tv Bloomberg Real Yield Bloomberg December 17, 2021 1:00pm-1:31pm EST
>> from new york city for our viewers worldwide, i'm taylor riggs info jonathan ferro. "bloomberg real yield" starts now. coming up, a hawkish pivot at the fed laying the groundwork for rate hikes in the new year, as the bank of england delivers a policy surprise, unexpectedly raising the benchmark rate. investors grapple with global monetary tightening as a central banks look to pull off the balancing act. we begin with global central
banks going their own way. >> they just have to open up their options. >> not going to pull liquidity too early. >> some of this is confidence in central banks communicating that they want to be nimble. >> i think they have been trying to catch up. >> the bank of england in the minutes today said that the impact of omicron will be in effect. >> focusing on the labor market, but the timing of things has been complicated. >> if policymakers are tackling short-term inflation more readily, that is boosting consumer confidence in helping to improve growth projection. taylor: joining us now, peter from morgan trust--northern trust. colin, let me start with you. when you think about this weekend what happened on
wednesday, is this a market that is relief that at least we know that they are taking inflation seriously? >> i think that is a good way to frame it. when you look at how the markets reacted after the announcement, what at first look like it could have been a hawkish pivot because we saw those dots increase from one hike to three this time, but when you look at the market reaction, you saw short-term rates move modestly higher. stocks continue to rise. not like there was concern that there was too much of a shift and they would suddenly slam on the brakes. they communicated clearly in the markets digested the information and other market looks to be ready for a couple of rate hikes next year. taylor: peter, do you agree that the fed struck a nice tone of balancing some of the inflationary data and then the concerns about not scaring the market? >> i think they did a relatively good job trying to find the balance.
one of the things that sticks out to us as it relates to the. plot -- dot plots, we do think the forecasters are way ahead of what the reality will be. a lot of times we try to analyze the fed with precision and try to focus on when the rate hikes are going to happen. the one thing that stuck out to us was the terminal rate. the terminal rate is 2.5%. we think that is just way too aggressive, given the uncertainties in the market. having three rate hikes next year as well as in '23 seems way too aggressive. sometimes we have to take a step back and think about the longer-term view of what this cycle is going to look like. quite frankly, we think 2.5, especially if you look at the 10-year treasury note yields come in looks way too aggressive. if the fed is this aggressive in
tightening from that is going to have a little bit of an impact on the growth outlook. taylor: while we are speaking we are hearing that the baseline outlook is for inflation to moderate. inflation alarmingly high persistence and has broadened. the omicron variant is posing uncertainty, but the u.s. economy is closing in on maximum employment. really highlighting that alan think act. -- that balancing act. marilyn, great to have you with your global perspective as well. central banks are going their own way. on the backdrop of the ecb that continues to stay low and study, that caught your attention this week? marilyn: yes, i think to a certain extent all the central banks looking at more optionality for next year.
they all clearly reference the fact that inflation is higher and been stickier than they had anticipated earlier on this year . i think they are all singling they are very willing to address much more forcefully this year. i think they had sort of temperate expectations a little bit. it is about 5% now, set to hit 6% next year. they are giving themselves a little more options into next year. the fed is clearly saying they are very focused on inflation. even with the ecb, it continues to remain very loose. nevertheless, it was on the slightly hawkish side where it was not as much of an asset purchase next year. i think all three central banks were all signaling that inflation is a very important
factor going into next year and they are all willing to act if they need to. taylor: collin, you were nice enough to go across asset for us earlier. you are highlighting the cues that the market was taking from the equity perspective. that is where i wanted to tie in some of the results of the latest america fund manager survey can which it said that policy error by central banks is the top concern. it was marking one of the largest readings for the top worry in the history of the survey. collin, are we passed that worry, or is there room for a policy error as we head into next year? collin: there could be a worry. what would concern us would be an even faster pace of hikes than what the updated projections are telling us. when you look at the credit market specifically, a fed rate hike cycle especially when it gets to the neutral rate, that
is what can kill a credit rally. for now we are not too concerned. while rising inflation can lead to more volatility with junk bonds, we don't expect a sustained rise in spreads or sharp decline in prices because the fundamental landscape is strong. growth is still high, albeit decelerating a little bit. demand remains strong given the low rate environments. we expect volatility in 2022, but not the sharp price declines with current bonds. taylor: i have a few follow-on points on that as well. in the meantime, peter, you were talking about the dot clots, that the markets were pressing in something you are not seeing. what is the biggest policy error, hiking too soon, not hiking enough, tying in the taper and the hike?
