Surveillance: Credit Opportunities With Watson

this bond market as well. If you're just tuning in, you have got a bond market with your tire on tens by four basis points to about one forty eight, just short of one fifty. Joining us now to discuss this, Marilyn Watson had a global fundamental fixed income strategy at black Rock. Marilyn, let's start with Chairman Pale and work our way toward into this bond market, treasuries into credit. Did you sense a big shift yesterday from the chairman?

We did censor shift, so I think sickly obviously the end of the last week. Um, you know, we saw this very much sure, a risk of tone with the new variant coming to We're leading to you know, a huge amount of uncertainty back in the markets. Um. And I think that led to you know, investors being obviously a little bit more cautious going into chair Powell and his testimony. And I do think it did surprise the

markets a little bit. And we have been saying for some time that we think, you know, the Fed really isn't a position now where they can accelerate the taper where next year they can start to even um, you know, maybe raise rates maybe two or even three times, depending on how this new variant shapes out. But I think the market was caught a little bit off guard, just given the volatility that we've seen over the past few

days with the negative news you know, around COVID. But I think in terms of the overall trajecture of the market, that's where it had been heading. I think it was just surprising given the context of the past few days. The q has been very important for signaling, signaling to the broader economy and to financial markets. Were Mary and I just wonder what an accelerated QUI taper would actually

mean for this market. You Rick read above, Miller have made the point repeatedly over the last several months that a lot of this would be canceled out at the taper at the Treasury. But if we accelerate things. Does it have a bigger impact, Well, I think on the margin it has a small impact. But the fact is that when they are still continuing to purchase assets, even as they wind down the amount that they hold, then you know, they're still actually supporting and they're still providing

a very very loose accommodative montry policy. They're still continuing to buy assets. So even if they sort of accelerate this a little bit, we think that the level of accommodation at the moment is so high, and particularly I think yesterday we did start to hear a lot more caution from Chair Powell around just the very high levels of inflation that you know, are potentially becoming more persistent.

And I think that's a factor that the Fed are now starting to really include in the forward guidance, and I think maybe they just starting to shift the tone a little bit as we do go into you know, the the FOMC meeting in a couple of weeks time, I think it will be key for market participants to really see you know, the timing around the que tapering, but also the time being around any potential rating increase as well. So I think given the high levels of

inflation that we've talked about a lot. Given the fact that the tone has shifted around that it could be a bit more persistent than so far we've been hearing from the Fed. Um. I do think it's important. One reason why perhaps Fredshire Powell feels important is because markets are letting him make these moves, to make these signals

without getting disrupted too much. And I take a look at credit nothing like the tape re tantrum going to back to but still nonetheless you are seeing money getting withdrawn from the high yeald debt market and slowly see yield creep higher the worst performance for that debt going back to September. Is this a buying opportunity or a warning sign for what's to come? Um? I mean I think potentially, if you exclude the current uncertainty around the

new COVID variant, it could be a buying opportunity. When you think that, of course, as you expect to see you know, Muntro policy normalize a little bit. Um And we have seen obviously, um, you know, the yield and treasuries and Greece, we've started to see spreads widen. We are seeing now better opportunities and better evaluations in higher quality credit, so we have seen some investors sort of

go up the credit quality spectrum. We have also when you're talking about how yield, we're continuing to see investors as well um still continuing to prefer the loan market

in many cases given the floating right structure. So I think again, as the market is put you know, really starting to position itself for a little bit more normalization, although we're far from normal um in this environment, and as we do see these you know, ongoing levels of inflation that are persisting through until next year, then I do think we do we are seeing more dispersion also in the sectors that are seeing you know, better prices

but evaluations. So I think it's a buying opportunity, but I think also investors are being you know, particularly cautious as we're going to year end. Liquidity isn't particularly great at the moment, and as we do have this you know, higher uncertainty as we're discussing around the new COVID variant, around petition, potentially measures to you know, limit restriction on movement, etcetera. So there's a lot of unknowns, but there could be

potentially buying opportunities. What an end of the year, Mounting, fantastic to catch up with you send out best to the team as always Mountain, what's in there? Black Rock? Right now? On fixed income, Bob Michael joins us here for a good conversation to says how to global fixed income currency commodities of JP. JP Morgan Asset Management barely describes the ability here do you buy the dip in bonds? I'm totally confused about what to do with full faith

and credit or just credit right now? Do you clip the coupon? Do you buy it? Or do you just go to cash? Which is it? You sell government bonds and you buy credit. There's been a tremendous repricing, You've had a flattening of the Yelk curve. There's a lot of concern that the Fed is going to move too quickly for the market and will lead to recession. And

that's ultimately why thev has inverted. That's nonsense. They're miles away from anything that looks normal, and I think this is an opportunity to get rid of any remaining government bonds you have and then go back into the credit markets, go back into investment grade and high yield. You can do it in US and you can do it in Europe, and those are the things that you're buying on sale.

