SONALI:
FROM NEW YORK CITY FOR OUR VIEWERS WORLDWIDE.
I'M SONALI BASAK. "BLOOMBERG REAL YIELD"
STARTS RIGHT NOW. ♪ SONALI: COMING UP.
CONSUMER CONFIDENCE STARTS TO BREAK.
INFLATION EXPECTATIONS STAY HIGH.
THAT IS ALL AS INVESTORS AWAIT CPI DATA JUST DAYS AWAY.
WE BEGIN WITH THE BIG ISSUE. THE FED CONFIDENCE TO CUT WITH
MESSY ECONOMIC DATA. >> THE FED IS LOOKING CLOSELY
AT THE DATA. >> IT IS LOOKING AT THE
TOTALITY OF THE DATA. >> WAGE GROWTH IS STICKY. >> THE FED IS LIKELY GOING TO
TAKE A TO THE ECONOMY. I THINK LATER THIS YEAR, WE
WILL GET OUR FIRST CUT. >> IF THEY DON'T CUT IN
SEPTEMBER, LIKELY TO CUT IN DECEMBER.
THE FIRST IN SEPTEMBER, ANOTHER IN DECEMBER. >> WE ARE LOOKING AT AN
INFLECTION POINT. I THINK HE'S LOOKING FOR A
REASON. >> IT IS RARE THE FED WOULD
INTERVENE BEFORE NOVEMBER. WILL HE REMAIN PATIENT THROUGH
THE ELECTION? >> THERE'S A QUESTION OF WILL
INFLATION BE ENOUGH BY THEN? >> COMING IN HOPEFULLY MOVING
IN THE DIRECTION WE WANT TO SEE BOTH ON INFLATION, IN TERMS OF
RESTORING BALANCE TO THE ECONOMY. SONALI: WE ARE LOOKING AT A
DOUBLE-EDGED SWORD. U.S. CONSUMER SENTIMENT DECLINED IN
EARLY MAY TO A SIX-MONTH LOW. SHORT-TERM INFLATION
EXPECTATIONS AND CONCERNS ABOUT THE JOB MARKET HAVE PICKED UP.
WHAT THIS MEANS IS THE ECONOMY IS SOFTENING.
WITH INFLATION STILL HIGH, THERE IS A QUESTION ON HOW
QUICKLY THE FED CAN CUT. THE CURRENT EXPECTATION IS AT
LEAST ONCE THIS YEAR. IF YOU FLIP UP THE BOARD AND
LOOK AT THE CREDIT SPREADS. THEY HAVE COLLAPSED ACROSS THE
BOARD FROM INVESTMENT GRADE TO JUNK BONDS.
THE EXTRA YIELD INVESTORS GET FOR OWNING DEBT INSTEAD OF
GOVERNMENT BONDS IS THE LOWEST IN TWO AND A HALF YEARS.
THE EXPECTATIONS FOR FED RATE CUTS, WE SAID JUST ONE THIS
YEAR. THAT HAS CHANGED DRASTICALLY
FROM EARLIER IN THE YEAR WHERE THERE WERE SIX EXPECTED.
SPREADS HAVE REMAINED ULTRA TIGHT. WE CAUGHT UP WITH THE
MINNEAPOLIS FED PRESIDENT ON THE SIDELINES OF MILKEN.
HERE'S WHAT HE HAD TO SAY OF INFLATION. >> WE ARE COMMITTED TO 2%, WE
WILL GET TO 2%. WE WILL GET THE INTEREST RATE
ENVIRONMENT NECESSARY IN ORDER TO ACHIEVE 2%. THE SECOND HALF OF 2023
SURPRISED US AT HOW RAPIDLY INFLATION FELL.
IT SEEMED LIKE IT STALLED OUT. IT IS TOO SOON TO DECLARE WE
DEFINITELY STALLED OUT, OR MAYBE IT IS TAKING MORE TIME.
JOINING US IS BARRY KNAPP. AND SKYLER MONTGOMERY KONING OF
TS LOMBARD. YOU LOOK AT THE CONFLICTING
SIGNS AND THE DATA. SOMETHING'S STARTING TO WEAKEN.
YIELDS HAVE BEEN INTERESTING IN THE SHORTER END OF THE CURVE.
