What's Ahead For Mortgage Rates

David Rubinstein's interview with John Paulson. I want to bring in somebody who runs a closed and fund invest primarily and residential whole mortgages. Katherine Hawkins joins US portfolio manager and senior vice president Vertical Capital Income Fund. So, Catherine, UM, what kind of my main question is what kind of risk are you seeing here for the return that you're getting or what kind of return are you saying for

the risk that you're taking? Sure? I mean, I think it really depends, you know, on what us A classes in the mortgage industry or investing in UM. Single family rentals right now are pretty hot. UM. They're producing the highest returns really UM, and that's with investors chasing yield and kind of this low rate environment. UM, you're still looking at a first lean on a residential mortgage. UM, so as far as you know the risk profile, UM,

your first in line. We're in the business of buying the whole loans, so we're not investing in any pools or tranches. UM. We own the servicing rights as well. So UM, that's where we are focusing on really right now as a single family that that makes a lot of sense. And I could see UM single family rentals being a great investment when you step back and look at the whole market right now, how does it strike you?

Because it seems like everyone wants to buy a house, Prices are going as high as they can and people are just paying as much as they can borrow. UM. Well, I don't know that I necessarily agree with all of that we have UM. You know, home ownership is actually down since two thousand nine, UM, and we've got we're seeing a lot more renters, especially in the younger generations

and millennial generation. UM. And you're seeing that too in a start with covid UM and a surge of people wanting more space, not wanting to be in the multifamily housing. So you're seeing kind of people moving out of that live work play area and looking for single family renter rental homes. Catherine talks to us about the credit quality of the market that that you play in. What are

you seeing now in terms of credit quality? Yeah, I think that's the big difference between kind of a surge right now and and back you know, subprime eras is really you're seeing seven hundred and above ficos um. You know, the credits guidelines and lending practices are tighter than they have been in a while. UM, So we're really we're looking at seven D seven fifty ficos um and generally

like a sixty percent LTV on the property. What about the feds involvement here, the asset purchases that they've been making, Is it hurting your ability to provide more returns? It's really not so. Again, we're buying a whole loan. Um, we have a whole loan portfolio. The tapering, you know that, I think we're not going to see any significant um change in rate due to tapering, um, you know anytime soon.

I think race will stay the same um, you know, And that's it's always going to drive you know, to kind of get creative on structure and leverage to find some yield and return. So I'm starting to hear I think maybe on the radio some of the return of zero down mortgages UM. That kind of gets my radar up. Having lived through the financial crisis, should we be concerned about for two and a half million, Yeah, yeah, UM, it concerns me to UM. Luckily, it's not a big

program UM and very few groups are offering it. And then it is different than subprime, you know, than we saw kind of the nina UM you know, in subprime programs that were out there. The credit um is a lot higher. I think it's a seven sixty minimum credit limit to these, and it is basically an so you're really financing your down payment on those UM. One of the biggest differences that I take a little bit of comfort in is that these are fixed rate loans UM.

They do not have a balloon payment uh and so there's not going to be any kind of or a pre payment penalty for that matter, and so there's not going to be a really a big payment shocked to any of the borrowers. I think it really weeds out some of the borrowers that are trying to get in in the beginning. What do you think about the way the fund has traded on the n Y s C. I mean, UM, it's obviously you don't expect to see much volatility in this kind of fund, and yet even

with the pandemic you saw big drop. People took advantage of it quickly and its snapped almost back, but it's still it's got yet to come back to the two levels. That's right. We did see a pretty big drop in the stock price with UM the onset of COVID, which I think was kind of in line with all markets

really in general. UM. And you know, the the volatility in our fund is that we're just it's not a big market share, right, so we've got a few and but UM institutional investors that trade in and trade out. It's really more of a long term play. What's the concerning your market, Catherine? Thirty seconds left here? Uh, if rates will in fact start to rise here, you know, for us, we're buy and hold, so we'd redeploy any

capital that you know, we get back and remit. UM. We're starting to see a slowdown and re fis, but it's too early related to tell if that was just kind of a come down as the summer season. Um, and if that will really continue. Um, but really for us slow down and refisum real red just redeployed capital, you know, in the current rate environment. All right, Catherine,

thank you so much for joining us. Katherine Hawkins, portfolio manager and Signior vice president of Vertical Capital Income Fund UH close and fund that invests primarily in residential whole mortgage loans and whole loan secured by deeds of trust. UH. The investment objective there is to seek income and for a lot of investors looking at a you know, one point three percent ten year yield, there is a need

for income. There is a need for yield in this market, and clearly the mortage market is one place of interest. This is Bloomberg Honors. Harrison joins us right now, chief investment Officer of Global Fixed Income at NOEU VENE. They have one point to trillion dollars of assets firm wide

