend. it has been a long week as we go through the gyrations of growth scare to potential taper discussion. we will continue the discussion next week. jackson hole coming up on friday. bloomberg surveillance will bring it to you when that powell brings that speech. we will see you next friday at 1:00 new york time. this is bloomberg real yield. this is bloomberg. ♪
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united states, other western countries, and news organizations. there is no evidence the taliban is carrying out reprisals even after the leadership promised amnesty. during a joint news conference today with vladimir putin on her farewell visit to russia, german chancellor angela merkel said it's important to communicate with the taliban in order to help with the evacuations. >> we have seen the taliban got more support than we would wish and we have to now try and talk with them and work toward the point where there are lives threatened and those who worked with germany for example can leave the country. mark: the united states says it evacuated about 3000 people yesterday from kabul's airport. vice president kamala harris will work to bolster economic and military cooperation in china's backyard during what will be the biden administ