Well that word normal, What does that word mean anymore? Well, for me who's been around for four decades, it means getting the central banks out of the market and leaving it to people like me to price. And there's a very different operating model than what we're used to from the central banks. Um, when I started the business, the central banks extended credit to the banking system and they controlled the cost of funding, and then they relied on

the banks to extend credit into the economy. Now they're controlling the cost of funding across the entire economy. It's gone too far. It's got to stop, and participants in the market like myself have to get involved again. Well that's a design, Is it a full cost? What makes it a fuecast? What makes it a forecast is j PAL yesterday and j PAL saying it's time for them to exit the market, which I think they're going to do.

They should announce uh that they're going to double the pace of of tape ring, so they should be out of the market by March, and then we should see rate hikes pretty soon after that, So they're going to start that journey to normal, and we're going to help them on that path. All right, You're gonna help them

on that path. So so completely egourgeous of you. I do wonder that when you say it's a buying opportunity for credit, particularly riskier credit, why this is a good entry point given the fact that we are still so vastly below where we were before the pandemic when it comes to yields, why is this an opportunity at four point eight percent a coupon on a junk pond. For a number of things. For one, corporate profitability still remains

very high. Companies have a lot of financial flexibility, and the companies were talking to don't see any significant drop off in aggregate final demands, so their top line is going to grow. They do see the input cost pressures and they're starting to pass some of those along, and by the way they've been raising dividends and buying back shares. They can dial that down a bit if they need to. But right now we're looking at a consumer that's flesh

with cash, that's out there spending. Yeah, there may be some headwinds from the O Macron variant will see over the next couple of weeks and couple of months, But for now, corporate profitability looks pretty good. I want to be a part of that. Well, but do you really think central bankers will ever get out of this market and let people like you truly price it or is there sort of an implicit put that if things get volatile enough, they'll step right back in. Well, that's the debate.

I start off by saying, I'm I'm used to one model, but when I look around our trading floor, um a very large percentage of the people only know the current model, which has existed since two thousand and nine, where central banks do intervene in all sectors of the bond market. So now I think it's a tool that they've learned to deploy. It's not going to go away anytime soon, and they're going to have to gauge that with all

the other tools that they have. And yes, financial conditions indicators are one of the reasons that you buy dips in risk assets. As long as they look at those things, they're back stopping the markets. Michael with his JP Morgan here on radio and television, Bob, I'm not going to

get you in trouble on China. Somebody else at JP Morgan is some challenges this week on China, But I am gonna ask you about the Pacific rim and about the great miss our David Wilson notices inequities internationals failed. What do you do with the international paper right now? I don't mean Turkey, but what do you do with the JP Morgan opportunity in international fixed income? You go

for it. And we've had a lot of conversations about emerging markets, specifically emerging market equities, and how earnings for companies across Asia in particular have come in higher than anyone anticipated a year ago. The stocks have gone nowhere, They've even drifted down compared to the double digit recurrens returns in the developed markets. Next year is probably the year that stock prices catch up to earnings, but earnings

are still going to look pretty good. So yes, we're also buying credit across a pack in China and across the emerging markets. Is Europe a piece of that as well, Bob Um, Yes, and and and in fact Um we were looking over the last couple of days of going back into the European Bank sector. Uh, particularly UH, the alternative the additional tier one securities and the lower tier two securities, so the bank hybrid securities. Um. So we do see some opportunities there as well. You know, I

have some speculations. So let me finish with this question. What did you think of cham and Pal making that move a week after secure and renomination? Bob? Did that stand that to you? It's so well, the easiest path for him would have been to do nothing and coast through the hearings on his reappointment and to suddenly start the tapering process disrupt the markets. Um to me is is taking some risk. What I want to know is what changed from Monday to Tuesday and what's going to

change today from yesterday? Yeah, I couldn't agree more Tom. It's been a month since they announced tape rink and now we're having a conversation. What's changed in a month for him to say, you know what, maybe we should accelerate things. What do you see here is a grizzled pro like Bob Michael getting right down to the nitty gritty what changed in twenty four hours? And that's the whipsofe for people who are not in the game. On

