Ten-Year Yield Could Fall Before Rising, Bianco Says

whether at the grocery store or the trading floor. Find the Bloomberg P and L Podcast on iTunes, SoundCloud and at Bloomberg dot com. Bonds what to do with the bond market, We've got Jim Bianco. James Bianco is the president of Bianco Research, joining us from Chicago. Boy, you know, Jim Bianco, I think of the bond market continues the way it's going, they're not gonna be any people in the bond market much longer. No, I think they're in

the sleeping You guys were talking about that. Yeah, they got their blankets, you know, they pull it up, they get that little pillow out from Tim. I'm so glad that you could join us. I don't know if you saw that the Feds Jim Bullard came out today and said that there's no need to discuss the Fed's balance sheet. People have been talking about when the Federal stopped reinvesting, what they get from their four point five trillion dollars

of investments that they're holding. Um, what's your take on this? Do you think that they're going to have to talk about it given the amount of money that they're receiving from bonds being paid out and maturing. Yeah, I think they're going to have to talk about it. Um, the feds balance sheet has got trillions of dollars of Treasury securities on it. In simple terms, the bond market believes that all those bonds that are on the Fed's balance

sheet are permanently out of circulation. They're never going to come back into circulation. So Bullet is saying, and what Bill Dudley has said and some others have said, be very very careful when you talk about reintroduced those bonds back into the market, because then you could have a

shock in the market if they believe that. We have to make room and private accounts now you know, banks and and endowments and trusts inspectative accounts for trillions of dollars of securities which are locked away, which we think is forever in the Fed's balance sheet, can be very disruptive. To date, I don't think the market has listened much to that conversation because it's not going to until the two big architects of the balance sheet, Bill Dudley and

Janet yell And speak on the subject. And they haven't. And now that Bullard has come out on the other side, it's going to reinforce that idea that man, that's just Fed talk. We don't really have to listen to it. Do you think we have to listen to it? I mean, aren't the mandates for the FED. Price stability and employment has nothing to do with protecting people against bond losses. Right?

Price stability is another word for inflation. Since two thousand nine, when the recession ended, the Great Recession ended, what have we not had is inflation. So when the FED has this giant sheet and they run these extreme policies, they're allowed to get away with it, if you will, because we haven't had inflation. Now you get Donald Trump being elected, and you see consumer confidence at the seventeen year high,

you see business optimism at forty year high. You see all of these numbers going through the roof, the stock markets at a new high, and there's talk of reflation, and part of that reflation talk is inflation as opposed to real growth. Maybe now, for the first time in seven years, eight years, we might actually get a pulse out of inflation, and it might force the Fed to

have to deal with that. Up until now, they could just discuss ignore, you know, you know, trying out smart everybody about it, but they didn't have to do anything about it. But if we get inflation, they do have to start thinking about it. Jim, I don't know if you caught this, but yesterday Black Rocks Larry Fink was talking about his outlook on the bond market, and he said that he actually thinks that there's a higher likelihood of the ten year Treasury yelled going down from here,

possibly going below two, rather than rising. So it sort of goes against this idea that we're actually going to see some inflation. I actually do agree with that. I think that the problem is, and this gets into the technicals of the bond market, I think we're going to see a bump up in inflation and I think that by two eighteen we're going to see higher yields. Now, that is the most consensus thing you can say, so much so that almost everybody in the bond market is

positioned for that. So if the market does go to three percent by the by the spring of next year, everybody makes money. And it was we found with contrarian opinion. When everybody's lined up one way in the market, it tends to go the other way. So that's why I wouldn't be surprised if we do go below two percent. Like Larry said, first question, that idea that there's going to be inflation, and then we have the big rise of rates after that going and you know, finding out

that Yett was there. It's just the problem is everybody's positioned for it right now, and usually when that happens, the market has a tendency to go the other way. So if every if everyone's wrong and the market goes the other way, who's going to suffer the biggest losses? And will this be something that everyone's talking about how there's a lot of hurt going on. Yeah, I think that you know right now, if you were to look at who is the biggest bet on rates going to

three percent. It's the more speculative hedge fund accounts by some of the measures in the futures market. And uh they have the biggest short position ever ever in the in the bond market, betting on higher rates because they think Trump is going to bring back a reflation. They're on the firing line that they're going to be the most hurt by some kind of a fall in interest rates as opposed to arise. Jim, how long can they hold that position until the leverage starts to hurt? Oh?

I think that if you start pushing rates down, you know, run under say twenty We're around two thirty four right now, right and we were at highest to sixty in mid December, so we're halfway there. I think that that's when the pain threshold will start to kick in, and then as you go underneath two it really kick in. Well, I thought about the spread though. I'm looking at the spread.

