Coming up, a hawkish fed sends treasury yields surging to cycle highs erasing highgrade bonds 2023 gains in the process as in the u. S. Government hurdles towards a shutdown deadline. A new world. We have seen a precipitous rise in a short time. Rapid moves. Longer yields are likely to move higher. Towards 5 . Bond yields backing up. It is not shocking that 10 year yields are increasing. Ask the dynamics in the bond market are changing. There are supply and an unmanned and demand dynamics with treasuries. At these leveled fixed income tax attractive. The bond market is testing the feds resolve. You could get a situation where the fed lost control of the backend end of the curve. Higher yields and concerns about growth slowdown. Hard to know where to go from here. A new world. Katie joining us now is Matthew Diczok and blake gwinn. Is this a new world . Matthew yes, the fed has a communication platform that is correct. As opposed to what they were telling us the last two years and they were behind the curve trying to communicate to the market then get behind that ahead of themselves. They have done a great job now getting in front of the market and talking hawkish to the market to get the market to do work for then. Chair bernanke he had a great quit. He said central banking is 98 talk. The fed is doing a good job now talking the right way trying to convince the market there is another hike and more importantly that rates are likely to stay higher for longer. The market is internalizing that message. The market is not concerned about another fed rate hikes this cycle. It only has about one third chance the fed will hike either in november, december, or january. If you look at the fed funds huge futures curve longerterm over the next 10 years the market is estimating the fed funds rates will be 4. 5 . So, the fed is doing a good job. Continue to talk hawkish and convince the market rates will be higher for longer. It is much easier from a Risk Management perspective to ease and bring back those expectations then to continuously try to play catchup. This is the right communication strategy from our perspective. Katie blake, a lot of people saw the dot plot last weekend heard what Jerome Powell is saying and took it to mean higher for longer. That is what you have seen across the bond market particularly at the long end of the curve. Looking at your notes it seems you were not too impressed by any shifts in the dot plot last week. Blake yeah, look, for me looking at the entirety of the selloff since july you can draw more of a story about the soft landing and hawkish fed. If i look at the last week, the last leg to the new highs all across the yield curve, to me, thats a little less about the fred the fed. Fed pricing nearterm has been stable. We have seen the backend lead the selloff. To me it is about a lack of buyers. I think the term premium story is weighing on people and icing to higher for longer acceptance means to have a long position you need to accept negative carry, these painful kerry for holding these positions. That is likely to persist for a longer time. I think a lot of people that would have been buyers here already got long when 10year gilts work 390, 4 10 . In that case theres not a lot you can do except look at the prices go higher and wish you could have waited. You cannot create dry powder to buy yields if you are ready spent the powder when we were at 394, 10 percent. We have a confluence of events keeping buyers on the sidelines allowing yields to move higher. I do not see what happened the last week as like a fed play. Katie the price moves we have seen, the yield moves we have seen, obviously there are a lot of heavyweights weighing in on where the ceiling for Interest Rates might be including larry fink of black rock. Lets listen to what he had to say. A my opinion is we will have 10 year rates at least at 5 or higher because of the embedded inflation. This structural inflation is unlike anything. I think Business Leaders and politicians are not providing the foundation to help explain this. We have not seen inflation like this in over 30 years. Katie it was interesting to hear him say that. That is what i have been looking for all week. The driver behind what we are seeing at the long end. Larry fink seems to think it is a structural change in inflation. Do you see a similar structural change in the inflation environment . Does that mean structurally higher Interest Rates . Matthew there is certainly a change. When you let the inflation genie out of the bottle you have trouble containing it. The history of inflation spikes tells you it is not usually one spike. It is usually two or three. We dont have a lot of high inflation episodes in the u. S. We had the 1970s and world war ii. In both instances you did not see inflation spike once or twice. You saw them spike three times. Historically speaking, the majority of the time when you have high inflation it tends to be a little more difficult to control and you have multiple spikes. That said, the market does not seem to be concerned about that. You can make arguments that temperatures are not that liquid and not the best barometer but it is the best barometer