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Terminal and the Bloomberg Business App. Brig Peters of PGM Fixed Income is with us in a studio, just a perfect guest to talk about what's having in the bond market. Greg, good morning. What do you make of these moves at the long end of the curve? I don't want to make this too much for a big deal if it doesn't have to be. We have sustained levels around four to five percent for quite a number of years now,
and the economy's been okay. What does five twelve, five point thirteen mean to you on a thirty year I.
Think it's the direction, right, not the level, And so there is just a pushback globally on the back end of the curves. So if you look at what's happening in Europe, you're looking at Japan. Obviously, the US investors are basically having a time out on the back end, and so consequently you're just seeing, you know, the thirty year twenty year yesterday really trade heavy just because there's
not that investor demand. I think investors concerns are manifesting itself in term premium and kind of wait and see mode in the back end of the curve, And that makes sense to me.
Can you help us understand the things we should care about and the things we should ignore. Typically, a twenty year maturity isn't something that investors like anyway, and it's auctions that we don't typically follow. All of a sudden, yesterday, twenty year auctions self demand and everybody cared about it. And I sat there and I just thought, if you care about twenty year auctions, you have no place in the bond market. What did you make of how much white people put on that?
Well, so the twenty year.
Definitely is an orphan type of you know, maturity, But what it says is about the duration. So forget about a twenty year thirty year. It is adding duration to the portfolio, so that's where the pushback is. And twenty years are trading poorly everywhere as well, so it is
an anti duration trade. And what you're seeing in the back and curve globally is that they're behaving like risk assets, not like the typical kind of defensive risk adverse assets, and that just kind of feeds upon itself, which is why you have two separate bond markets.
In the front end, you have.
Yields and prices driven by central bank policy, and as you move further out, it's driven by all these other factors, from debt and deficits, to inflation, to the uncertainty to all these.
What you're saying is so so important. If we've diluted the risk mitigation characteristics of the long bond, what does that mean for how people invest? And what are you telling clients of PGM that they should do.
Yeah, it makes it really tricky, And what you're seeing is kind of manifold. First, you're just investors kind of diversified globally, so you're seeing less of a sole focus on the US bond market. So you're seeing in guilts, you're singing and jgbs you're singing across just to get that diversification in.
And then second is front and the curve right.
You want to be attached to something that you think you have a better understanding, and that is the Central bank reaction function. So in our minds, you want to be as close to that kind of two year front end point as you can. To further you drift out the more vaguers you introduce into your portfolio. So the get defensive, I think, is to kind of stay front end, and that includes spread and carry as well. So we're
very defensive. We think valuations are exceedingly expensive. I mean you just kind of think about it in really simple terms. You know, credit spreads are well through kind of the average, and I think all of us would admit there's probably above average uncertainty out there risk, and so just kind of think of it in that simple way, and you want to be defensive.
And the uncertainty is emanating from Washington, DC.
Can we talk about that relationship?
Is there a line you think that Congress actually starts paying attention to it.
Has to get worse.
So the only arbiter out here right now is the bond market. So it's kind of back to the nineties, right, kind of Carbill's.
Revenge and so.
Absent that there's no political will. You saw this bill last night. It was casting dogs and all these things no one wanted to cut, and all these things were added. It's not the political will of Congress to kind of.
Tighten the belt.
And what you're seeing from a market perspective is really worrisome outlook on the debt and deficit, and quite frankly, it is worrisome.
It is a really bad place.
Right.
We never took our deficit to a better place when the economy was doing well.
And so what I really worry about is not the hero and now, but let's say when and if we do enter a recession, then what.
There's one or two it opens.
One is Congress doesn't do anything fiscally, which means you have a longer, harder recession, or they do as they always do, they spend, and then you come out the other side and the debt and deficit is exceedingly worse, and then you put us in a real precarious position.
Trillion dollar question, Can I just jump in quickly forgive me what you just said is so so important. Typically in developed markets, what happens is you go into a downturn, yields drop, and it enables fiscal authorities to act counter cyclically. This is also important to investors because they understand that's the bust in their portfolio. You get into bad times and bonds rally. That is the definition for me, at least if a developed market, that's what happens. In DM
them you have problems, other things happen. Are you suggesting that if we go down into a downturn and the deficit just by definition blows out, that yields don't drop, that they actually might time.
