Good morning. It's Thursday, the fifth of October here in London. This is the Bloomberg Daybacurate podcast that I'm Caroline Hepkit and.
I'm Stephen Carroll. Coming up today. Barkley's analysts say it will take a stock crash to rescue the bond market.
Rishi Sunak tears off a project championed by five of his predecessors in a bid to reset his party's agenda.
Plus, as the downturn and the property market is hurting owners and landlords, the imminent danger may be elsewhere. We look at the struggles facing the firms who get things built.
Let's start with a roundoff of our top stories. Global bonds are doomed to keep falling unless we see a sustained slump in equities. That according to analysts from Berkley's. The Global Chairman of Research at the Bank, aj Rajah Dax, says that in the short term, the only scenario where bonds rally materially is where risk assets fall sharply in the coming weeks. Yields hit levels not seen since two thousand and seven yesterday, but then rallied on weaker US
jobs data. Invesco's Stephanie Larasilier says that traders are watching the current moves.
Closely, investors starting to take no heels that we haven't seen over a decade.
I mean, every part of the curve.
Is at a decade plus ties, and we're talking about a uni market where you know, in the past, when we have seen these yields, they've usually meant that there was some underlying fundamental questionable, you know, credit issues, and that doesn't exist right now.
Stephanie Lowersilier's comments come as trade has remained on high alert for a resurgence in volatility, especially if US non farm payrolls data on Friday come in stronger than expected.
Bill Gross, the co founder of PIMCO and a man once dubbed the bond King, has also been weighing in on the recent market gyrations. He says stocks are clearly overvalued and the bond yields will need to fall significantly to justify current valuations. Speaking to Bloomberg, Gross also took aim at retail investment is, saying they've also helped to spook the market, acting as quote little bond vigilantes.
They've been spooked over the last week or so by declines of two, three four percent in their etups, and so I think.
They're joining the crowd in terms of selling.
And you know, we're seeing a little bit of an oversol market here headed to five percent.
If I want to hear that full interview with Bill Gross, you can get it on the Bloomberg Talks podcast all of our key conversations in one place. Redemptions by individual investors have helped to deepen their out over the past week, as exchange traded funds were forced to sell holdings worth hundreds of millions of dollars.
Now to the UK. After days of criticism for not making a decision on high speed Rail two, the Prime Minister has confirmed that he's scrapping the northern leg of the one hundred billion pound infrastructure project. Soon made the announcement in his Leader's speech out the Conservative Party confidence and sought to frame the move in a positive light.
I say to those who backed the project in the first place, the facts have changed, and the right thing to do when the fact change is to have the courage to change direction.
Richie Sonac says that he'll spend the thirty six billion pounds saved on hundreds of other transport schemes instead, but decisions to cut the project short go against the past five Prime ministers, all of whom backed the plan. David Cameron reacted to the news, calling it the loss of a once in a generation opportunity.
Barclays is laying off roughly fifty senior deal makers as part of its annual staff cut. The move is said to be part of a planned to trim headcount by about three hundred people across the Corporate and Investment Bank divisions. That amounts to about three percent of the total headcount in the unit, which also includes Barkley's trading operations.
The London Stock Exchange CEO Julia Hoggett says the City of London is being hamstrung by low salary. The finance executive says that luring top recruits with market changing talent needs pay to match.
That person who would be game changing in terms of unlocking that value for the UK company you're unlocking that market would have to be paid more than the CEO and wouldn't be able to have any performance related to pay on top of what they started at and is probably still taking a pay cup from what they be paid to work for a Nation company, or a US company or even sometimes a European company.
LC CEO Julia Hoggart speaking there to the Inner City podcast. Median pay for footy one hundred CEOs increased by sixteen percent to three point nine million pounds last year, and you can listen to that whole interview wherever you listen to your podcasts.
Your opinion, and diplomats have reached an initial agreement over an overhaul of rules on migration. Officials agreed that in a crisis situation, member states may request the relocation of asylum seekers to other EU countries, as well as financial contributions to support migrants. And migration have become an increasingly urgent problem for European Union leaders meeting in Grenada and Spain this week, with some countries taking unilateral measures to Titan controls.
And finally, the twenty thirty Football World Cup will take place across six countries and three continents. Spain, Portugal and Morocco will stage most of the tournament, but it will start in South America to celebrate one hundred years of the competition, with Uruguay, Argentina and Paraguay hosting a match each. The FIFA President Johnny Infantino says that the choice of Uruguay is significant.
The first of these three matches will of course be played at the stadium where it all began, in Montevideo's medical Estadio Centennario, precisely to celebrate the centenary edition of the FIFA World Cup.
