'Bloomberg Real Yield' (07/01/2022)
>> LIVE FROM NEW YORK CITY FOR OUR AUDIENCE WORLDWIDE, "BLOOMBERG REAL YIELD" STARTS NOW. COMING UP, DOWNGRADING THE ECONOMIC OUTLOOK. THE TREASURY MARKET RALLYING ON WEAK DATA AND CREDIT SPREADS BREAKING OUT. WE BEGIN WITH THE BIG ISSUE, THERE COME THE DOWNGRADES. >> LOOK AT WHAT IS HAPPENING TO THE REAL ECONOMY. >> WE ARE LOOKING AT AN ECONOMY LOSING MOMENTUM FASTER THAN WHAT WE ANTICIPATED.
>> ECONOMISTS CUT THEIR TOP 10 ECONOMIC FORECASTS FOR GDP. >> IT'S A GLOBAL STORY. >> INPUT COSTS HAVE RISEN SUBSTANTIALLY. >> WE SEE DEMAND DESTRUCTION IN SOME AREAS. >> THE CONSUMERS ON SOMEWHAT. MORE FRAGILE FOOTING.
>> WE EXPECT THE FED TO HIKE RATES MORE AGGRESSIVELY. . >> THE FED HAS BEEN DRIVING THE CAR LOOKING THROUGH THE REARVIEW MIRROR. >> THE ECONOMY IS SLOWING IN THE FED IS SAYING THAT IS COLLATERAL DAMAGE.
>> COMPANIES AND CONSUMERS NEED TO GET READY. >> WE THINK THEY CAN KEEP GOING. >> WE DON'T HAVE ANY NOTABLE DOWNWARD REVISION. >> WE HAVE HAD A TON OF DOWNGRADES IN THE LAST WHEN HE FOR HOURS. JOINING US TO DISCUSS IS GREG PETERS, FS INVESTMENT AND KATHY JONES OF CHARLES SCHWAB.
KATHY, THIS QUESTION A FEW TIMES THIS WEEK, WE HAD MARKET VOLATILITY AND ARE GETTING ECONOMIC WEAKNESS FROM THE PERSPECTIVE OF THE FEDERAL RESERVE, IS THAT A FEATURE OR BUG? KATHY: I THINK WE AGREE IT IS A FEATURE BUT THEY ADMITTED DRIVING THE ECONOMY TO A POINT WHERE DEMAND SLOWS DOWN, TO ME THAT IS THE GOAL AND IMPLICIT IN THAT IS A RISK OF RECESSION , RISING ON AND PLUMBING, AND THEY HAVE ADOPTED THAT. INFLATION IS THEIR TARGET AND THEIR COMMITMENT TO GETTING IT DOWN NO MATTER WHAT HAPPENS. I THINK THERE WERE QUESTIONS EARLY ON AS TO WHETHER THEY REALLY MEANT IT. I THINK NOW THE MARKET BELIEVES THEY DO. JONATHAN: GREG, DO YOU AGREE? GREG:. I AGREE.
I THINK YOU HAVE TO TAKE THE FED AT FACE VALUE, AND I THINK THE MARKETS HAVE BEEN WAY TOO COMPLACENT THE ENTIRE TIME AROUND WHAT THE FED IS INTENDING TO DO. I THINK IT IS STARTING TO FINALLY PLAY OUT IN REAL TIME AND I'M NOT CONVINCED WE ARE EVEN CLOSE TO THE END OF IT. JONATHAN: TROY, WOULD YOU SAY IT IS TOO PREMATURE TO PRICE OUT HIKES AND PRICE IN RATE CUTS? TROY: IT IS STILL PREMATURE TO DO THAT. THE FED IS FINALLY TIME TO CATCH UP FOR BEING WOEFULLY BEHIND THE CURVE FOR SO LONG.
IT IS AGGRESSIVELY MOVING OR ARTICULATING A VERY AGGRESSIVE PATH. IF YOU LOOK AT THE 2024 OR 2023 -- IN 20 23, IT MADE SENSE TO SPECULATE THERE BUT IN THE SHORT RUN, FOCUSED ON EXPOSURES THAT COULD BENEFIT FROM THE FED HIKING AND ARE EXTREMELY ECONOMICALLY RESILIENT, DON'T TRY TO BE A HERO AND IN THE SPREAD PRODUCT YET. IT DOES NOT HURT TO KNOW BITAL -- NIBBLE BUT UNDERSTAND YOU WILL HAVE VOLATILITY. IF YOU CAN TOLERATE THAT, GOING AFTER CFOS MAKES A LOT OF SENSE.