EVEN THOUGH WE SAW IT GO LOWER LAST YEAR, WE HAVE BEEN
WAVERING AROUND THE 4.8% LEVEL. WHERE DO YOU THINK WE GO FROM
HERE? >> I'D LIKE TO FIND MORE THAN
THE BACKEND -- >> I LIKE THE FRONT END MORE THAN THE BACKEND.
THREE MORE SCENARIOS, ONE BEING THE MOST LIKELY, WHICH IS RATES
MOVE HIGHER, RETEST THE 5% PEAK THAT THEY REACHED IN LATE
OCTOBER AMIDST THE INCREASE IN TREASURY ISSUANCE OF NOTES AND
BONDS. THAT IS THE MOST PROBABLE SCENARIO FOR ME.
LAST MONTH'S EMPLOYMENTS REPORT, -- LAST FRIDAY'S
IMPLANT REPORT OPENED UP THE POSSIBILITY WE CAN GET A STRING
OF WEAK LIGAMENT -- THE LABOR MARKET DATA THAT WOULD ALLOW
THE FED TO START USING PROCESS, WHICH WOULD PAINLESSLY DISS
ADVERT THE CURVE, BRING THE BANKING SYSTEM BACK INTO ALL OF
THAT ISSUANCE, IN TERMS OF THEM PARTICIPATING.
AND THE LEASE PROBABLE SCENARIO FOR ME IS WE JUST MUDDLE
THROUGH AND THE FED DOES NOT CUT BUT RATES DON'T MOVE.
I THINK THE MOST PROBABLE IS THE BACKEND IS STILL GOING TO
RETEST THE 5% LEVEL. >> I WANT TO BRING HEADLINES
CROSSING THE TERMINAL. BLOOMBERG HAD A CONVERSATION
WITH FED GOVERNOR MICHELLE BOWMAN WHO SAID SHE DOES NOT
THINK IT IS APPROPRIATE FOR THE FED TO CUT INTEREST RATES IN
2024. SHE POINTS TO PERSISTENT INFLATION.
WHEN YOU LOOK AT THAT PROSPECT, THE IDEA WE MAY NOT GET A RATE
CUT, WHAT ARE THE CONCERNS? >> I THINK FOR THE FED, THEY
VERY WATCH -- THEY VERY MUCH WANT TO CUT WHAT THEY COULD DO
POLICY WISE AND SAY THEY WILL DEFINITELY NOT HIKE.
I THINK THE PROBLEM IS THE ECONOMIC DATA.
THE ECONOMY IS STRONG, THE LABOR MARKET IS TIGHT.
THERE ARE GREATER WORRIES OF STICKY INFLATION AFTER THREE
MONTHS OF UPSIDE SURPRISES. I DON'T THINK WE HAVE TO GET
BACK TO 2% INFLATION FOR THE BUDGET CUT.
IT IS WHY WE ACCEPTED WE GET THE PREFERENCE FOR HIGHER
INFLATION. WE DEFINITELY NEED DOWNSIZE
SURPRISES AND INFLATION. A CLEAR DISINFLATION TREND.
NOT JUST ONE MONTH. THERE ARE PLENTY OF MONTHS IN
2024. SO WE CAN GET 2024 CUTS READ
BUT IT MAKES SENSE THE CUTS AND THAT THE PEOPLE ARE THINKING
ABOUT NOT CUTTING THIS YEAR. WE HAVE TO SEE HOW THE DATA
COMES IN IN THE NEXT FEW MONTHS. >> WE HAVE BEEN TALKING ABOUT
HOW RENT IS THE LAST DOMINO TO FALL. SHELTER COSTS.
TAKING ABOUT THE INFLATION STORY.
HOW STICKY IS HIGHER SHELTER COSTS? >> EXTREMELY.
THINK ABOUT THE VARIOUS MEASURES OF RENT, THE APARTMENT
LIST, WHICH IS NEW RENT, OR THE ZILLOW OBSERVED, MORE OF A
BLENDED OF EXISTING AND NEW RENTS, THEY PEAKED IN MID 2022.
MOST ACADEMIC RESEARCH SAY IT SHOULD BE ABOUT A YEAR LAG
BEFORE IT FILTERS INTO THE CPI OR PCD MEASURES.
