Surveillance: Recovery Risk With Deustche Bank's Ryan

foot on the two year yield? Well, the Fed does, um, so you know with their guidance um, you know they're they're sort of suggestion that they're gonna keep race low for a long time. Uh, they all continue to hold this front end down. I think when you look at the bottom market, you want to look at the Fed's actions in in two different parts of the curve. So the front of the curve is all about what they're gonna tell us they're gonna do with the policy rate.

The back of the curve is sort of chewy driven. But the Treasury is issuing a lot more at the back of the curve than the FEDS buying. So let's talk about the issuance here. Issuance is a flood of paper onto the market, and to be clear, that means yield up priced down. How much of that movement would you calculate? So what's been surprising is how well we've been able to handle the supply so far. That said,

it's it's just relentless. So if we look again, only focusing on the long end front end supply, during Operation Twists, the FEDS sold six thirty billion dollars of three year and shorter treasuries and it barely moved yields at all. So long end is where the supply matters. Seven year and longer auctions between March and October is going to be up eight fo So even though the Feds buying

it's peanuts relative to what the Treasury is issuing out there. Um, you know, we think we're just gonna see this steady weight of supply dragging yields a bit higher. Michael, Not a trick question, a genuine cure us from me. What's the history of supply mattering in the treasury market? So generally it matters that extremes. So it mattered a lot when the US ran a surplus for four years UM back around the turn of the sentry UM. So back then we saw two S tens invert fifty basis points

two S tens swaps stayed positive that whole time. So you had this incredible richness of long treasuries back then. Um, you know it, it mattered a little bit coming out of the last crisis when we saw you know, a lot the Treasury initially issued lots of bills to handle the jump in supply. As they turned it out, it really did offset some of the effects of QUE. And that's what we think right here is is the issuance matters more than QUE right now. Um, you know, the

Fed would have to upsize enormously to offset this supply. Well, let me throw this in there, Micaul. What matters ultimately more the outlook for inflation or the outlook for supply the long end, right, So, so the I guess within this inflation will set a fundamental level for bond yields. Supply, can you know, create some significant swings within that. Um, so we think we're so low right now, there's just not much upside. I mean, we we've seen a lot.

We saw equities move pretty substantially in the last month tenure and yields stayed in the six basis point range the whole month, So you know, you're just not seeing much of a hedge benefit from treasuries at these levels. That means there's less fundamental value in treasuries. Treasury is underperform corporates the vast majority of the time. The only reason you own a treasury is because when the outperform

corporates is when the equity market gets hurt. When you lose some of that hedge value, that diversification value, uh, treasury is fundamentally worthless. This is such an important point, and it's one that a lot of people are highlighting this morning, saying that treasuries can no longer be a hedge right, they never could, no longer can be a ballast to your sixty forty portfolio. Do you think that it is too soon to ring the death tool for bond's acting as this ballast or or do you think

that this is an accurate characterization. I think these ear levels is accurate. You know, we back up a little bit in yields and I think it will the behavior will come back. But you know, with with the US rates pended zero on the front end, you know, the Fed is repeatedly said they're not going to go through zero. If they do go through zero, it threatens disruptions in

the repo market. Um, when the Uncle Sam has twenty trillion dollars of debt to roll over, the last thing you want to do is interfere with the funding of those treasuries. So you know, at these ear levels, I don't think there's much benefit if we cheapen a little bit. I do think it comes back, all right. Uh so can you give us a sense of where you start seeing value again? Just to give you a perspective. The thirty year treasure yield right now the highest since June

at one point of five. Yeah, I think we we need to sort of back up another twenty bit before uh you get a little more interested, and then before we get some of that hedge value back in the equation with pointing out Tom here today long treasuries t l T, the E t F. I think the key clause in what Michael is pushing right now is just the idea that at these levels they don't present the