this John, we're all talking about the market action. We're forgetting about the losses earned and made over the last forty eight hours. Is I really wonder what the carnage is up there? So my final question to Bob Michael Thomas usually football related, so we'll keep it consistent in remain in Georgia, not Alabama, Georgia this weekend, Bob. Confidence level so I want to understand from your perspective tends back to two or another championship for Liverpool. Another championship

for Liverpool to they are a goal scoring machine. Well, Michael JP Mark and asset management in the flesh, Bob, It's good to see you joining us now, not just on the global economy, but on the pandemic. Lauren Spoon, the chief economist at the O E C. D AND's typically I've come straight to you on a forecast, a call for US growth for Europe et center. I want to come to you on a number you guys have put out this morning. Vaccinations are key for the recovery.

They would only cost fifty billion dollars. Fifty billion the context of how much we've spent over the last eighteen months is nothing. How do you get there? How do you get to that number? So so the way we've getting to that number, sorry about this. Basically, you know, the fifty billion is what's been estimating by Covax and all the related institution um. The ten trillion is actually what the twenty has been providing into fiscal support to

the economy, two people, to firms, to jobs. So when when you balance things out, ten trillion for supporting our economy going through the pandemic, you know, compared with the fifty tiny fifty billion to bring the vaccine to the entire world population, that looks completely disproportionate. Well, right now we're dealing with the omicron variant, the idea that Africa

has an incredibly low vaccination rate. Have you heard from member nations that they're accelerating, doubling down some of their aid to try to distribute vaccines in Africa and in other places that are really underserved. So yeah, with our Health Department here A, the O, E, C D, and the Trade Department, notice that it's very difficult to bring it to Africa, as you say, it's where the rate

of vaccination is very low. There's a huge logistic questions, right bringing not only the vaccine, but being able to keep it at the right temperature and then distribute it around UM. So that that's where I think a lot of the effort now has has to focus on. But not only if we go back to the O E c D UM and that's what we should this morning.

Even within O E C D countries and advanced economies, some countries have very low vaccination rate and that's an issue because as we've seen for example in some of the Eastern European countries, UM, they just had led them to put in place restrictions to mobility and economic activity. Again, so really, you know, expanding vaccination, making sure people get double or triple vaxed is key to a sustain recovery.

In the meant time, Lawrence, there is a problem when we talk about the hiking cycle for the Federal Reserve, when we talk about the Bank of England going to a similar type of mode at the same time that you are seeing the potential for additional variants to slow the economy. What's the risk that we get a slow down in economic growth at the same time as surging inflation and central banks being forced to tighten into that UM. So, look, there's lots of uncertainty um, and there is no question

that it's new variant is adding to this uncertainty. Now, one of the things we're very clear about is there's no one size fit all policy. The inflation in the US is very different from the inflation you may see in Asia, for example, in China or India. It's again very different from the one you see in the continental you are or in the UK UM And for that reasons,

we have a very clear message. If inflation tensions mostly from the supply side, then sents for banks who looks through when you have a lot of momentum in the recovery, excess demand, un employment back where it was, then Yeah, normalizing the monitory policy is not something that's extraordinary and should be done. Lawrence tim Kin in Good morning to

you on radio and television, Lawrence Mooonwether. So the O E c D as they reassess the global economy will do that again with key economic data today, including a d P. Lawrence I did a very careful study of John Byrne Murdock's magnificent work at the ft on cases and particularly deaths from COVID. The vector, the trend called the log vector of Germany, Austria and Switzerland is nothing short of grim. Can O E. C D extrampolate out the trends that we see in death from COVID or

do you sit back and wait for more data? Look at Good morning to you and thanks for the invitation again, um Adeo CD. You know, we're economists. So what we do is we take into a the uncertainty that has increased with the period with the emergence of the new volant. We take into a condy uncertainty that has increased because the LATA is developing faster in countries where there's less vaccination, and we factored that in. But I think that's that's the base we can do again. We've warned about the

uncertainty that was coming from the lack of vaccination. We've warned about the threat that this total imbalance between countries very vaccinated and those where they are just might be or where the vaccines has not gone yet was creating, and the risk that's creating this what's happening now is it's just a reminder that we need to find this fifty billion you know that that that will help us and all these imbalances and and there's stress that the

various is creating on the global economy. Lawrence, always good to hear from you. Thanks for being with this morning, Lawrence Burning that of the A c D. We're staggering here on Bloomberg surveillance and particularly with our aviation coverage

