From new york city for our audience Worldwide bloomberg real yield Starts right now Up a blowout payrolls report in america Following another choppy week in the Treasury market Fed chair jay powell is not for turning We begin with a big issue A taperless tantrum people who are Uncomfortable Are our bond market participants like Myself i am very nervous It's not a miscommunication or a Misunderstanding rates are going to keep Rising Financial conditions are still Exceptionally loose And easy until we get that disorderly uh Market functioning how the fed reacts To a rapidly accelerating economy it's Really the long end That i think is going to sort of try and Force the fed's hand the back end of the Curve is there A lot of room the fed is going to be has A very high bar to hike But to taper the rise in interest rates Whether the 10-year was 150 The fed is not uncomfortable we heard From chair powell that he wasn't worried About the moves five basis points of Steepening a day Corners of the market are questioning How how patient the fed can
Can exactly be we didn't get that Support the the fed needs to start Communicating the market's going to Tantrum some more Let's bring in the team lafayette Colleges krishna mamani alliance Bernstein's gershwin distance And jim bianco of bianco research i want To begin with that live from jeff Rosenberg Of blackrock it's not a miscommunication Or a misunderstanding krishna Do you agree with that yes so i there is Everything is working out according to Fed's plan the economy Is doing well expect it to do even Better Uh financial conditions are relatively Easy still Very much so and you just have to look At credit spreads to come to that Conclusion So why why would they kind of show their Hand too early They only have to show their hand if There is a A significant issue for the economy Rather than the equity markets and so Far Everything is looking really good right Now the talisman twos gershon i'm Looking at the story right now 14 basis Points on twos the 10-year yield at About 156 if yields are going higher
Because the data's better At the long end and the two years Anchored isn't that what chairman powell Wants Well uh i don't think he wants the to go Up too much because that's going to undo A lot of what needs to still be done Remember corporate borrowing has gone Up a tremendous amount usually goes down In a recession or whatever you call this Last period It's gone up i got to say jonathan it's Really great to have fixed income back In the news but I think that people are way too fixated On Short-term movement in rates the key Questions actually have nothing to do With the short term It's what's the economy going to look Like post covent How much of the supply has been Destroyed at this point and how fast is It going to come back When you say that gershon do you mean What's the difference between the Reopening In the next several months and what's The difference between the shape of the Cycle can you give me Some more color on that yes look there's No question that in the initial stages Of the reopening You're going to end up having a lot of
Demand so we still have Close to 10 million people uh less jobs In the economy than there were Pre-covered you also have had the Highest savings rate in Maybe ever since data was recorded Certainly the largest increase in 20 Years You can have all this pent up demand Even people with you know their People are going to get jobs people with Jobs have been staying home and not Doing things The problem is on the supply side right Sporting Events are only going to be open at 25 Not all restaurants are going to be open It's going to take time for business Travel to come back and all that So there's going to be a mismatch that's Probably going to lead to To higher inflation in the short term The real question though is What happens in the long term how much Permanent damage has been done to the Economy Jim just build on this for us as well And let's just start with that story Looking across the curve right now Is there a challenge for the fed as far As you can see Yeah i think there is a challenge for The fed if you look at the the middle of The curve the belly of the curve
And i'll go into the weeds a little bit If you look at swaption volatility in The two to five year sector of the curve That is the volatility or the Uncertainty that the market has about Two to five year Rates it's back to the peaks it was During the pandemic And it's very close to where it was at The powell pivot great uncertainty in The market at that point If you look at the fed fund futures They're actually pricing in the first Fed rate hike For the june 2022 a little over a year From now The market is worried about inflation The market thinks the fed is going to be Forced to act sooner than they need to Now Sooner is a year from now not Immediately It's not going to be two or three years Like the fed likes to think That's where i think the unsettled this Comes from while i Agree that normally higher rates should Be a welcome thing To financial markets because it suggests Real growth There's some lingering fear that these Higher rates are being driven by Inflation And that's why you're seeing the market
Especially in the middle of the curve Starting to price in much higher Volatility Uncertainty about the fed and you're Seeing things like the stock market Wobble every time we see A long rates go up i want to pick up on Two words you used inflation Worries krishna inflation worries what I've seen over the last couple of weeks Is a bond market being driven by real Yields and i'm trying to understand the Inflation piece of this i get it The base effects kick in energy prices Are higher food prices are higher demand Comes back online we have some supply Constraints Are they inflation worries krishna as Far as you're concerned Well so i i think from a cyclical Standpoint because of the Points that gerson was making that there Is probably a cyclical uptick in Inflation And powell basically said it just as Much but the real issue for the fed And the real issue for the markets from A longer term perspective Is what is inflation going to look like On a secular basis And you know that is what would Inflation look like In 2022 and 2023 and the driver for that Is really not the the structural
