Surveillance: Tipp Says Yields Have Peaked

started this morning with with Lisa. You'll ten ure yield one eight. Why we downhead? Uh, Well, I think we're down here because the treasury curve is really, i think kept suppressed by what the FETE is going. They anchored short rates low, they've been really buying a lot of the longer duration UH treasury bonds long term and so really there's no place with the demand for treasury securities to go except the middle part. So you see a lot of express seeing of emotion in the middle park.

I think it shows people are worried about inflation, yes, but they're also worried about what if you called me slows down from deceleration or from COVID. Also, it is high as he pointed out, compared to guilds and the rest of the world, the dollars stabilized. So really attenduere

one thirty plus or minus looks like a pretty decent investment. So, Markie, based on your view if this perhaps has driven by what the Federal Reserve is doing, based in the fact that you could see foreign buying, do you count on yields remaining around here for the foreseeable future when you decide, you know what equities still look like A bye yes, number one, Because Sharon Powis told us so. He thinks

inflation is transitory. He wants to lengthen out that period where we look at even reducing the amount of purchases they're doing with treasuries and mortgages. So I believe what he says. They have the power to do that, And I think he's holding his breath when he thinks about what if we very slight and taper and we see some explosion in the marketplace. So I think they don't

want to see that. They're going to keep on this course. Uh, what they think about inflation coming down is more important than what the market things, and also their other goal of employment. They still claim that there's a lot of slack in the labor market, so that gives them a lot of pace even if inflation isn't really doing what they'd like it to do. How important have earning season

been this year? Well, I think they've shown what people expected are very very strong in the first quarter, and I think we may once again be surprised in the second quarter to see earns being much stronger than maybe we might have thought. We might have looked for a little bit of margin pressure, and my feeling is we're going to see companies continue to operate with less their sales are going up, they maintain their their labor force costs,

either through productivity or just not hiring. So I think we may have another very pleasant surprise um in the second quarters. You start to roll that out, not just over the course of this earning season, but really since last earning season mid March, we've seen the Russell two thousand down about seven percent from its peak, and over the same time, the NAZAC one hundred is up about over that time. What do you want to do with small caps now, Well, I think that's the thing you

see also in ASDAC it was very very large. Uh, you might say high growing safety kind of stalks the thing they have so far outpaced the rest of the market. Good example was the airlines which you cited, and I think that's typical. Lots of stock, small cap or even some larger are really down from their peak in March.

By ten fifteen, they've even and I think that shows that mixture is people want to be in the market, but they want something safe, so they keep sticking with the thangs and things keep going up, and the rest of the market seems to be churning around small cap, MidCap or even large camp market just quickly and finally even I've got a chat about this in the past, just how much sick the countity is left in this credit market. Does the cycle matter anymore to what's going on? No,

I don't think we have a cycle anymore. I think the FED determines that were on a you might say, a secular path of low growth around the very very low range of meals what a cool market. We've got to follow up on that another time. You know, I'm fascinated by this call of yours. MARKT. Bittel of Wells

Fargo MESA Management, Senior portfolio Managers patent fixed income. Chief investment strategist ahead of Global Bonds, Rob Steve Major of hsp C says we cannot afford higher rates, that this might be the cycle peak for the yield curve already. What do you say, Yeah, I think we have seen

the peak in rage probably for the cycle. There could be another twin peak later on UM, but I think that is one of the underpinnings of the long term decline, secular decline in rates, aging demographics and high debt burdens that economies that are incredibly indebted, and there's been a secular rise in debt to GDP ratios across UH the developed world, and the upshot of that is you simply cannot afford the higher interest rates that you had before.

So I think it's entirely reasonable to expect we're going to get a lower peak for rates in the cycle that last time, and we've probably already seen it. Bro, Is that consensus at this point? I mean, that's a pretty bold call that you and Steve Major over HSPC are making that we have seen the peak in ten year treasure yields for this economic cycle. Are people prepared

for that? Yeah? Well, it isn't him. It is. If you ask forecasters, and forecasters have been consistently to barish on the market, they would say, no, you know you're gonna see two per cent or what have you. Um, And that's that's entirely reasonable given the economic picture that

that you're looking at. But if you look at the market, you look at the price action in the market, you're seeing something that you haven't seen for for decades or even hundreds of years, which is an interest rate cycle that runs almost exclusively through the front end of the Yeok curve. So when you're on the gold standard, there was faith that the central bank would control inflation because