JONATHAN: A LOT OF THIS BEGS THE QUESTION, WHAT WAS THE FRONT-END OF THE BOND MARKET, THE FRONT-END OF THE TREASURY MARKET DOING RALLYING SO MUCH THIS MORNING AND THROUGH TODAY. IF YOU BELIEVE ALSO IT IS TOO PREMATURE TO PRICE OUT RATE HIKES AND START PRICING IN RATE CUTS. KATHY: I HAVE NEVER BEEN CONVINCED THE FED WILL HIKE AS MUCH AS THE MARKET BELIEVES. OUR POSITION INTO THE YEAR IS THEY HAVE A BASE RATE BUT LET'S HAVE A PRETTY IMMEDIATE EFFECT ON THE ECONOMY. AS IF THEY WOULD NOT BE ABLE TO GET TO THE 3.5% TO 4% AREA THAT THEY HAVE BEEN TALKING ABOUT FOR A COUPLE REASONS. I THINK WE HAVE TO TAKE INTO
ACCOUNT THE GLOBAL TIGHTENING CYCLE AND A FRAGILE ECONOMIC CYCLE BECAUSE OF THE ENERGY SHOCK AND ENERGY SHOCK ASSOCIATED WITH ENERGY RECESSIONS IN THE PAST. AND WITH THE GLOBAL TIGHTENING DRAINING LIQUIDITY, WE HAVE QT. I KNOW IT JUST STARTED BUT THAT WILL BE THE EQUIVALENT OF PROBABLY ANOTHER 100 BASIS POINTS OF TIGHTENING. WHEN YOU ADD THAT UP, DOES FED REALLY NEED TO GO TO THE 3.5%? WE DON'T THINK SO. I THINK IT PROBABLY WILL FALL
SHORT OF THAT. THERE IS STILL TALK OF THIS GAME UNTIL THEY SEE THE NUMBERS THEY WANT TO SEE. WE ARE ALREADY STARTING TO SEE THE COLLATERAL DAMAGE IN THE CREDIT MARKETS AND IN THE STOCK MARKET, ALL OF THAT INTENDED TO TIGHTEN FINANCIAL CONDITIONS BUT I THINK AT SOME STAGE THEY WILL SLOW DOWN THE RATE HIKES AND NOT GET FAR UP IN TERMS OF A SHORT-TERM RATE THE MARKET HAS BEEN DISCOUNTING. JONATHAN: YOU SAID UNTIL THEY SEE THE NUMBERS THEY WANT TO SEE, WHAT ARE THE NUMBERS? WHAT DO YOU THINK THEY ARE? KATHY: WE HAVE HEARD POWELL SAY A COUPLE MONTHS SEQUENTIALLY OF DECLINING INFLATION. I THINK THE OTHER NUMBERS WE WILL SEE HIS RISING UNEMPLOYMENT. JOBS NUMBER COMING UP NEXT
FRIDAY, IF WE SEE THE DETERIORATION OF THE JOB MARKETS, THAT WILL GIVE THEM A LOT OF REASON TO SLOW DOWN THE PAST RATE HIKES. JONATHAN: GREG, YOUR THOUGHTS ON THAT. HOW FAR DO YOU THINK THE FED CAN TAKE THINGS AND WHERE IS THE TIPPING POINT IN THE MARKET FOR WHEN THEY HAVE TO TAKE A PAUSE AND THINK ABOUT DUMPING? GREG: I DON'T THINK WE KNOW. THIS IS VERY DIFFERENT. IT IS CONTINGENT UPON INFLATION. SO I CANNOT THINK OF A WORSE SCENARIO FOR THE FED THAT IF THE ECONOMY IS THROWN INTO A RECESSION AND INFLATION REMAINS HIGH. FOR ME, BACKING OFF BECAUSE THE NUMBERS AROUND GROWTH ARE SLOWING DOES NOT MATTER.