HERE WE ARE NEARLY TWO YEARS PASS, AND SURE IT HAS COME OFF. WE HAVE LEFT THE SEVEN MONTHS
DOWN AVERAGING CLOSE TO .75 PER MONTH.
AND IT STILL HAS NOT MOVED DOWN ALL THAT MUCH.
IF YOU LOOK AT THE MEASURES ON A QUARTERLY BASIS, THEY HAVE
TURNED BACK UP ALONG WITH HOUSE PRICES.
IT IS VERY UNCLEAR TO ME THAT WE ARE GOING TO GET ANYWHERE NEAR THE .2 FIVE MONTHLY
INCREASES OR 3% ANNUALIZED INCREASE THAT PERSISTED THROUGH
THE 2010S. I THINK THE FED DID SERIOUS
DAMAGE TO THE HOUSING MARKET. THEY EXASPERATED THE IMBALANCE
BY THE WAY THAT THEY TIGHTENED. PASSIVE QT AND AGGRESSIVE RATE
HIKES CAUSED THE DEEPEST INVERSIONS SINCE THE VOLCKER
RATE. THEY DAMAGED THE SUPPLY SIDE AS
MUCH AS THE DEMAND SIDE. THEY JUST MADE THINGS WORSE.
I DON'T THINK IT IS POSSIBLE TO GET TO 2.5%.
I WOULD SAY THAT THE EXPECTATION THAT THE FED ALONE CAN BRING INFLATION TO 2% IS
NOT CONSISTENT WITH HISTORY, NOT CONSISTENT WITH THE 1960'S
OR 1970'S. WE NEED A TIGHTER FISCAL POLICY
TO BRING THAT NOT HOUSING SERVICES COMPONENT DOWN, WHICH
IS REEXAM RATED IN THE SECOND HALF OF LAST YEAR.
I'M NOT RELEASING WHAT ABOUT THE INFLATION OUTLOOK. SONALI: SKYLER, WHAT IS YOUR
EXPECTATION? WE ARE DAYS AWAY FROM ANOTHER
CRITICAL INFLATION PRINT. WHERE YOU MOST CONCERNED WE CAN
SEE THINGS TOO HIGH? >> I COMPLETELY UNDERSTAND THE
WORRIES OVER STICKY INFLATION. ON THE GOOD SIDE, IT HAS BEEN
EVIDENT WE KEEP GETTING THESE RISES IN COMMODITY PRICES, EVEN
IF THEY HAVE MODERATED IN MORE RECENT TRADING.
WE HAVE CONTINUED GLOBAL POLITICAL TENSIONS.
A HAVE BEEN IN THE BACKGROUND. THAT HAS MEANT CONTINUED
SHIPPING DISRUPTIONS. BOTH OF THOSE THINGS FEED INTO
HEADLINE INFLATION. THE BIGGER WORRY, BECAUSE OF
POTENTIAL FOR THE SECOND ROUND OF FACTS IS ON THE SERVICES
SIDE. WAGES ARE FAIRLY STICKY IN THE
4% TO 5% RANGE, DEPENDING ON WHAT MEASURES YOU ARE LOOKING
AT. BECAUSE WE'VE HAD THREE MONTHS
AND UPSIDES PRICED INFLATION SURPRISES, IT IS HARDER TO GET
THE DOWNSIDE SURPRISE. I WILL SAY IN THE U.S., THERE
HAS BEEN A SUPPLY-SIDE REBUILD. THE LABOR MARKET HAS REBOUNDS
WITH DECLINES IN THE INDUSTRIES WITH THE HIGHEST VACANCIES.
I DON'T THINK HIGHER WAGE GROWTH HAS TO BE INCONSISTENT
WITH INFLATION IF ACTIVITY IS RISING. FOR US, ONE Q WAS A BUMP ON THE
ROAD OF DISINFLATION. WE DON'T GO BACK TO 2%.
BUT CERTAINLY, WE COULD GET SOME DOWNSIDE SURPRISE AND
INFLATION. >> I THINK WHAT CARLISLE'S
ECONOMISTS SAID, IT SEEMS TO DRIVE WITH WHAT YOU ARE
STARTING TO SAY EARLIER ABOUT LONG-TERM YIELDS COME RISING
LONG-TERM YIELDS. POTENTIALLY HIGHER THAN WHAT WE
SEE TODAY. YOU SEE THESE INVESTORS
SLAMMING THE DURATION STORY. THEY ARE PILING INTO THE
DURATION STORY. WHAT IS THE RISK THEY ARE WRONG?
