Yields Aren't Likely to Rise Until the Fed Resolves Its Balance Sheet, CIBC's Tucci Says

They give us some perspective on what is happening in the bond market and its relationship to the value of the US dollar. Tom, always a pleasure, Thanks for being with us. Thank you. Um So, maybe you could just provide a little backdrop for this current market and the performance of the US dollar, because we're seeing a big sell off in bonds today. I mean, looking at the thirty year were down more than a full point right well.

Last week we were dominated by what would be risk off and concerns surrounding several unknowns ranging from the hurricane to government shutdowns to geopolitical risk coming out in North Korea. I think some of that has calmed down from now, From now um, but all of it hasn't been resolved. We still don't know the full impact of what's going to happen from the hurricane. We know historically it's provided a bit of a dip in growth, but then it

bounce back uh in later quarters. Um. I think the thing that really will be driving the market going forward is really what's coming out of Washington, whether or not we get any kind of tax reform and whether or not they can really show up the death ceiling limit. We're under a temporary order right now that's gonna last us probably between January and February next year, and we need to clean up some of these things. Tom, you're the head of US trading at c ib C. You

are overseeing the actual day to day volumes. I'd love to get your take on the feeling in the activity. Is this just sort of humdrum, slow moveing kinds of days where people just are sort of basically doing basic maintenance on their funds. Or are you getting investors from overseas that really have conviction on treasuries one way or another. No, I think from the flow standpoint, overseas investors, particularly out

of Asia, are better sellers. They've been long for quite a period of time, and they've been better sellers up around these levels. I think overall, what's happened is if you look at the dynamic of what happened to the market since November, UM, you've reported on it several times, the market price and something coming out of the election, with certain expectations coming out of this administration, and they haven't been able to deliver on any of them for

various reasons. And if you look at a chart, basically what we did last week is we rechased all of that sell off, particularly in the long end of the market, and that's despite the Fed tightening a couple of times. So UM. To me, what's happened is people have been positioned for higher rates for quite a long period of time. Things have been moving against them from the inflation scenary front.

In other words, inflation has been coming in below trend for six seven months now, the Feds identifying the fact that those are some structural change that they hadn't seen before, and you start to see a little bit of an adjustment as far as expectations in the long run for yields. In other words, they're not going to back up as significant as people had predicted earlier in the year. Right, Tom, what do you think the next big move is UH

with yields going higher or lower? Well, to be honest with you, I still think the reality is that until there's a structural change, and what I mean by that is whether the central banks out of Europe, out of the US can really make a dent in reducing their balance sheets, I think it's gonna be very difficult for yields to rise appreciably. UM, there's still a structural demand from the demographics globally of UH, an aging population, and

just an underlying demand for yield overall. You see these record numbers of corporate supply coming into the market, were into a new month now and the calendars been pretty heavy, and it's been met with very significant demand. So that

yield demand is still there. Until we see something structurally change in the economy, which I think could come out of tax reform and some other things that come out of the government UM and central bank policy shift, is going to be very difficult for bond yields to rise significantly. How's Tom Tucci voting when it comes to raising interest rates? I don't think there's any need to raise interest rates. I think the FED is focused completely on reducing their

balance sheet. They want to start to get They've already prepared the market for that. Um I think that will be the thing that will come this month. I don't think they'll they'll tighten again this year. I think the economic data will be fuzzy enough because of the hurricane related activity. It'll it'll sour the economic numbers that are coming out going forward, and I don't think there's any need for them to be raising short term interest rates

in here. I think they're better off focused on reducing the balance sheet. Having said that, what happens to the US dollar? It was weakening against all major trading partners, the yen at one eight, eight seven, the euro one nine, and so on. Wondering if you give us your outlet

for the dollar, and what does that mean for investor money. Well, I think in general, the only thing that will change for the dollar is if you start to see some other situations happen where the dollar doesn't become the dominant reserve currency. And what I mean by that is you start to see China and Russia, you know, looking at pricing oil in different currencies, not in the dollar. These are long term things that would have to happen. I

think overall, the dollars pretty oversold. I think we've had a pretty good run in some of these other currencies, and you'll start to see UM some movement back to a more neutral stance with the dollar firming up some. You know, one thing that I've been thinking a lot about is if you do get a dollar that starts to strengthen again, how much does that disrupt current market positioning?

