Extinct him investor fixed income investors interested. They are crushing yields. Joining us now is jeff rosenberg. Its fantastic to get you on the show for this topic, the role that treasuries play in a portfolio, from 2020 looking out. Its a huge topic at blackrock. How are you thinking about this question . This i wrote a piece on and continue to write under the theme on investing without a parachute. This september is a really good example. We wrote pieces on it and everybody is talking about it and its like ok, what does the new world look like that we are going into . In september, equities are down 8 and treasury yields are highlighted by all of those comments. Barely budging. Its the combination of the low yield makes the income relatively unattractive, a couple of comments in there about taking credit risks. And it will come around to that question in a second. But another thing that is difficult about the investing outlook now and where treasury yields are is that they are not moving much lower. With andlow to begin they dont have much further to fall. You have lost their hedging efficacy. Thats as big of an issue to investors, not just fixed income investors but all of the investors using fixed income as critical balanced. Thats as important of an issue as the loss of income. Jeff jonathan lets talk about that and how you can make it up with the credit risk. But with investing without a parachute, is the replacement treasuries . Something to put into the makes for a portfolio, versus a 60 40 mix and putting something totally in the trash . Jeff we have to start by appreciating how remarkable 40 was. Years we haven 40 faced a unique confluence of events that made hedging efficacy so wonderfully attractive. Its a recognition that those things are not a given. They are not structural. Youre not going to have a hedge and get it for free. They are a consequence of the unique structure of the past environment. Recognizing that, the structure going forward, the underlying determinants is what made fixed income so effective and they are all facing very significant challenges in the current environment. The bottom line answer is no, theres not a simple replacement. Whats lost was significant and unique in terms of the confluence of events that led to the behavior. It is not simply substituting nominal bonds with tips or fx currency. All of those are partial solutions. We will have to think much more holistically about portfolio construction in the future and todays investing environment. Jonathan lets start with a series of assumptions. That you should take less risk and assume lower returns. You might make the assumption that you need to embrace higher volatility and take more risk. What are the assumptions that you think investors should make to make the next decision which is what bucket to put the cash in . I dont think its about the assumption so much as it is forecast. My forecast might be someone elses assumption. Is thecould be what current 10 future structure. There is rumors of hedging efficacy. And what does that do for objectives . If you are looking at relatives if youre looking at this relative to the todays terms, the solution might be to taking on more risk. And that might be prioritizing one objective, the attainment of anotherurn over objectives, which is the or myity of my access asset liability over time. I think what investors have to look at is the attainment of their objectives is going to entail a much greater degree of tradeoff than we have seen before. About thee thinking portfolio mix with fixed income. Jonathan in terms of the conversations you are having at the moment. With the investors at the moment, do you think who is ahead on this . Whos giving more than others . And who needs to think about it with more clarity and detail with more effort . Jonathan i think everyone it jeff everyone is thinking about it because the reality was quite laid quite clear clear. Takeaway, itone was the extension of the forecast period to 2023 with no change in the Interest Rate outlook. For those who were hoping that it was a Crisis Response and the fed will normalize and we have been at zero Interest Rates before. We can wait. I think this is a recognition that this is a different operating environment. Is the implementation of the and it is framework dawning on folks that even after obtaining their objectives. They will keep Interest Rates at zero. This is very different. Asking whatwere does normalization look like and what does liftoff feel like and i can get back to a normal riskfree Interest Rate. Is very different and i think its dawning on investors across the spectrum. Particularly after we have seen another year of forecasted interestrate staying at zero. Jonathan i would love to know what that means for you. Highyield spreads have actually widened, not an insignificant amount. Harder for credit spreads to widen in this environment . That it makes it more difficult. But also because we have a price insensitive buyer . How does that shape your views on credit . Jeff theres a couple of crosscurrents. In the fed support is most explicitly in Investment Grade spreads. There is a real dampening of volatility and implicitly there is some support for the crossover area with fallen angels providing a bit of support. The firstorder is that this dampens the volatility in the response of daytoday moves and even smaller moves like we have seen in the month of september. The reaction to high yield is lower than it otherwise would be. That gives you a degree of support for cushioning some of those blows. Aspect when weer think about credit is that its related to the earlier line of question what the lost of ballast hedging efficacy. When i think about spread risk and my poor folio and what are my offsets, i have hedges. Rates riskfree interest and they have negative correlation but there beta has collapsed. Run inunt of risk that i my credit portfolio when im trying to find talents in that portfolio with offsets is a lot lower. That means i have to manage that risk and except that i have higher risk or change the character of the risky assets that im investing in