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tv   Bloomberg Real Yield  Bloomberg  January 27, 2023 1:00pm-1:30pm EST

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katy. bloomberg real yield starts right now.
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the treasury rally starts as we count down the fed decision next week we begin with a downshift to the downshift. >> data for the most part has been mixed but on the positive side, the gdp is a decent amount of -- of momentum. >> the actual soft landing coming in. >> the outlooks are generally quite negative. >> job cuts in hiring increase announcements with a still low unemployment rate. >> the divergence between the forward-looking sentiment gauges but we have yet to see that in the hard data. >> i don't think the fed is satisfied. >> i'm not expecting this pivot or goldilocks scenario that you see playing out in bond markets. >> it's far too early to price in a fed pivot. >> it is prudent to slow the pace of hikes. >> the market is actually
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underpricing the rate hikes just the rate hikes for this year. katie: joining us now is our three guests. great to have you guys with us. needless to say, all eyes are on the next wednesday and we have everyone saying it's going to be 25 basis points. is there any risk of a hawkish surprise? >> good afternoon, happy new year, it's great to be here. yes, there is a risk of a hawkish surprise but not on the rate level. the chair will have a press conference afterwards and that's when we should be -- where we should be focusing. it will be a 25 basis point rate hike which is priced by the market but when he speaks at 2:30 p.m., there is a high likelihood that he's going to bring back some of the comments
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we have heard which is going to be around higher for longer, the idea that prematurely tightening -- prematurely letting financial conditions get easy is not going to be great for the economy but the price stability is important otherwise the economy doesn't work for anyone and continue to reiterate higher for longer. i think that is something we will hear and the hawkish nest will come at 2:30 p.m., not at the actual meeting. katie: we get a decision at 2 p.m., you have a knee-jerk reaction and the chair speaks at 2:30 p.m. and everything changes. when you look ahead, what kind of jerome powell will we get? >> i think we will be focused on what kind of forward guidance we can infer from his comments, in particular how he responds to questions during the press conference. i expect they will ask questions
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on the data and the prospect for a soft landing and what is the reaction function of the bed. there is some evidence on some metrics the inflation is trending lower. there are a lot of those types of questions that will be asked and we will try to go through many of them, every word to infer what the potential forward guidance from here would be. i agree with the 25 basis points. there is no question it will be 25 basis points hike. katie: when it comes to wednesday, it's all about the presser in the guidance but looking beyond wednesday, there is a lot of optimism on the idea that the bed is getting close to the end of its tightening cycle. where do you think we are in that journey? >> we are pretty far along.
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the market is really anticipating and starting to price ahead of the fed that this hiking cycle is near its last legs and that the fed will have more flexibility because inflation has started to cool. when you look across markets, many are pricing in this goldilocks scenario of where you are starting to see inflation come down to more reasonable levels. at the same time, the economy is in pretty good shape. you don't see that much in the hard data in terms of job losses etc. and that's a great scenario for the fed that are worried is that the market is a little ahead of itself pricing that in. there is still a lot of risks that the fed has to be more hawkish and the fed is concerned asset prices have gotten ahead of what they are expecting to do, given what we've seen on the inflation front area katie: as we near the end of the
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tightening cycle, we have a bit of a to date among heavyweights. mohamed l area of bloomberg opinion wrote this week ahead of the fed decision -- that's one view and on the other side, treasury secretary larry summers says he wrote that the fed needs to maintain maximum flexibility were things could go either way. when you weigh the different viewpoints against each other, you see what we are getting in terms of the economic data. what would a policy mistake look like in this cycle? >> i think the policy mistake would be not being flexible enough. i think the fed will want to keep as much flexibility as they can possibly keep an react to