And I was just looking today at the incredible record breaking flows into local currency emerging markets debt, which has basically been a cloaked currency bet on on the weaker dollar. I mean, do you think that could be a disruptive kind of event. Well, I think you know what what you're identifying as people continually looking for almost like an alternative currency, writing you've seen these cryptocurrencies benefits substantially UM.

I still don't understand the fundamentals of that, but nonetheless they've it's an alternative currency. I think with what's happened with central banks and the manipulation that's taken place within UM governments, overall, people are looking for what they would consider a safer store of their wealth and I don't I don't know the answer to that. As far as the cryptocurrency is concerned, I don't have enough experience with that.

But it's been since the crisis. You've seen that, You've seen money trying to find what it would consider a more secure currency. You saw what happened with the Swiss frank over time during the during the crisis, particularly in the European crisis, and that's what people are more concerned about, the more interested in the stability of the value of their currency. You mentioned, you know, this idea of looking for an alternative to the to the US all are

why are they looking for an alternative? I think it's you know what you've what you're faced with. As far as the outlook for the government, the outlook for budget deficits, um, those things that have driven flows and demand from foreign investors into the market. So if you have a little bit of a concern about what's going to happen going forward as far as deficits are concerned, UM, we still haven't delivered on any of the infrastructure promises here. We

have a death ceiling issue still. Um. Those kinds of things kind of detour people from having the confidence in investing in the underlying currency. So that that's where I'm saying, there's so many moving parts when it comes to central bank policy and government issues, particularly here in the U s UM, people continue to look for an alternative. Tom Tuci, thank you so much for joining us. Tom Tucci as head of US Treasury. Trading as c i BC World

Markets in New York City. Tava Pharmaceutical Industries appears to have ended it's longer search for a chief executive officer today it named h Lundbeck's Car Schultz as its new chief executive officer. And here to tell us what this means for the path forward of this generics maker, I want to bring in Liz krutel Holm Kruto Hallo. She's specialty pharma and biotech analyst for Bloomberg Intelligence in London. And Yakov ben Mella, he's a reporter in Bloomberg in

the Tel Aviv office. Liz, I want to start with you. Was this an expected choice? And uh, does this choice of car Schultz give you any sense of the path forward for the company? So this morning's news was definitely not expected. Lundbeck has been having a really great year. Schultz has been able to lead a turnaround there, so he was in a secure a place, so not an expected move for him in terms of his role at Teva.

I think it certainly is good from a Teva perspective, as evidenced by the shares today, but you can see that this period of uncertainty is at least behind the company and he is bringing in specialty expertise which will help the branded unit, but the generic unit is not really an area that he has a lot of expertise in,

so that is a bit of a surprise. You know, Kobe, I want to bring you in here because I want to if you can explain to people how urgent the situation is at Tava Pharmaceuticals and is there going to be an even greater effort to split the company from its generic versus it's a branded drug business. So yeah, I mean it's certainly been urgent, and that was really as you can see, but in the stock that they will was depressing the stock price. Urgent in the sense

that Teva has a huge, huge problem. I think that is about almost twice the side of the the Vali the company, and that's really uh tied the hands of what they can induce to tag. So uh, they needed to get someone on board to to really steer the company, to really set forth a coherent strategy, you know, type of spin. Uh. This is now the fourth to you in five years, and it feels like almost the strategy has been changing lesson right so uh so yeah, so investors are really

rewarding type for for getting shorts. From what I'm said, By the way, it's a pronounced car like like a Boston accident when you stay car. Thank you. I appreciate that. I had to ask as well. The chairman. Yeah, he told me how to say today. Um. But but yeah, it's it's it's uh, it's it's well received, and there's a lot of skepticism about the kind of job that you can do. But that's certainly a positive step forward for Enny. You know, Liz, I'd love to get your sense.

