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tv   Bloomberg Real Yield  Bloomberg  October 22, 2021 1:00pm-1:30pm EDT

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>> "bloomberg real yield" is brought to you by pimco. a global leader in active fixed income. jonathan: from new york city for our audience worldwide, "bloomberg: real yield" starts right now. ♪ jonathan: coming up, investors pricing in more rate hikes, chairman powell offering pushback as inflation expectations continue to build. we begin with the big issue. >> we are thinking two.
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>> the market is anticipating a quicker pace of tightening. >> talking about rate hikes sooner than anticipated. >> you have upward price pressure. >> the fed will be late to the game. >> they will have to do something. >> and provides a little flexibility to say we cannot hike. >> we were once talking about early 2023. >> we now saw the first one priced into the market in september of 2022. >> if you move them up a little bit from december. >> it would require june. >> all of a sudden, you end tapering mid-2022. that is putting it close. jonathan: joining us to discuss our my guests. h much daylightow much daylight is between this market and to the federal reserve? >> i think the market tends to
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swing one direction to the other direction, pretty extreme. we have been around talking about more inflation than the market has been pricing a long time -- for a long time. and it has started becoming a political issue, so i think the fed is likely to raise probably sooner than we were anticipating , and potentially more. jonathan: bank of america is with you, they pulled afford their call. "w raise our outlook on stronger rents." mike collins, where you? mike: we are sticking with our guns. the markets are playing a game of cat and mouse with the fed. the markets are using - to race ahead of the fed. and then the fed has caught up and now the markets are racing ahead again of the fed, pricing
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in two hikes next year, three in 2023, and more each year after that to get to 2% funds rate. and we are generally taking the under. we think there is a good chance, in a year from now, certainly two years from now, just as the fed is moving into action, to lift of the funds rate, that demand will be weaker in supply is coming online, and inflation and growth are both rolling ford. jonathan: you are pushing back on where it is priced right now, right? mike: i'm looking at the five-year tips. it hit 3%, meaning the breakeven inflation rate was 3% a year for five years, we are taking the under. jonathan: exact, where you? -- so, zach, where are you? zach: we see a gap. we have mid-2023 lift off. the risk is certainly scooted towards a sooner rather than
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later, but when anything about when the fed tapered in 2013-2014, it finished in october of 2014 and did not hike until 2015, but it again in 2016 -- but it began in 2016 and they waited another year before. so i expect this to be quicker this time around, as the recovery has been faster, so it makes sense to us, but there will be daylight between when they finish tapering and when they start hiking rates. jonathan: there are differences between the three of you, that outlook of inflation. mike thinks it will fade next year. sonal, i know you think this will be a lot more persistent. the last time we caught up with you in the summer you are beating that drum hard, what is it that separates you from mike collins at the moment? sonal: for example, when we talk about what happened previously,
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we were not looking at it against a backdrop where consumers had a massive quantity of top savings ready to go when they can. we were not looking at it at the time, after $1.9 trillion this year, we are still debating how much fiscal expansion we will get for the next few years. and something to keep in mind, while the fed tapers it is still expansionary -- they are buying each month. so we are still looking at expansionary monetary policy. this is all coming together and you need to have some dramatic decline in growth outlooks for this to meaningfully impact inflation. if i think about with the inflation outlook looks like, a lot of these supply chain bottlenecks seem to be running for longer. the chips were supposed to be
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six months, now at two years. jonathan: do you need growth? mike: you need supplied coming up, which is happening more -- supplied coming up which is happening more slowly. this week it is natural gas prices in europe. but today, the ukraine is negotiating with russia to provide a big discount to pipe natural gas into europe, to provide supply. so the markets will find a way, supply will eventually come online. i think the surprise will be how quickly supply and demand adjust. years from now, we might be talking about disinflationary trends coming back. jonathan: you say if we get to 2%, back up the truck and add duration. what about 1.75?
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mike: there is a lot of value in the long rates. the 30 year, we have loved it. i was looking at my notes from being here years ago, a yottabyte of 2% on a 30 year treasury would be a museum piece. and here we are all the way back to 2.10. today, you are seeing the price action. the front end is selling off and the back end is rallying hard, because of the fed hikes too aggressively, they will shut down the global economy and inflation will the rule of law. jonathan: i remember the cushion that led to the answer, i asked how you will look back on this bond market in 10 years with rates this low, and you said you would wish you had brought the 10 year where you are trading at that point. do you disagree, zach? zach: we do, yields will continue rising from here, and
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that coincides with our outlook for the fed to move slowly with respect to rate hikes. so we think it will keep the front end anchored and perhaps you will have aggressive repricing come out of the market and pull down front and yields. -- end yields. but with policy remaining accommodative through the middle of next year, and the rate remaining though through the middle of 2023, we think there is room for the back end of the curve to continue rising and get a boost in the next couple weeks, as we expect a fed to announce a taper on november 23. -- on november 3. jonathan: right now, the 10 is at 1.65. sonal, you are on the others of the trade to mike. mike is a buyer here. what is the limit for the 10 year yield? when does it become self-limiting? how hi can it go -- high can it go?