and are based out of gorgeous Charlotte, North Carolina. UM and anders this is you know, obviously it's a personal issue for me COVID and what's happening in terms of travel restrictions, but it's got to affect um, the companies that you cover, as well as uh, you know, the the entire global economy. When you don't allow Americans to fly into Europe, it becomes a problem on so many levels. Yeah, thanks for having me. Yeah, No, certainly, it's it's it's

a key the area that we were paying attention to. UM. Certainly, the trends ofthing concerning and the reopening kind of type uh trend that we've been seeing not just here in the US but also globally is certainly could could become impacted. And as you said, if if Europe starts becoming more strict on you know, uh, you know, a scissors or visitors in general, that certainly can have you know, both

an economic impact and behavioral impact as well. But I would say, and when we take a quick step back year of late the economic activity at least in the US has not been quite as much affected on this latest wave on the on the delta side as we've seen in the past, and the high frequency data has has sort of been showing quite minimal impact of consuming

consuming behavior so far, that could certainly change. And certainly we're keeping an eye on return to school and how that's going and even if they were delays to returning to the office. But at this point, so far that again, the high frequency data seems to be holding up quite well. Certainly we're keeping an eye on on case counts and hospitalizations around on around the US and around the world, where at least now we're seeing some of these desolation

in the latest numbers. Not to say that we're out of the woods, far from it, but um, we're certainly monitoring this risk. But at this point COVID has not had a whole lot of impact on the fixed income side of things at least, so worth monitoring obviously on the top of mind for everybody, so that the company's wearing less than um, but so far it's necessarily minimal impact. We would say, just what was your takeaway from Jackson Hole last week? It's that, you know, the the signaling

factor seems to be pretty good from the FED. What was your takeaway? Sure, yeah, I would say we would we would probably call it a bit of a non event. Obviously, it's felt like there was in line with what the market was expecting and kind of hoping for, perhaps a little disappointment of not getting more clarity around the actual

tapering timing. But we actually feel like General Powell handled events very well, gave a little more assurance that tapering is coming, and we sort of clarified and reinforced that that there is a thought process of that likely that could start before the end of the year. But at the same time, he left himself with a lot of optionality, be it looking at some of this additional economic data

coming up. Obviously jobs numbers on Friday would be quite key, and even you know, a better read into what we just mentioned about COVID and the delta variant potentially impact. So all in all, we we we felt like he handled well. I didn't really scoop the markets one way or another. Um I think it was kind of interesting to see that you had a lot of key speakers from from the FED come out in the past week or so with sort of a mix of views and

discussion points. But in the end, I think this reinforced our view that you really, really mostly almost exclusively need to listen to to Powell or with maybe Clarenda Williams and Brainard, and those are the key people that are really setting the tone here. So interesting to get to take aways from other FED speakers, But ultimately power in this core team is what truly matters. Here are they are all the Hawks non voters. It's a bit of

a mix to be fair. And then as you guys know it, kind of it's a moving target as well as those are moving around. But but the key players in our mind is again those kind of four power Clarada, William some brain art um. And that's not to say that everybody obviously has some influence and have views that

can can frame things up. But at this point um, we cannot view this weekend's message from Powell in particular, particularly that it was sort of adubblished tapering message, meaning reinforced here what I said that it's on top of mind they have kind of the four end of the year time frame, but at the same time also reinforced that the tapering timing and the interest rate hiking timing

or in completely supper timetable. So that had been some market speculation again part be I think because some of the other FED speakers being fairly aggressive and some of their sound bites, so there has been some speculation and maybe we can start reading into timing of the first hike around when tapering would wrap up. But again I think Powell came out he said it pretty clearly on that that that shouldn't be the case, and he's separating

those two timetables completely. So again we kind of do it as a dobish tapering that message at this point and again gives them a lot of flexibility here and could easily posse ab bit before rate hikes start. Uh, and kind of wrapping up the tabling. All right, Anders, thank you so much for joining us as always unders person Chief Investment Officer of Global Fix Income at now Vene based in Charlotte, North Carolina. As we watch markets hit a new time a new all time high at

least the SMP five after what we saw in Jackson Hole. Um, we should talk about what exactly that was pre a misrab joins us Managing Director and Global head of Great Strategy at t D Securities. Great having you on, Great talking to you again. Um, what did you think that was? Was that a dovish taper as it was sort of referred to on the day. Hi Matt, thanks for having

me on. Yes, I think we heard not a new message from chair Power, but certainly a message that they are inching that the fat is inching towards taper, but that they don't feel urgency either on the inflation front on the labor market front to have to accelerate the base. We're also seeing very clear signs from the feather they're trying to disentangle um tapering from hiking. I think they're trying to prevent a taper tantrum. They've done a fantastic

job so far. We're three months away potentially from a taper, at least in our foecast tapering happens in December, and yet the bond market is table, equities continue to go up. So I think what the FED is trying to say is the corner me strong. The FED is starting to take the punch pull away, but they're doing it in such a gradual pace that it doesn't threaten the recovery.