peter: i think the policy error would be they are attaining way too quickly. i think the fed does need to show and demonstrate some patients here because there is a lot of uncertainty when you look at things like the omicron virus variant, and quite frankly, even more after that. we think the fed historically has been very cautious, and we think that they have had a little bit of a departure from that point of view. again, from our perspective, we just think the fed, at least the dot plots are way ahead, and it would be a policy error if all of a sudden the supply chain disruptions, labor shortage, and let's talk about the base effects, or one of the reasons why inflation was so high this year, it may reverse itself with calculations next
year. if the fed all of a sudden sees inflation fall too quickly, they are still on a tightening path. that may prompt a defendant to actually pause. heaven forbid if the growth outlook does get disrupted and all of a sudden the fed has to reconsider, they may have to be targeting for longer or potentially -- that would be a major policy mistake. taylor: marilyn, do you see that with boe as well? some of the analysis i read said they are more worried about inflation, and yet the ecb is more worried about the variant and the economy than they were about inflation. what is the risk of not taking a stricter stance when it comes to inflation or the variant? marilyn: i think they put a
measure this week to raise rates slightly, giving them more flexibility and data around the new wave of the virus and we will have a little more data around the economy after the holidays. the bank of england, they do have high inflation rates in the u.k. and they have taken small steps to address that come and i think inflation is the key concern. that being said we will see base effects coming through next year. we will see inflation down a bit . i think in the euro zone it is a little bit different when you look at some of the economic data out of the euro zone in terms of the pmi, after seeing the spread to deal with the virus. the bank of england wants to take a small step just to give themselves a little more flexibly going into next year. in terms of the u.s., it does
remain on a very robust footing. if you look at other economic activity, the earnings backdrop, we think there continues to be a very positive backup going into next year when you look at the 10-year and the doubts around the virus and what might happen in the next few weeks. i think the u.s. economy does remain on a solid footing. taylor: collin, final question before we wrap up this segment focused on credit, and that is the balance sheet. some of the commentary i read is that we are so focused on the taper and the rate hike. are we spending enough time talking about the balance-sheet discussion and the disruption of the balance sheet? collin: i think we are spending an appropriate amount of time. we heard from pal -- it was the first time he brought it up in the meeting, and when the question was posed about the timing, he alluded to the fact that we will probably be waiting shorter period of time this
time around for them to shrink the balance sheet ella tip to the last cycle. when you look at the long-term rate, as the other panelists mentioned, there's not much room for the fed hiking now. you wouldn't want the fed to hike enough, but the balance sheet gives them a tool. it is a tool in the way they communicate their plan can allow long-term yields higher. taylor: everyone is going to be sticking with us because coming up next, is the auction block. the u.s. treasury pumping up auction sizes with the debt ceiling showdown in the rearview mirror. this is bloomberg. ♪
taylor: i'm taylor riggs, and this is "bloomberg real yield." time for the auction block. there were no investment-grade sales this week, and this comes one week after sales talks of $38 billion in monthly issuance. that number for december top to the previous record, which had broken the first two weeks of the month. there was a little bit of activity in the high-yield market. a mobile gaming company sweeten the deal terms with the yield of 11%. u.s. junk bond issuance for the year is more than 457 billion dollars, a record level. president biden signed a $2.5 trillion hike to the debt ceiling. u.s. treasury is pumping up its bill auction sizes as a result.