There's that potential.
I think it's a level of uncertainty that is introduced that we typically don't have to worry about, right, And just the fact that we're having that conversation and that question just changes behavior. So you know what we saw in twenty twenty one, twenty twenty two when inflation moves higher, as an example, there's nowhere to hide, right, So this is a kind of a similar story in a way.
So that's that's the worry. It's not like base case.
By the way, I don't want to show it all darkned hour here, but at the same time that is a real risk that investortion.
This is just a really important thought exercise I think is happening on invest the committees around the world right now. I just wanted to finish with the level that were at the moment, so five point fourteen now almost on a thirty year yield. When I started the conversation, I talked about somewhere between four and five. We have lived with that through this cycle so far. But when you get to the upper ended where the ranges for the whole cycle, which is basically through that level right now,
life up here hasn't been sustainable. It is this self limiting. How sustainable are these levels?
I think to a degree it is so I do believe there'll be a.
Crowding out effect, so to speak.
So if you continue to move yields higher, that just changes the incentive structure. Right, so investors are much more apt or willing to invest in treasuries let's say VSV investment great corporates and equities, and so there is this great kind of modulator regulator function with yields itself. But at the end of the day, you have to have a higher level of certainty of what you're investing in, and so yes, as yields go higher, that compensates you
more for that uncertainty. But typically you don't see investors jump in when they don't know what they're jumping into.
They're not jumping in right now, that's for sure. I can appreciate your time. As always said, thank you, great pit A patient. Native Richardson of IDPAS drop boy to catch up with us this morning, Native, good morning.
Good morning.
Let's stop it. Jobs claims two twenty seven. Just continued resilience, which is a thing that you keep going back to repeatedly. One depends that resilience of the moment.
Well, the labor market, if you look at it in a snapshot, is really really stable. Companies are keeping their workforce, they're not letting them go. That's why we see the such low initial jobless claims, and workers are buying large staying put. So the snapshot of the US labor market is solid. The problem is if you look at the
labor market in motion, the churn is gone. People are not leaving, firms are not hiring in mass, and so you don't see the dynamism that has defined not no, not only the labor market but productivity growth, And if you really want to look for the crack in the labor market, go back to the last measure of labor market productivity output worker was down one point four percent year over year. That's a sign of the drag that's going on right now.
When you see a load chain dynamic like the one you describe start to grip the labor market, typically when you look back, how long is that sustained before things break one way or the other.
I don't think we can go back to pryors. I mean, if I look at the Great Financial Crisis, for example, the unemployment rate was above seven percent for several years. Now we're not even at the starting point of that Great Financial crisis. We're at four point two percent. The unemployment rate has been remarkably stable, and I think that's because there's so many demographics that are shaping that rate. Lots of retirees, slow down in immigration, there's going to be labor shortages.
That are persistent.
So it's hard to really capture the labor market in one number, harder than it has been in the past.
When you think about.
Immigration policy, do you see the unemployment rate actually going down?
I don't see that Actually, I actually see those shortage in certain pockets of the labor market. What's interesting about this labor market versus twenty twenty two or twenty twenty three is that they're no superheroes. We could rely on leisure and hospitality to be the stalwart in the labor's market, or healthcare more recently.
We're not seeing that now. So who's going to.
Save the day and boaster or jobs into the future. Well, there's no sector that's doing that. Immigration is actually the lack of the labor supply is likely to keep wages very tight and robust, which is a problem for the FED, who's looking to bring inflation down.
If there was to be a superhero, though, wouldn't it be AI and the supply chains around that these data center build.
Out, You know, that is a long term play. I do think that AI increases what contributes to American exceptionalism, which is productivity growth. And so if AI can make workers more productive, then there is a chance that we grow our way out of some of these problems. But the problem is it's not just the technology, it's the people, and right now there's a gap between the two. Is the technology hitting the workforce in a way that increases labor productivity.
We have yet to see that.
Let's talk about a potential problem this morning. Yields are higher by five basis points the very long end of the curves, getting all the attention the thirty year. At the moment of five fourteen, we've sustained this expansion. We've been running GDP around three percent with rates close to where they are now. These are cycle highs were through those levels, granted, but between four and five percent. We've seen fed funds between those levels now for a couple
of years, and we've sustained the expansion. Is there any reason to believe that this break out puts the brakes on this economy?