same opportunity they did this year. And let's think about how many people came on the program last year saying that the next test for treasuries the budget deficit, all those bad things, and what happened to treasuries when things hit the fan? They rallied and they rallied aggressive. I mean, this is really important, Michael, Clarity very quickly here. I

just think it's so important. The great measurement of a bond bear market is when your clients gets three months in a row statements of their for sure, like a rock bond portfolio going down in price, where's that equivalent ten year yield? Now, I mean on a full faith and credit tenure, where does the pain really click? And well, again that's that's one of the issues is at these year levels, I'm not seeing much income, um. So you know, normally you could have prices fall a little bit, but

it gets offset by the income. Getting these year levels. My income is so small um that you know, again it all depends on distribution. But we get up. We we sort of sell off five basis points a month and more than gets you there into negative territor. Michael, would you still call the US the high yolda compared

to what's playing out in Europe at the moment? Given what we on a ten year in Germany negative fifty four basis points for a foreign investor right now from an international perspective look into the United States, just how attractive our things that actually there's still some value there. Um. You know, what we've seen is some of the the FX hedging costs have actually come down, um recently. There seems to be a lot of street balance sheet out

there right now that's reduced those costs. So there is a little bit of value for some of those foreign investors. But you know, again not exactly to jump up and down sort of price. Michael clad to catch up, sir, Thank you, Michael Clotty. There of ubs on this right. Smart David Riley gets started with the asset management. We're thrilled you could join us today, David. First, chart I looked at today where those five year out, five year forward break evens so different for the United States with

a whiff of inflation versus the disinflation of Europe. What does that signal? Well, I think that signal is that Europe is in a very difficult situation in terms of the extent of the bitch inflationary deflationary forces. I mean, we've had a record loot um inflation prints recently, and I think that's going to prompt THECP too UM and spent more policy action, but probably not until the end

of the year or um early next year. Well, I think in the US, you know, there is still a challenge on the inflation from but I think there's more upside potential, particularly if we do get a substantive physical stimulus after the U S elections. Given that, David, do you think that the euro, the rally that we've seen

versus the dollar is overdone? Well, I think if we get a situation where um, you know you were discussing before, let's you know, a Democrat clean suite, then I think market expectations will be for a very significant um US physical stimulus sometime in the early one I think it's going to be associated, at least initially with a weaker dollar. Um, I think you're rightly does that play out with a

stronger euro. I actually think it will benefit the sort of laggered of this recent dollar weakness which has been emerging market currencies. I think a sort of Biden and Democratic clean sweep is unambiguously positive for emerging market assets, including currency. So that's where I'd rather play. Where I think we're going to see some future dollar weakness. Is that just a trade policy trade David? What is that? Yeah?

I mean I do think that there is a sort of trade policy premium uncertainty associated with a Trump administration, and that extends not just too obviously relationships with China, but also the way that tariff policy is being used with a number of trading partners, including allies of UM

the US as well. So I think if you take that out that other things being called, that implies a weaker dollar, and I think a big US past stimulus package would also be then a sort of signal for the market to sort of more aggressively would decisively go into a rotation trade and a kind of global reflation trade.

I think you get a steeper treasury curve. But as part of that as well, I think he gets some rotation from dare I say, from growth to value, but also into I think some of those assets like emerging markets that do better in a sort of global reflation world. Dare I say, you said it, David, So let's discuss it. This rotation, the elusive rotation, this idea that banks can

start doing wow, that curves can start stepening. I mean, that's the European trade that's the long right there, That's the trade everyone wants to see work and just hasn't for so long. David, If it work in the United States, can it work in Europe? Um? Well? Yeah, I mean I think it can help. I think if we see that kind of move in in the US and steeper curves, then to some extent, that would sort of show the

way for European policymakers. I mean, we have seen a better and more coherent policy response from European policymakers, particularly on the fiscal side, in this crisis, um, than we've

