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tv   Bloomberg Real Yield  Bloomberg  February 26, 2021 1:00pm-1:30pm EST

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>> bloomberg real yield is brought to my pimco. jonathan: for our audience worldwide, bloomberg real yield starts now. coming up, closing a wild trading week with central banks voicing concerns. a wild week for the bond market. >> this is painful. >> the belly of the curve is ridiculously steep. >> it has more to go in terms of driving rates higher. >> markets expecting a much
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stronger recovery. >> we are selling off because of optimism for growth. >> it's the distinction that is illustrated by that rise in real yields. for a lot of traditional investors in fixed income, this is a painful process. >> a lower rate in the markets finally taking and repricing. >> what is the second -- that is the second wall of worry. >> we have relied too long on monetary policy. >> the exit becomes difficult. jonathan: the exit becomes difficult. let's get to the panel. mark cabana, priya misra, and zachary swabe. what a week it has been. people cap saying it is healthy, real yields pushing higher. chairman powell said it was a statement of confidence. priya: i would argue this week
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peaked with moves and rebound. we went to optimism on inflation to concern. the fed pushed back and fed on it. exacerbations in price action. this week was about the fed stepping away and if they hike at the end of next year which is crazy that we are still in the midst of a pandemic. i would say this is signs of a broken market emerging. the fed needs to step in, otherwise i think it is going to get worse. jonathan: it is hard to reconcile with the idea you have higher rates before you've priced in inflation can you
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reconcile those two things? mark: i agree that this is a bit of an unhealthy rate rise. it started out as a healthy rate move reflective of better inflation and growth expectations but grew to an unhealthy area. you can see it in the liquidity and exacerbations in moves. real questions about how is the fed going to handle this and what will they be looking for to bring them in to stop the move are what will they signal the outlook for monetary policy? we think the fed is really going to be challenged to talk about how the rise in interest rates is becoming unhealthy while communicating they have a better outlook for the economy at the march meeting. at the march meeting, the fed will sound more optimistic's -- optimistic. you have the bond market that is
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reflecting serious signs of concerns about a attentional withdrawal of accommodation. it is going to be awkward for the fed to discuss. way to get around this is by focusing on the illiquidity in the marketplace that is not healthy, that can spill over and have negative impact in other markets like we saw yesterday. it will have to get kicked into acknowledged that soon otherwise you will have a broader tightening. i suspect we will hear chairman powell start talking about the unhealthy this in the markets next week. jonathan: chairman powell, next week. this from the federal reserve bank, i am not worried about this. he said i am not expecting we will need to respond. tone deaf in the last 48 hours. zachary: thanks for having me back. i can't say whether the fed has been tone deaf. the statement earlier on from
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powell and priya explained the bond markets. with the investment made and credit are kids, there has been increases but manageable. in terms of tone deaf, pricing risk and the cost of capital and borrowers coming back to the market and in terms of investment grade, there is certainly some element of spread whitening -- widening. in high yield has been the most boring part of credit markets and fixed markets in general. you have probably seen the best returns and global fixed incomes. as we go forward, this is when policy errors can occur. and policy errors lead to market
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accidents. four credit we are ok, but we can talk about it. -- we are good for credit -- for credit, we are ok but we can talk about it. jonathan: when they look at financial conditions, do you think there is reason to be concerned at this point? priya: i think the speed of the move and the fact that it is driven by real rates. in late 2018 is when real it's much higher. we are in a different world but in a post-covid world. we just moved to -60 basis points. that is why the fed needs to come in. i agree with the point earlier that the outlook is better and i
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don't say -- think they -- i think they will clarify that there will gradual taper. to the earlier point about credit, i think doing the taper to investment grade, where i want more in credit and you start getting fixed income outflows, so far the fed is looking at spreads. if they don't come in and calm the market down, things can go
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quickly down as we saw in the treasury market. jonathan: for composition, it wasn't inflation expectation. we saw people talking about inflation and this is the real yields move. about the move yesterday in the last 24 hours, it was not at the back end of the curve, it was at the front end. we had a conversation about supply and balance that could lead to lower yield in the front and -- end. i was asking myself what does the two-year have in the next couple of weeks. what were your thoughts about that? mark: at the front end of the curve without the move was overdone. we have been recommending that given the collateral and balance that is still going to play out, the two-year move is a bit overdone. we do anticipate paring back will continue as the tsunami of