You know, there's so much, as Anne Marie was saying, there's so much to be determined in this particular bill. We can't think that the levels are sustained at the where they are today.
There's going to be a lot of movement.
And I think it's also the speed of the increase that matters in terms of yields. So it's not just the levels, it's the churn and the volatility in those numbers that will ultimately decide the short term, but longer term. This country is built right now. The economy is based on interest rates that are much lower than where they are now. Yes, housing mortgage rates for higher in the
nineteen eighties, but house prices were a lot lower. And now we live in a world where house prices are very very high, and you match that with higher interest rates, you're really going to get a cold breeze in the housing market, which trickles into other parts of the economy.
This is the problem for Federal Reserve guys, you know need they cut rates by one hundred basis points and mortgage rates went up. Have they lost control of the long end of the curve? If they ever had control of the long end of the curve.
That's not their sweet spot. That's not where they make those money moves. They make it at the short end of the curve and maybe at best the two year, but really the ten year that is reflective of not just the US economy, but the global economy.
And if the.
Global economy shrinks away from you set, not necessarily because of preferences, but a slowdown, then you're likely to see those mortgage rates continue to high at the hole at the levels they are, or even edge higher.
Well nearly.
When it comes to the Fed, they've been talking about the fact that they don't have all the you know, dotting the eyes criss crossing the t's, but they have some. Now they have a little bit of a blueprint of what's going to happen fiscally in Washington.
Do they start talking about that now?
It depends on how much they want to show their hand in terms of whether the rates, whether they increase rates or lower rates. And I still think that's an open question for the Federal Reserve because, as you know, there are a lot of things that are changing in the macro economy, and those changes right now look to be inflationary, and so I think they want to give it a little more time to be certain that the next move is a rate cut before they start contemplating that publicly.
NATA, it's going to say, as always a lot to think about NATA riches in that of id page, nature of sounds. Where to say in New York now joining us from parametric nature, good to see it.
Has been too long?
Yes it has good to be here the long end of its curve. Does it get bored? Can we sustain levels at these kind of levels?
I think we're starting to hit that ceiling. Right, You start to hit he yields north of five percent, and you take a look at everything that's been priced into the equity market, right, we've seen in a very sharp rebound. Equity market is saying, look, everything's good, nothing to worry about, a lot of optimism. I think in the equity market, I would argue in the bond market, we've almost priced in a lot of what has been feared, right, especially in the deaths and deficit side. So I think this
is kind of a ceiling where you start seeing buying opportunities. Look, I think for fixed income investors, the biggest thing we've been lacking for many years has been the income aspect. The duration plays another story, right, So going on on the long end your tape, a duration play which you can make an argument at this point in time, with no slowdown or recession risks in the market's being priced in. I almost think that that's being undervalued, right. Fixing investors
may not be positioned for this slowdown. We had a claims number this morning came in maybe right in line with expective. If we start seeing any cracks on the job side in labor markets, in consumer spending. I don't think we've seen that being pricing in the bond market, and that's something that I think we're not fully taking into account.
In years gone by, that would be a good argument to anticipate level yields on the long bond.
Yeah.
But now people are coming on the program suggesting that, given the concerns that are dominant at the moment, that if we go into a downturn, you could see and I don't think it's the base case of the consensus view right now, but you could see yields climb, not full because the dominant concern right now is the deficit. YEA, how much comfort can you take from the tenure and out in a downturn?
Yeah, I mean look, I think also you've had kind of this trifecta of three things happening in a short period of time, which is why you've been seeing kind of long end pricing in a lot of concerns around deficits. Right, so Moody's downgrade, You have a tax bill which is coming in nowhere near the amount of cuts that that people were expecting or wanted to see, and know you have kind of just further concerns in regards to tariffs and that not coming in anywhere close to the revenue
that was originally being generated. So I do think that that ten plus year part of the curve, look, you're going to continue to see some volatility.
Right.
Finding natural bias in that part of the space is going to be very tricky, but I think this is an entry point where you do start to see again looking at real yields, you're starting to see very attractive yields in that part of the curve. I think for a fixed income investors with you know, come of an income bias, we would even argue stay in the belly
of the curve. Right, It's all about stepping out of cash, moving out a little bit in the ill curve, and there's I think a tremendous opportunity from an income perspective.