Underpinnings of the supply side of the Economy at least not on the good side It's really on wages And i think if wages if you expect wages To continue to Rise on a sustained basis and not just In 2021 We're talking about 2022 and onwards if That is what your expectation is Inflation is going to be real I just don't see it i think you know From a from a secular standpoint All the things that we faced in 20 uh 2019 We still face it's just that uh we We had a substantial drawdown yeah and Now we are coming out of it And the temporary income replacement is Certainly helping The economy grow out of it but that Temporary income replacement Is going to start fading in 2022 and We'll be back to where we were before Talking about Uh secular stagnation and everything Else that we used to talk about Steve major of hsbc shares that view With you christopher and here's the view From p Jim uh robert tip a colleague and good Friend of yours I'm sure guys send the following as Growth drops off next year it's going to Become clearer that the fed is not going
To be hiking as rapidly As what's priced into the forward curve If at all maybe for the next handful Of years jim i'd like you to come back In can you respond to that Yeah i think that christians really Summed it up Very well in that we've got a lot of Stimulus being pumped into the economy Fiscally there's 21.5 trillion dollars Of personal income that We all americans generate every year the Vast majority that comes from wages Right now a quarter of that is being Mailed to us from the government In the form of stimulus checks from the 900 billion dollars From the old cares act and coming soon As fourteen hundred dollar checks as Well too That's where you're getting the Immediate wage inflation let's call Personal income inflation The next question then becomes is that Done We've sent three checks out we've got Senator romney proposing monthly checks To everybody who's got children under 17 Or is this the beginning of ubi because If it is the beginning of universal Basic income Then i think the market is right to be Fretting about inflation As we move forward from here so it
Really comes down to all this stimulus Is it temporary Or is it something more than just Temporary Right now you could make the case it Might be something a little bit more Because we're about to have our third Round of stimulus checks go out in the Next couple of weeks Assuming everything goes as we expect in Congress gershon let's have the final Word from you on this Is it temporary or is it a story that Persists Without this anything that krishna Robert said i think we need to be Honest and humble here we are in Unprecedented times The past 12 months we've seen again i Don't know if you called a recession But we've seen five times the downturn Of The average recession since world war ii In a quarter of the time period You lop on top of that the fact that Again corporate borrowing has gone Up usually corporate borrowing goes down In recession you have All this money sitting on the sidelines We don't know the trajectory of the Vaccine It looks like it's good right now Especially in the u.s but there could be Variants out there
We are really in unprecedented times and I think What the the balance that the fed is Trying To to get right right now is on the one Hand communicating to people Not to panic on the other hand Recognizing that they themselves have Absolutely no idea when they're going to Start uh raising rates When they even start going to taper so It looks like they're going to buy a Trillion worth of bonds this year So there's a lot of uncertainty the fed Recognizes it and we have to be humble In making sure that we we don't really Know exactly what's going to happen in The short term it's been a humbling 12 Months guys you'll be sticking with us Coming up on the program up next the Auction block junk rated companies Borrowing At an unprecedented clip that Conversation coming up next from new York This is bloomberg I'm jonathan ferro this is bloomberg Real yield it's time now for the auction Blog where we kick things off Over in europe where searching esg debt Sales are helping fuel the best ever Start to the continent's market for new Bonds Italy's debut green offering was the
Most subscribed deal in europe's primary Market Through the week in a state's junk rated Company setting a first quarter record This week roughly 100 billion dollars in Sales fueled by first-time borrowers Taking advantage of their rising equity Prices And the high grade market remaining well Open as well sales topping weekly Estimates by Wednesday with at least 45 issuers Selling more than 65 billion dollars In new debt back with us christian Mamani gershon distance and Jim bianco jim i want to come to you sir On the auction slate on the treasury Side of things we had that ugly Seven-year offering Last week and next week i believe we get 30-year and 10-year debt Are you worried about the amount of Supply coming to market over the next Couple of months Um not really for the next couple of Months because the treasury has already Pre-announced that they're going to pull It back and run down their Cash balance their cash balances that's Actually got me worried a little bit too That we might see negative rates at the Very front end of the curve But longer term just beyond the next few Months yes because