the fiscal could not get out of control. The back end of the Yolk curve would be relatively stable as short rates would go up and down, And you didn't see that. You didn't see that. In when there was a fear of the Fed raising rates, the entire yield curb went up. But what we've seen this time with the dot plot and the dot plot I think has been a nuisance for the Fed for a long time in a lot of ways, or at least for people

trying to explain what's going on there. But seeing those scenarios where if you have high inflation, the FED is going to get into action. The you already have a large swath of the participants at that meeting that are ready to go uh. And what you saw on the back end was the markets that are you know, we have faith that in a overheating scenario, the feed is going to contain inflation and therefore long range do not

need to go up. And in fact, if the Fed is a balanced group, and up until this point, I think market had been leaning towards they're gonna stay on hold too long and let inflation get away. If this is a balanced group, that we're gonna have lower growth than we expected six months ago in the long run, and you're gonna have lower rates in the long run. Talking about lower growth, let's talk about real yields. We're sitting in the ballpark of negative a hundred and five

basis points. Will they go even more deeply negative? Well, I think the thing that people have to wrap their mind around is you're kind of in a a new permanent area for real rates. I mean in in UH. In my view, the FED funds rate is just about zero. Now. The peak of the last cycle was around two and three eights. The peak this cycle will probably be significantly

lower than that because of these secular fundamentals. And if you're gonna be averaging a FED funds rate that's maybe a half percent or one percent or less, the cash rate in real terms is going to be significantly negative the vast majority of the time. And you have to get used to seeing a negative real yield term structure, So yields are going to be in these lower range.

You know, when things are really bad, maybe the tenure rallies to a half percent, And as we're seeing, if the economy is searing hot and inflation is soaring, you might get a two percent ten youre uh. And if that's the case and inflation on average is two percent on the CBI, there's gonna be a lot of negative real yields. So if some bunts there robs, so let's put a boone on this, or we start this conversation by asking you whether you think we've seen a cycle

peak and yields you suggested we had. I want to just really make it clear why your positioned on credit and how it relates to that view on shorts and making that cycle cool already right. Well, I think, you know, what we've typically seen is that you get an economic recovery, have a big tightening and spreads, but as that economic recovery progresses, that spreads tend to stay fairly narrow, and

that that's likely to be the case this time. UM. Now, the one thing we haven't talked about is that taper, and I think, um, you know, uh, summers are a difficult period for the market, and UM, what we're kind of setting up for right now is to get to August, have interest rates pretty low, and have the FED coming and shock the market with their taper announcement. So you know, I think, you know, this is going to be a transition year. That's been our view all year, where rates

are cresting. I think we have seen the highs, but it's not going to be a completely smooth ride as we go forward, and that will jar credit a bit as we go through. UM. But in general, looking twelve to twenty four months out, I think you're going to

get some additional outperformance from credit. And the surprising thing that we've been saying, uh and and believe to be the case twelve to twenty four months out is that the yield the rolldown factoration portion of the bond market is also going to contribute, and people staying at their strategic as allocations are probably gonna get the best results. A lot of people watching the show have probably thought it has become bond show today because that has been

where the entire focus has been. But that's where the focus has been for equities to And when you say that monetary policy may be executed entirely on the front end during this cycle, it makes me think that we're going to see a much flatter yield curve going forward. If that is the case, which is a bad thing for banks, which has been a big call for a lot of equity investors. Is that what you're saying that we've already seen the peak in yield curve steepening? Yeah?

I think so. Yeah. I mean if um, uh, you know, long rates on the tenure are going to be peaking, you know, sub two percent bouncing around in this area. Typically financials they like to see higher yields. Uh and um, you know that doesn't look to be in the cards. It looks like you're going to have stability. The one thing that the credit cycle has going for it, and that would include financials is the really good asset performance.

There are concerns about asset quality as at the early stages of the crisis, and I think a lot of those concerns, you know, are falling by the wayside as we go forward, as we get information you know from

the bank's going on here. So I think the underlying fundamentals of an expanding economy of corporations that have liquefied, that are able to roll out down, extend of maturities out uh, you know, continues to provide a background where there a lot of opportunities across the credit spectrum from you know, local and hard currency, emerging markets, UH, invest regrading and how your proper bonds as well as structural products. Rob going to catch up. I love the team of PGM.