we have whether it is one year, fiveyear, 10 years, 30 years. The entire tips break even curve is telling you inflation is not going to be a problem. Once you adjust for pce it looks like the market is saying the fed will have no trouble hitting that inflation target over any timeframe. So, you have to take a step back and look at that if that is really the markets view. Maybe, we do not have to be as concerned with structurally higher inflation, but it is certainly an open question. It is historically informed that you have multiple inflations hikes. You have to look into the value. In our opinion real rates are not high enough in the 3 4 range that would structurally take care of the regime shift in higher inflation but they are at a level where they are reasonable to good. If you look at a normal real rate environment that is lower they look very attractive. On balance, we still favor being slightly longduration here. We think the market is internalizing at pricing in more risk than we think is necessary. Katie we will get to the iteration discussion. You make a good point. When you look at what is priced in in terms of inflation expectations, blake, the market does not seem concerned about getting back to a 2 target. When you think about what it would actually take to get to a five percent level on nominal 10 year treasury yields, what would it take . Inflation expectations becoming unanchored . Blake i think that is one way to get there. But we are beyond any real technical level. I think there is a big concern about term premium out there. Right now the biggest upside risk to yield i am concerned about is the term premium side and not on there be acceleration of inflation or the fed having to hike more and hold rates higher for longer. That seems like a conversation that settled down a month ago. Now the term premium thing, since the treasury refunding announcement where they surprised a lot of people with how much they were announcing on the deficit really got the conversation going again, but over that timeframe i shifted to think that if we are moving to the 5 range it is much more likely to be on the back of what the supply of what treasury supply means. Who will buy that supply and more of the term premium idea than we will see inflation continued to pick up. We have had very positive data on inflation. It is interesting to me we are having this conversation again about higher inflation. I think it has been emboldened by the fact yields are selling off. But the data we have had over the last months in my view is positive for inflation continuing to soften. Katie we got more of that today in pc figures. I am glad you brought up the refunding announcement. That was a surprise. Think about the treasury market. It feels like supply, we talk about it sometimes when there is a bad auction, etc. , but does supply truly matter in the market . Does it expend a 50 basis point rise we saw in september . Blake we can do a lot of analysis on what the passthrough should actually be. Go back and do regressions on prior times when we had supply coming online. I would say this. I was in canada all last week doing client meetings. The question of who will buy the debt came up in almost every single meeting. It is weighing on investors minds. I think it is very hard for the dip buyers, who would step in, by the yields, get long . A lot of those people are worried about the term premium issue. It is really a question of supply and who will buy the supply. I think it is real. It is worth something. Certainly at this point we have priced a lot of that in since august. I think still it provides a lot of upside risk to yields here. Katie matthew, are you concerned about who the National Buyer is . Matthew we are not considering the National Buyers. We assume there are plenty of people that find real rates at 2. 25 two point 5 real across the curve. If we were taking two years ago five year real yields were 2 . For the privilege of owning a treasury index the security you could lose 2 of your wealth every year. Now we are talking real rates 2. 5 positive. No credit risk, sit back, bro your real wealth by 2. 5 per year. That is a good to reasonable rate for it structurally higher inflation. If not, it is attractive in our opinion. There are a lot of pension funds, longduration buyers, they would like the real rate environment. We are not concerned about finding buyers. Canon technicals and supply shortterm drive rates . Absolutely. Over the longterm will technicals drive rates . They will not. It will be fundamentals, valuation, inflation, nominal real growth. Those will drive rates not technicals. So, taking advantage of a slightly higher nominal yields and real yields makes sense in our opinion. Katie . Matthew historically its a fair point blake is making. To have an eye on potentially higher rates. On average the last 50 to 60 years the spread between the fed funds rates and the 10 year averages about 100 basis points wed it cycles and gets converted but the average is 100. If the market is correct and the average fed funds rate over the next decade is 4. 