Since Trump won the presidency, everyone just kept telling me this tax bill is priced in.
So why all the consternation?
Now, Yeah, I think it's a few things. Up until this morning last night, we really didn't know what was going to be kind of fully implemented, and we still don't know, right. I mean, this is the House version. There's a lot that's going to be changed so even early on, Again, what I would say is, while a lot of these components were known, I think it's a little bit of a confluence with the Moody's downgrade, right, and you have kind of now these reignition of debt
and deficits concerns. Keep in mind, the economic data has held up fairly well, right, So it's like the bond market's like, look, we're not worried about that for now, so we're going to focus really on the dest and deficit side. So I think you're seeing that now being priced in, and again there is this worry that this bill again does not have enough and that's basically what the bond market is saying, right, So it's going to
be very tricky for the Senate. Look, they don't have to take any of these components, but to really come up with something that is going to satisfy not only bond markets but overall markets, to really suggest that the administration's doing, you know, kind of a significant enough job here. And then again the tax cuts aspect, that's something that this illustration definitely wants to do. It's getting very challenging to come up with the pay force on the other end to make up for it.
You mentioned the downgrade from Moody's in the last week. If I go back to the previous down grade from FETCH, I think that was back in twenty three and that landed around the same time we had the quarterly refunded announcement, which spooked this bomb market and ultimately forced the degree of corrective action from the Treasury Secretary then Treasury Secretary Janet Yellen, who tightened up the average maturity and started
issuing a ton of tea bills. Do you think we need this time around also corrective action either from Treasury or from Congress in some form, maybe reshaping this tax bill going through Congress right now, to put a lid on some of the volatility some of the moods we're seeing at the long end of the curve.
I think those tools are definitely there, and I think that's a great example. It might be too soon to really come out and say anything needs to be implemented, but I think this is where kind of your Treasury auctions. Again, to your point, you're going to have to see a different structure of issuance, a debt financing to really help support the long end of the curve. This shot up in yield tests happened, I would say relatively kind of recently,
in a short period of time. But I think we need to see a little bit more again, more economic data. I don't expect anything to happen over the next two to three months, whether it's from a monetary policy standpoint or even in terms of Treasury Secretary coming to kind of step in. I think the economic data here is going to be the focus. July fourth time frame is going to be very important, and I think that's you know, we're all hoping for a quiet summer here, but I think.
We're that may not be the case.
So I mean, look for our clients that again have a higher quality kind of typically mandate that are looking at fixing come as a ballast. Look, we're suggesting if we haven't been kind of if you've been underweight, fix income. Here's an opportunity to at least step out locking some income. And again, this bond market I think has become almost too optimistic. We have completely priced out any I would say slow down risks. I hesitate on the word recession, but any risk of slow down.
Great PSPGM said that Jamie Damer and JP Morgan said that in the last week as well, and Niche Patel a parametric Just set it right now.
Sure he's going to see you.
Yes, good to see you too.
You're in good company, that's for sure. It's got cron at a city right in the following. Recent signs of consumer slowing are concerning we Bus in favor of a combination of defensive names and secular growers that have been more heavily investing in their businesses. Scott, John just now for more, Scott, Welcome to the program, sir. We need to take a bit of a bee and talk about what's developing in the bond market and what ultimately it
means to you and the team in equity. Scott, what happens when we get to these kind of levels in bonds? What does it mean to you?
Nahan, Well, it means a couple of things.
I think, first and foremost, you look at the potential impact of higher rates in terms of a slowing effect in terms of demand.
For a new credit. That's pretty straightforward.
Additionally, from an equity perspective, it's mostly about valuations, and essentially, when you're looking at how to value securities, it's a combination of where you think near term fundamentals are going, but it's also how you discount future earnings five ten years down the road and assign a valuation to terminal values.
And so what ends up happening.
Here is when you backup yields, you begin to change the math and those future earnings are worthless now. So the bottom line is that from a valuation impact, when you look at this current trajectory in ten years in particular where we focus, it's a gating factor potentially on future economic activity, but essentially real time it's an overhang in terms of the evaluation set up for US equities.