If we get stimulus we already have a Three and a half trillion dollar deficit We could be looking at four plus Trillion dollar deficits And that's a lot of bonds that are going To have to be sold maybe not between now And june But after june i think there's going to Be a lot more bonds that are going to be On the block And unfortunately what we saw with the Seven year last week might not be the Last time we see something like that in A downturn like what we saw through last Year there's a lot of demand for that Kind of debt and i just wonder krista Going forward from here Whether that competition for capital That some people think might materialize In the coming years Starts to evolve soon what's your take On that Well so uh you know if you if you look At the us real yields As we talked about earlier they are Significantly higher so People overseas who need that You know you need that exposure need Those bonds we are making more of them So I'm you know whenever someone talks About supply and demand imbalance Driving treasury markets driving driving Bananas
Because that's not what drives president Markets i mean For an auction it may but from a Long-term perspective What drives the treasury market is what Your inflation expectations are And what where what the economic Conditions are so that we have an idea As to Uh where uh you know both nominal and Real yield should be Well krishna to put a finer point on it Supply matters is what you think that Supply will achieve do you think this Additional supply leads to that growth That inflation You know supply certainly matters but uh The the the fact of the matter is That if there is a substantial rise in Yields And uh and because of that supply Concern Then the equity market will tumble and Then all of a sudden people who are Buying equities Will become buyers of bonds so i that Eventually works out And that's how the markets work do you Think gershom that high yield is a Relative winner here Well uh the technicals are are Phenomenal People are going to need yield um it's Important to note that you know spreads
Are not Crazily tight the ultimate yield the Yields are pretty low and That's going to be the same debate we've Been having for a long time what matters More yield of spread i would just like To comment one thing on the treasury Market which Is is is uh very concerning to me much More so Than than the supply is the liquidity in The treasury market You know we saw earlier this week uh bid Offer spreads on the third a year Go out to like 10 to 12 ticks that is Not something we've seen Before uh even the most liquid point the Five year point You know you would have had a hard time Doing uh more than Than 500 million at a clip that is Concerning More so than the supply we need to make Sure If we're going to have all this debt the Fed's going to be buying a lot of it We're going to be issuing a lot more of It There has to be an orderly transparent And low transaction cost treasury market Do you think ninja bianco that's what The fed needs to be focused on here The volatility the liquidity of the last Couple of weeks
Yeah i do think that they need to be Worried about it i agree with gersten You know If you look at the history of uh the Central banks that do qe And if you look at the extreme example Of japan you know that their Their central bank bank of japan now Owns about 45 percent of their market Where the fed owns in the low 20s right Now they're Their liquidity is almost non-existent They have the whole days Where benchmark issues don't trade in That market at Any great degree if any if at all and That's what usually happens when you get A very large footprint from a central Bank In a market they kind of nudge out Everybody else in fact we might even be Seeing it in the tips market right now In the u.s With some of the liquidity issues that We've been Noticing that have been coming in that Market because of the heavy involvement That the fed has had as well too so yeah You should be very very worried about The liquidity issues moving forward They're not going to get better If the economy continues to advance and They're not going to get better If you if inflation concerns still are
On the forefront of everybody's mind If those liquidity issues lead to Volatility Doesn't that offer some kind of Opportunities the year progresses Gershon Well volatility is always the friend of The active investor So yeah we've been sitting here for the Past few months not Very having really strong provocative Views we'd love some volatility Um right now it's just it's it's steady As she goes It's looking at you know credits and if You Go back to the high yield market credits That look quite uh Attractive but the pricing is not great And we're going to see that for a while One interesting thing in the investment Grade market which we don't talk about a Lot Is for the first time in i don't know How long Decades you can buy high quality Companies below par I mean for years we were looking at Those you know Old issuance five six percent coupons That you had to pay 140 Price on a bond today you can buy a Company like amazon for example you buy The debt of amazon