5 you could see a structurally higher 5 plus 10 year. That would be consistent if the market expectation for the fed funds rates is correct. Katie i looked at the clock. Time is flying. This block flew by. We did not even get to the Government Shutdown. We will have to do that next time. Matthew diczok and blake gwinn thank you for your time. Next, the auction block. Citibank taps the bond market with its firstbank level Debt Offering in 10 years. This is real yield on bloomberg. This is real yield on bloomberg. Fabulous surroundings. But everyones looking at their phones for Financial Insights from merrill. Is he hailing a ride to the concert hall . No. Hes making sure his portfolio and retirement plans work in harmony. They want to adopt a child and build a new home. So theyre talking numbers with their merrill adviser. Shes not researching her next role. Shes learning how to handle market ups and downs without the drama. Personalized advice so impressive your money never stops working for you with merrill. A bank of america company. Explore endless design possibilities. To find your personal style. Endless hardie® siding colors. Textures and styles. Its possible. With james hardie™. Katie im Katie Greifeld this is bloomberg real yield. Its time for the auction block. After a chilly start of the week action picked up on a highgrade sales with weekly volume more than 18 billion. September hit 124 billion dollars. Citibank pushing numbers higher this week with a 5 billion sale of the fixed floating rate notes. Junk borrowers take advantage of strong investor appetite bringing riskier offerings to the leveraged loan markets. One was Wedding Planning site the not that had a 765 million sale. Noble corporations are buying back bonds at the slowest pace since 2009, likely a sign they are waiting to refinance. The delay could come back to haunt them as maturities pile up and rates stay higher for longer. Black rocks amanda lynam says loans are likely the most exposed to economic headwinds. Amanda if you take the three broad buckets of leveraged loans, highyield bonds, and Investment Grade bonds, arguably, leveraged loans are in the weakest vulnerable fundamental position because they have been contending with higher borrowing cost of the past several quarters since early 2022. But, they had the best performance year to date. We do not think that is sustainable longterm. Katie joining us now is invescos matt brill and kelly burton of bearings. Kelly i will start with you. What amanda lynam was just talking about we have been talking about all year. Riskier credits have been outperforming in 2023. Windows are run out of steam . Kelly good question. Here in the world of highyield bonds, triple seeds have massively outperformed the rest of the market up nearly 13 yeartodate. We have had a lot of compression in the lower bands of the credit quality spectrum. What we have really tended to like in our asset class has been quality trade. Double vs today you can get at 7. 5 8 . We feel like investors dont have to reach down far in the credit quality spectrum to garner some pretty attractive total returns. Katie to finish that thought, when you reach down . When is the time to maybe look towards the riskier end of the spectrum . Kelly i think as we move into 2024 if we really can get a better sense for how the lagged effects of all the credit tightening we have seen to date are starting to run through the market, if we can start to make sure any signs of potential recession are pushed over further right, or, if there is really no sign of recession to come. I think there is always room to reach for certain triple seeds. We certainly do that at bearings. It just has to be on a real credit by credit basis. A lot of idiosyncratic stories reside in that bucket. It is only about 10 of our market now. That is about 50 of what it was 1015 years ago. It is a different quality of the market then we used to have in highyield. Katie matt, bring us to the world of investment debt. Is this an up and quality trade even in blue chips . How do you think of that comparative valuations . Matt we think there is value in the triple these in the lower portion of the market. We feel pretty comfortable the soft landing will happen. I would say the rise in rates the last few weeks or so have thrown a kink into that. Overall we are still on the path to a soft landing we believe. With that, triple v companies have plenty of incentives to stay investmentgrade. The cost to go from triple b to double b is expensive. Anything else starts to be upper digits. You will do everything you can to stay investmentgrade now and we think that is a nice incentive for them. Overall fundamentals remain good. We are comfortable down in the quality spectrum in the investmentgrade space. Katie and investmentgrade issuer will do everything they can to keep that great rating. Will they be able to do that . Matt it depends on the timing of when the economy slows. If you could guarantee me a soft landing, i would tell you its a good scenario for owning bonds, particularly investmentgrade and double b highyield. Companies want to pay down debt. It is very expensive to have debt now. As of now we think that is fine. As the economy slows, and we do think we are on a path to selling