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Welcome to the Daybreak Asia podcast. I'm Doug Krisner. On Monday, in the US, President Trump and Israeli Prime Minister Netanyahu said they agreed to a twenty point plan designed to end the war in Gaza. Now, this plan stipulates that the conflict would end immediately if accepted by both Israel and Hamas. Here's President Trump.
Working with the new transitional authority in Gaza. All parties will agree on a timeline for Israeli forces to withdraw in phases. Will be withdrawing in phasis, no more shooting. Hopefully, as progress is made toward achieving these goals, Arab and Muslim nations need to be allowed the chance to fulfill these commitments of dealing with hamas they have to deal with them.
In a moment, we'll get some analysis on this plan from Kirsten Fontenrow of Red six International. But let's begin in the States and the threat of a government shutdown. Congressional leaders showed no signs of progress toward a deal on a short term spending bill that after a meeting late Monday with President Trump. So government funding is set to expire at twelve oh one am on Wednesday, unless
Congress passes a short term spending bill. For a closer look now at what a potential shutdown means for markets, I'm joined by Bill Campbell. He is Global bond portfolio manager at Double Line. Bill, thank you so much for making time to chat with me. I'd like to start if we can with the government shutdown that seems imminent here in the United States. We have government funding set to expire at twelve oh one am Wednesday, unless Congress
passes a short term spending bill. I saw yields come in a little bit today, more so at the long end. Is the bond market sensing a little bit of risk here?
Do you think?
Well? I think that.
We're all watching with anticipate, patient to see if we can get a short term continuing resolution passed. I think that the real question here. In the past, we have seen eleventh hour deals, We've seen relatively short government shutdowns, but they've come at times maybe when we haven't had such large budget deficits or.
Debt to GDP issues.
My biggest concern, despite the move today, where you're going to get an initial if we get a shutdown, I think you might get an initial flight to safety response, but the duration of this shutdown needs to be watched closely, and if it extends through through this week out a couple of weeks, I think there are going to be some real questions that investors are going to have in their minds about, you know, the quality of policymaking in
the United States. More specifically, there's going to be a delay in the employment report, which obviously is key right now to markets to focus on for a downshift in the labor market. But one item that I'm catching on that that's on my radar for you know, the government shutdown risk is a delay potentially in the CPI numbers.
And obviously inflation is the other important component for the FED, but for the tips market, if we don't get the September inflation numbers in time, there's a technical procedure whereby we would look at the last inflation print, annualize the growth rate, and use that for pricing out and paying
the inflation component of you know, the tips payout. But I feel that this is going to raise concerns about the outlook for policymaking in general and bring eyes back to one the trajectory of US fiscal policy, and two, the trajectory of the pressure that's being put on the FED around monetary policy, and do they have the appropriate data to be navigating what is now becoming a much more difficult decision on how much to lower interest rates.
We heard today from the head of the New York Fed, John Williams. He was saying inflation risk have receded while those for employment have moved up, and he said the risk to employment and inflation are kind of more aligned, or at least closer together, and therefore it's sensible now to lower interest rates. Do you think he's underestimating the potential for inflation in that statement.
Well, I think there is a diverse view of opinion, And when you look at Governor Hammick, she said almost the opposite, that inflation has missed to the upside for the past four and a half years, and in her modeling she thinks inflation could continue to be above the Fed's two percent inflation target out to twenty twenty eight. So I think that there is a lot What I can say is there's a lot of uncertainty about the
outlook for inflation that has gone up. We've obviously gone through the inflation spike we had a couple of years ago, and now we have the unknown impacts due to tariffs and changing trade policy that makes the outlook more unclear. So when the outlook's unclear, we need more data, and we need real time data in order to be able to make the right decisions, and the Fed obviously needs
that data as well. It's my concern that if we decide that the government is going to be shut down for an extended period of time this time around, that might actually, after the initial concerns that it could slow growth maybe on the margin that helped yields rally just a little bit today, that could actually build term premium
back up in the long end of the curve. So those concerns that we don't have the data that we need and that there's more uncertainty rising about the outlook for inflation, I think that has the risk of keeping
longer and yields elevated. Which despite the rally that we've seen over the past month, if you look at the long bond, it's still up just under five percent around four seventy, But the likelihood that it stays at the upper end of its range or pushes higher over the next couple of quarters is a big risk, and I think is only complicated by these issues that we're facing today, both on inflation uncertainty and where the US fiscal trajectory is.