Infantino went on to say that the organization is quote bringing everyone together by awarding the competition to so many nations.
Welcome back back, sitting beside me after your trip to Manchester this week, So much happened, of course, culminating in the speech by Rishie Sineak yesterday.
Yeah, listen, it was great to be in Manchester. It was difficult to get back, of course, because there was strike action and so that was one of the things that were sort of overhanging the last day of this full day conference up in Manchester. It's a huge jamboree. It's all the MPs, it's the Prime Minister and Chancellor giving major speeches, and it's all the party activists there.
It's sort of meant to rally the grassroots of the Conservative Party and so there was a lot of anticipation around what the Prime Minister was going to say and there was a lot of speculation about high speed rail too. This is a huge infrastructure project that was meant to end with fast, super fast bullets trains coming into Manchester Station. Speculation that was going to be scrapped, and indeed that is exactly what the Prime Minister did in that speech.
He canceled it. He did talk about reinvesting all of the money in one hundreds of other projects road and rail in the North of England and the Midlands. But there was really a furroy after that. And so I spent the afternoon after the Prime Minister's speech going to the press conference held by the Greater Manchester Mayor Andy Burnham. He was surrounded by.
Who you'd spoken to earlier in the week of about.
Absolutely I had spotted him roving around the conference hall, you know, speaking to people. He's obviously a labor politician, but you know was was welcoming the Conservative conference to his city and yes, so I caught up with him then in a one on one conversation. The palpable frustration and really anger because Burnham was surrounded by a number of business people and also the chair of the Greater
Manchester Business Board, lou Cardwell, who's herself an entrepreneur. So I spoke to both of them and there was real sort of anger. It doesn't help build business confidence. What Andy Burnham was saying he didn't understand how the Conservative Party could call itself the party of business or bring
growth to the regions that they didn't. The particular point they made again and again was that Richie Sunac was in the city to make the decision affecting the city and did not consult business people and all himself in the city when he was their There was a real sort of anger about that Prime ministerial government decision and seems to be potentially building to push back.
Yeah.
Look, it's something that we're going to be hearing plenty more about as well, and the ramifications without decision being made and whether or not party members from the Conservative Party and indeed voters will buy the alternative plan that Richie put forward in his speech yesterday. First, we're going to turn to the markets and bring you more of
our interview with the Pimcoke co founder Bill Gross. After that historic sell off that we've seen on bond markets, driving yields to their highest levels since two thousand and seven, the man known as the bond King, says the market's looking a little over sold. Bill Gross has been speaking to Bloomberg's Katie Greefeld and remain bustic.
I think pe rachel's are coming down. Katie explained it in terms of an equity risk premium being close to you know, basically the bond market and meaning that there's little risk in terms of stocks relative to treasure bills or short term treasure notes. I would put it this way, give me thirty seconds for an example, that APE ratio at twenty, turn it up signed down as an EP
ratio at five. So an earnings ratio at five, a PE ratio of twenty was a year and a half ago, and since then, real yield says Katie pointed out, I've gone up by.
You know, a good three hundred and fifty basis points.
If and I'm not saying this is going to happen, but if the earnings yield ratio, the EP ratio went up from five to eight and a half percent, then PE ratios would be down around twelve or thirteen.
And that's it's a little old school.
It's Gordon discount dividend discount model type of thing. But it does indicate the direction in terms of pe ratios that they might move if we see a situation really real yields still at the two point four zero.
Percent, and let's break down what we've seen in terms of nominal yields. As you mentioned, real yields very high and they've been in the driver's seat really if you think about this rise in the ten year yield, talk to us though about break evens. Do you think that inflation expectations should be higher here given what we're seeing in the energy market.
Yeah, I think it should.
And you know, the break even rate for the ten uere amazingly is rather stable between two and two point three percent today, I think around two point three four percent, and so that's the expectation for inflation. I would say it's more like three. Getting down to two is going
to be very difficult going forward. And so you know that to me means that nominal treasuries take the tenure again at four point seventy five or four point eight, that nominal treasuries are basically based upon an expectation for a three percent PAD funds rate over a long term basis. There is an equity risk premium that you talked about there is a term premium for bonds as well of about one to one on a quarter percent, because that's the risk of owning a tenure versus a treasury bill.
And so if FED funds settle around three to three and a half percent, you know, a five percent tenure treasury is decent value, it's not great value.
What is great value?
Though?
When you think about five percent on a ten year treasury, we haven't seen that for fifteen years plus.
If that's not great, what is great?