What is the most logical step forward. Is it to continue to ramp up sales of ass it's in order to pay down some of that debt, which I believe is close to thirty billion dollars, or is it to uh sort of bolster the current generic offerings and make sure that pricing is in line in order to bring back revenue sufficient to grow into the capital structure, so it will be more of the former at this point. So the bigger concerned certainly near term, will be debt

paid down. Just based on Teva's covenants, they're required to be at four point to five times net debt to ebataon by end of year and they're currently at four point five six and based on their free cashlew that we've seen so far this year and what we expect in the second half, the only way that they can meet that be through asset sales. So they have mentioned that women's health is on the chopping block as well

as their European pain and oncology franchises. Those would pretty much just get them there to reach their covenants by year end, and again they have to close by your end, so that's going to be quite difficult. Uh. And then looking forward to have the risk to their leading product, which is capac Zone for multiple sclerosis, so we expect a generic second half next year, so really they've got that threat coming in which threatens their cash flow even further. So as it sails, are at the top of the

list in terms of priorities. On the generic side, there's not much they can do. It's more of the sector wide pressure that we're seeing in the US on price erosion, and that's not expected to let up until about Is there a competitor that you believe Liz will benefit the most from this transition period of Tava, So that that's a good question. I think, you know, most of the

generic players are really all on the same boat. You know, a good pier would be someone like Milon, and they've downgraded their guidance for the year, not expecting any new approvals until about as well. On the specialty side, there's really not anyone that would benefit from having a transition at TAVA. There is, you know, of Race in the Migraine market, where Teva is expected to come to market second behind Amina nove Artist. That's expected to be a

pretty big market. It could be a seven billion dollar opportunity in the US. So that's potentially a place where if they're not focused on that launch properly appear like Eli, Lily or a small biotech like Elder could take advantage of that. I want to thank you both very much for joining us uh Kobe e Ben Malick is our Bloomberg reporter, and tel Aviv and Liz crud to Hollow, our specialty pharmaceuticals and biotech analysts for Bloomberg Intelligence, joining

us from London. There was a report that caught my eye over the weekend. China said that it was going to end sales a fossil fuel powered vehicles in the upcoming years. China is just joining their nations such as the UK and France seeking a phase out vehicles using gasoline and diesel. My question is how much does this shift the landscape profoundly for automakers worldwide. Here to answer that question, hopefully, is Jamie Butter's US autos reporter for

Bloomberg News, coming to us from our Detroit bureau. So, Jamie, does this how how big of a deal is this for US car manufacturers? At this point, it's it's not much of a deal at all, right, I mean, it's so far down the road that it's hard to really see how serious the Chinese are with this, you know, as so, I mean, look, I think their goals that

there's that they're trying to achieve make perfect sense. They want cleaner air for their cities, they want to reduce their dependence on foreign oil, They want to be technology leaders in ways that are going to be meaningful in

the twenty one and centuries. Uh. But you know they've also I been covering China and their auto industry for more than a decade and they, you know, have this policy to reduce the number of automakers that they have and instead they have more brands, more Chinese brands now than they did fifteen years ago. So, you know, we'll see, there's not a date on it. We'll see what they actually put a date. Well, but Jamie, but you know, aside from China's declaration here, which you know you can

sort of say, it's sort of unclear. A lot of details have to be worked out. Just the fact that so many countries around the world are focusing on trying to reduce the number of fossil fuel vehicles and giving subsidies to electric vehicle production to me signal some kind of sea change that's going on in the industry. Do you do you think that that is overseating the issue. Well, there's definitely some politics for it. A lot of it comes down to the definitions, right, So we had a

lot of it. We got really excited. It is the kind of exciting you know, Volvo and their electrication commitment.

But you know, it sounds like electrification means they're going to be making electric vehicles, and they will make some, but most of the Volvos are probably still going to be hybrids technically, even mild hybrids, so more like a Toyota are more like the Honda Insight than a prius Um so I really, you know, kind of what we would consider now like pretty primitive or mild hybrid systems, so a lot of that what we saw of London

and Paris. They're more city based, you know, than like the entire country or big you know, the whole of the EU, and so something like a plug in hybrid with the right technology. Some of them are kind of automatic. They run on electric until they run out of battery and then the gas engine turns on to make the electric power run. You can have them some of like