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incoming data. this is precisely what we expect to hear that chair powell will reinforce that the incoming data is at the center of their thinking and they will be very much data dependent and keep all the options open. i think that's in them portland as opposed to committing to any specific course of action. there is an expectation that retaining flexibility would be the most important thing. i expect to hear more of that that kind of tone at the press conference. katie: one of the pillars of mohamed el-erian's argument why the fed should fire off another 50 basis points is the dramatic easing we have seen in financial conditions since mid-october or so. when you think about that and
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there was a real fountain risk assets, what does that mean for the fed goal to pull inflation back to 2%? >> on the first question, it's around where with the policy mistake bni think the policy mistake would be if they didn't maintain the optionality. by going 25 basis points, they maintain the optionality to go 50 if they needed to or continue at a 25 basis weight for two more cycles depending how the cpi data comes out. to your point around the easing of financial conditions that has taken place, a lot of that has certainly been around movement out of cash to buying bonds and equities and equities are obviously having a strong year but i don't know how much of that is fundamental driven. i would argue some of that is more technical driven especially
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on the bond side where people are waking up and looking at this incredible field of dreams that i like to call it that's available and rushing into fixed income etf's they have had about $15 billion in inflows this month. back to the fed, i think they have this delicate balance where on one hand, inflation still remains at a much higher than the target level and slowing down but nowhere near 2%. on the other hand, pockets of the economy are slowing down whether we look at personal income and spending or look at the industrial production data retail sales and durable goods, there is a slow down. other than the labor market, everything is weakening so they need optionality so go 25 and then higher or lower if needed as the data shows. katie: you are speaking my language with the bond etf's.
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what would a policy risk look like? what is the bigger risk, that the fed over titans or the end up ultimately not doing enough? >> the bigger risk is that they end up not doing enough and what we learned in the 1970's is if you declare a victory to early on inflation and it comes back, then you really need to inflict economic damage to right the ship area they want to avoid that mistake so in our view, them not going high enough for for long enough which results in higher inflation for longer is the policy mistake area that would end up resulting in a much deeper and longer recession like we saw as a result of the 70's. there is a policy mistake potential for them going too far but we need to be data-dependent.
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as long as the data continues to weaken, that gives the fed more flexibility and that's what the market will be focused on, the continued deceleration of inflation and hopefully some weakening in the labor market. katie: we have to talk about the incredible strength we've seen in the treasury auctions. it seems one category investors are buying into is that the fed will give it at some point. if you look at the indirect bidder categories, we've been seeing record shares taken down by that class of esters. i have always been told that includes overseas investors and global central banks. if you go with that logic am a white you think we are finally seeing foreign buyers come back into the treasury primary market? >> my thinking is within the market, it's convinced that in
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the face of a slowing economy, in the face of inflation coming down and we don't get to the 2% any time soon, you combine these things and i think the market is betting that the fed will not be able to keep policy in these restrictive territories for very long. it is a question of how long will the fed keep this restrictive monetary policy. in the face of a pickup in unemployment or the weakening
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story, the global market participants are betting on this calculus changing which is in contrast to what the fed's messaging thus far has been. one chief economist said the fed will keep the hike once more and hold it through much of the year and the change will come in september. the market thinks the fed will break before that. katie: everyone is sticking with us. up next, the auction block, regional banks take the place of the big six u.s. banks. details are next, this is real yield on bloomberg. ♪
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katie: this is bloomberg real yield. time now for the auction block where we start -- stop me if you heard this before but regional debt sales have set a record in january with the total surpassing 275 billion euros. and the u.s., we focus on the banks, not the big banks, but the regional banks. u.s. bancorp is a highlight with a deal of a key book of $15 billion. in high-yield issuers, they continue to turn a deals in, now topping 15 billion dollars, more than one third of the energy companies. keith lennar of truest is taking caution amid a potential recession. >> our main messages keep extent income say.