with the recognition that my hedge efficacy is much lower in todays environment. Fascinatings a conversation, especially with those clouds on the horizon. I want to get to rapidfire, three quick questions, three quick answers. One thing we have discussed, from where you sit, can we get a fiscal agreement in d. C. Before the election . Yes or no. Jeff no. Its unlikely. Highyield, important for many people now. It come up several times. Built in and around 500 basis points, do you think we see 400 or 600 first . Whats first, 400 or 600 russian mark jeff 600 . Jeff thats tricky postelection. Jonathan we have gone back to this question multiple times. We are slat bank in the middle of the post bank. Will we break out of this to the upside, or are we on the downside. This might be contradictory to my highyield answer but to the downside more than the upside. Jonathan coming up tomorrow, and next week. President trump announcing a Supreme Court nominee on saturday. This is the first president ial debate. Speaking ahead of the e. U. Summit on thursday we get u. S. Gdp, jobless claims and finally, this is coming around quick. Payroll is on friday. We will see you next friday on new york time, 6 00 on london. Have a wonderful weekend, this was bloomberg real yield. This is bloomberg. Vonnie welcome to bloomberg markets. How equitiesat will increasingly affect markets. And well speak to David Abraham about who we can expect President Trump to choose for a Supreme Court nominee. All of that and more is coming up. Lets get a quick check at the markets. Green on a friday. Healthy nearly 9 10 of 1 . Thats a mistake. Be agine that was meant to currency but we will get back to that. Up with theindex is vix at 27. And on wall street, its a rite of passage to spend an Election Night teeing up orders and making trades until morning. But this could be even longer than normal. We are joined by the Bloomberg Finance supporter, jenny. Put in long hours on Election Night. But will they be up if the election will not even be decided on Election Night which seemed be the best case at this point. It will be interesting to see if that changes how things are for returning workers to their desk. We are inviting folks back to the office but it has been slow. As you get closer, different metrics are showing that volatility might be spiking. For now it seems like most of this will be happening from home. Vonnie talk to us about the wild swings and what they will be based upon. A couple ofeard different expectations. The this might go as much as eight times. Banks are already starting to stress test the system and make sure they are not going to have any issues come election day. They definitely want to make sure that whatever happens Election Night that they are there. We will see if it is eight times the normal volume and thats what actually happens. We had similar experiences back in march. Banks were in the process of sending their workers to work from home. It seemed like people are feeling pretty confident. Have had a lot to contend with and continue to. How are they preparing their system to be ready for Election Night . Jenny theyre doing a lot of system checks where they make sure that if volumes do spike that there is no chokepoint, no issues with any type of system. They are hiring these outside firms which can come in and do the synthetic models. They are in the process of that now. I think a lot of the banks feel they have done that all from home. And are definitely testing making sure they are ready. Wenie any update on what could expect from the biggest banks. Morgan,ed anyone in jp there was a bit of a setback when people had to go home after a covid positive case. What is the story now with the lack of requests being made by the big bank. A lot would like to see more employees back in. But its very backwards and forwards. They will invite folks back in. A lot of banks have already stacked at their London Office pretty heavily. To banks are back up to 25 30 employees being in. Process follow that after the Prime Minister announced it earlier this week. Its definitely an uneven shape to the curve of people coming back in. Are inviting more folks to come in over time. Vonnie thank you. And still ahead, deteriorating social conditions. Katie ines how and and equities will increasingly upset markets. More in a moment. This is bloomberg. Vonnie this is bloomberg markets. Social and equities will increasingly affect markets. This is according to the director of Investment Research at bridgewater associates. Specifically, what social inequities. Where do you see them beginning to inspect markets . Karen ultimately, policymakers intend for whatever they are doing to raise prosperity over time. For most of modern his tree, standard measures like gdp growth and unemployment were pretty good proxies for what was happening with the prosperity. Its what policymakers paid attention to. In the decade or so coming out of the financial crisis, we are seeing this significant diversion. This actually came along with rising inequality and deteriorating Health Measures and safety measures. As well as infrastructure, housing, just about any qualityoflife measure you could come up with. And then covid came upon us and has brought not only the worst downturn in a decade, but also one that actually is more vulnerable than most. So job losses are greater for minorities. Women are more impacted by the need to take care of children who cannot go to school in person. Lower income households have a bigger impact on schooling being interrupted. Have this policy landscape which has changed significantly because of covid which can actually take account of these social inequities. The most important is that it used to be that Monetary Policy was the most important tool. And now fiscal and Monetary Policy together are the most important tool. Policy is really inherently distributional. It has the mandate to look at social issues and to address them directly. Monetary policy less so but even in the context of the changing policy landscape. The fed is able to say they are such weak cyclical impacts on inflation. We have not