from story to story. Guy Johnson has led our coverage on airlines, on jets, on the Transatlantic, on the global and joins us now and Guy, I do understand that with our wonderful guests, the key question is the new Manchester United and how they'll do with Arsenal this weekend. But other than that, it's getting the planes in the air. It's a I think that's gonna be a critical question for shy Wi. Yeah, let we can. We can start on the football I Alsenal match to unite it. That's

what Tom wants to know about. Are we live Yeah, Arsenal of course, Okay, we have an answer. Yes, Okay, let's let's talk about what this is going on now that we've we've cleared that one up. Um O Macron hard to say what impacts is theyre having on the business. Well, I'm just reminded that we met twenty three days ago outside of Terminal three at Heathrow for historic day of opening up the corridor between the UK and the US joint synchronized takeoff. And here we are twenty three days

later and we have a new variant. UM. I think it's early days on this one. My intuition tells me that it is probably more transmissible, maybe not as severe, just based on the patterns. This just didn't emerge for five days ago. It probably emerged a few weeks ago, possibly in October. UM. We've changed adapted, of course South Africa's shut down, although there was a flight right now in the air from South Africa back to the UK where people needed to quarantine. So we'll we'll deal with it.

You know, this industry has shown resiliency and so are we. The governments have reacted much more quickly in this time. He has that surprised you be? Is that the right soil wrong thing to do? It hasn't surprised me, and I think it's the wrong thing to do in the sense that travel is so omnipresent in our lives and if you can, you know, kind of put a combination of politics and pandemic, airlines is the easy target for changing of signals to the public, so I wasn't surprised.

I think we should evaluate the situation quickly, and what I'm telling my team and telling the government in the UK is as quickly as you introduced those measures. If things turn out that they are not as significant, take them back immediately as well testing opening up orders, removal of of red less countries. Do laias told that the

North Atlantic may be shut down again? I am not that concerned about that, based on the comments that President Biden made a few days ago, which in my mind were the most calm of the political leaders out there. Let's look at the formation. This should be data driven and then we make the calls. And travel is not the way to stop a pandemic. This variant is now

everywhere in the world. Everybody understands that. So shutting borders hurts thousands and millions of people, of course over the festive period, but businesses and GDP is reliant on it and we need every single piece of help that we can get, and travel enables that. What has what does the North Atlantic look like since November eight um? What kind of load facts is if you've been experiencing what does pricing look like. What does pricing look like around

the holidays? Has Business Travels given me a kind of a data dump as to kind of what it does look like since then? And I will try and be organized in my comments on the data dump. UM. So, first post the eight tremendous bookings across the Atlantic UM, and we've seen load factors building very nicely close in in December, and we will probably be still flying anywhere between six load factors. On the week post the eight, you couldn't get a seat on a Virgin Atlantic from

London to the US. The variant has changed this a bit, but I think we're neutral in the December period, so new bookings are offsetting cancelations, and there have been cancelations,

of course people want to do that. But for Easter and UM and the summer, we're still building momentum and still building load factors UM and if you look at the expected January load factor is trailing quite nicely anywhere in the s some flights up to so overall I would say very good response to the opening of the borders. The Armicron of course a dampening effect, but not enough as a long haul carrier focused across the Atlantic neutral at this point? What are the states of the finally,

what are the states? What is the states of your finances at the moment? If I can spit that out, Um, there is a suggestion that maybe you're in talks again with the shareholders to raise some more money. Can you confirm will deny that. Are you comfortable in terms of where you are with with the balance sheet right now? There was talk of an I p O. You haven't come. You've never confirmed that to me? Is there're still talk of an I p O? Is that a discussion that

is happening. So first of all, I'll start with the important thing. We were trailing ahead of our plans by a significant margin leading up to the month of November and December, so we have a cushion. Any airline executive is thinking about their capital structure and raising capital. We are never short of needing more capital. All options remain on the table and we are exploring them, um robustly.

But I am very confident that Virgin Atlantic will have a very good balance sheet going into the recovery phase that really starts in December and on to the sumber of two. Also know by how many versus Matchester here and I didn't. I'm going for a win to one, surprise win, surprise win to one Arsenal overmatch the United Shy. Wise, the CEO of Virgin Atlantic has spoken song. Thank to you, Guy Johnson, Thanks so much. Of course, man, you was so much change going on right now. This is the

Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten am Eastern on Bloomberg Radio and on Bloomberg Television each day from six to nine am for insight from the best in economics, finance, investment, and international relations. And subscribe to the Surveillance podcast on Apple podcast, SoundCloud, Bloomberg dot com, and of course on the terminal. I'm Tom keene In. This is Bloomberg