here, the corporations need to be out in front of that and i think for the most part they have been. It has obviously been the most forecasted recession in history. It should not surprise anybody if and when the economy does slow. The starting point now is very good. As the cost of debt continues to stay high and more and more debt roles over it will be more problematic for corporations. As of now if this is a next 618 months type timeframe for a slowdown i think they are wellpositioned. Katie real yield viewers will not be surprised when the recession hits. Someone will, but not viewers of this show. I am enjoying this conversation, hearing from matt that maybe look at lower rated ig issuers. Hearing from calais, maybe look at higher junk issuers. I want to ask something to the both of you. It applies to investmentgrade and highyield. The fact you have yields very high, at some of the highest levels in a year at least then you look at spreads, very narrow. That is true in high yields and investmentgrade. Kelly, when you are in evaluating your market are you saying, wow, yields are high, i should like this in. You look at spreads and say, that looks rich . Kelly theres a lot of debate around valuation. But as we walked in today, highyield was at 9 . Generally that has been a buy signal for the market over the past year. The other thing supporting the market is our absolute low dollar prices. Highyield is offering 10 15 percent price discounts. Generally when we see yields or prices in this context we see doubledigit for 12 months returns. Also in this price context, that has already been in recessionary environments that we are clearly not in today. On the spread of story we are over 400 basis points on an oas basis today. Part of this goes back to the point before on quality. We have never really been this high in quality before in the types of companies we have in highyield. Katie matt, looking at ig spreads, they look tight to me. Look at ig yields. I believe they are at the highest level since october 2022. Which is the bigger signal to you that you are paying more attention to . Matt its all about yield right now. Until the last few days, higher yields were met with more and more buyers. Last time we hit 6 , october 2022. We rallied about 11 in the investmentgrade market after that. I am not saying we will get at this time. But the mass is in your favor. At a certain point it gets harder to lose money. It can be done, but the math gets better and better at higher yield levels. We look at spreads at 120 on the past to a soft landing on the path to a soft landing at higher yield levels there will be less supply and better fundamental, or at least good fundamentals that drive spreads in my opinion to 80 if you get the soft landing. If you dont there is a tail risk that is still relatively fat now. If you dont, you go back to the high 100s. Overall it is probably fair at 120. But as it goes on the path we are expecting i think you will grind tighter here. Katie its all about the yield. Thats a great place to end. Matt brill and kelly burton, great to catch up with you. Have a great weekend. Still ahead on real yield, the final spread, the week ahead, featuring the u. S. Jobs report, maybe. As it could be delayed by a likely u. S. Government shutdown. This is real yield on bloomberg. Katie im Katie Greifeld. This is bloomberg real yield. Time for the final spread. The week ahead. A potential Government Shutdown could begin sunday. Monday a bloomberg tv interview with jamie dimon. Tuesday sam bankmanfrieds fraud trial begins. Wednesday adp private payrolls. Another round of job numbers thursday. Friday the september jobs report could be delayed by a Government Shutdown. Look at the estimates. From what we could get you are expected to see Less Headline jobs, fewer headline jobs added. The Unemployment Rate actually down a little bit. The jobs report may not be the only economic release affected by the shutdown. All these releases are vulnerable. All of them are very important especially thinking about cpi. You think about retail sales, etc. Again, we will see where we end up. And, what we are talking about this time next week. From new york, that does it for us. Same time same place next week. This was bloomberg real yield and this is bloomberg. And this is bloomberg. Ike changing tax rates or filing returns. Avalarahhh ahhh i dont want you to move. Im gonna miss you so much. You realize well have internet waiting for us at the new place, right . Oh, we know. We just like making a scene. Transferring your services has never been easier. Get connected on the day of your move with the xfinity app. Can i sleep over at your new place . Can katie sleep over tonight . Sure, honey this generation is so dramatic move with the xfinity 10g network. Jon im Jon Erlichman and welcome to bloomberg markets. Matt lets check some markets. Equity indexes rising for the last trading day of september. They are now lower. The s p 500 down. 25 , still set to be the worst months of the year, as september typically is, and the worst quarter of the year as well. The 10 year yield coming back down still at 456
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