In the 80s and that's because the yields Have gone up recently and they've had Very low coupons so there's Interesting convexity opportunities in The investment grade market That we haven't seen in quite some time I want to pick up on some of those Opportunities there was a battle several Years ago On this program i'll call it a battle Between gershon and krishna Over leveraged loans and what would Perform better i believe it was about Two and a half years ago and i believe I've been informed that Gershom was right on that one krishna That high yield outperformed leveraged Loans over the next two and a half years As you see things right now christian What are you more comfortable with the Lone story or high yield Well i'm i'm uh you know gerson won a Temporary battle but he had lost the war No i'm kidding the the point with Respect to that is i think Credit markets are attractive overall And and i think both loans and high Yield uh are Are quite attractive and gerson was kind Of uh alluding to that Uh the the and from a fed's perspective From a credit creation perspective in Support of the economy That is a far more important metric
Than uh treasury market volatility to be Honest i mean they're worried about Treasury market volatility But that may have been driven primarily Because of repositioning Because everyone was on the same side of The boat and then all of a sudden they Decided to move to the Other side with the steepening trade so Credit spreads are quite stable and the Fed is Laser focused on it and therefore all Credit spreads Including loans and high yield depending On your productivity Is attractive i would go back to the Original statement that i made to gerson The In in that episode yeah which is Loans really aren't about duration i Think if it is about duration there are 15 different ways of managing the Duration of your portfolio The valuation issues really is more About spreads relative to the underlying Credit risk and i think Everything looks pretty good at the Moment the final word question As much as i like to disagree with Krishna i agree with everything he just Said All credit is attractive my view two and A half years ago wasn't that loans Weren't attractive it's that high yield
Was much more attractive and quite Frankly they've both done very well high Yields done better but they've both done Very well I still think there's a lot of Opportunity and prudent investors are Going to look across both markets To figure out where the best Opportunities are in each that was very Graceful Gershon thank you sir everyone's going To be sticking with us coming up on the Program still ahead the final spread the Week ahead featuring a slew of u.s Economic data And an ecb rate decision that Conversation up next this Is bloomberg I'm jonathan ferro this is bloomberg Real yield it's time now for the final Spread the week ahead Coming up the oacd publishing its Interim economic outlook on tuesday Then we get cpi readings from the us and China on wednesday an ecb rate decision And president christine lagarde news Conference on thursday and we round out The week on friday with uspi with some Final thoughts i'm pleased to say still With us Christian mamani geshen distant founder Jim bianco jim let's pick up on the ecb And president lagarde Next thursday different proposition for
Them when they see yield tyre compared To say chairman powell they seem to be Much more uncomfortable with it What can they do jim Oh that i think that they're are setting The stage that they're going to Increase their pet purchases and they've Already kind of said that and i think When legard has oppressor that that's Going to be the basic thing they're Going to talk about Is now that the month is end because Remember the ecb has to set their pet Purposes Every month they just did that now it's Going to be about how you're going to Execute it give me some ranges on save The tenure bund Where you're going to come in how are You going to come in what ranges would You Uh look at if you were going to start Moving the the discount rate or any of That other stuff but i really think it's Going to be about Where is your pain point that you'll Step in With your purchases have you been Confused jim by what they've been doing Over the last couple of weeks because The public commentaries been one thing Behind the scenes looking at the data It doesn't look like they stepped in Even if they were uncomfortable why
Goes back to what i said before you have To set those pet purchases at the Beginning of the month they did that at The beginning of february by the time The markets got a little bit wobbly at The end of the month They were out of authority to really buy Bonds well the good news is march first Came And they could now reset that authority To buy bonds once more time It's unfortunate that they have such a Difficult kind of bureaucracy in Deciding how they're going to do their Purchases And i think a lot of people might have Misread that as a lack of commitment or Uninterest Because it happened to come at the last Week of the month when they were pretty Much out of authority to buy bonds Final segment guys i've been told off The last couple of weeks but my producer For running down the clock too much and Missing out on the rapid fire round so Let's get there now three questions Three quick answers and start with this One right here I want to do this just to see not Because i think it's going to happen the First rate hike I want to understand from you three Where you think that comes 22 23 or low For a whole lot longer which one krishna
I think uh 23 earliest but low for long Gershon 23 mid 23. jim 22 gonna be really interested to see how Those numbers evolve 22 from jim 23 the others maybe longer Here's a final one for you have we seen The low for the 10 year this year Already 91 basis points yes or no Gershon No definitely not uh for this year yes Jim I go with yes guys great to catch up With you all christian o'malley gershwin Distance jim pianko thank you sir That was two not three i know we're out Of time from new york city that does it From us we'll see you next friday at 1 Pm new york time 6 p.m in london this was bloomberg real Yield this is [Music] Bloomberg