Let's say the two ten uh spread one point one seven on the two year and the as you just said, the tenure two point three eight, so one, you know, one one versus two and a quarter, right, I think that you know, as you were to push the tenure down to two twenty or maybe down to two, you would see the YEO curve spread you write it's one seventeen, probably continue to narrow two and that would not bold

well for financial stocks. And they've actually hit a little bit of turbulence yere recently because a wider spread they borrow shortland long benefits them and a narrow spread would hurt them. So if if everybody's two lined up for three percent rates, which would be good for the banks, and we wind up going to two, they could stumble in that environment as well. Okay, so let's say what what happens that you just said, Let's say it plays out or all of a sudden, you've got yields on anten,

your treasury is plunging against everybody's senses. Mortgage rates do you think that they could continue to rise despite this or they also fall in tandem? I mean, are they basically linked at the hip at this point? Um? No, I think mortgage rates would there. They would fall on an absolute basis, but I would agree with you that the spread would white. They would not fall as much as treasuries would fall. Uh, So they wouldn't the couple all the way that one would go up in the

other would would go down. And and I think that the reason that mortgage rates would fall is one thing the FED is working off of. There is the mortgage holdings are really working off their balance sheet fast. That means they're more in private sector. If we do get a reflation and that does get a bump up in housing starts and in refinancing, you could seem demand for mortgages and that could also keep their rates um higher than they would from a treasury, So you could see

the widening spread. That's really interesting. So even if we see treasury yields decline, borrowing costs for people who are looking to borrow money to by a house might stay elevated. Thank you so much, Jim Bianco, always a pleasure speaking with you, President and founder of Bianco Research, longtime veteran of the bond market. Expecting that just like Larry Fink of Black Rock thinks possibly it's more likely for tenure

treasure yields to fall before they rise. We've been talking a lot about the anti globalist trend, uh the populist wave that we've seedwash over really the entire world. We haven't heard as much about what this will do for travel, But now we have someone who can give us some insight. Alex Sosiah, chief executive officer of Apple Leisure Group, which is based in Philadelphia. Alex, do you have a sense that people will try novel less internationally given the populist

backdrop in sort of the anti globalist sentiment that we've seen. Yeah, thank you. I I am concerned about that. What we see the trends in the short term is that we have stronger numbers for Americans traveling outside of the country, particularly to Mexico and the Caribbean, versus a year ago for traveling within this year, but it could be affecting soon if the territory continues to be the one to protect protectionism and uncertainty of what's going on in the

airports and stuff like that. So, yeah, it is a concern that we have, although the big trends still shows very positive. Well, you've been doing this for what thirty more than thirty years? Can you sort of run down for us the destinations where you think investments at least in the actual infrastructure of hospitality our best our best looked at, whether it is Mexico, Costa Rica, Panama, where would you look. Yeah, well, that's the places that we're looking,

that we're investing. And indeed, the places that you mentioned now that we are UH totally focused on on resorts, and on the resorts, the most profitable destinations happen to be the ones that have the biggest connectivity, the best natural resources, are lowest payroll, and and and and the avocation of tourism, particular to certain American tourism, the American

tourism UM oriented destinations are the most profitable ones. And yes, the beaches in Mexico and Country Amaya, Loscaos, Portoa, that all those are great places. But also in the Caribbean there's great there. There are great opportunities at Jamaica, UH Talks and Cacos. Domerican Republic is growing very rapidly and

with great returns. And and then we see opportunities in Central America, not just in contact in Costa Rica that it's been there for a longer period of time, but now we see emerging places in UH in Panama as well, hopefully so Nicaragua. And then we go south place like Colombia, it's also growing very rapidly with good returns and and

good respond and great customer satisfaction Alex. In addition to some of the protection as to rhetorict that we've globally, there also is this feeling that generally people are feeling better about their economic wherewithal, particularly in the United States. Are you seeing that sort of trickle into plans for more expensive vacations or just more vacation plans in general. Yes, of course we see that that that that of course

helps a lot. People are feeling better. The prices of flying outside of the United States in general is is cheaper than before. We have a tropic about four to the destination that we work with versus a year ago. So I think that the Americans are seeing more value for the morning one side and the other side. They are comfortable with their um with the with the overall economy, and I think that obviously helps the people to travel

and we seek that. We see the number of new passports issuing in the United States now at fifteen million per year, about fifty percent or those so seven point seven seven point five million are reissuing passports renewals. But the other side point five our brand new passports. So in ten years you're talking about almost eighty million new passports in the United States, and it's still only forty percent of the population. We still have sixty percent of

population in the United States without passports. So I do see a big trend of people getting passports, getting passports of course to travel outside of the country. And the biggest region that it's utilize for the utilization of those passports is a Mexican and Caribbean. So I see a big growth, a big trends traveling internationally. It's becoming more for everyone, more a commodity. But within those experienced travelers,

certainly they're spending more money and looking more sophistication. There's also much better product. Well, when you talk about product, alex I wonder if you could tell us is there an opportunity for an investor in Mexico. Are there hotel projects that are looking for investors that maybe have been stymied because of the change or the parent change in policy because of the Trump administration. I don't, I don't.