When you look at the policy down in Washington, scott we do have the one big beautiful bill passing through on the House side, and the bond market seems to be pushing back on a number of issues. But what if they didn't do anything and we would have a tax at the end of the year, what would the bond market do?
Then it's kind of pick your poison, right, So what you would get with the tax hike, which was where we were a year ago at this time looking at potential presidential election outcomes, is that you would have a different influence where you would probably begin to slow aggregate spending levels. You would crowd out essentially expenditures because more of your income is going to taxation.
So essentially, to be careful, what.
You wish for the bottom line memory is that we've been living in a fairly fiscally stimulative environment going back to the pandemic. That's when you really began to see your debt to GDP rise. And now with the Fed rate policy in the rearview mirror, you're also looking at the debt service component kick in it as well. So essentially from my perch, from an equity perspective, you get
the deficit spending that's fiscally stimulative. That's actually pretty good for economic activity and probably for corporate fundamentals.
But the offset is what you're doing.
In terms of uh, you know, you know, paying forward now for future pain, in terms of the risk of higher for longer rates, the valuation impact and the ultimate slowing effect that could have an economic activity.
So Scott, as you know, the economists over sets in your colleagues are worried about downturn hits the labor market and they think we're going to see a real reduction in interest rates. I continue in fixed income. The conversations we keep hearing is that they don't know what defense really looks like anymore, and they don't want to plan on the long end of the curve. They want to aggressively shortened duration. Scott, how does that apply to equities?
How are you thinking about defense now compared to maybe years gone past?
You know, Jonathan, we pulled out you know, a month or so ago.
Are in old playbook.
Tactic of ours where when you go into these periods of economic concern we like to pull out growth as defensive as our approach here, And so what I'm getting at is that you're dealing with lots of issues in terms of economic activity that affect the way you think about traditional cyclical parts of the market and also traditional defensive parts of the market.
However, when you look at.
Longer term, longer term, where are the best underlying structural growth dynamics at work? There's still the AI play here, but you can broaden it across sectors. We've been writing more recently within the consumer discretionary sector as an example.
But my point here is at one antidote to a lot of the issues that we're discussing right now in terms of rates economic activity deficit is show me the growth where I've got more confidence in longer term structural growth drivers at a company specific up to a sector maybe even market level, that in our view, is the more appropriate way for navigating the current period of uncertainty that we've got from a fiscal and economic perspective.
Scott, when you screen for those things, does it scream MAC seven?
It has to start there, because where you go with this, Jonathan, is let's look at where companies are spending capital spending for the most part is very concentrated within the S and P. The megacap growers that are attached to the AI trend are certainly driving the bus right now, and what we saw with Q one earnings is that there's not much of a risk to that materially changing in
the short term. However, when you look across sectors again I mentioned consumer discretionary, you can find companies that are are showing capital expenditure profile as well above depreciation, where their fundamentals are also less cyclical and the correlation of
their fundamentals is less high economic activity. Those are the types of names that we want to keep a focus on, and I think that's an appropriate way for thinking about the valuation issue we have with broader equities, as well as how to think about navigating this current macro setup, which certainly is noisy at the very least.
Scott, When you put consumer discretionary and you break it up, how much performance dispersion are you seeing within that group of stocks at the moment?
There's a lot because at the same time consumer discretionary and stables right alongside that's ground zero for where terriff effects are kicking in, particularly as it relates to the China aspect on this.
So what we've seen through the.
Tariff discussion over the past several months is a very strong dichotomy and performance within the consumer part of the market, where you've got companies that are more directly exposed to China feeling the real brunt of that. But again i'd come back here, it's less about the inflationary component of terrorists. It's more about the gross margin pressure that potentially emanates
from your higher cost of goods that you're importing. So bottom line is it's a lot of performance dispersion, and so we're kind of cutting through all that noise with let's keep a focus on companies that we think structurally are in a pretty good position to perpetuate ongoing growth. Again, regardless of the macro circumstance Right now.
Scott, appreciate your input. As always said, what a monocle ready's called cronic that city breaking down the equity market for you. This is the Bloomberg Surveillance Podcast, bringing you the best in markets, economics, and geopolitics. You can watch the show live on Bloomberg TV weekday mornings from six am to nine am Eastern. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen, and as always on the Bloomberg Terminal and the Bloomberg Business app.