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sonal:sonal: i think i can go very high, because from my perspective, we are looking at more durable inflation. there is no reason to have negative yield rates, and we do, so i look at that and i do not see it being self-limiting. if we are talking about the fed buying the long end, to keep it surpassed, keep in mind -- that's expansionary as well . it does not help with the fed started buying in the long end, which ultimately i think will be needed if you want to keep the long end suppressed at about 2, 2.25. if you want the long end to stay there, you will need to take more actions, unless inflation just plummets. which we are not seeing. jonathan: but that has confused me. it has confused others, too. i spoke with some this morning and they pointed out that the front end pricing more hikes,
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mike, can you reconcile that? is there a disconnect? does this make sense? mike: the real yield you reference in the name of the show is the residual of this. as inflation expectations have gone up, long rates have not gone up much, they have been relatively range bound. the curve has flattened in the last few months. but as the fed hikes rates, it means a slower growth and inflation. the real yield, and i will take the other side, is going to be negative for the rest of our lives, probably. you should not earn a positive return over inflation if we are sitting in cash, that is not the world we live in. there is $17 trillion in the bank at zero, probably because the rate is too high. it will fit was -- if it was
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2.5, everybody would be doing some thing different. jonathan: to wrap things up, people have talked about breakevens this week. and people talking about the market implied rate of inflation. if getting about breakevens, subtracting the real yield of the curve from the nominal yield of the same maturity, does that give you a clean read of what the market-based expectations of inflation is? do you know what i'm getting at? does that make sense? is that a clean read on a market-based inflation expectation? are we covering this in the media in the wrong way and in the markets and elsewhere? zach: that is a great point. in the sense that it is not our only measure of market-based inflation that you could look at, you could look at inflation swaps, but they are pointing to higher inflation than what we have been used to. but from an economic fundamental perspective, we have inflation
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your 4% on cpi next year. pce around 3.5%. but looking past that, we have a coming down to 2%, a more comfortable level, that the fed has wanted to see for a long time now. as far as these measures hitting higher rates, it shows a large demand, i think, for real yield or inflation protection and we think that that will actually come off as the fed starts to provide less support. we think the taper has a bigger impact on real yields, but we do not expect inflation expectations to collapse, so we think that real yields move higher and it will push nominal yields with it. jonathan: is it a hedge or bet? those are two different things. up next, we talk about the auction block. this is bloomberg. ♪
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jonathan: from new york city, i am jonathan ferro. time to go to the auction block. in europe, raising 34 billion euros this week, a green sovereign offering in the u.k. and worst ever twenty-year auction in the u.s. this week, missing the mark. and carnival returning to the junk bond market, upsizing its offer and pushing weaker supply close to $8 million. my colleagues include zach, still with us, and mike collins.
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bank of america coming out with this data the week, turkey cutting rates, it is the 1000th rate cut, a cut once every three trading days. all we have seen is hikes. can you tell me what is happening in the emerging markets? mike: china will be joining the rate cut story. china is always the big story in emerging markets. and they are, unfortunately, slowing really quickly. it's not just the property sector, some of it is secular, tighter regulations, but certainly they are outsized relative to other their measure of economic activity. and as the air comes out of that, the rates are at 3%, they will have to come down. but every other central bank is going the other way. turkey is a little off the chart
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here in terms of their policies, but every other central bank is hiking rates. they do not know how to fight inflation, they have only one tool, to hike rates. and by hiking rates, the fed will not solve a shortage of materials or the supply bottlenecks. so they are really going to have a dilemma. jonathan: i think it is important what is happening in em, 75 basis point hike in russia. morgan stanley, 125 basis point hike, looking for that in brazil. and that is what they are looking for next week. from your perspective, windows this matter to the global economy, dm specifically? monster rate hikes in really big economies. zach: we think it is a big theme and it is going to matter sooner rather than later. i would switch focus to the bank of canada, which also has a
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meeting next week and we expect them to announce tapering as they focus on forward guidance as to when they might actually begin hiking rates. the big one earlier this week was the bank of england coming out and essentially showing that they will hike rates in november, almost a done deal. we expect the fed to taper on november 3. i think that you are seeing a big shift globally and it will start to matter, but with respect to the u.s. and domestic demand that we see here, we have a sturdy backdrop, so we expect the economy to remain on solid footing, but tighter policy is a big driver of why we see rates moving higher in the near term. jonathan: who held speaking to the financial times, chief economist at the bank of england, calling november for a live meeting. what's fascinating about the interview, when you read through it, away from the big flashy headline about a live meeting on november 4, he essentially is