WHAT IS THE RISK YIELDS ON THE LONGER END OF THE CURVE ARE
MUCH HIGHER? >> THE BRAND NAME FOR OUR
ON-SITE'S MACRO IS IT IS NEVER DIFFERENT.
A TREMENDOUS AMOUNT OF WORK ON PAST PERIODS.
I THINK THE APPLICABLE PERIOD TO JUST GET A LONG-TERM
POTENTIAL SCENARIO OR OUTLOOK FOR THE TREASURY MARKET IS TO
THINK ABOUT THE 1960'S. WE WERE UNWINDING THE RATE CAPS
EXISTED THROUGH WORLD WAR II. BANKS HAD PILED INTO
TREASURIES, IT TOOK 30 YEARS TO WIND THOSE POSITIONS DOWN.
WE HAD A SERIES OF HIGHER HIGHS AND HIGHER LOWS AS INFLATION
ROSE ALONG WITH MORE EXPANSIVE FISCAL POLICY THROUGH THE 60.
I THINK THAT IS VERY MUCH WHERE WE ARE.
HAVING NEGATIVE TERM PREMIUM ON 10 YEAR TREASURIES IS REALLY
ABNORMAL. WHEN YOU LOOK AT THAT AND LINED
IT UP WITH THE WHOLE QE ERA, IT IS CLEAR THAT UNLESS SOMEHOW WE
ARE GOING BACK TO THE ZERO LOWER BOUND BECAUSE THE ECONOMY
BECOMES UNGLUED, WHICH SEEMS HIGHLY UNLIKELY WITH SUCH
EXPANSIVE OF FISCAL POLICY, I THINK WE ARE HEADED FOR HIGHER
RATES AND HIGHER TERM PREMIUMS OVER TIME. SURE WE COULD HAVE A HICCUP IN
THE ECONOMY AND HAVE A MOVE LOWER IN RATES, BUT I DON'T SEE
THE POLICY RATE SETTLING IN WHERE THE FED THINKS IT IS
GOING. 2.6%. I THINK 4% IS MORE LIKELY AS A
NEUTRAL POLICY RATE. I THINK RATES, THE LONGER END,
NEEDS TO HAVE A TERM PREMIUM. THAT IS WHERE WE ARE HEADED.
SONALI: WE HAVE TO LEAVE IT THERE. UNITED STATES SINCE 2021. >> I'M SONALI BASAK.
THIS IS "BLOOMBERG REAL YIELD." IT IS TIME FOR THE AUCTION
BLOCK. GLOBAL COMPANIES ARE SEIZING ON
STRONG DEMAND AND LACK OF CLARITY AROUND FUNDING COSTS TO
ISSUE THE MOST DEBT IN YEARS. LOOKING AT U.S.
HIGH-GRADE, NEARLY $56 BILLION OF SALES, WAY ABOVE ESTIMATES.
CBS, CHARTER, AND HBC DRIVING ISSUANCE TO THE THIRD BUSIEST
WEEK OF THE YEAR. THE LIST OF SALES WAS ROBUST.
YOU CAN SEE NAMES LIKE COCA-COLA, UBS, AND HASBRO.
MONDAY THROUGH WEDNESDAY, EACH SAW 14 ISSUERS FOR THE BUSIEST
THREE SESSIONS SINCE 2021. IT WASN'T JUST INVESTMENT
GRADE, THE CREDIT PARTY WAS ALSO SEEN IN HIGH YIELDS WITH
ALMOST $13 BILLION. LIFEPOINT HELPING PUSH THE PACE
TO THE BEST SINCE 2021. GUGGENHEIM PARTNERS CIO AND
WALSH SAYING IT IS A GOOD TIME INDEED TO BUY. >> INVESTMENT-GRADE CREDIT,
ALSO, THE HIGH-YIELD MARKET, PARTICULARLY THE HIGHER CREDIT
QUALITY PART. AVOID THE LESSER CREDITS.