IT IS ABOUT INFLATION. THEY HAVE TO WORRY ABOUT INFLATION, SO WHAT I ALSO THINK IS A CONFLATION BETWEEN WHAT PEOPLE ARE SAYING ON PEAK HAWKISH NIST AND PEAK INFLATION. INFLATION CAN COME DOWN, BUT IF IT IS AT A HIGHER LEVEL THAN THE FED IS COMFORTABLE WITH, THAT MEANS THEY HAVE TO DO MORE AND I THINK THE MARKETS ARE PUTTING THOSE TWO TOGETHER. AS SOON AS INFLATION STARTS TO ROLL, THEIR JOB IS OVER.
I DO NOT SEE IT THAT WAY. NO ONE REALLY KNOWS OF COURSE BUT TO ME THE RISK IS THEY HAVE TO DO MORE BECAUSE INFLATION IS SHOWING SIGNS OF BEING MORE STICKY AND BROAD-BASED THAN INITIALLY THOUGHT. JONATHAN: TAKE IT ANOTHER STEP. WITH THAT IN MIND, HOW MUCH PAIN IS THERE TO COME IN CREDIT WITH INVESTMENT SPREADS THROUGH 150? YOU GOT HIGH-YIELD SPREADS THROUGH 550, ALMOST 570, AND TRIPLE C WE TALKED ABOUT THAT. HOW MUCH PAIN IS STILL TO COME? KATHY: I HAVE YET TO EXPERIENCE -- TROY: I HAVE YET TO EXPERIENCE THE CREDIT MARKET THAT HAS NOT WIDENED IN A RECESSION. IF YOU THINK THERE IS A RECESSION OR HIGH PROBABILITY OF RECESSION, I THINK THERE IS MORE SPREAD WIDENING. AT THE SAME TIME, 150 IN R.G. -- IG IS THE AVERAGE.
YOU ARE AT THE AVERAGE PEER THE AVERAGES ARE MISLEADING IN CREDIT BECAUSE YOU HAVE THESE SPIKES AND IT STAYS LOWER SPREAD LEVELS FOR LONGER. TO ME, I THINK THERE IS A LOT MORE ROOM FOR SPREADS TO WIDEN BOTH IN IG, BOTH IN HIGH YIELD, THE CREDIT CYCLE HASN'T HAPPENED YET. WE HAVE NOT SEEN THE HIDDEN FUNDAMENTALS AND THAT IS ON THE COMP. JONATHAN: YET WHAT WE HEAR, IS IT THAT WE
GET A RECESSION IT WOULD BE A SHALLOW ONE. WE HAD A LOT OF MESSAGES ABOUT THAT, JUST HOW MUCH THE CONSENSUS CHANGED THROUGH 2022. TO GO THROUGH IDEAS WE STARTED WITH, THE FED OWN TYPE MUCH, THEN THE FED WON'T HIKE 50 BASIS POINTS, THEN THE FED WON'T HIKE 75, THE FED WILL PAUSE IN SEPTEMBER THEN A SMALL CHANCE OF RECESSION, 50% CHANCE OF RECESSION, AND THE NEW CONSENSUS IS RECESSION BUT IT WILL BE A SHALLOW ONE. WALK ME THROUGH WHAT YOU THING THE RISKS ARE AROUND THE CONSENSUS VIEW AND WHAT YOU THINK THAT MEANS TO CREDIT. GREG:
IT IS THE PAUSE THAT REFRESHES, WHICH I STRUGGLE WITH AS WELL. SO THE DEATH OF THE RECESSION I AM UNSURE OF AS WELL. I DO THINK THERE'S A LOT OF EXCESS CAPACITY THAT NEEDS TO GET WASHED OUT OF THE SYSTEM SO I'M NOT CONVINCED IT WILL BE A SHALLOW ONE. CLEARLY A SHALLOW ONE VERSUS A DEEP RECESSION MATTERS IN TERMS OF THE FALL AND ULTIMATE RECOVERIES. TO ME, WE ARE NOT EVEN AT THE POINT WHERE WE ARE PRICING IN A SHALLOW RECESSION. IT MATTERS.
I THINK IT IS HARD TO PLAY OUT AT THIS POINT, BUT ULTIMATELY WE HAVE TO GET THE PRICING FOR A RECESSION AND PEOPLE ARE USING THIS AND TO GET A NOW IS TO PREMATURE THAT'S TOO PREMATURE. TROY: I AM MORE IN GREG'S CAMP -- TOO PREMATURE. TROY: I AM IN GREG'S CAMP. THE HETEROGENEITY OF OUTCOMES WITH HIGH RECESSION RISK IS UNLIKE ANYTHING WE HAVE SEEN SINCE THE EARLY 1980'S. THE ONE THING WE HAVE NOT DISCUSSED IS THE POLITICAL CALCULATION. THAT WAS REALLY WHAT GOT THE FED FINALLY MOVING AND CLEARLY IN D.C.