Going day with the inflation point for a moment or two last week at the end of the week, we had a pretty tame reading on core personal consumption expenditures, which obviously is the Fed's preferred measure of inflation. We have a Bloomberg big Take piece today talking about AI
data centers are sending power bills soaring. Wholesale electricity cost are as much as two hundred and sixty seven percent greater than they were five years ago in areas where we're finding these data centers being constructed and those costs now are being passed on to consumers and I would imagine businesses in those jurisdictions. Is there a lot more about the inflation story that we have really yet to
grapple with. And then, kind of as another point, you were talking about yields backing up at the long end, and I'm wondering whether we could get to four and a half on the ten year in no time.
Yeah, So let's take those in the order that you presented them. On the inflation side, one of the surprising elements I think is that services inflation has remained relatively sticky and continues to do so. I think that on the good side, we have seen fairly moderate goods inflation. But I would caution that I think the tariff passed through story was initially anticipated to be a quick, one off spike, a one off adjustment that then would be
corrected quickly. In fact, when we look at the Fed's Beige Book, we see that many companies are talking about the inability to raise prices too quickly, but the intention to raise prices over the course of the next twelve months. So I think that with sticky services inflation and the potential that we could have a steady rise in goods inflation.
And then if we have any type of exogenous event, like you point to an energy spike, whether due to the data centers, a geopolitical event, or something that we're just not anticipating, all of those present real risks to
inflation moving higher. I think that given markets trade on uncertainty, right, so we both have point estimates, but we put a band around those point estimates based on how confident we are, and compared to the last two decades, I think one thing we can easily say is those confidence bands have widened, and I think that that demands an extra premium in and of itself, and it's going to continue to demand
an extra premium. So it's my belief that we are going to see over time in upward pressure on interest rates. Whether we're going to see that the tenure hit four fifty in the next week or so, you know, I think that that is anybody's guess. Whether we in a in a cycle where the FED is likely, you know, cutting at twenty five basis point clips and maybe slowing the pace after this year is over, that we have a backup to four p fifty on the tenure, I think is highly likely and highly probable.
I was struck by a story in the Wall Street Journal recently about how Microsoft has lower borrowing costs than the US government. We're talking about corporate bronze rated triple A. Is that where you're focused right now and looking for opportunities in the credit space.
Well, interestingly enough, yes, we are looking at you know, shorter dated credit, you know, in higher quality credit. We find we're finding some opportunities in the corporate sector. We also are finding a lot of opportunities in the structured product sector where we can get short duration assets with higher yields somewhat in some cases significantly higher. Then you get on the US Treasury bond market, and then you get your cash returned to you over the course of
the next year or two. But one of the more interesting plays for those who have a little bit who have capacity to take a little bit more risk, is we've been allocating to non dollar fixed income assets, more specifically emerging market local currency bonds, and the idea there is that we're having several factors that have both caused the dollar to devalue this year and are likely to keep pressure on the dollar going forward, and with a FED cutting into not what is a recession and not
what is a current economic emergency, that likely is going to extend the near term economic runway. We think that the one sector in the global fixed income market that's been under allocated to, you know, has been em local fixed income and in many cases we're picking up high single to load double digit yields and we're getting currency
appreciation on the back of it, so we're blending. It depends on the specific strategy, but we're trying to blend shorter duration where we're investing between the front end to the belly and the treasury market, shorter duration, high quality credit, and then we're adding, you know, in the strategies that can take a little bit more risk the em local trade.
