tv Bloomberg Real Yield Bloomberg October 1, 2021 1:00pm-1:30pm EDT
jonathan: from new york city for our audience worldwide, "bloomberg real yield" starts right now. ♪ jonathan: coming up, inflation pressure is lingering into year-end as well as sensitivity and the bond market. we begin with the big issue, kicking off q4. >> we are still dealing with a lot of uncertainty -- >> ringing alarm bells -- >> the supply chain issues -- >> the real question will be on the supply side. >> this is for nonprofit.
>> inflationary pressures -- >> inflation is not going down. >> the fed has said they are not changing policy. >> inflation is above the target rate. >> it's unlikely they can get to their target. >> no one wants the fed slamming on the brakes. >> the stories say that investors and markets are climbing a wall of worry again. we don't know how that worked out. >> the question is what you do as an investor. >> to help us navigate our our guests. let's start with you, sebastian. what is the playbook with you right now? >> the concerns you highlighted on with the program are definitely valid. we saw strong ism, we got a strong consumer. the delta variant cases seem to be coming down, but this concern going forward is going to be more on inflation, and
whether we will be able to get workers back into the workforce, after the taper announcement on the fomc meeting. jonathan: we have heard concerns about inflation and concerns about growth. here's the quote. it all boils down to accelerating negative supply-side dynamics defined by two key features, both at the same time. i want your thoughts on this quote. upside risk to inflation, downside risk to growth. can you walk me through what this means to the bond market? >> yeah, thanks for having me on the program, jon. it's more about where expectations for growth are going to be heading. we have already had the slowdown in growth that we have seen, and
we need data that gives people a better perspective or more optimistic perspective on 2022. for us, you can have both sustained high inflationary pressures as well as a rebound in growth expectations. eventually the data will follow, we think. we think both of these factors will press bond yields higher into the end of the year. jonathan: do you agree? >> we do agree. when you look at economic growth and expectations, we probably hit peak growth, but are not decelerating and are going to go back down to zero. growth ratings are still very strong. we saw strong ism manufacturing this morning, and when you couple that with inflation pressures that are higher than a lot of people have seen, given the influence he expected, that should lead to higher yields at the end of this year. we think the treasury yield could continue to rise from here , mainly because we still have, dative -- accommodative and easy
monetary policy. for now, financial conditions remain easy, allowing inflation to thrive. jonathan: looking ahead to next year, we are looking at real gdp growth near the for handle. that does not sound like stag, but stagflation. subadra: i completely agree with you. i do not think this means a stagnant economy. the economy is growing at a pretty good clip, and i think this year's growth's getting pushed forward to next year. we will be revising down this year's numbers and revising up next year's numbers. really, what the unknown is, if you will, is how much is there a persistent inflation, how much will it eat into consumer spending? will it eat into the growth
prospects and the trajectory for next year? that's the key risk. i think the fed in its policy has to be prepared to be able to raise rates soon, if there is a clear sign that inflation remains consistent well into next year. that's going to impact growth adversity. that's what we are watching on our end. jonathan: will it overwhelm the fed? this is an important conversation. the inflation story is persisting into next year. will that overwhelm the fed's outlook goals? >> inflation isn't going down. inflation is hot at the core level. if you do that pure statistical calculation, it's very unlikely they can get to their target. they will be revising their end of your target up yet again and we will be signaling to the market yet again that they don't understand the inflation dynamics. this is consequential. the risk is that at some point,
the markets challenge it. the market will not challenge them with $120 billion, but the minute it goes lower, people will have the courage again to show the bond market. jonathan: i would like you all to respond to that. matt hornbach, your reaction? matt: investors will challenge the fed when they feel it is most appropriate to do it. i don't think that bond purchases are standing in the way of that. we can simply point to what happened in 2013, when the fed was still buying bonds. the market had no problem throwing a taper tantrum. i think it's less about the fed buying bonds and the market has to feel comfortable that it is doing the right thing. investors have gotten burned way too many times in short duration. it's more about the comfort level and the confidence level that growth is going to pick up
and inflation will remain high. jonathan: colin martin? collin: i think it puts the fed in a difficult position and situation. it was a year ago that they change their policy to allow inflation to get a little high, and i do not think they were expecting five percent readings 12 months later on a sustained basis. i think they have boxed themselves in a little bit. i do agree with matt, the tapering will not have any impact there if it is well communicated. for us, we think risk is if the fed would be to tighten faster than the markets are pricing that in, just because of the high inflationary numbers and the concern in the markets. what that does to inflation expectations, we think that would limit any upside and long-term treasury yields or pull them lower if they were to preemptively tighten and choke off. jonathan: subadra, your response? subadra: i agree with the other
speakers. the concern is not so much on the tapering side for me, because even with the expectations for tapering, the fed will be at about $600 billion once they are done with their asset per search program -- asset purchase program. it's really the repricing or hikes that i think will be consequential. over the last week, we have seen significant pressure in the 10 year and five year part of the curve as the maker it -- market started to price in a much more aggressive rate hike. i am not saying it should get more aggressive from what we have already priced in right now, but that's the risk. that we do see a selloff in the market starts to price in a much more aggressive rate hike. jonathan: and hiking potentially its weakness. there has been a big conversation, much more so, about this em type dilemma gripping these central banks.