THERE IS A CONSENSUS THAT INFLATION IS A FAR MORE PREVALENT RISK THAN HAVING A MILD RECESSION. IN TERMS OF MILD RECESSION QUESTION, IF YOU LOOK BACK BETWEEN 75 AND 150 BASIS POINTS OF PEAK TROUGH DDP -- GDP DECLINE MAKES SENSE WHICH IS RELATIVELY MILD, NOTHING LIKE THE GLOBAL FINANCIAL CRISIS BUT WORSE THAN THE RECESSION OF 2001. IF THAT IS THE CASE, WE THINK ABOUT EVEN IF DEFAULTS STAY LOW PRIOR TO THOSE PERIODS, WHICH THEY SHOULD GIVEN HOW MUCH IT HAS BEEN TURNED OUT IN THE LARGE EQUITY CUSHIONS IN BORROWERS, YOU STILL HAVE AROUND 800 IN HIGH YIELDS. IT IS RARE TO HAVE A RECESSION WHERE HIGH YIELDS IS AT LEAST 800 AND GO TO 1200. THERE'S A POTENTIAL IF THE FED
DOES IN FACT RAISE THEIR BALANCE SHEET OVER THE AGGRESSIVELY -- OVERLY AGGRESSIVELY THAT HIGH YIELDS CAN PULL IT AROUND 800. WE ARE IN FAR RANGE FROM THAT, A FAR AWAY FROM THAT -- THAT, FAR AWAY FROM THAT. WE HAVE 200 BASIS POINTS TO GO IF WE HAVE A MILD RECESSION.
IF IT IS DEEPER, YOU ARE TALKING 1000 TO 1200 AND YOU 12 MONTH PEEKING IN THE 6% A PERCENT RANGE. JONATHAN: I WONDER HOW FORECAST A BOWL THIS TOUGH IS. PART OF IT IS UNDERSTANDING THE FED. IF IT IS THE WHIMS OF POLITICIANS THAT SHAPE THE FED, THAT CONCERNS ME.
IF YOU TRULY BELIEVE THAT, HOW DO YOU COME UP WITH A FORECAST IF THE FED IS SHAPED BY POLITICIANS IN WASHINGTON? TROY: I WOULD NOT SAY IT IS THE ONLY THING THEY'RE LOOKING ABOUT CLEARLY THE FED OVERTIME HAS BECOME MORE POLITICIZED AND IT TOOK PRESSURE FROM D.C. TO GET THEM TO START MOVING OR AGGRESSIVELY. IN TERMS OF THE FORECAST QUESTION, THIS IS ARGUABLY THE HARDEST ENVIRONMENT ANY OF US HAVE EVER SEEN FOR MAKING FORECASTS. THINK ABOUT HOW RAPIDLY WE WENT FROM HIGHER INFLATION, WHOOPS INFLATION HAS PEAKED, TO EVEN HIGHER NUMBERS TO WHAT NOW LOOKS LIKE A MUCH HIGHER PROBABILITY OF RECESSION THAN ANYONE DREAMED OF AS RECENTLY AS EIGHT WEEKS AGO AND THAT HAS BEEN A SYMPTOM OF THIS ENTIRE CYCLE. IT IS NOT JUST IN THE MAGNITUDE OF MOVES IN TERMS OF MONEY SUPPLY GROWTH, MARKETS RIPPING UP AND DOWN, IT IS ALSO THE VELOCITY OF CHANGE AND HOW FAST THE CYCLE IS TAKING PLACE. YOU CAME INTO THE YEAR AND RECESSION WAS LOW.