WE HAVE SOME RISK BEING RATIONED AT TRIPLE C RATED
CREDIT TO BE THOUGHTFUL ABOUT. YOU CAN SEE SOME SPREAD
WIDENING. BUT HISTORICALLY, WHEN THE FED
IS ON PAUSE, IT IS A GOOD TIME FOR CREDIT. SONALI: JOINING US IS WILL SMITH,
DIRECTOR OF U.S. HIGH-YIELD CREDIT AT
ALLIANCEBERNSTEIN AND DAN'S WERE IN, CEO OF ARENA INVESTORS.
LET'S START ABOUT HOW YOU HAVE PERCEIVED THE LAST WEEK.
IT HAS BEEN A DAY LOUCHE OF SALES. HAVE YOU BEEN A BUYER? >> WE HAVE PARTICIPATED IN
SEVERAL TRANSACTIONS WHERE WE THOUGHT THERE WAS GOOD VALUE.
OVERALL BEING REALLY SELECTIVE. FOR THOSE OF YOU WHO ARE FANS
OF THE NHL, WE ARE IN THE PLAYOFF SEASON NOW.
TOWARD THE END OF A GAME, THE LOSING TEAM WILL ATTEMPT TO
PULL THEIR GOALIE AND A CHANCE TO SCORE THE GOAL THAT PUTS
THEM TO TIE UP THE GAME. IT LEAVES THEM EXPOSED.
IT FEELS LIKE THERE IS A RUSH FOR INVESTORS TO BUY AS THEY
CAN. BUT THE RISK IS GREAT. YOU NEED TO DO CREDIT HOMEWORK. >> I'M GLAD YOU BROUGHT THAT UP.
YOU WERE QUOTED RECENTLY IN A BLOOMBERG STORY AND YOU SAID
THERE IS THIS NOTION THAT BECAUSE DEFAULT RATES ARE LOW,
EVERYTHING IS FINE. BUT IT IS NOT ABOUT DEFAULT, IT
IS ABOUT RECOVERIES AND ACTUAL LOSSES. WHAT ARE PEOPLE MISSING?
>> AS A GENERAL MATTER, BANKS, INSURANCE COMPANIES, AND
REGULATORS TEND TO FOCUS ON DEFAULTS AND INTEREST RATE
COVERAGE VERSUS ACTUAL SEVERITY IN THESE SITUATIONS AND THE
LEVERAGE YOU ARE TAKING ON WHEN YOU EXPOSE YOURSELF TO A
CAPITAL STRUCTURE. ULTIMATELY, YOU CAN MANAGE AND
CREATE LOW DEFAULT DATA BY HAVING WEEK COVENANTS.
YOU CAN CREATE HIGH COVERAGE DATA BY CHARGING LITTLE.
YOU CANNOT FAKE IT ON LEVERAGE IN SEVERITY. SONALI:
DOUBLE DOWN ON THAT. THERE IS AN IDEA THAT DATA DOES
NOT LIE. SOMETIMES IT DOES. >> THE CHOICE OF DATA MAY DIE
-- MAY LIE. IF YOU ARE CHOOSING THE WRONG
DATA TO EXPRESS A CERTAIN THING IT DOES NOT SUPPORT, YOU CAN
GET FOOLED. HISTORICALLY, PEOPLE HAVE
RELIED ON A MORE HOMOGENEOUS WAY OF LOOKING AT CREDIT IN A
WAY THAT DOESN'T NECESSARILY ANTICIPATE CHANGES WE HAVE SEEN
IN THE WAY PEOPLE STRUCTURE AND THINK ABOUT CREDIT. SONALI: WE WERE TALKING ABOUT THE IDEA
SPREADS HAVE REMAINED INCREDIBLY TIGHT DESPITE
EXPECTATIONS CHANGING AROUND FED RATE CUTS THIS YEAR.
DO YOU THINK THAT IS WARRANTED? HOW CAN THEY BLOWOUT? >> IT IS ALWAYS A DIFFICULT
QUESTION TO ANSWER. WHEN SPREADS ARE WIDE, IT TENDS
TO BE WHEN THE ECONOMY IS WEAKENING.
MOST OF THE TIME WEAKENING MORE THAN FOLKS ANTICIPATE.
THAT IS A DIFFICULT THING TO TIME WELL.
IF YOU LOOK AT HIGH YIELDS IN PARTICULAR, THERE IS REALLY THE
STORY OF THE HAVE AND THE HAVE-NOTS.