a little more so for the u.k., may be more for the federal reserve next year. i've got no idea if that's what transpired. i was looking at the estimates. 4% gdp growth for next year. we are pretty decent still. can you give me your comments on that, this idea that the em type dilemma grips central banks for the next 12 months? matt: i think this speaks to the topic you raised earlier on the program, which is stagflation. stagflation is ultimately about when supply and demand are both falling, but supply is falling faster than demand. that's what ends up leading to weakness in growth as well as higher inflation rates, and in the u.s., for example, we have a little example of that in the services sector. last year, we had a decline in service sector demand, but we had a larger decline in service
sector supply, which is why with both of those things happening, server -- service sector prices went up. the future of the global economy doesn't really involve the demand going down. we think demand will be going up, and that's hard to call a stagflationary environment. these equivalencies between what's going on in the u.k. and what's happening in emerging markets, i don't think they really make sense to me. jonathan: collin martin, your thoughts? collin: if we are seeing growth of 4%, six percent areas, we will be seeing 4% next year. that would be described as stagflation. one thing we are concerned about is the signaling. although growth is strong in the absolute sense, albeit maybe decelerating a bit next year, it's the signaling of what a tighter financial condition could mean.
if you look at rates today and they were to hike 25, 50 basis points, that should not have much of an impact, but the signaling of what that means going forward, where we saw in 2018 a hint of the fed continuing to tighten when the markets thought they were already tight enough and the stock market tanking among those financial conditions. if the absolute rate is low, real yield is strong and should be able to handle it. but our concern is that the markets are not necessarily price for that right now. jonathan: we will build on that next. our guests sticking with us. up next, the biggest jump in debt in seven years. from new york, this is bloomberg. ♪
jonathan: live from new york city, this is "bloomberg real yield," let's kick things off with the auction block. in the u.s., high-grade borrowers following through on volatility, pushing weekly sales up to 23 billion dollars. the junk bond market raising another $16 billion this week, closing out september with the busiest day in seven years. with us are our guests. collin, give me a taste of what the primary market is like right now. collin: it continues to run hot. you are looking for investors -- you have investors who are looking for higher yields and treasury investors, and on the other side, historically low borrowing costs. we have seen them issuing debt
to clean out their balance sheet and create higher rates, so you have that perfect marriage of strong demand and companies shoring up there balance sheets because -- shoring up their balance sheets because rates are so low. rates will continue to rise in the final quarter of the year. jonathan: we've had some volatility, but it is not december 2018 or 2013 either. have we had much of a tantrum in this bond market yet? subadra: not really. we did see a bit of a tantrum earlier on this year when yields were quite dramatically, after we could have gotten very close to 1.75%, we had to dial back our expectations for yield as well, for growth in general. there is, like mohammed pointed out earlier, there is a chance for a tantrum if this risk for inflation starts to get out of hand, but broadly speaking, the
expectation is for improvement in the fundamentals and a gradual rise of yields. i think that environment is good for credit as well as risky assets. jonathan: what has surprised some people is this move in the fx market. matt, what's been happening, and why have we started to see this big push through the fx market? the real dollar strength. matt: yeah, jon, i think there is a tie-in here to the commodity story and this inflation narrative you are talking about on the program. we have had natural gas prices in europe going up quite dramatically. that has been raising rates even in the u.k. as well as europe more broadly. the central bank in europe, the ecb and the bank of england, maybe not quite as dovish, but generally speaking still on the dovish side, has allowed real interest rates in
europe to remain extraordinarily low. contrast that with what's going on in the u.s., with real interest rates having risen, we are seeing this decoupling that we have been expecting between real interest rates in the u.s. and those in europe. the investment buyer meant -- investment environment in the u.s. looks more attractive from an interest rate and growth perspective. those factors do raise the attractiveness of the u.s. dollar as a currency with which to ultimately put your money to work in. we think that's why the dollar has been appreciating of late. jonathan: that raises some questions about how any move to the upside would be on 10 year yields in this market. in terms of foreign participation in treasuries. your thoughts on that currently? matt: i think all year, we have been expecting interest rates to rise in a gradual fashion. i would describe what happened earlier this year in many ways is a rational exuberance rather than a taper tantrum of sorts.