BEFORE YOU KNEW IT, YOU ARE RISING SIGNIFICANTLY AND AT THE SAME TIME INFLATION NUMBERS WERE MAKING HIGHER AND HIGHER HIGHS. STAGFLATION IS NOT OUR BASE CASE BUT IS ALSO A SCENARIO YOU CANNOT CATEGORICALLY DISMISS FOR THE REASONS YOU KNOW. SO VERY HARD TO MAKE A FORECAST. YOU CAN POINT TO VARIOUS PERIODS OF HISTORY, 2000 TO 2002 WHERE YOU HAD FINANCIAL ASSET OR VERSION COUPLED WITH 70'S STYLE STAGFLATION AND THAT IS THE BEST FRAMEWORK TO USE WHEN MAKING ANY ASSUMPTIONS ABOUT HOW HIGHLY THE YIELD CAN GET AND HOW MUCH HIGHER THE RATES CAN GO BEFORE THEY GO LOWER AND HOW MUCH EQUITY MULTIPLES NEED TO CONTRACT FURTHER. THEN THE QUESTION FOR EQUITY MULTIPLES IS WHAT WILL -- BE -- WHAT WILL EARNINGS GROWTH BE? JONATHAN: I HAVE SPOKEN TO MORGAN STANLEY A FEW TIMES THIS WEEKEND THEY HAVE BEEN COMPLAINING A LOT ABOUT THE LACK OF REVISIONS TO ESTIMATES AROUND THE EARNINGS STORY. I HEARD THAT A LOT THIS WEEK. GREG PETERS, TROY GAYESKI, KATHY JONES STICKING WITH US.
MORE UP NEXT. JONATHAN: LIVE FROM NEW YORK CITY, I'M JONATHAN FERRO AND THIS IS "BLOOMBERG REAL YIELD." IT'S TIME FOR THE AUCTION BLOCK WHERE WE KICK THINGS OFF IN EUROPE WITH VOLATILITY THIS WEEK.
AND ISSUANCE FROM SPAIN AND THE U.K. PUSHING MONTHLY VOLUME UP TO 89 BILLION. IN THE U.S. HI CRAIG, BOND SALES STALLING, FALLING SHORT OF ESTIMATES FOR A THIRD STRAIGHT WEEK. IN THE JUNK BOND MARKET, ISSUANCE REMAINING STALE THROUGHOUT THE SECOND QUARTER. WE'VE HAD THIS LOWEST FIRST HALF FOR ISSUANCE SINCE 2009. STICKING WITH US IS -- A WELLS FARGO.
>> YIELD TYPICALLY PEAKS ON 10% IN THE PSYCHO AND RIGHT NOW IT IS HIGH. SO I WOULD SAY IT IS TENNIS, MAY AROUND THERE. THE FED IS LOOKING AT THIS -- THESE IDEAL CONDITIONS SAYING IT HURTS BUT THIS IS A FEATURE NOT A BUG. JONATHAN: KATHY JONES, I KNOW YOU AGREE.
CAN YOU TELL ME WHEN CREDIT STARTS TO GET INTERESTING FOR YOU? KATHY: I WOULD AGREE WITH GREG. IT IS NOT TIME YET. IT IS PREMATURE. WE HAVE BEEN HOLDING OFF ON HIGH YIELDS AND ON INVESTMENT GRADE, BEING CAUTIOUS. WE DO THINK THE ECONOMY SLOWED OUT -- SLOWS DOWN AND WE THINK IT SLOWS DOWN FASTER, PERHAPS DEEPER THAN THE CONSENSUS. ALTHOUGH A LOT OF DATA HAS BEEN TURNED DOWN, THIS IS NOT YET -- WE ARE NOT AT LEVELS YET THAT ARE ALL THAT INTERESTING. I WOULD SAY HI YIELDS AT LEAST
850 OVER, 750-850 WE MIGHT NIBBLE BUT IT DEPENDS ON WHERE THE ECONOMY IS AT THE TIME. JONATHAN: GREG, YOUR THOUGHTS ON THIS? WE HAVE SEEN MAY 2018 TAKEN OUT AND 2020 THAT WAS A PROBLEM THEY HAD TO STEP IN AND BECOME DOVISH IN LATE 2018. CLEARLY THE FED WILL NOT PIVOT THIS TIME AROUND WITH SPREADS. ONE OF THE FLASHING LIGHTS AND 2018 WAS A PRIMARY MARKET PICKING UP. I'M NOT SAYING IT IS SPEEDING UP BUT I'M SAYING WE ARE SEEING SLIDES COME OFF. WHEN DOES THAT BECOME A PROBLEM? GREG: I DON'T THINK IT IS A PROBLEM IN AND OF ITSELF.