Volvo's models or you know, they're more European minded. You can switch them on and off, so you might drive in from the suburb to your job in the city and then when you cross the border you flip it to all electric mode and you drive in electric while you're in the city where the pollution is the worst. And the congestion is the worst. And then when you're coming back, you say, Okay, do I have enough electric

power to get me all the way home? Or do I just use the electric until I get out of the city and then you know, use the hybrid system. And so if you to say no, uh no, no, no burning of gas, no burning of diesel, you're just moving it to well, where is the electricity gonna come from? And in China, I mean, like the US electricity keeps getting cleaner and cleaner. We're using gas, natural gas that's

pretty efficient of you know, China coal. Um, they don't have the cleanest coal technology and even the cleanest coal technology spits out a lot of carbon. So that's why I guess I'm not sure if they really mean this, and they're saying, you know, later than it's not as meaningful as what we're seeing in London and Paris and even from Volvo, and even the Volvo stuff I think

gets largely overblown. Jamie. What effect does the scandal over diesel engines and pollution emissions have on the debate, particularly in Europe about introducing electric vehicles. Oh yeah, I mean you you hear right on it. That's why. I mean,

there's two things driving it. Right, You've got the political negatives about diesel um you know, and it's not clear yet you know how widespread the cheating was at the minimum, right, we know the Volkswagen, the world's largest automaker, has admitted they've sold eleven million vehicles with you know, cheating software that polluted many times more than the law allows. So it's a big fight. They still have to meet these environment they still have to meet these environmental regulations. And

I'll give you about twenty seconds. Well, so what's next for them? So that's why electric And the other thing is Tesla, right, that doesn't even make money, but because they make electric cars, their stock is values hugely high. So there's a there is some pull and some push, but it's very external. The economics are still a real challenge to make electric cars and make money on in the kind of scale that we need for a China

let alone, you know, the US in the whole world. Indeed, well well done, thanks very much, Jamie Butters joining us as our US autos reporter talking about China and its desire to get rid of fossil fuel automobile perhaps, Yeah, right, well, uh, you know how many electric vehicles General Motors is sold in China seven thirty eight. So there's a long way to go. Right now, we're looking at a market that

is trying to figure out the path forward. Yes, Irma wasn't as bad as many people expected, but Houston is still trying to dig out after the hurricane that hit them. To give us more perspective and what we can expect for oil prices going forward, Regina Mayor joins us now. She's a global sector leader for Energy and Natural Resources

for kpm G based in Houston and Regina. We talked so much about Florida over the past week, but Houston still is digging out, and I would love to get your sense of just you know, where we are in the disruption of gas, in the disruption of crude refining, and uh and where we go forward with the price of oil. Excellent, Well, thank you for having me. Good morning. I think overall Houston's energy business is proving to be incredibly resilient. The production facilities by and large are back online.

Many in Corpus and in Texas City, as well as in the ship channel in Houston are at full capacity. Some of the ones that were not at full capacity during the storm. It was in large part due to pipeline limitations and takeaway capabilities and less situt damage that was sustained at the facility. The longer term challenges will be in the Beaumont Port Arth area. My understanding is one or two of the refineries in those locations suffered

more damage. They are already seeing gasoline futures edge lower or this morning because the impact of IRMA wasn't as bad as what traders initially thought it would be. Regina, the change in the US energy industry to one that is focused on exports with liquefied natural gas and reversal of pipeline systems, how has that changed, if at all, the reaction and the effects after effects of Hurricane Harvey on the unit on the industry. I don't see that export strategy having had a big impact yet as a

result of Hurricane Harvey. Play this forward maybe five years when we have more of the energy export facilities online and we have a much larger refined products export strategy. As Mexico opens up and other other parts of the world, and a Category four or five storm hits the Texas Louisiana Gulf Coast again, then I could see potentially there being global disruption and commodity prices because the US footprint is so strong and growing. But for Harvey, we're not

seeing any of those impacts yet. The export overall percentage is relatively negligible, and frankly, production wasn't offline long enough for it to have a material impact on supply. So, Regina, if there wasn't a material impact on supply, let's switch to the demand side. Because there was a big debate about whether the destruction and demand with people holding up in neighbors and friends homes elsewhere outside of Houston, whether

that would offset any refining decrease. And it seems like perhaps that is the bigger story here, the destruction in demand. Do you think that that could contribute to lower prices? I do, And like I said, I think from just the market opening today and looking at gasoline, teachers were already seeing that the millions of Ustonians sheltered in place.