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asked by the financial times whether he would consider going back to pre-pandemic levels, and they are still committed to the idea of transitory. so the journal might start sooner, but for the bank of england the path is still shallow. it raises a question for me, even the likes of the bank of england right now, they are still thinking about transitory inflation as a backdrop. from your perspective, heavily broken out of this low inflation mindset at the central banks yet? mike: apparently, we have it. jerome powell was talking about inflation expectations this morning, still going back to 2% over the next couple years. so i think that the bank of england, the fed and other central banks, they will try to raise rates. raise them a little bit, then be surprised at how much financial conditions tightening as a result of that. you see it in the emerging markets. with all the new debt we have, we had a lot of debt as it was,
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but when covid hit the levels went up, so any quarter-point hike has a magnifying impact on these financial conditions. maybe the fed hikes to 1%. they get stomped out. that is a likely scenario. jonathan: franklin templeton, we got comments from. but sona isl -- sonal is back with us. we are talking about interest rates. you think we can take higher interest rates. you think that selloffs in the bond markets will not be self-limiting. sonal: i think i caught the end of mike's comments, and i think right now if -- well, if i can go back to something before the break, the inconsistency between the short end and long end. the long end cells off, i think the short end is not pricing in
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as many hikes as it will lead the long end is going to come down, that is number one. two, if i look at what the fed is saying, or the bank of england, i would only say one thing -- they would say that, wouldn't they? if you had jerome powell saying he did not believe that inflation expectations were going to come back muslim buddy like me will say, well then why do you have rates as low as they are? why do we have such expansionary monetary policy, if you do not believe that rates or inflation is going to come back down? in a sense, more than being self-limiting, i that central bankers are talking their talk. they are all in expansionary territory despite inflation. and unless they believe that inflation is going to come down, their policies are inappropriate. so i actually do not agree with mike on this. jonathan: fund managers just talking, who would've thought that? sonal: seriously.
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jonathan: unbelievable. sonal: isn't that incredible? jonathan: i think that mike is talking his, too. final word on credit. investment-grade credit, ubs pointing out that they will have a negative year. we still have some months to go for investment-grade to have a negative year. we can have a negative year in investment-grade and then we are up year to date, how rare is that? mike: it is the duration component. if you look at the credit spread, the excess return of the corporate bonds versus government bonds, it has been a huge year. they have been correlated with stocks, earnings are great, fundamentals are great, companies are upgraded faster than downgraded. we are at an incredible part of the cycle, where we have a tremendous rate of credit calling improvement, and it is reflected in the outperformance of corporate bonds versus government bonds. that is the key point. jonathan: mike stallings -- mike
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collins is sticking with us. it's good that u.s. that in different places. the week ahead, featuring and host -- a host of global rate decisions. that's next. this is bloomberg. ♪
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jonathan: from new york city, i am jonathan ferro. this is "bloomberg real yield." the week ahead, economic data and focus with the fed entering its quiet period. consumer confidence is coming on tuesday. the treasury will be auctioning off five and seven your notes. we get rate decisions from the ecb. and we round out the week with u.s. personal income and spending numbers. now to the final round, the rapidfire around, three quick questions and answers. does inflation end next year with a two handle, three or
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four? sonal: i will go with three. sonal: -- mike: two. zach: three. jonathan: rate hikes from the fed next year, 25, 50, or none at all? mike: 50. zach: none. sonal: probably 25. jonathan: easy one, the big of england says it's a live meeting commit do we get a hike at -- meeting, do we get a hike at the next meeting? mike: yes. zach: yes. sonal: yes. jonathan: i enjoyed the show, so thank you for being with us. and, zach, i got the name right at the end. that does it for us. same time, same place next week.
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from new york, this was "bloomberg real yield." this is bloomberg tv. ♪ this halloween, xfinity rewards is offering up some spooky-good perks. like the chance to win a universal parks & resorts trip to hollywood or orlando to attend halloween horror nights. or xfinity rewards members, get the inside scoop on halloween kills. just say "watch with" into your voice remote for an exclusive live stream with jamie lee curtis. a q&a with me! join for free on the xfinity app. our thanks your rewards.
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mark: i'm mark crumpton with first word news. democrats are getting closer to an agreement on a roughly $2 trillion compromise version of president biden's spending bill. nancy pelosi says that she is optimistic after a meeting today with the president and chuck schumer. the deal could allow the house to vote on a separate $550 billion bipartisan infrastructure bill that has been held up by progressive lawmakers, who first want it on the larger bill. -- who first want an agreement on the larger bill. pandemic relief spending sustained at the federal government's massive borrowing needs and to the treasury department says the deficit for the fiscal year, through september, was $2.77 trillion compared with or $3.1 trillion se


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