THE BACKING OFF OF SUPPLY YOU TO THE MARKET TODAY THAN SIX MONTHS AGO. KEEP IN MIND, THERE HAS BEEN THIS DAY LUCIAN OF SUPPLY. COMPANIES ISSUED AT A PACE WE HAVE NOT SEEN BEFORE. THEY ALREADY HAVE LIQUIDITY, ALREADY HAVE THEIR FUNDING PLACE, THERE IS NOT THE MATURITY WALL. STORY IN AND OF ITSELF. TO ME, AT KATHY'S LEVEL, IT IS A GREAT LEVEL, ANYTIME HIGH-YIELD HAS BEEN OVER 800 BASIS POINTS, IT HAS REWARDED YOU HANDSOMELY. THAT IS A REAL LEVEL.
THE TRICK WITH FIXED INCOME THAT YOU HAVE THESE SPIKE HIGHER SPREADS IN YIELDS DOES NOT SIT THERE FOR THAT LONG, SO IT IS HARD TO CAPTURE. AS YOU GET CLOSER TO THOSE LEVELS, YOU HAVE TO GET MORE CONSTRUCTIVE AND WEIGHED IN EVEN IF YOU ARE EARLY BECAUSE SPREADS TOUCHY LEVEL AND THEN THEY COME DOWN. JONATHAN: WHEN DID THINGS GET INTERESTING FOR YOU, TROY? TROY: FOR THE TIME BEING, THEY ARE STILL INTERESTING THANKS TO THE REAL ESTATE CAPITAL STRUCTURE GIVEN HOW RESILIENT THEY ARE WHICH IS YOU WILL NOT HAVE THE DOWNSIDE PAIN, FURTHER WIDENING BECAUSE OF PRIVATE LOANS AND YOU WILL LEARN SOMEWHERE BETWEEN A MID TO LOW HIGH SIGEL DIGIT RETURN. YOU WANT TO BE IN THE NORTHWEST QUADRANT OF EFFICIENT FRONTIER. IN TERMS OF HIGH YIELDS AND MORE SPREAD, THEY DON'T HAVE THE DEFENSIVE NATURE. I AGREE 800 OR ABOVE IS TYPICALLY A BUY.
YOU CLOSE YOUR EYES AT THAT POINT HE READ IN THE MEANWHILE, IF YOU LOOK AT PARALLEL MARKETS, CLO DOUBLE YIELDS ARE OFF TO 12%. FIVE TO 12 -- FIVE TO 7% LIFE, A TOTAL TREMENDOUS RETURN. JONATHAN: YOU GOTTA CONVINCE ME BETTER THAN THIS. YOU'RE ARE ALMOST LAUGHING ABOUT IT.
CAN YOU TELL ME THE RISKS AROUND THIS? TROY: I'M SMILING BECAUSE IT IS A RIDICULOUS YIELD AT A LOW INTEREST-RATE ENVIRONMENT WHERE YOU'RE FULLY FLOATING-RATE EXPOSURES ARE LOOKING FORWARD IF THE FED MOVES LIKE WE EXPECT YOU WILL BENEFIT FROM THAT. THE RISK IS YOU WILL HAVE MORE MARKET DOWNSIDE ALMOST CERTAINLY . YOU HAVE TWO LEG IN AND BE CAREFUL AS YOU DO SO. FURTHER OUT IN THE RISK PROFILE, IF YOU LOOK AT TRADABLE BDC'S THAT ARE 28% TO 30% DISCOUNT, MAJORITY ASSETS ARE FLOATING ALREADY AND YOU ARE NORTH OF A 13% YIELD, THOSE ARE THE TYPES OF THINGS YOU LEAN INTO AS LONG AS YOU CAN TOLERATE VOLATILITY IN THE EVENT OF A RECESSION.
WE HAVE FOCUSED A LOT ON RECESSION BUT THAT IS NOT NECESSARILY 100% OUTCOME. IT IS ONE IN THREE TO ONE INTO. THERE IS A NONZERO PROBABILITY THAT THE CONSUMER IS STAYING STRONG, THAT WE GET BUSINESS THANKS TO INVESTMENT BUT CLEARLY THE PROBABILITY OF RECESSION HAS GONE DOWN DRAMATICALLY. SO YOU HAVE TO EXPECT MORE DOWNSIDE POTENTIAL. JONATHAN: GREG, CAN I GET YOUR THOUGHTS? GREG: YEAH.