I think that's the message we got on Friday, and now I would say it's much more important now what happens to the economy and the economic outlook rather than the FED reaction function. I think the FED is tried hard to clarify that back and holding through other FED messages. All right, for yourself, we are to look at the economy,

presumably labor is a big, big part of that. So when we have obviously the jobs before coming up on Friday, how do you think the FED is looking at this labor market and what do you think they're kind of what clues do you think they're looking for? Ye, so I think they'd want to see the continued number of you know, non farm payroll numbers, so jobs created in the economy. I think they'd want to see that continuing

to grow. We do expect to see that sign, but our economists do have a slowing in the pace, a pretty significant slowing. We've got four thousand pensylvan for Friday, so that is much weaker than close to a million that we saw last month. Some of it is a seasonal issue, some of it is high frequency data we're noticing is showing a deceleration in the job momentum. But I think the FED would want to see continued job growth plus people returning to the labor force. I think

that's been a big open question. You know, is there a structure shift in the labor market or in our view, this is more a function of the fact that we have the extended unemployment benefits, or there's just lingering COVID fears or the fact that schools won't reopen. I don't think you get that sense from this report because this is still August report. Really, I would say September and October payroll report so released a month later, would be

more important. On that, you know, structural component of the labor market. I think that will give the FED a sense of true labor market slack. As long as there a slack in the system, I think they want to

be extremely accommodative. If there's science that people are not re entering the labor force, that they've left the labor force for good, you know, retirements or people just there's skills mismatch, I think then the FED may have to accelerate that piece of exit because I will mean beige in flame scan and sustainable price inflation will be on, you know, will be sooner than they expect. But our thought is that people do reent to the labor before.

So we are looking for a weaker number this Friday, and I think that can make the market a little bit nervous here if the recovery is derailing a little bit. But we expect, you know, over the next couple of months numbers to remain strong and that will allow the fit to exit gradually. But I think that's really the critical one. Well, this is the end of summer. I

mean you mentioned a high frequency data. We had a great story overnight by Steve Matthews and Jill Shaw just putting together a ton of charts from the data, and the one that caught my eye was um airline travel. It's just rolled over at the end of August. But you know, to be expected because you did hopefully some kind of vacation June July. Um. You know, unless you're Amy Morris who hasn't gone on vacations since May. Um. What about the beginning of school? Does that? Does back

to school? You think push that day? The backup is back to school. Three more moms and dads to get out there and look for a job and obviously get one right away. It is back to school. Change the picture. Yeah. I think, particularly on the labor market front, in terms of labor force participation, we do think back to school will help because it will free up a lot of people to come back and look for jobs. The Jewels statu is suggesting the job openings are there, so you know,

employers have the job requirements out there. The openings are there, we just haven't found the people willing to take it. Now, the big question is is there a skills mismatch the job openings out there versus the people that are re

entering the labor force. Is there a skills mismatch, which is I think more concerning for the FED if that does emerge, But I think there's enough jobs looking at the Jewels Stata across the spectrum that if people re enter the labor force as schools reopen, and I think COVID does is a bit of a concern. If we continue to see COVID cases rising, that might delay some

people re entering the labor force. But if we do it, spect over the next couple of months, people re entering these jobs getting filled, and that's a sign that there is underlying labor market slack beyond just what the unemployment rate shows. Thirty seconds, Um, I'm looking at the ten year here, you know, one point three. It just feels like we're range bound here. Is that kind of how we're gonna play out the rest of the year, do

you think? I think in the near term, yes, I think we're in a one twenty five to fifty type range. We are looking for higher rates by your end because by then we think we'll have the evidence that people are returning to the to the labor market, that Delta maybe delayed the recovery but doesn't derail it, that the FED starts to exit, we get more fiscal So by year end we think we may be able to break

out of this range. But in the next few months, while we still have questions about the economy and the impact of delta, and the FED is being patient, we think we stay fairly range bound on on the tenure. All right, pray, thank you so much. We appreciate that as always pre a Misraah, Manager, Director and Global head of rate Strategy at TV Securities. Again a ten year

trading today about one point three zero percent. Well earlier we heard a discussion some tape between John Paulson and Mr Rubinstein uh in a discussion about Mr Paulson's view of the markets are including crypto, and I want to get Shannali Bastic's view on that. Chanale is the Wall Street border for Bloomberg News joinings here in our Bloomberg Interactive Broker Studios. So, Sally, I know you you saw the interview. You saw the comments from John Paulson. What's

your takeaway there? Well, a few things. I covered Paulson very very closely when he was working with Carl Icon as an activist investor against a i G. It's like, since two thousand and eight, everybody was waiting for John Paulson's next big short, and we never really saw it. But this is a very rare interview. He doesn't do much public speaking at all. I've tried to doorstop him personally at E C n Y conferences, and so it

is a rare kind of view into his world. One of my favorite things he told David Rubinstein, though, is that he didn't really love managing money for other people. Remember now he runs his own money. It's billions of dollars. But I thought I totally agree. I thought, um, it was super fascinating, especially for those of us who you know, lived through and covered the financial crisis or invested through it for our listeners. Um, so fascinating to hear from