investors looking to the credit insight and that inflation debate. >> when you look at credit growth, credit growth in the u.s. or in the euro zone is still very weak. annual rates of growth in the corporate sector are really in the low single-digit rates. it is almost like doing we are well on our way to re-normalize out of the pandemic and return to the low-growth, low-inflation world we have had. taylor: peter yi, marilyn watson, and collin martin still with us. given the divergence in the euro area, what other opportunities are you finding in credit? marilyn: in credit options in particular we have switched more of our holdings to european investor great credit, for example. we like names where we have seen
slight widening and we have allocated more money there. we are for duration in terms of germany as well, particular given that the ecb this week, they are more on a slightly hawkish tilt. going from a slightly steeper yield curve and higher yield as well. unicredit market overall, w--in the credit market overall, we see better valuations in the euro zone. taylor: i want to talk about high-yield a little bit. bradley rogoff of barclays has seen a choppy credit markets ahead. he wrote, "we expect the trend of higher volatility to continue through the holiday season and into the new year." collin, is the biggest risk to high-yield now some of the volatility? collin: we think it will be more volatility as opposed to a
sustained drop prices. what makes us a bit concerned is the ongoing supply chain bottleneck. i'm optimistic that those can improve in the new year, now with the new covid variant and more restrictions overseas, that continues to be a risk. when you look at a lot of the lowest-rated companies, the junkiest of the junk, they have those ratings for a reason. they may not be able to withstand anything that throws a wrench in their business model. that continues to make us concerned there. one area of opportunity with our clients at schwab is preferred securities. we have seen a reversal from the post thanksgiving spread surge and a lot of spreads and prices are back to where they were a few weeks ago, but not so much in the preferred market. preferred prices have fallen pretty sharply and they have not rebounded. we think it offers a relatively attractive entry point for investors who are looking for the higher-income gains in a world --
taylor: peter, it seems to me you were taking the other side of that debate. citigroup was warning a little bit about this, saying many blue-chip u.s. companies are likely to boost their borrowings next year until rated just a few steps above junk. they may not be fully prepared for, well, for four years running that worst-performing major issue were has been a company that began the year with at least one single-a rating, hailing from sectors as diverse is utilities, aerospace, energy, and technology. is there going to be this wave of issuings that pressures these ratings, or is high-yield and still good shape? peter: we have the strongest conviction around high yields and think that investors could have exposure, and quite frankly, that asset class we are
forecasting returns in 2022 to be five to 7%. we can get equity low returns in high-yield that has more consistent -- as well as it has the ability to just be a less risk-tolerant as a class. if you look at high-yield for the next year, we think the fundamentals look really good even for the lower-quality credits. we think just from a default perspective, historically high- yield the defaults are roughly 3.5%. we are forecasting the next couple years they will hover around 1%. with the higher income streams, with the better fundamentals, and with the lack of defaults can we think high-yield is going to do really good in the next couple years. taylor: marilyn, i will give you the final word. i think the bigger risk this year was that -- how are you
finding china investable, if at all? marilyn: we do have allocations in china. there imported on a bottom-up fundamental level. given the size of china in the bond market space, given its importance in terms of a driver of local growth as well--global growth as well, and china is an incredible important market, something we are constantly keeping an eye on, we do have allocations there. it is important to understand on a fundamental level what we are buying and the impact it could have. taylor: peter yi, marilyn watson, collin martin, everyone is going to be sticking with us. it is going to be the final spread. all in the holiday-shortened trading week. that conversation is next. this is bloomberg. ♪
taylor: i am taylor riggs and this is "bloomberg real yield." now for the final spread, all about the week ahead. a host of u.s. data next week, starting with gdp. plus, the fed's preferred inflation gauge and the university of michigan consumer sentiment survey. markets are closed for the christmas holiday. peter yi, marilyn watson, collin martin still with us. final thoughts as you think about the next week. is it the focus on gdp, or are we set and know where we are going until march and maybe the economic data doesn't matter as much? marilyn: i think the economic data does matter, now where we are glad that the market is focused on going into next year and it is clear that gdp is on a
solid path, and i think over the next couple of weeks brzu very low liquidity in markets--we are seeing very low liquidity in markets. i think the focus will be more headlines around the virus and other things and maybe around economic data. it will be a very high focus on the data and the fed will be more data-dependent when they start to raise rates. the data is very important, but the market may not be so focused on it. taylor: peter, do you agree? peter: i do agree. the market is looking to 2022. it will be pretty quiet for the next couple of weeks, so we are not expecting all that much, even though the data is important. taylor: collin, rapidfire, two or three rate hikes next year? collin: i will go with two. peter: one. taylor: marilyn? marilyn: two.
taylor: ok. i guess we are going to have to leave it there. i always wish we had more time. really appreciate it as always. peter yi, marilyn watson, collin martin. divergence of rate hikes next year as we await more guidance from the dot plots. this was "bloomberg real yield," and you are watching bloomberg. ♪
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the cdc has recommended a coronavirus vaccine by pfizer or moderna over the johnson & johnson shot. president biden warned that unvaccinated americans faced what he called a winter of severe illness and death and asked the u.s. supreme court to allow a federal shot mandate for health workers to take effect. pfizer has asked u.s. regulators to grant full approval for their jab in children between the ages of 12 and 15. british airways has put its flights to hong kong on hold until march. the move comes after hong kong imposed strict quarantine rules that forced air lined workers -- airline workers to stay in a makeshift camp.