seen in previous crisis. But I do think that a part of you know, in order to get that take how that kind of Japanization story for for for Europe, We're going to need continued fiscal policy support, and I think the ECB is going to have to accommodate that by extending its asset purchases, but eventually saying we're going to backstop government borrowing and don't worry about how much debt there is right now, keep on borrowing, keep on

supporting the recovery. And I think if we get that as a story not only in the US but also in Europe, then I think we will seem stupid curves, and I think it will be beneficial for the cyclicals and value like financials. David, what's your hedge? What's your go to asset to counteract if you're wrong about this reflation trade? Yeah, I mean it's it's actually um you know, not an easy thing to do to find hedges for

portfolios right now, bigause. I think the way that fixed income has behaved core government bonds, you know, during September, shows that it has become very asymmetric. I think it's hard for those shields to go much lower. And I think if we do get some positive news incremental policy news, particularly on the fiscal side, but but also in terms for example a vaccine before year end, then then I think those shields sort of moved higher. How do you try to sort of mitigate that risk a little bit?

I mean, we've reduced some of the risk within our portfolio has given the level of uncertainty at the moment, but also you stick with your biased to sort of up in quality to sectors like utilities, um in high grade credit, de Haven greater catch up. As always get to see a Sir David running their fluid asset manage around the latest in Europe. We're not Julie Norman with us with UCL Professor of Political Science. And what's fascinating about her is her study and her expertise and academics

for conflict. Her focuses on arab Is really uh conflicts and particularly a focus around the Palestinians, But far more it is just simply about the politics of our conflict. Julie. I don't mean to make light of it, but you could take your conflict over the culture wars of the United States of America. How will they play out in the next twenty nine days. Well, Tom, that's certainly what

we're all going to be looking at. This has obviously been such a polarized gear, a very polarized election, and with the events of the recent days, with Trump's diagnosis, with the response to that, it's looking like the end of the campaign is going to look even more different than we had thought before. We all chained up in both Dividing campaign and the Trump campaign and how they move forward in its crucial time leading up to election

day in November. I mean, you lead up to election day in November, all the focus on the president tweeting out massively single line all cap tweets. He just put out moments ago one that looked like it was pre programmed an election tweet as well. What should we look for from the other guy from Vice President Biden? Well, Biden really needs to keep up his own momentum for

these crucial weeks. He has already decided to suspend negative ads while Trump is is sick and has counseled a few events, but for the most part is moving ahead with his plans of planned events on starting and sported this week. So it's really crucial that Biden keeps that going. He needs to make sure that he gets out the vote and keeps that enthusiasm going as it gets closer to November, and doesn't play it to safe even though

he's the head in the polls. Julia, at what point do some of these Senate Republicans look at these polls

and start to break away and go solo. Well, you know, that's something that we've been wondering really from the start of Trump's ascendency, and so far most Republican senators have stayed aligned with Trump, of course, with a few pretty notable exceptions, But I think for Senate Republicans right now, especially with the Amy Coney rate nomination trying to push through the Senate, there's a sense of commitment to conservative values, conservative policies, and really trying to look more at the

long game of staying committed to those aims rather than necessarily making a break from Trump and saying keeping a kind of a standard strong front with the Republican Party with the conservative values seems to be the best way forward for most of those Senators right now. Judy, just on process, just quickly, how difficult is it to get the Senate operational now, given that some Senate Republicans have

actually been exposed to COVID nineteen. Can you walk us through the process just briefly for the next couple of weeks what that might look like down in Washington. Sure. So, we've heard from Mitch McConnell's that most Senate activity will be suspended this week and not start again until on

the week of October twelfth at least um. But McConnell has emphasized that the confirmation process for Anny Tony Barrett will move forward in that regards some of the meetings and procedures they're currently having people even if they're sick or don't feel face coming in can tune in virtually.