seen low unemployment translate for so many years and lets think about our maximum employment mandate as broadbased and inclusive. Looking at how berries communities are experiencing the labor market. There is much less need to preemptively tighten and much more interest in saying maybe we dont preemptively tighten and we can benefit. We deftly have the Federal Reserve talking about targets but they say there is a with to what they can do difficult conditions for some parts of the economy. You are saying they can do things like have reporting requirements. On the fiscal side. Do you imagine a different changeover in the fed or Something Like that would have an impact. On thehis effectively path to where you think we are going anyway . Karen we are pretty vigilant that any president is coming cliff. Large fiscal and so far, social distribution is addressed very directly by the package that has been employed so far. We have unemployment and low income households. We really feel that so far, this has been affected. Vonnie karen, we will have to pick a set. We are having a technical difficulty. Mark this is bloombergs first word news. Emma kratz on the white house are deciding to restart negotiations on new stimulus. That has drunk skepticism in congress that a deal can be reached before election day. Pelosi ander nancy treasury secretary Steven Mnuchin thursday expressed they were willing to resume talks. House democrats started work on what would be a roughly 2. 4 billion stimulus proposal that they could take into negotiations. The deal is still more than 1. 5 trillion of stimulus that the president indicated he would accept. The late Supreme Court Justice Ruth Bader ginsburg is lying in state at the u. S. Capitol today. The first woman in American History to do so. A military honor guard carried her casket into statuary hall for a private service. Mourners gathered under coronavirus restrictions for the service. Judge ginsburg died last week at the age of 87. More people are likely to get flu shots this season and Health Officials are warning that could lead to shortages. The World Health Organization says demand for the influenza vaccine is climbing as Health Officials try to keep the flu at bay to keep hospital beds free from covid19 patients. Influenza and covid19 symptoms can be similar and only a lab test can really tell the difference. Global news, 24 hours a day, on air and on bloombergquint take, powered by more than 2700 journalists and analysts in over 120 countries. Im mark crumpton, this is bloomberg. Amanda live from toronto, this is bloomberg markets. Storieshere are the top we are following from around the world. President trumps pick for the Supreme Court will discuss who is on the shortlist and the decision about confirming a Supreme Court justice so close to an election. For months, ceos say they have been bullied by money managers. We will discuss whether biggest investors in the 1. 2 trillion dollar leverage market are now taking them on. Staying in that world, some of the biggest hedge funds are keeping their workers at home into next year and we will discuss the slower return as some big wall street firms try to get employees back into the office. Lets take a look at the markets. The markets are faring a little to a little better today. Most analysts are suggesting volatility be weak just will be with us for a short while because of the uncertainty around the stimulus package. It remains in negotiations and that could have a big impact on personal income and spending in the fourth quarter. Its slightly more positive sentiment not right across the board but energy is a weak spot. The s p 500 is the big drag with some tepid behavior from rate sensitive sector but tech is back in focus and are leading the market higher and we have seen that in toronto as that is a place of leadership with places like energy and materials sinking but its not just the stimulus but the economic and political fallout attached to that thats causing some uncertainty but also the politicization of the nominee to the Supreme Court after the passing of Justice Ruth Bader ginsburg and the understanding that President Trump will announce his new nominee tomorrow. Where does that take us and what might happen next . David abraham is a Professor Emeritus at the university of miamis law school. Thank you for being with us. There is some hint about what we expect to hear tomorrow. Whats the significance of getting this announcement weeks before a president ial election day . Hard rightment to a Supreme Court has been underway for a while. We saw that in gorsuch and the kavanaugh appointments. There is no doubt that someone with a very attractive biography florida, the cuban american sector with the trump plan, its the moment. The Senate Majority may not be there next year. Coalesced around the importance of an appointment that thise project presidency in this Republican Party are committed to. Amy ehret ispears the front runner but there are a couple of others. Have you looked at them and what would be the case we should look konyst if it should be amy barrett . Whats interesting is that is they have a conservative catholic, natural rights approach to law, very much in the spirit of the late justice scalia. In addition, they have biographies that are very attractive. They live in an area where those biographies become important whether its Kamala Harris or amy barrett or Barbara Logoa, the mother with her children, coming up from their bootstraps, these are things that sell well these days. There is an audience for a combination of humanity and hard right politics. Especially for the global audience, this supreme more conservative justices than in the past. A what extent can we rely on judge and particular judge operating at this level, illegal legal mind at this level . Should we be more concerned with how they interpret the constitution and less with which political stripe we would paint them . We look at the rulings and put them in buckets of political ideology but can we trust them on this courts . Can we trust their constitutional interpretation . The border between law and politics