I'm wondering whether or not there's a conversation at double line that has to do with a potential pullback in the equity market and how money may get moved from stocks into the bond space, and maybe you could see some opportunity is for short term capital gains in certain parts of the bond market. Is that something that you guys are talking about.
I think that if you had a short a larger correction, near term correction in the equity market, I think the front end of the yield curve would respond, the front end to the belly of the yield curve would respond
more than the long end. My concern is that, similar to what we saw after Liberation Day, I think that many international investors are watching very carefully their exposures to the US, and I'm thinking that it's more likely that if you get a equity correction in the US, some of that money right now, it stands at about sixty trillion of foreign savings that sits in the US could get repatriated out of US markets back into home markets internationally.
I think that that would, you know, support a little bit of a lower dollar trade, which is different than what we've seen in equity corrections prior to this year, but it is in line with what we've seen with the equity correction around Liberation Day or at the beginning of this Trump administration. So I think that we still remain cautious even in that scenario of flight to quality
on the long end of the curve. We think that fiscal issues and inflation uncertainty and this over owning by the international community that may have an itchy trigger finger keep risks on the long end of the yield curve out more towards the thirty year sector. But the front end of the belly still will have those risk aversion
flight to safety qualities. But this time around high quality fixed income assets internationally, you know, may have the ben fit that the dollar may not go up in this next equity correction but may actually go down.
Bill will leave it there. It's always a pleasure, thank you, So very much a Bill Campbell there. He is Global bond portfolio manager at Double Line. Joining us here on the Daybreak Asia podcast. Welcome back to the Daybreak Asia Podcast. I'm deg Prisner. On Monday, President Trump unveiled a plan for a ceasefire in Gaza. It was framed as a landmark deal to bring peace after two years of catastrophic violence.
Standing alongside Israeli Prime Minister Neknyahoo, Trump unveiled a proposal which both men had agreed to and if it's agreed to by Israel and Hamas, this proposal would end war in Gaza and free the remaining hostages. For more, we heard from Kirsten Fontenrose, president of Red six International. She spoke with Bloomberg TV host Sherry On in April on the Asia trade.
I think we should expect Hamas to be spoilers. Initially. They tend to follow a playbook.
Where they will participate in negotiations and then put new demands on the table right before this is final. But in this case, they're seeing a unified voice from the Arab States, which is a little bit surprising and really impressive, that will pressure them to accept these conditions, accept as plan,
so it'll be more pressure than they've seen previously. I think they'll also listen to President Trump's words saying that if they do not agree to this plan that has received eight Arab and Muslim states input as well as Israel's input, that if the plan falls apart because of their non compliance, then Israel would have his full backing to finish the job of destroying the threat of Hamas
inside Gaza. So they will be thinking about taking that seriously about what an unleashed Israeli defense forces with no US reigning the men would look like if they chose to say no to this one chance for the war to stop immediately.
It does seem quite a positive development as you raise that you're seeing that unity among Gulf states in backing this plan. How do you see the role of the Qataris in a potential implementation as crucial to this plan actually walking out?
They will be crucial as well.
Frankly every other state that was involved in this conversation, perhaps with the omission of one or two. But remember you saw eight Arab and Muslim states here, So Kada will be critical in bringing Hamas around to this, and Kada will be going to them with a message saying We're not here to get your demands anymore.
We're not here to go back and forth. This is on the table.
All the Arab states are aligned, and plus Turkey, plus Indonesia plus Pakistan, you literally don't have anyone who is going to have your back in negotiations should you choose to turn this down. So Kada will be delivering a tough message. But then you have Indonesians offering to send troops. You have several states that will be called to provide training, like Egypt and Jordan for Palestinian police forces. You'll have funding for redevelopment coming from other parts of the Golf.
So each one of these states is playing a role.
You know, it was interesting how President Trump set up that phone call between Prime Minister Nadanahu and the Katari Prime minister, given of course, that attack on Doha that
did not sit well for the Middle Eastern state. But what do we think about the increasing isolation of Israel despite the fact that Hamas may be backed into a corner because of this cooperation and understanding between Golf states and the plan that President Trump has in place, the fact that Israel continues to be isolated on the international stage and is receiving a lot of criticism. Will they have the bandwidth to go against Hamas if this seal is rejected, They would.