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reserves washing through the front and in pushes rates to zero. the belly of the curve is where the biggest curve has been. we anticipate the market is not yet done repricing the belly yet, primarily because the market is recognizing the outlook has improved materially, that the fed will start shifting distributions to the upside. that will mean this is a fed feeling more confident to eventually think at some point about raising rates. we can talk about how bond market illiquidity factors in and complicates their ability to raise rates, but what the market will price is a steeper path for the fed when the commodity pandemic. that is going to be supported by above trend growth for years, not just in 2021 or 2022, but if we get infrastructure in 2023 to
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2025 above trend growth, the largest gap we have seen since the 1970's. that is a material improvement in the growth outlook. as that occurs, should the fed be hiking twice a year, which is what the bond market was pricing this week? probably not. that is why we have been recommending curve flattening positions. the five-year part of the curve is alive with fed expectations and alive with the possibility that maybe the outlook will allow the fed's potential to raise rates in the future. the illiquidity poses a challenge to that the market typically prices in a more rapid pace of fed rate hikes as we get closer to lift off. that is what is happening today and we don't the market is yet done repricing the valley. jonathan: i want your thoughts
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on the credit market in a moment. i want to bring breaking news quickly on the political front in washington, d.c. the u.s. sanctioning to saudi officials over killing of jamal khashoggi. it is said that the saudi prince approved of the assassination. junk bonds headed for the biggest quarter. that is still ahead. this is bloomberg. ♪
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jonathan: i'm jonathan ferro. this is "bloomberg real yield." time for the auction block where we kick things off in the u.s. to close out the week, seven year bond auction added fuel to
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the bond markets. a smaller share since 2013. corporate blowouts at $1.5 billion offerings in europe. four times of that subscribed. in the junk-bond market, robust continuing, hitting $11 billion to make it the biggest first quarter on record. mark cabana, priya misra, and back with me is zachary swabe. the seven your auction was a mess -- and back with me is mark cabana, priya misra, and zachary swabe. the seven year auction was a mess. what was it for you? priya: there were signs of illiquidity. a new auction coming in and rates have been rising in two of the auctions. it did poorly.
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who wants to catch a falling knife? if rates are going to rise another 50 basis points because a lot of people have been hiding out in that curve. the seven year should have gone ok. that tells you there is real stress in the treasury market. there is going to be a big rise in rates. if the fed maneuvers that, given how important they are, i would read that option as concerning, because we have long options in over a week from now. a lot of focus will be on chairman powell next week. jonathan: on the 10th of march, more coming to the market. on the 11th, seven year coming to the market. you have concerns? mark: i do.
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what is remarkable that is happening in the rate market is that the fed appears to be using control of both ends of the curve for different reasons. they are losing control of the front end because of all of the reserves and cash coming into the market and that is what is pushing markets to zero and at times negative. at the back end of the curve, the fed appears to be losing control because the market is very unclear as to what the fed's reaction will be to sharply rising interest rates. no one wants to step in and catch the falling knife. the fed has to come in and act as a circuit breaker to some extent at the backend of the curve. we think they need to say something akin to what the ecb has been signaling, that they are monitoring markets and aware that the high interest rates can be a problem at the back end of the curve, and they are ready to use all of their tools to ensure
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maximum employment and stable price objectives. if they don't do that, the market will be questioning, how high can the move go and how fast can it evolve? there is going to be concerned about being the investor that steps into a rate move that could well continue if the fed does not send some kind of single. powell has a delicate dance to do, but he has to address issues of loss of control at the front end and the back end. jonathan: your world is different in many ways and you talked about it. this is a duration story. i wonder in your mind whether high yield on the credit side could be the reticent winter here. zachary: if we put into perspective, it is a relative asset class. u.s. investment grade has eight years duration versus u.s. high yield at 3.5, european around
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three. back to high yields, lower duration asset last means you have less rate volatility, but also if we look at the tantrums or episodes of 60 to 70 basis points in widening in 2013 to 2015, and at the back end of 2018, and this week, in general, there has been a recovery quickly in the credit markets. in 90 days it covered the spread widening. why is that? maybe about u.s. investment grade for this purpose because the lengthening of the class. first of all, we have two think about the lower rating, etc. what i wanted to do was focus on