people forgot about the fact that the liquidity dynamic this year was going to be so powerful that ultimately, the liquidity would find its way into risk-free assets, just as it would find its way into risky assets. we think yields ultimately will move higher, but in a gradual fashion that is frustrating for a lot of investors these days. jonathan: it has been frustrating many people through the year. how much of the year have we spent saying, yields shouldn't be down here? subadra, how limiting what a selloff be? subadra: i think there is a lot of cash, ultimately, to put to work. this move we have seen in the last couple of weeks, you are going to see some for investors say hey, wait to see where yields settle down and if the
tenure settles down between 1.50% and 1.70%. because of the fact that yields continue to remain attractive relative to where yields are in europe and japan and other countries, where both real yield and nominal yields are very low. we have seen tremendous demand for treasuries, but even domestic investors have seen there is a lot of cash to put to work. we know there is $1.4 trillion sitting there, the savings rates in the u.s. are high, so cash has to make its way to all markets. jonathan: when you think about the limit of the 10-year treasury yield, they might reflect on what happened in late march. in and around 1.5%. what's the difference between the selloff in q1 and the selloff in the back half of q3? subadra: the selloff in q1 was
much more, i would say, based on the trajectory for growth. there was a lot of optimism right after the announcement of the vaccine, and i think now, we've had a reality check, if you will, on the vaccine front, given the fact that there are all of these variants and we know that going over, the progress is going to be much more gradual and it's going to be in fits and starts. i think the market is adjusting its expectations based on that. also, like we were saying earlier, there is a lot of cash. again, i think that will be somewhat limiting in terms of how high yield it. -- yields get. unless there is something on the inflation front that causes a panic in the market, and you see a tantrum on the back of that. jonathan: collin, your final word on this? collin: there was more growth and inflation expectations at this start of the year, but now i think we are past peak
growth. i think the jury is still out on peak inflation. that will be a key driver through the end of this year and into 2022, not just what actual inflation is, but expectations as well. one point, i want to take the other side of discussion about self-limiting treasury yields an international bond markets, we think international yields could help our yields rise a little bit. we agree that the 10-year treasury yield or any treasury yield should be tethered to what global bond yields are to a degree. we are seeing some central banks that are maybe not quite hawkish yet, but a little bit less dovish. we see global yields rise little bit, that could help lift u.s. yields also. jonathan: they are certainly turning hawkish, that's for sure. brazil, not so much turkey, but mexico and the mix as well. still ahead, the final spread,
jonathan: live from new york city, this is "bloomberg: real yield." on the week ahead, plenty of economic data on tuesday. initial jobless claims out thursday and we close out the week with the main event, the payrolls report on friday. let's go to our final thoughts from our guests. the median estimate, 488 k in the payrolls report. the range is only 500 k this time around. what are you looking for this time around? matt: we are looking something close to the median estimate, john.
the payroll reports have been coming out all over the map, and we just want to wait to see what it shows us, but i would also just highlight not the headline payroll number, john, but there is very rarely a clean read by looking at the headline payroll numbers. jonathan: what are you focused on, subadra? subadra: earnings. average hourly earnings. i think that will be another .4%. with all the focus on inflation, i'm concerned around the narrative on labor shortages. we know it is about 10.1% in the job openings, and maybe more unemployed. i am sure there will be a lot of people coming back into the workforce after the unemployment benefits are expiring, so the headline number might not be as important as all of the details and components. jonathan: let's get to the rapidfire around. we can do this really quickly.
1% or 2% on 10? 1.5% right now. what comes first? subadra: 2%. matt: 2%. collin: 2%. jonathan: does powell get a second term? subadra: yes. collin: yes. matt: yes. jonathan: just for the record, i don't think he is dangerous man. guy's, thank you. enjoy your weekend. from new york city, that's it for us. i will see you next time, same time, same place. this was "number: real yield," this is bloomberg tv. ♪
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