Have the bandwidth militarily, but would they have the bandwidth in terms of international goodwill? Likely not.
This may be doing Prime Minister Natanyahu a little bit of a favor because while he is the face of this policy, a lot of the preference for a hard line military operation are coming from right wing factions within his government, and this insistence by a unified Arab and Muslim world, and by the US government and by European states as well, may give Bbe the power to turn to some of those factions and say we're in a corner now as well.
We don't have a choice.
This is an all or nothing offer, and if we say no to President Trump's personal invitation to be a part of this peace board he wants to set up, we may not get another chance from the US that will be in our favor.
The terms of this plan also reference of future where the conditions for policy and state could finally be in place. Do you see this as a potential ground work for broader me these.
Peace It could, but Honestly, there's still quite a bit to be worked out.
Specifically.
On that note, the plan put forward by President Trump.
Does not use the phrase two states.
It says that the new Peace Board will oversee development in Gaza until the Palestinian Authority is reformed and can take back control of Gaza.
Does not mention a Palestinian state.
Then you have the joint statement from the Arab and Muslim states, who are briefed on the plan and will be central to it, calling for governance to eventually be handed over to a then reformed Palestinian authority that would administer an integrated Palestinian state of both Gaza.
And the West Bank.
And then you have Israel saying it does not see a role for the Palestinian authority because, to their point, Palestinian authority has had thirty years to prove it can govern and has failed to do so and has been rife with corruption. So you have similar generic language saying we're looking toward Palestinian control of at least Gaza.
But you have three different framings right now.
It seems like each party has said we're okay with that for the moment, because we really.
Just need to get this approved.
We need to get this across the line so that the war itself can stop and we can have a partialist, real withdrawal and return of hostages. They're not as concerned about exactly what that means right now. They're talking about pathways to two states, they're talking about reformation of the PA. Those are long term eventualities. So right now the emphasis is, let's come up with language we all agree on so we can begin.
And potentially make some hidway on this. It could also mean Trump's role as a peace broker gets bolstered. But to your point and Sherry's point earlier about how Israel doesn't seem quite bald as a stage about how it is being isolated in the international community, how do you see Trump potentially exerting pressure on Nitan Yahuo if things don't pan out well.
I think him offering to pose himself as the chair of a peace board, which is really uncommon for a president of a large nation to offer to put that kind of time and effort into a single individual world issue. They almost can't say no because if they say no to that, and the President says, then we're done paying attention.
You're on your own Israel will be fighting, perhaps not a war on the ground against all the Arab states, not that no one wants, none of them want that, but a unified voice of the Arab states that would be in Washington, would be in Europe.
They haven't had to face that before, and I don't think they relish the idea of that.
And that strike in Doha that you referenced earlier is exactly what finally brought all these voices that often come to Washington complaining about each other into one voice saying, we have to have a solution for this going forward. Israel cannot be unchecked. Hamas we agree, cannot be in charge of Gaza.
We're all going to agree.
On the basics so that we can get Israel to start withdrawing, get Palestinians put back in charge of their own territory, and start to try to rebuild from there.
So I think he's seeing the pressure is not.
Only from Washington, and it's from globally, but it's also not only from the administration. It's from President Trump him self, who's saying I will invest personal time and effort. Boy, that's really hard to turn down if your country is reliant on that person's individual support for your military to sustain its own operation.
Kristin funten Rose, always good to have you with us. Thank you so much for your INSIGHT's President and Red six International.
Thanks for listening to today's episode of the Bloomberg Daybreak Asia Edition podcast. Each weekday, we look at the story shaping markets, finance, and geopolitics in the Asia Pacific. You can find us on Apple, Spotify, the Bloomberg Podcast YouTube channel, or anywhere else you listen. Join us again tomorrow for insight on the market moves from Hong Kong to Singapore and Australia. I'm Doug Prisoner and this is Bloomberg