has been porous. What we have seen is less and less willingness to do as Justice Roberts said, just call balls and strikes and not ring politics into it. It has never really been true but what is true now is the lack of effort to disguise or cover over the differences. Expect Barbara Logoa to bring her strong support for executive power in the spirit of attorney general barr. I would expect her to bring her preferences for business rights over labor rights. One of the things she did on the floor of the Supreme Court was overrule the effort of the city of miami to increase the minimum wage locally. Issues that one can describe as political but they come up in the form of judicial opinion. Its about legislation, policy rulings and the like. Interesting because i dont remember biography during being a problem during the kavanaugh hearings and i cant imagine it wouldve helped there but you say it will hear. That said, you can never know how it justice will vote once they are actually seated . I wish that were the case. And they areprises always noted but one of the things thats been problematic in the last generation is the predictability of judicial opinions especially at the High Court Level where the issues are much more about fundamental philosophical orientation and less about who is responsible for the auto collision. Amanda one suggestion that has been floated, should joe biden win the presidency and the democrats win a plurality, that they expand the court so that you restore balance between socalled republican and democratic judges. Is that an option that would be palatable . It would be extraordinarily difficult. Fdr, at the height of his new deal powers, was confronted with the very conservative Supreme Court that opposed most of his moves. He attempted to expand the size of the court, it was called Court Packing at the time, and many of his allies deserted him on that. It would be a very major step. On the other hand, the threat to do so works. , the switch inse time that saved the nine. The Supreme Court buckled when it saw how popular fdr and the new deal were and they saved their existence as a ninemember court by switching just in time to validate the very popular new deal legislation. Weaponeat is a potential but if it happened, i would be amazed. Vonnie you teach property immigration and citizenship law and the transition to social theory. Im curious how you imagine immigration plays out over the next two or three years and whether we get another donald trump term or abide in presidency. Or a biden presidency. Thats an immense question. Not too many years ago, there democraticlican piece of legislation in the senate that was almost approved when the thin tea party, the hard right wing within the Republican Party, said there was no way it would go along with that. Since then, we have moved to more exclusionary positions on the immigration front and we have seen that less in canada but certainly in europe as well. There is something going on largely having to do with immigration caused by the climate crisis, by the failure of states around the world. I think we are in for a long ofiod of protectionism pressure to keep borders closed. The covid epidemic has legitimized the closure of border in europe. We have seen the agreement for free travel in the eu. One of the key accomplishments of the eu is suddenly suspended. European, the Eastern Countries dont want any part of migrant reception. I think we are in for a rough road ahead. On the other hand, i think a Biden Administration would try to rationalize the procedures some. You dont have to have too long a memory to recall that president obama was called the porter in chief by advocates of more immigration. I think the immigration road will be a very rocky one regardless of whos elected. There may be less demonstrative cruelty than we seen from the Trump Administration under his successor. Forie thank you for that and we appreciate your time. Managers with troubled loans on the move that can help them get new capital and can greater powers negotiate with hedge funds . We will discuss next. This is bloomberg. Vonnie this is bloomberg markets. Clo managers are making amendments to better fight hedge the loans that they own get into trouble. One of the loans they own or many. Joining us now is lisa lee. What are clo managers trying to do . Things an interesting about this default cycle where we have some of the most bruising battles between lenders as they restructure companies that fall into trust usually because they have been profoundly impacted by covid. Clos handcuffed themselves willingly in distress situations because they wanted to make sure that people who invested in them dot very safe and they would extraordinarily risky stuff. Hedge funds have started taking advantage of those. The clo world has woken up to the fact that this will be a really bruising battle. What can they do to fight back . There are limitations that they can do but what they are doing mend the clo so they can have fresh cash. Fresh cash is the biggest tool and restructuring. That gives you the ability to inht back and participate the various options the Company Wants to do to get out of trouble. We showed that chart which is amazing of the expected defaults of leveraged loans. This could be tied to the pandemic. In terms of the terms that they are trying to change and the lack of flexibility, how much of this is a surprise to the players involved . They always knew they had limitations but what surprised people is that hedge funds would try to take advantage of them. They have had these limitations for a long time and in previous cycles, they havent been as much a target. Two things that have changed is the Leveraged Loan Market and clos have grown to their bigger theet and its awful how coverage of loans have been in the last decade. With new documentation, hedge funds can come in and press one group of lammert of lenders and process them over lenders than they previously could. Year,having woken up this they are saying we are a target now and we need to fix this. They are trying in various ways. They are having limited success