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triple bees have collapsed so the market is pricing in a soft landing. you are not even baking in any of that so we see the spreads widening later this year and we would keep it simple. katie: our guests are still with it and weeks, investors have been telling me they favor ig over high-yield and yet you see the riskiest parts of the bond markets rallying. how do you explain that? >> part of it is supply. in the high-yield markets, going into the end of last year, we didn't have as much supply. part of it can be explained by that and this year has also been this goldilocks pricing taking place. we had the weak cpi number and most everyone immediately started rejoicing about there being too fed rate cuts by the end of this year. i think it still too early, it's
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just january. i think we are going to see a significant slowdown in the second quarter and third quarter which will have an impact on high-yield spreads which will have an impact on perhaps where the equity market is and where earnings go lower. i think it's still too early in height yield has led in the first month of the year but i think investors should be looking at investment great and if anyone, the front and of the ig credit market to pick up that high quality. katie: we have ccc debt experiencing the best performance since 2003 on a total return basis. you think about this big rally we are seeing, does that make sense to you? is that tempting? >> what we are seeing is in influx of asset allocation flows into the fixed income markets
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area they would call this year the year of the yield. there is a huge influx of yield based buyers and that's showing up in the flows and across the board with fixed income. that is really what is being reflected here. this means higher quality or quality but if you look at the high-yield bond component, you can get some comfort that the high-yield bond index actually has meaningfully gotten better over the last several years and it's not the same market it was 10 years ago. it is much more higher-quality and closer to dd. i would consider high yield and
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we continue to advocate for high-yield quality fixed income with interesting opportunities for someone in the parts of the market. that is what we are telling your clients is to focus on the high quality, high opportunity, they are still attractive. katie: you are the director of high-yield research so i have a feeling that you probably like high-yield but let's get specific about the ccc's. city core as a call this says you need to go down the risk sector. markets are off to a strong start as the paper leads so how
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significant is this rally in ccc's? >> this sustainable in that the technical backdrop remains very robust for credit. we had zero supply throughout the course of last year and while we have seen sums of light is on, it still pales in comparison to the amount of buildup demand we have for high-yield in fixed income. there is a reason why most houses are going to the street and saying bonds are back. we haven't seen this type of valuation environment in quite some time. ccc's are a different animal and you want to be selected. there will be clear losers in the situation because rates are up so much, companies have had a lot of leverage on balance sheets and those capital structures might not necessarily work when you have the cost of that up so much. we prefer picking our spots in
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parts ofccc's that are not as levered and have the ability to withstand a weakening economy. we think the better opportunity is buying heavily discounted bonds in thedd space that have gotten killed by more of the rate story and less about spreads. if we think about the biggest repricing in this cycle, it's been the fun just the front end of the treasury curves when we get more exposure to the front end of the treasury curve, that's what we think is the best risk-adjusted reward today. katie: great conversation and we will keep it going. everyone is sticking with us. still ahead, the final spread, the week ahead, a monster we for markets with rate decisions from the fed, the ecb and the boe. this is real yield on bloomberg. ♪
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katie: this is bloomberg real yield and it's time now for the final spread, the week ahead coming up, gdp data out of europe and pmi numbers out of china tuesday and finally the fed rate decision with the chair powell news conference wednesday followed by decisions from the ecb and the boe thursday another round of jobless and finally another big day with the u.s. payrolls report friday. before we get there, it's time for the rapidfire around. three questions in three quick answers -- does quantitative easing last through 2023? >> yes. >> yes. >> quantitative tightening you meant? >> you are right. what's your answer? >> the quantitative tightening
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that's underway will continue. >> yes. >> does the fed get to 5% this year? >> yes. >> no. >> yes. >> all right, final question -- i told this from jonathan ferro -- who hikes more this year the fed or the ecb? >> ecb. >> ecb. >> the fed. >> say that again? >> the fed. >> all right, thank you all so much. we are counting down to the big week next week with the fed rate decision on wednesday. the consensus is for 25 basis points and we will see if we get a hawkish jerome powell at 2:30 p.m. from new york, that does it for us, same time, same eyes next week. this is bloomberg real yield and this is bloomberg.
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