Well, it's great er, there's no doubt about that. But five percent again, would would be a normal bond term premium of about one or a quarter percent hunder three percent inflationary expectations.
So that's okay.
And I know corporate spreads have winded out a little bit and that makes them attractive. But what what I think has happened, Katie in the past several weeks and the market is beginning to recognize treasury supply, you know, based upon a two trillion dollar deficit. They're beginning to recognize, you know, basically the selling of bonds by the.
Fed in terms of the QT.
They're beginning to recognize higher for longer as well, and so those two factors have been important in terms of the current rise. What I've seen in the last week is that the bond vigilantes, to the extent that they are now individuals owning you know, billions and billions, hundreds of billions of bond ETFs, they've been spooked over the last week or so by declines of two, three, four percent in their ETFs, and so I think they're joining
the crowd in terms of selling. And you know, we're seeing a little bit of an over soul market here headed to five percent.
Certainly over sold.
But I do worry bills about some of these external events. Of course, yesterday there was a lot of hoopla around basically the Speaker of the House losing his position here and whether this was symptomatic of just the dysfunction in Washington. You mentioned the federal debt. We know debt servicing costs have gone up from sub two percent here for the government too, I think now somewhere in the four to
five percent range here on average. How much of that ends up becoming a factor in investment decisions or can you ignore it?
Well?
I don't think you can ignore it. You know, We're going to see the point again thirty days.
From now, in which they have to vote and we'll have a new speaker, I assume. But to me it indicates, you know, disruption in terms of the process, additional disruption based upon what we've seen because Henry Republicans ten concerned are Republicans basically are running the show and the house, and so that will increase volatility in terms of all markets and curly as a negative.
So that was the Pimco co founder Bill Gross there speaking to Bloomberg's Katie Greifeld and remain bustic.
Now we're going to Germany for our next story, where the property downturn driven by higher interest rates is starting to claim some big victims. A swathe of German developers are facing insolvency. That's leaving construction projects in limbo across the country and creditors potentially facing hefty losses are distressed debt reported. Libby Cherry has been following this story. Libby,
great to have you on. Firstly, what's just prompted this particular wave of businesses to file for insolvency?
Hi that so it's a bit of a perfect storm really when it comes to these developers. So, as you said, we've seen this very rapid rise in interest rates and that's feeding through into higher financing costs for these developers, the loans that they often take out in order to fund a project to completion. And then on the other side, you've had inflation, so that's increased the cost of building materials, that's increased the cost of labor, and that's eating into
their margins as well. And you know, often they can find themselves at a point where they're halfway through a projects and they're left without the money to finish it. And you know, at that point, you know, if your lenders aren't willing to provide you with more money, you know, you sometimes you face a little choice but to yeah, to file for insolvency proceedings.
So what are the broader repercussions then for Germany cities.
Well, yeah, it's a good question.
I mean these cities, you know, they these projects, you know, they can be in the middle of these cities, they can become iceols. You know, often construction has been delayed while negotiations are going on anyway, and once you enter an insolvency process, you can find that some of the existing contractors walk away. There's then a problem of having to tender for you know, for new contractors to come in.
You can start having.
Some of the people that decided to buy the building getting called feet and it becomes a.
Political issue as well.
I mean, no one wants these you know, gaping issols in the middle of their cities.
So you do see some kind of yeah, you know, the.
Mayor's office or some of the sort of local politicians also you know, getting involved.
Yeah, and so then what are the lenders doing about this? What's their attitude?
So, I mean many of the you know, a lot of this is kind of bank financing, and there can be situations where you know, it's it's in their interest to fund the fund the project or completion, so they might be willing to, you know, in certain cy situations, you know, provide a bit more new money to kind of get the project to completion and sell the building and move on.
But negotiations can become more difficult.
You do see, you know, for instance, there might be some of these smaller pension funds which have invested in funding these developments, and for regular true reasons, they might be limited in the amount of new money they can provide, So yeah, it can lead to quite sort of difficult negotiations for sure.
What's the outlook then for the sector? Maybe given that interest rates are where they are and as we're being told by central banks, will remain higher for longer.
Well exactly, I think obviously the sort of macro outlook is quite is quite uncertain. But certainly some of the people that we were speaking to that deal with these kind of cases were saying that they do.
You know, anticipate more of these insolvencies going forward.
And you know, as you say, if you know, central bank and just way to stay where there are, there will be this period of adjusting. Let alone, if we get see some kind of you know, downturn in the economy as well, you know, I feel that, you know, I think a lot of the responses that we've got with sciss a business model which relied a lot on cheap financing.
But you know, perhaps in the.
We might be able to reach a new equilibrium.
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