I don't think that because of the Trump administration has slowed down any of the projects that are down there. But certainly there's always an opportunity for American investors to go and invest in in places in Mexico or you know, or in other destinations in the Caribbean. In this case, Uh, the American investors. In the case of our company, we just had KKR and CASEL investing big time in our company. Uh,

they're being very shy so far. The Americans have not very active in this In this sector is mainly dominant by regional and local investors as well as European investors. So there's not so much activity so far for the for the for the for the U S investors and particularly for the U S banks to participate in the leisure sector. On the hospitality in Mexico. But I see a lot more appetite and a lot more oppenness of going and compete and start investing there. So I don't

see any projects slowing down. H. But what I do see is a create opportunity to spit that up. We gotta leave it there. I want to thank you very much, Alex Dosiah. He's the chief executive of Apple Leisure Group P and L is brought to you by proper Cloth, a leader in men's custom shirts. At proper cloth dot com, ordering custom shirts has never been easier. Create your custom shirt size, by answering ten easy questions, select from over

five fabrics to suit your personal taste. Shirts start from eighty five dollars and are delivered in just two weeks with proper Cloths perfect fit guarantee. Remakes are completely free and expert staff are standing by to help. For premium quality, perfect fitting shirts, visit proper cloth dot com Custom shirts made Smarter. You know who did some innovation. Theresa May, Prime Minister of the United Kingdom. She innovated by convincing the Parliament to uh pass her plan to exit the

europe Pian Union. It comes with a catch, though. Let's stay a little bit more into that with Sarah Jane Mahmoud, government analyst with Bloomberg Intelligence in London. So, Sarah, can you first just give us a rundown on what exactly Parliament past giving Theresa May the ability to go ahead

and start the process of excuting the European Union. Hi? There, Yes, sure, And so yesterday and MP's in the House of Commons passed the bill that gives Raiser May permission to activate Article fifty of the Lisbon Treaty, effectively kickstarting exit talks for Brexit with EU leaders and however she doesn't have a free pass as yet because the bill now goes

to the House of Lords. I'm who from the twentieth of February will start considering whether or not Traiser May can activate Article fifty by the end of March as she wants to. What is the outlook for the House of Lords vote? Um, Well, the House of Lords um

mainly opposed to activating Article fifty and to Brexit. However, as they're an unelected body, they would be unlikely to block the bill itself, but they could take their time to consider it and make possible amendments, for example, make the activation of Article fifty contingent on the government considering staying in the European Economic Area or securing continued access to the EU Single Market for UK based financial services companies.

So in other words, um, this might become a pretty thorny, sticky issue. Just because this means that Theresa May can start the process, it doesn't necessarily mean that it will speed it up by any means, and it sort of remains to be seen whether Parliament will work with her on some kind of constructive basis to get through a

plan that is palatable for for everybody involved exactly. I mean, it's likely that the House of Lords will ultimately pass the bill allowing the government to activate Article fifty um. And it's also likely that because tres and May wants to activate Article fifty start exit talks of the leaders by the end of March, a self imposed deadline. Um. I think ultimately she wants to do this during the next European Council meeting that's set for March the ninth, UM.

So she's hoping that the bill will get approval before them. Sarah, you know, just assooming out a little bit as as a member as somebody who lives in London. How has the conversation changed. I mean, when you go out to dinner, you go to the pub, is everybody still talking about Brexit and Brexit negotiations? So people still care? Are they paying close attention to all of these machinations or are they kind of separating themselves from it, kind of assuming

that things are going to keep going. I mean, I think, to be honest, there is a lot of Brexit fatigue at the moment um in professional and social circles. But a key issue looking at the financial services sector is whether or not banks fund managers, insurers, payment service providers and more. M can continue to access the EU market at once the UK exits the EU, which gift RAISU may can activate Article fifty by the end of March. UM. It would be likely the UK would leave the European