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credit at the negative amount and the balancing act. i don't know how much negative yielding is out there. it was 16 trillion and probably down to 11 million -- 11 trillion now. that eventually could be the seesaw that makes high-yield potentially further down the line and possibly fuel weakness. maybe we see less issuance, because it is more attractive to into the risk-free rate. auntie of argument we can continue to go through -- plenty of argument can continue to go through. s&p dividends in early training at 1.5%. they may prefer high-yield. we have not seen outflows so there are risks we need to think about further down the line. we did see this in 2018, but because of the strength of the fiscal supports and monetary support from the fed and ecb, we
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kept on buying back credit. there are plenty of other things we could roll through but i want to highlight something you spoke about, the excess to untold amounts of capital, revolving credit, bilateral loans, private credit government bailouts also gives an effect on credit volatility and credit spreads. for all these reasons it means we have been immune from the selloff this week. it goes back to the duration. jonathan: 12.64 in case you wanted it. coming up on the program, featuring the u.s. payrolls report. rapid round as well. from new york city, this is bloomberg. ♪ when you switch to xfinity mobile, you're choosing to get connected to the most reliable network nationwide, now with 5g included. discover how to save up to $300 a year
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jonathan: i'm jonathan ferro.
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this is "bloomberg real yield." time for the final spread. we have a rate decision on tuesday. the onslaught of fed speak continuing. all coming ahead on thursday. chairman powell. running out more claims thursday morning. and the u.s. payrolls report. it is about thursday, thursday, thursday. we talked a little bit about chairman powell next thursday and what to look for. as you get across the curve, what is the pocket on the bond market on the curve you're most concerned about? priya: it has to be the three or six to seven year sector. it is suggesting the market is questioning when the fed would start hiking and how quickly with a hike.
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tapering should be on the long and. -- the long end. the tapering has moved into the five year sector. the fed explaining to us and i think they won't commit to of period of time but explaining the threshold for them to hike. they want to make sure it is sustained and it would be a gradual accommodation. i think that is important. if they can control the three to five year, they can put some back in as well. it is one that will be contained. jonathan: it is a chance for the ecb to contain it. the federal reserve hasn't just yet. we spent most of the show talking about what they should and shouldn't do here just a final word on that. she is talking about the front
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end through the valley is where they should be concerned. -- through the belly is where they should be concerned. you think they are concerned? mark: they are concerned with the illiquidity in the rate market. no it is unhealthy and have impact on other markets. it is encouraging to see what zack is saying about credit i worry if we see these types of worry continue and illiquidity continue, it will inevitably spillover into credit, or at least i worry it will spill over credit. the fed cares a lot about the credit creation mechanism. they care most about the illiquidity. if the belly is replacing, than the is happy to see that. what they are getting signs of is long end rates, seven-year, 10 year part of the curve is getting to levels it could begin to constrain economic activity and have negative feedback into the housing market and other
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interest-rate sensitive parts of the economy. i don't believe they want to see that type of constraint activity happen. they want the economy to grow and interest rates to be in a position to facilitate that. maybe encountering the issue that lung end rates are rising too fast -- that long end rates are raising too fast. jonathan: we have to leave it there. great to catch up with you. enjoy the weekend. we will see you next week, same place, same time. this was "bloomberg real yield." this is bloomberg tv. ♪
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mark: we begin with breaking crossing the terminal. the u.s. intelligence report
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declassified citing saudi arabia's crown prince signed off on the murder of a washington post columnist jamal khashoggi. the release of the report reflects the biden's decision to recalibrate issues with the kingdom over humans -- human rights. prince has denied any involvement in the killing. president biden takes his first trip to a major disaster site since he took office. left the white house with the first lady, headed to texas, hit hard by the energy crisis this month, which was caused by the extreme cold weather. in easton, the president has -- in houston, the president has two missions. he is also encouraging people to get their vaccines. in the fight against the pandemic, the government is set to lift the state of emergency


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