THERE'S ABOUT 4% OF OUR MARKET PRICING IN A VERY HIGH CHANCE
OF DEFAULT OR RESTRUCTURING OF SOME SORT. THE OTHER 96% OF OUR MARKET
TRADES AT THE ALL-TIME TIGHTS. THAT IS CONCERNING TO US. AS WE TALKED TO INVESTORS, MOST
FOLKS ARE LOOKING AT MARKETS AND SAYING I WANT TO BUY CREDIT
BECAUSE YIELDS LOOK GOOD. BUT I DON'T WANT TO TAKE ANY
REAL DOWNSIDE RISK AND CROWDED TO HIGH QUALITY.
WITH THAT HAS DONE IS BASICALLY MAKE HIGH-QUALITY BONDS
EXTREMELY EXPENSIVE. IT IS NOT TO SAY SPREADS ARE
SUDDENLY GOING TO WIDEN, BUT FORWARD RETURNS ARE GOING TO BE
CHALLENGED. YOU ARE NOT GOING TO EARN MUCH
MORE THAN TREASURIES IF YOU ARE BUYING A BBB RATED CREDIT.
AT 120 BASIS POINTS A SPREAD. THAT REALLY OPENS YOU UP TO AN
ENVIRONMENT THAT MAY LOOK DIFFERENT THAN THE ONE WE HAVE
TODAY. GROWTH SLOWS OR PICK YOUR
POISON IN TERMS OF A MACRO EVENT. WE ALWAYS LIKE TO THINK ABOUT
MARKETS AND HOW WE CAN -- HOW MUCH MONEY WE CAN LOSE IF WE
ARE WRONG. MOST PARTS OF CREDIT, YOU
CANNOT MAKE MUCH OF YOUR RIGHT, BUT YOU CAN LOSE IF YOU'RE
WRONG. SONALI: HOW DO YOU FEEL ABOUT THE
RISK-REWARD? >> I WOULD AGREE.
YOU HAVE TO DEFINE WHAT YOU'RE LOOKING AT IN CREDIT.
IN THE TRADABLE MARKETS, CORPORATE AND ABS, IT IS TIGHT.
THE COMPRESSION WE HAVE SEEN WITH HIGHER QUALITY AND LOWER
QUALITY IS LOW. THERE IS MORE THAN THAT KIND OF
CREDIT. WHEN WE LOOK AT THINGS LIKE
CREDIT WITHIN GROWTH ENTERPRISES, THE EMBEDDED KIND
OF CREDIT OPPORTUNITIES AVAILABLE IN THE SECONDARY
MARKET FOR LP INTERESTS. WHEN WE LOOK AT THE MARKET FOR
COMMERCIAL REAL ESTATE, THERE'S OTHER TYPES OF CREDIT WHERE
THERE IS VERY LARGE VALUE DESTRUCTION THAT IS HAPPENING.
AND THE ABILITY TO BE THE BENEFICIARY OF THAT HAS BEGUN.
SONALI: CORRECT ME IF I'M WRONG, BUT
THE LAST TIME WE SPOKE YOU WERE A LOT MORE SANGUINE ABOUT THE
STATE OF CREDIT. IT FEELS LIKE SOMETHING HAS
CHANGED. WHAT HAS CHANGED FOR YOU? >> IT IS TWO FACTORS.
ONE IS VALUATIONS. SPREADS HAVE CONTINUED TO GRIND
A LOT TIGHTER. THE SECOND IS INVESTOR BEHAVIOR
AND THINGS THAT START TO LOOK AND FEEL MORE LIKE ANIMAL
SPIRITS OUT THERE. FOLKS KIND OF SEARCHING FOR THE
LAST RISK PREMIUM. AND THAT STARTS TO BE QUITE
CONCERNING. THAT MEANS CREDIT IS BEING
EXTENDED TO AREAS IT PROBABLY SHOULD NOT.
THE LIKELIHOOD BONDS -- BONDS ARE GETTING MISPRICED, WHICH WE
THINK IS HIGHER. AND WE START TO GET CONCERNED
YOU ARE LATE IN THAT CREDIT ENVIRONMENT WHERE THE CHANCES
YOU GET BURNED ARE SIGNIFICANTLY HIGHER.
I WOULD HIGHLIGHT THOSE ARE THE MAJOR AREAS THAT HAVE CHANGED.