Union around about April two thousand and ninety. What are people in London worried about losing their jobs? I think that there is a big concern that many financial institutions are likely to move their operations into another EU member state. UM. But I guess until there's more clarity, until Article fifty is activated and negotiations start taking place, UM, there's just a lot of uncertainty here. How does passporting relate directly

to the sales that financial companies currently enjoy? Okay, So under the passporting regime, the companies financial services companies that

are based in the UK, regardless of where they are incorporated. UM, they have free access to over twenty seven European countries, and they're allowed to establish a branch or provide cross border services without needing local authorization in every single country, and they generally only have to comply with one rule book rather than up to twenty eight for example, um Tresa May's plan is basically a hard Brexit, which means to leave the EU without continued access to the Single Market,

or rather continued membership of the Single Market. Um So with that passporting rights would be lost and financial services companies that have their base in the UK would need

to seek alternative ways to access the EU market. Now, the white paper that the government published last week didn't really give any clarity on what special deal they're looking to to make with EU leaders, and similarly EU leaders won't really show their cards and they won't indicate what they might be able to offer the UK until Article fifty is activated. I want to thank you very much for your insight in your time. Sarah Mahmwood is a

government analyst for Bloomberg Intelligence based in London. Of course, Bloomberg Intelligence providing unique in real time research in a variety of industries and also government as well as market factors that affect business. Just type B I go on the Bloomberg to get all of that Bloomberg Intelligence research. You know, every time I see that a bank or firm is moving their operations out of London elsewhere in the in the United the European Union or the U S.

I have to think, is this because of Brexit? Is this become of Brexit? But perhaps perhaps it's just people are sitting and waiting. I guess we'll have to say it could be. I want to call on Sharudi sing, our agriculture Companies reporter for Bloomberg News, joining us from Chicago. Sharudi, I'm wonder if you could describe for US an industry that many people may not know the details of but

are the recipient of. This is the meat packing industry, and uh, maybe you could give us the sort of rundown on how a steak actually arrives on the plate of a diner and how that is connected to foreign policy. Sure, absolutely, so good to be with you. Um, the meat industry in the US UM employs a lot of different people, and um, it's it's a long supply chain that starts with a farmer that you're talking specifically about steak. You've

got farmers who raise cows and calves. Those cattle go onto feed lots, and then those cattle that are battened up at feed lots then eventually go to the meat packing plants. And the meat packing plants are where we have a number of different types of workers. They're one of the larger segments is the immigrant population. Particularly over the last few decades, the immigrant workers increased um and more recently, in the last decade or so, we've seen

refugees become a fixture in these plants. So, shrewd I was just looking at your story and you say that immigrants hold more than one third of these jobs in the United States and wondering, shrewdly from your sources, what are you hearing as far as what recent immigration policies

and proposals, what effect they would have on their business? Well, right now, I think a lot of the companies are monitoring the situation that when we talk to some of the industry groups, um, they're telling us that they want the administration to really um consider what ramifications the policy changes would have on businesses as well as the foreign born workers. Well, I wonder if you could get the details for us in terms of the companies affected, Tyson,

for example, Cargil, j B S. Are they all exposed equally. Well, you know, one area that we looked at was Fort Morgan in Colorado, where Cargill has a large beef plant, and that is an area where UM, there are a lot of immigrants and a lot of UM refugees that are working in that particular plant where there are these people from. Just to give us as much detail as you have, sir, so, Cargill actually told us that about twelve percent of the employees at the Fort Morgan beef

plant come from East Africa. UM. And a lot of these workers have come for a variety of different reasons, but UM. You know, one of the ways that they can find employment UM in the US through placement agencies, has been at these plants. And over the last decade, Cargill and other meat packers have relied on or had turned to refugees as a source of UM a labor pool basically, and UM. Even so, Cargill has told us that it is still a challenge to be able to

fully staff those plants. And just to give you a little bit of an idea, Cargil Fort Morgan plant in Colorado UM starts workers at an hourly wage about fourteen dollars and nineties cents, and that's about higher than Colorado's minimum wage, and they offer health care and benefits. But UM, it's still a challenge for Cargill to fully staff that plant.

So UM to play devil's advocate, somebody could say, well, the reason why they can't find enough people to fill those jobs is because it's a difficult job and it's one that people aren't drawn to you unless they're paid substantially more. And you know, there's a question of would they be paying even higher wages and employing a sort of broader range of people if they didn't have access to people who were escaping war zones. I mean, I'm just wondering, is that is that really what's going on here?

Because before two six, right, they there were a lot of illegal immigrants UM that these plants employed, and after a crackdown, they turned to refugees. So one person we talked to who tracks refugew resettlement program really carefully, she actually suggested that maybe the meat packers UM could draw for Native born applicants for these particular jobs and these

meat packing plants if they raised their wages. And then she even acknowledged that, you know, that could potentially lead to higher prices for consumers, but she said, you know, I'd be happy to eat less meat. Well, I want to thank you very much for being with us A Sharudi Sing is our Agriculture Companies reporter, joining us from Chicago. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at iTunes, SoundCloud,

or whatever podcast platform you prefer. I'm Pim Fox. I'm out there on Twitter at pim Fox. I'm out there on Twitter at Lisa Abramo. It's one before the podcast. You can always catch us worldwide on Bloomberg Radio. M P and L is brought to you by proper Cloth, a leader in men's custom shirts with proprietary smart sized technology and top rated customer service. Ordering a custom shirt has never been easier. Visit proper cloth dot com to order your first custom shirt today