LOOK, THE DOUBLE BE CLO TRADE IS STICKING YOUR HEAD AND THE TIGERS MOUTH. YOU ARE SUPER LEVERED SO THE UNDERLYING COLLATERAL. YOU ARE EXTREMELY EXPOSED TO DEFAULT AND LOSSES. TO ME, THAT IS WHERE THE PAIN IS GOING TO BE. I SEE A TREMENDOUS AMOUNT OF
VALUE HIGHER IN THE CAPITALS OF STRUCTURE. YOU CAN HAVE A AAA CLO NOW AT 200 BASIS POINTS. THAT IS THE DEFAULT REMOTE. YOU HAVE 30% OF LOSS SUBORDINATION UNDERNEATH YOU AND SO WHAT WE ARE DOING, WE ARE TRYING TO GET OUT OF UNSECURED RISK INTO STRUCTURED RISK WHERE THE STRUCTURES AND SUBORDINATION INSULATE YOU FROM THE MACRO WHICH IS WEAKENING. JONATHAN: KATHY, FINAL WORD.
KATHY: I'M WITH GREG. UP THE CREDIT QUALITY. I'M ALSO NOT CONVINCED THAT THIS GIVES YOU ENOUGH ADVANTAGE AS AN INVESTOR BECAUSE THOSE ARE FLOWING THROUGH TO THE BORROWER AS WELL. YOU ARE GETTING A DRAMATIC INCREASE IN BORROWING COSTS. I THINK IT PROBABLY PAYS YOU
13% AND A LITTLE RISK-FREE RATE AROUND 2%. JONATHAN: KATHY JONES, GREGORY PETERS, TROY GAYESKI STICKING WITH US. THE WEEK AHEAD FEATURING FOMC MINUTES AND WE HAVE PAYROLLS FRIDAY AROUND THE CORNER. FROM NEW YORK, THIS IS BLOOMBERG.
JONATHAN: LIVE FROM NEW YORK CITY, I'M JONATHAN FERRO AND THIS IS "BLOOMBERG REAL YIELD," TIME FOR THE FINAL SPREAD OF THE WEEK. MARKETS CLOSED MONDAY FOR INDEPENDENCE DAY. A LONG WEEKEND COMING UP STATESIDE. THE MICE FROM CHINA, THE EUROZONE, THE UNITED STATES AROUND THE WEEK. FEZ BEACON THEN WE CLOSE OUT THE WEEK WITH PAYROLLS FRIDAY. JUST OPEN JP MORGAN, MIKE ROWLEY DOWNGRADING ECONOMIC GROWTH.
A ECONOMIC DATA THIS WEEK LEADING TO REVISED DOWN TRACKING ON REAL GDP GROWTH DOWN 2%. A PROTECTION FOR REAL GDP GROWTH TO PERCENT FROM 1%. THE LANTE FED GDP FORECAST, NEEDY -- -2%. LET'S GET TO THE RAPID FIRE AROUND AND WE CAN DO THAT WITH OUR GUESTS, THREE QUICK QUESTIONS IN THREE QUICK ANSWERS. I WE SEEN THE HIGHS ON THE 10
YEAR YIELD FOR THE YEAR? KATHY, YES OR NO? KATHY: YES. TROY: 70/30, BUT MORE LIKELY YES. GREG: I'M WITH TROY, 70/30, MORE LIKELY YES. JONATHAN: I WANT TO SEE IF THIS HAS CHANGED.
FED FUNDS, WHERE IT IS A PEAK, ONE HANDLE, TO HANDLE, THREE HANDLE, FOR? HOW HIGH -- FOUR? HOW HIGH WILL THE SCOPE -- WILL THIS GO? KATHY: FOR. GREG: THREE. TROY: THREE BUT MOST FOUR. JONATHAN: LESS ON SPREADS COME AROUND 570 THE LAST TIME I LOOKED. WHAT DO WE SEE FIRST ON HIGH-YIELD SPREADS. 650 OR 500?
WHICH ONE, GREG. GREG: 650. TROY: 650. KATHY: 650. JONATHAN: ALL ON THE SAME PAGE THERE. KATHY JONES, GREGORY PETERS, TROY GAYESKI. THANK YOU.
THAT DOES IT OFFER US. SEE THE SAME TIME, -- SAME TIME SAME PLACE. THIS IS BLOOMBERG TV. ♪
2022-07-05 15:25