John Paulson. I did think that if you're a crypto investor, you probably you couldn't you couldn't care any less what he thinks about bitcoin, right, And he also hasn't made any big bets um other than gold and steinway that I know of. Is that wrong, Nale? Since since the Big Short? Well, remember I had said I covered the A G investment and so that was certainly a big deal when that was happening. But to your point, no, not like not like what he had done during two

thousand and eight. Nothing, nothing like that. And so you know, John Paulson, who is he to a new generation? That's a great question to me because and what can you learn from what he's done? I think the reason I'm so interested in what he said about investing is that he said he didn't really like the business of business. And so can you make more money just by yourself day trading crypto and not working at a big investment fund or is investing the business of it still a

good business? Well, I think that's a great takeaway, because, first of all, no one can ever reduce the enormity of what Paulson did. I mean, I remember when the Big Short came out, I expected it to be about Paulson, um, you know, and it turned out to be about some other players making similar bets. But I think even more fascinating was the way John Paulson went about making his bet.

The people that he enlisted, they were kind of uh lone wolves or people who were, you know, maybe very smart and wouldn't necessarily need to be courting clients or going on UM conference calls or helping other people deal

tax issues. I mean, this was this is about making a big bet yourself and for your group, right, and not really about Remember when he was starting out in the hedge fund world, hedge funds were not what they were today, right, It was a nascent industry, which is why what he said reminds me so much of crypto guys.

There's no day that went back through the last two years, almost now, the last eighteen months where I wasn't looking for the new John Paulson, where I wasn't saying who was making money off of this crisis that we've been living through. Now, many different players, some of the same, right, There are a lot of distress names, Apollo, oak Tree, even Scott Minored at Guggenheim that made big money last year just by betting on bonds at their lowest right

by the point hundreds of millions. But but there has not been what John Paulson tells David Rubinstein an ace metrical trade. Where can you be Yeah, you know, and it was really what he's saying, really, what can you take that is long lasting investing advice? He said something that people have told David now a few times. Don't invest in things you don't know about, right, no about what you're investing. And people say that about crypto too. If you're going to dive into salan, don't know what

it is. But also looking for asymmetrical trades, how how rare that is to find something where you wouldn't lose as much money on the downside. Yeah, it's interesting when you hear people of the generation John Paulson talk about crypto the way they do it and old guys. I want to remind you he's not really very he's only sixty five. I think in the context of crypto, that

feels to me. It feels to me a lot of those investors may not necessarily get it if you will, and maybe not necessarily want to put in the time to develop a call on it. Um. That's kind of a theme I think I hear from some of these folks. As you know, I was driving the Pacific Coast Highway all of last week listening to five podcast. Yeah, I'm a total nerd listening to the parlance of the new generation of finance. I just want to know about the pc H. How was that. That's like a lifelong dream

of mine that I've never accomplished. I highly best. I traveled once a month that I'm telling you, that was the best that I had. Wow, and she got spent some time in lovely Carmel, California. I did. I did. Listening to d FI podcast, Well, I know what I mean. I imagine doing in that trip in like um convertible Mustang. What were you driving? A Ford Fusion rented so you're able to get him in a car? Yes, we were able. It was hard. I would recommend doing it way in advance.

And honestly, it was very empty. San Francisco was pretty empty. That's what I hear. Yeah, by the end of it. But we're not here to talk about San Francisco fell sometimes we sometimes we diverge a little bit, and uh, you know, it's very cool that. I mean, I agree that the Paul's interview is fascinating. I was psyched to watch it, and there were a couple of really interesting threads to pull from it, and it's great to hear

our Wall Street reporters take. But I also want to hear her take on the Pacific Coast Highway because that's just awesome. Greg Jarrett apparently did it an mg A coup of seven n G A coup, which is an awesome car to do that trip. I'll do it better next time for you. Let's what you can do with Greg. Thanks for listening to the Bloomberg Markets podcast. You can subscribe and listen to interviews with Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter

at Matt Miller three. Put on fall Sweeney. I'm on Twitter at pt Sweeney Before the podcast. You can always catch us worldwide at Bloomberg Radio