so far but they are definitely trying. Amanda in terms of what you think the options are for the players in the market, we saw the percentage of potential defaults. How destabilizing is that rate of default for the investors in the clo market . Thats a huge default rate. There is a lot of Equity Investors and People Holding the lower rate of date will feel some pain. There has already been pain. It will just get worse as the default cycle picks up and more and more companies go default and go bankrupt. How much they can recover when these Companies Default matters quite a bit. That will depend on how willing and able they are to fight against the hedge fund maneuvers. If there is a lower recovery, that will be more painful. Its always great to have you with us, lisa lee from bloomberg and speaking of hedge funds, while many are starting a slow return to the office, hedge funds may be slower than others including banks. We will look at what that might be about after this. This is bloomberg. Amanda this is bloomberg markets. It is time for our stock of the hour. Kayley draft king is up nearly 5 in todays session. The say stock thats nearly up or hundred percent year to date as a couple of factors are at play. It was initiated with a buy rating at Argus Research and analyst put six to five dollar price target on the stock that ties the highest on the street and represents about 25 upside from current levels. He becomes one of 12 analyst with a buy rating. Pac12,ate news, the one of the power five College Athletic conferences, will be resuming football come november. That will add another seven games of the football schedule alongside the big 12 and scc which start tomorrow. Thats good news for draft kings. The final picture is potentialm a in the betting space. London hill confirming today that it has received cash offers from Apollo Management as well as Caesars Entertainment already is its partner in the u. S. The company says the talks are ongoing and no guarantee will result in a deal but the prospect alone lead the stock to be up more than 43 in the european session and its helping its Sports Betting peers. Vonnie thank you so much. And we have seen a slow move to return to the office but it appears hedge funds may be dragging their feet. Many of them telling workers that they will home into next year. We welcome our Bloomberg Hedge Fund reporter. Tell us whats going on which had with hedge funds . Do they not need the Office Culture to keep their businesses running . What we are seeing in some of the biggest hedge funds is a slower move to bring their staff back in the new year. They have the furthest away plan to bring people back and they have told her staff not to come back until july 4 of next year. On a voluntary basis, they can come back in january. Cautionthere is more and part of it may be within hedge funds waiting to see and learn from how other firms are coming back and seeing what lessons they can learn. And also firms that are not seeing any impact in productivity without put the same, they met not be as rushed to get people back to their desks. You get any reporting in on the smaller and large hedge funds, if they are holding onto the real estate . There are arguments for giving up some of it but you dont want to signal your giving up on everybody coming to the office. Surely, they are renegotiating . I think its a little early the longterm trends are. A number of the funds are having conversations and looking at what this means for real estate and what this means internally as they look at the space. It may be premature right now for them as they figure out bringing people back and if people want to come back and that might be a gauge. Whats interesting as we look at employees demands for coming back, at citadel, there is Strong Demand for workers who want to come back to their desks. , another company did a survey of their employees and found they really like working from home and were happy to keep doing so. They actually pushed back reopening efforts to at least late fall. You see a mixed bag across different firms. What are we seeing by way of hiring and firing trends that might be on the horizon for these firms . If we look across the space, we havent seen huge numbers of firings. Ofhave seen a number continued trends in terms of hiring within multistrategy hedge funds. These are a type of hedge funds where you see a lot of the same people moving across the same fund and chasing around each other. Persist and we see a number of hirings across some of the bigname funds. I think we will be watching this closely over the next several months to see what the longterm implications are of what we are experiencing now. Vonnie i would say the bulk of people who spoke to you set the number one priority for their staff was their health and wellness. Our thanks for all that reporting. With stocks higher and a couple of hours left to go in the trading session, this is vonnie quinn and amanda lange from new york and toronto. See you next week. This is bloomberg you can go your own way go your own way your wireless. Your rules. Only Xfinity Mobile lets you choose shared data, unlimited or a mix of each. And switch anytime so you only pay for the data you need. Switch and save up to 400 a year on your wireless bill. With the carrier rated 1 in customer satisfaction. Call, click, or visit your local xfinity store today. Isk Ruth Bader Ginsburg lying in state today at the u. S. Capitol. The first woman in American History to do so. A military honor guard carried the casket to statuary hall where nancy pelosi opened the private service this morning. It is with profound sorrow and sympathy to the ginsberg family i have the honor to welcome Justice Ruth Bader in theg to lie in state capital of the united states. On a platform built for abraham lincoln. May she rest in peace. Mark mourners gathered for the service. She died last week at the age of 80 seven. Kim jongun offered an apology after the Fatal Shooting of a south Korean National by the north korean military. In a letter, north korea apologized for killing a man
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