Where that's going to change and change is when there's actually a vote for a vote, they will actually need senators to come and be physically present, and so that is really when it will probably depend on the health of those senators who have been infected so far and the extent to which the virus has moved between other

other numbers. By that point, there's so much confusion around the virus and how it's hitting Washington and President Trump, even with conflicting data, conflicting information from his own doctors over the weekend, Julie, from an international relations perspective, given the fact that President Trump is on the end, he does appear to be. Although there is such a lack of consistency and the information. How much does it put the US at risk or put the US at a

more vulnerable position when it comes to dealing with other countries. Well, you know, we we have seen some reports, even as recently is today, that this is a rather vulnerable loan for the United States. Having the president hospitalized, so, as you noted, does seem to be recovering, and hopefully we'll confer within the next few days, but hopefully you have

a president who is um who is hospitalized. You also have a number of other members from the highest levels of government who are sick or potential for being thick. And also just the country really quite distracted at this moment um. You know, from the security point of view, the United States is uh, you know, relatively vulnerable. But I say that relatively uh strongly the US. Everything else

that we have is in place. There are so many agencies and people beyond the President and beyond the White House that are really gage much more of our international relations that this is not a time to be afraid, so to speak, but just to be mindful that it is a rather unprecedented situation. Late start to the year for universities here in the United Kingdom if you're not familiar with the education system, and I believe first day

of the term today over us. Good luck jo He tries to catch up Julie Norman, University College, London, Professor of Political Science, Brett Ryan with us a Dutsche Banker, senior US economist, and he went right to where I was in. The unemployment report is a good report, mixed report. Markets certainly reacting to it. But Bret Ryan, you went to median duration, which really shows two America's discuss what

you saw in a little bit more difficult media duration statistic. Right, So the median duration is basically how many weeks people have been unemployed. And so you know, one of the things that we've been following is people that say their own temporary layoff versus permanent layoff. And the issue with that is those it's sort of a distinction without a difference when the number of weeks that people are unemployed keeps extending. And so right now you're seeing the media

duration go out to uh, seventeen point six weeks. That's the longest um really uh. And so you know, one of the issues that we had in the last in the week of the financial crisis was long term unemployed because the longer you're out of out of a job, the more your skills around, and the harder news to get back into the end of the labor force. But to Peter Hooper, team has absolutely nailed this, I mean

full disclosure force. Deutsche Bank has its moments where it's very optimistic on the direction and you guys rolled over here a number of weeks reaffirm right now, your caution on the American recovery. Yeah, so, you know, it's been a faster it's been a certainly surprisingly fast start out of the gates. There's no question about that. We've recovered half of the jobs lost between February and April. The problem is looking forward, and every member of the Federal

Reserve has basically said, we need more fiscal support. Without that, without f PUC benefits, which have now been used up, the seam of money is now gone. That's three billion in income that's going to be lost between Q three and Q four. That's gonna come during the holiday spending season, and it's going to come upon those with the least amount of savings and the highest marginal propensity to consume. So that's why, you know, while we've had a faster start,

looking forward, it only gets more difficult for here. And there's a real risk that consumer spending could be negative in Q four and that's one of the reasons why we're more cautious. Right there's a narrative that's becoming increasingly popular that even if we don't get fiscal support from Washington before the election, we'll get it at some point, and it doesn't really matter when it will help support

the economic recovery on the other side. And then you have other people say, well, if you get bad data, if it really shows a market deterioration of the economic situation, that changes the dynamic and you have to start counting for that in your calculus when you decide whether to invest. Have we already crossed that rubicon? Are we already at the point where the data is showing a material deterioration in the momentum of the economic recovery and people have

to take count of it? Well, I think number one. I mean, tell that to the twenty million people who are collecting some from unemployment insurance right now and they're seeing their income cut and half. You know, tell that to the restaurants that are going into the winter season. The p P P loan money has dried up. There's a hundred and thirty billions still sitting there. Why why not allow them to take out another loan and get

through the winter. Because these programs were designed to deal with a four to six months shutdown, not a year shutdown or at least restricting capacity. Uh. And these businesses need help now, and airlines as well, they need help now, not three months from now, because you're going to have you know, businesses that go under in the meantime. So