It always come out with a call, a proper call, Robert Tip of PGM. Rob going to hear from your mate. Good to see you too. Let's turn to David Page of Acts for Investment Managers, the head of macro Economic staates. Let's start there. Just your response to the data, not just this morning, but through this week. So I think

you've got a very mixed bag. I mean, the consumer thankfully actually coming through reasonably solidly here, but we have seen a relatively week months and months quarter across Q two after we've seen that obviously, that huge surge come through in March. What caught our eye over the last week has been the drop in weekly consumer confidence as well. We've seen the fastest retracement in consumer confidence over the three weeks than we've seen since last December. So there's

a really mixed bag here. Yes, you're seeing price pressures come through, but those we recognize to be frictions to the economy, not something that's that's necessarily reflecting strong demand. That's something that's actually sort of a headwind to growth

if you like. You've had industrial production a little bit softer than expected, manufacturing dipping again for the second time in the quater um, and some of the surveys, you know, Empire State survey yesterday, through the Roof series high others just starting to come off a little bit. And we think back to that non manufacturing I s M which also included a sharp drop in the employment number. And there are some pretty mixed messages come through here. Now.

I think you know the backdrop is Q two GDP number looked pretty solid we've been looking for a cent annualized for some time. We'll find tune on the back of these numbers, but it looks pretty consistent in that area. But I think that it's going to be slightly more challenging for Q three UM, and that's one of the things that it's going to be watching when it thinks about sort of trying to send that signal as to just when it will be watching. As you say, it's

really hard to read the data. It's really hard to read what it should mean for the body market two yield to higher by a couple of basis points one or two through the curve here. But on the week we've had that hot CPI, that hot PPI, that hot retail sales, print and yield are still lower on the week a little bit earlier today. In fact, thirty minutes ago, we asked Robert Tip of p JIM whether he thinks we've seen a cycle peak in yields. Take a listen to what rob had to say. I think we have

seen the peak in rage probably for the cycle. That could be another twin peak later on, but I think that is one of the underpinnings of the long term decline secular decline in raids aging demographics and had that burdens deva page. Your reaction to that sound that response from Robert Tip of PGM. You know, I think that's probably a little bit pessimistic for the outlook for gross and I think one of the key issues here is going to be what comes through in terms of spending.

We are expecting to see a very large stimulus package come through. Its not being as easy as Biden perhaps thought it might have been, but we are expecting to see in September the government actually put some significant spending programs in which we think are going to lift potential growth for the US going further forwards. It's not a deficit finance argument. This is something that we think is actually money going where it needs to go in the

U S where it's not gone for some time. And I think that's going to support the outlook if we take a step back and think what the Fed things. The Fed things that the terminal rate for the Fed funds is two and a half per cent. Now, okay, we could have an argument around that twenty five basis points either side quite comfortably, but it's unusual to see

bond yields topping out at such a low level. If we think that the terminal rate is going to be at noce of two percent, and I think certainly as time goes by and as we get close to that point where we are going to see the FED tightening, and we think that happens in three and not any time later, So you get closer to that than there's ten yields and the two yelds are all going to start to respect these rates going higher. So I think it's it's up to our minds. We're expecting to see

yields rising. We think, you know, back to one seventy five by the end of this year is likely, or I think it could be quite a long summer. But I think we'll see them climb higher than that as we move over the next year or so. So what's the decide thing factor? Here? Is what I'm hearing from you, that it's more important to look at Washington d C and what plan they might pass, and any of the incoming data of it come in for the most part

harder than expected, or have been for the past few weeks. Now, I think what we've seen from d C is going to give the economy a significant rebound across the course of this year, and we've been tailoring how our forecast a little bit lower, we think six point four one, but by and larger. Seeing a very strong rebound comes through, you're going to see the economy move into a position of excess demand, and that's something that that ultimately is

going to govern how the Federal Reserve moves. I think when we look to the longer term, there are questions about whether or not there's there's scarring in the economy, um just how much readjustment the economy is going to have to take to get to get over this pandemic. But I think that's where you start looking at those longer term spending plans and you think, well, yes, there could be some downside, but there's possibly some upside coming

through from here as well. So I think DC is important for the longer term, but I think in terms of what we're likely to see from the Fed and what we're like from the economy of the next six months, the stimulus that's been injected into the economy already is a key feature here, but from markets will always before looking DEVI page of acts Investor Management, Dave, You've got