I personally was holed up in my home for six strain paste with my children, and we did see a significant drop in demand that helps offset some of the supply disruption. So while gasoline prices have gone up. I think it's peak. It was maybe thirty five forty cents um up overall, you know, in terms of historic trends,

maybe from a month or a year ago. I think we're back down to about twenty five cents up on average, and we'll see that quickly iron itself out, I believe, and get back to prices that we saw pre storm around that mount Sorry no, no, Regina. Just to go offscript a little bit, because we talked so much about Hurricane m or at least the aftermath of it. It's currently now it's been downgraded to a tropical storm. But where is Houston in the process of rebuilding right now?

It's it's interesting to see what's happening in Houston. I mean relatively speaking about Houstonians were not personally affected by the storm, but there is that small percentage who were devastated by it. So it's the communities coming together. So many people lost everything, and in the west side of town you have homes that have been sitting under six to ten feet of water for ten the fourteen days

that it creates. The absolute destruction, not just in the parts of the home that we're submerged, but with the belongings that might have been on a second or third story. So the focus has been on getting individuals settled right, temporary housing, carrying out the damaged parts of their homes, lots of Houstonians coming together. Um, a lot of folks

will have to replace everything. But you know, I think the city is going to have quite a few challenges relative to how they take this forward because this type of flooding can happen again with the unbridled development that the city of Houston is relatively known for. Can we continue to have that kind of response? Uh? And major roadways were underwater until, you know, just at the end of last week. So the city overall is kind of getting back to normal for the most part, but there

are people that have been so substantially affected. And I do believe the City of Houston really has to have a, um, a heart to heart with itself about how it continues to develop and manage its growth to prevent this kind of catastrophe from happening in the future. Are there any sort of follow ups to let's say, the health effects of the flooding and the mixture of chemicals and energy pollutants that may in some way get into the water system in any way to contain all those kinds of things.

From what I understand and what I've seen in the city, there's not a strong concern about long term contaminants. The water itself it is. It wasn't clean water. I mean, it's sewage. It's it's runoff from all sorts of roadways or industrial locations and levies being opened or indeed reservoirs being open precisely, and that so that I'm trying to get rid of all of that water, uh that it's

going to have to be. Homes are going to just have to be destroyed and restarted if they even do rebuild in some of those areas, because frankly, some of those homes should never be rebuilt and it should become a floodplain against the Bayou so that you don't see

this kind of destruction in the future. Regina, Do you think that there the aftermath of this will also have an effect on Houston's position in the energy market, that there might be a focus on de emphasizing Houston in favor of the of the more Midwestern shale drilling areas. I really don't foresee that type of choice being made. I think Houston is a diverse economy already and has changed substantially from the oil booms and busts in the

eighties that we saw, Uh, you know. And you've got the space center, You've got the healthcare um, you've got all kinds of financial services capabilities. It's not just an energy center. And it's incredibly international. I think its second highest concentration of consulates outside of New York. For example, very strong performing aren't very strong community based activities. And so given all the other pieces, it's centrally located. It's

got a great airport. I don't see people choosing to pull inland and go to a Midland or a Permian type of location. And I think the city's energy companies are demonstrating a huge commitment to their employees with their rebuilding. Many of the large companies are paying for temporary housing there, put contract their teams together to do remediation of individual homes. They're subsidizing their employees ability to get back on their feet, and I think that's going to create loyalty and a

long term stickiness with the City of Houston. Thank you very much for being with us, Regina Mayor is the Global Sector leader for Energy and Natural Resources for KPMG, joining us from Houston and giving an update on the aftermath of Hurricane Harvey that hit the area. You're listening to Bloomberg MARKETSI pim Fox with Lisa Abramwitz. Thanks for listening to the Bloomberg pm L podcast. You can subscribe and listen to interviews that Apple Podcasts, SoundCloud or whatever

podcast platform you prefer. I'm pim Fox. I'm on Twitter at pim Fox. I'm on Twitter at Lisa Abramo wits one before the podcast. You can always catch us worldwide on Bloomberg Radio.