I think that's the one the one thing. Um. But yes, will there be fisicals debates at some point, yes, but it's more important for that You're going to delay the recovery by causing hardship over the next three months for thousands of businesses restaurants that are going to go under if they don't get more PPP money, um, And you're gonna it's it's gonna hurt demand, especially during the holiday season, and so companies are gonna be less likely or less

willing at least to hire. And it just sets you back unnecessarily. Okay, a lot of policymakers will say, show me the numbers, right, how much will it set us back? If it sets us back a little bit, but we can remove some of the political silly season around us, then it's worth it. How much does it set us back if we don't get fiscal support before the election,

it's prolonged for months to come. Well, I think it risks the consumer consumer spending recovery, and you could have a negative quarter of consumer spending and basically that that's fifty chance that you're going to have a negative quarter of growth and the economy is not exiting recession, and it's hard for the N A b E to you know, to um, you know, to declare the end of the recession,

and it could weigh on jobs. We've already is slowing in the pace of job games as we saw the last report, as the BLS noted itself, is the unemployment rate, Well, yeah, it did tick down. It would have been um forty basis points higher if not for misclassification issues. So you're still really at three percent unemployment rate. Well great, but that doesn't help me. Where's the Deutsche Bank real unemployment rate?

Was a parlor game we've been playing bright where we go through the math and everybody says, the math doesn't work. What's the real number? What's your recalculated real number? Is it double digit or can you be more optimistic than that? Well, I would say, I mean the from the U three perspective, it's it should be a three from a US. But I want the EU Deutsche Bank. I want the EU Deutsche Bank perspective. Come on, we all we all see out there, what's going on? The U three is a joke.

What's going on? What's the real number? Yeah, I think it's definitely a double digit number right now. Thank you. When you're looking at it. When you're looking at what's happening here, Tom, is that as you see continuing claims on the state levels start to start to go down, you're seeing a commitment, not a commensurate but a good portion of those rolling off are going on to Pandemic Emergency Unemployment Compensation. So that's the federal program with extended

benefits that go towards year end. Same thing you're seeing PUA, even though California had some issues with reporting PUA, which is Pandemic Unemployment Assistance, that's also taking higher. So the total number of people collecting claims is not coming down as fast as what you would think just looking at the state continuing claims. By the way, p U A and p e U C both expire December three, at

the end of the year. If Congress doesn't do anything, then that's another big hit to income, possibly another couple hundred billion two D three hundred billion UM, and that further dense you know, profile for spending Bright Just quickly, you've quantified the kind of damage that would happen to the U S economy if we didn't get that fiscal help. Let's just talk about what kind of damage, not just

in the anunted states, in the UK as well. Hit a Chancellor talking almost about embracing creative destruction and not allowing it to rip, but acknowledging the around permanent changes in this economy and some businesses that won't be valuable in the long term. Can you embrace creative destruction to any degree in a pandemic with the restrictions to this government has on right now? Uh? When it comes to you know, restaurants, Do I want to see my father

with four restaurants go out of business? Um? Is that creative destruction or is that somebody who, through no fault of his own is being restricted to fifty percent capacity? So I think industry by industry, and when we talk about creative destruction, businesses that you know are no longer are not longer viable through technology or some sort of

natural process. Sure, but for businesses that, through no fault of their own are being restricted by the state right and they can't operate profitably, there needs to be some sort of state aid. Brett right to catch up. I send up best to the family. Why don't you It's a tough industry. Brett Ronnet, don't with your bank Stadia US economists. Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or

whichever podcast platform you prefer. I'm on Twitter at Tom Keane before the podcast. You can always catch us worldwide. I'm Bloomberg Radio.