to catch ups on this data. Jonathan Miller has been covering this industry for decades at Miller Samuel, He's the president and chief executive officer, with incredible data and insight into the trends. Do we have housing shortage at this point in the big cities given that we're starting to see a little bit of interest or is there still a massive glut that needs to get filled. I actually

think it's somewhere in between. Uh So, for example, in New York, we saw since January when we had near record inventory, we've seen inventory fall about I think the way to look at urban markets around the country is

that the suburbs got all the attention. That's where the outbound migration was initially, and so I would look at the city's I'm not saying we returned exactly to normal, but clearly elevated inventory levels are coming down and we're seeing it's clearly not as tight as the suburbs are at record lows or surrounding New York and other markets

that we cover. But if we're seeing inventory really fall sharply in the cities as well, because demand purchase activity has skyrocketed from year ago levels, which was the lockdown period. But even when we compare two years ago, same period we're looking at, for example, in Manhattan, sales are up about over uh second quarter two thousand nineteen numbers. But Jonathan, that's because everybody wants a deal. Have we seen the bottom and prices or is these all the bottom feeders

coming in to try to pick up things cheap? I think the window is just about closed on that. If you look in an you know, at the aggregate numbers, you're really talking about market that's within three it's about three to five cent per cent below what it was in the same period two years ago, which would be the pre COVID sort of benchmark. And uh, but that

that is really compressing. One thing about the city cities in general, is that rental markets are generally hit much harder than purchase markets because renters are more you know, more flexible, they're not they don't have to sell a

property during a global pandemic. And what we're also seeing at the same time is in Manhattan specifically, we're seeing new leasing activity for the last three months has been at all time record levels, and so what that's doing is burning off the significant inventory and actually in some segments of the rental market. I'm not trying to be sort of sensational here, but we're actually seeing bidding wars

on rental properties starting to emerge, which is highly unusual. Jonathan, You're making me so glad resigned my lease when I did, because when I did it back in the spring, I got a couple of months off, I got my rent monthly rate lower. If I were to do that now, or if I were to try to do that now, they'd send me out the door because someone else is willing to pay more. And I live down in the financial district. It's gotten a lot busier over the past

couple of months. But are people like me where they want to live kind of close to offices, close to the places that they work, or has COVID changed that. Are we seeing the places even within the city that people want to habit eate different? Right? Right? Right? So that's a that's an excellent point. And we're actually seeing Wall Street firms, a number of the big ones basically say come back to work five days a week, uh, you know, and they're sort of, uh, sort of ahead

of the pack. Uh. One of the one of the things we have to sort out is I think we're going to have perfect callbacks for employees are going to really ratchet up beginning in September and throughout the fall, and that's going to breathe a lot of oxygen and just level retail. And right now, as I always say, we're at peaks zoom, we're really you know that everything is, everything is sort of being recalibrated. Um. One thing that really I think is a misunderstanding too, is that work

from home. That phrase implies to many work from the sub suburbs at home, and that's not true. You're going to have plenty of people working remotely, you know, a couple of days a week from the Upper East Side or you know, whatever neighborhood, just because of the sheer density of workers in the city. So Jonathan, Lisa and I are a little bit biased, and we think, you know, New York maybe is the only market that matters, because

it's the one that matters to us. But you obviously cover a lot more throughout the country, including South Florida. And we've talked a lot here in New York about the flight to Florida, to what extent has that actually taken shape, what does demand looking like down there? So Florida, just like most housing markets in the country, has a chronic lack of supply. UH. An example, UH months of supply for um UH luxury condominiums in Miami. UH two years ago was something like three to four years to

sell off. Now it's about eight months. So there's been a tremendous absorption of of all price points, but even the most problematic, which had been sort of the high end market. And I think a big reason for that.

I think the escape from New York UH sort of UM narrative is a little bit overblown because essentially, I think zoom or remote working has given perfect executives much more flexibility on where they have to be at any given time, and the way I described as the tether between work and home has become infinitely longer, So there's

a lot more flexibility. What's really different this time in Florida, and we cover about fourteen housing markets there, UH, is that, besides the low inventory, is that we're seeing an inversion of what's performing. It's skewing. Instead of softest at the top, it's actually inverted and we're seeing the upper half of any given markets. So we're seeing some big pricing in markets that we might not have seen before. So it's not just a couple of locales, it's it's a it's

a big footprint. Jonathan Miller, thank you so much for that Inside Jonathan Miller Miller Samuel, President and chief executive Officer. 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