Surveillance: Yield Correction With Caron

what are we doing back up near one fifty? Well, good morning, thank you for having me on your show. Look, I think there's a couple of things that are going on. One of them is very technical. One of the reasons why yields were so low was because the Treasury General account had been drawn down so much. Now that's really technical speak for saying that there wasn't a lot of net issuance of US treasure reads over the last couple

of months. In fact, nearly zero net issuance. Today, all of that is starting to change a lot of things are changing right now that are leading to higher yields. Number One, now we're start going to start to get net positive supply, so more positive net supply is coming to the markets. That and the fact that we're getting closer to a deal on the deficit, then the question becomes is it going to be I'm sorry, a deal on the infrastructure bill? And the question then becomes is

it going to be deficit financed? So that's another argument for higher debt into the future. The third point is tapering. The FED is announced pretty aggressively. It seems like at the September FOMC last week that probably by December they're gonna start tapering. So all of the factors that we're keeping yields lower in the second quarter and for part of the third quarter are now starting to run in reverse,

and you're seeing yields start to move higher. Not to mention that energy prices are moving up and even some of the COVID cases are are on the decline. We could be setting ourselves up for a much stronger, much awaited for fourth quarter, and all of this is pushing treasury yields higher. And it makes sense. Yeah, Jim Carren. When you're on the Gorman Gulf Stream, you're flying at thirty two thou feet and you're looking down in the yield market, What is the ten uere yield where you

signal shift or you signal trip point. We're in a one seven, maybe one fifty, But what's the level where you go things have changed. I think we're past that. I think it's around one forty. The fact that we've gotten a back above one forty is telling us that

the correction lower in yields is over with. We have to start thinking about yields progressing up back towards the March thirty one highs around one seventy five, even up to one eight percent, and it's even possible that you could start to even test two percent by end of this year beginning of next year. I think it would be hard to get above two percent and stay there, but I think that's the trajectory that we're on, and the fact that many people have squared up most of

their positions. I would say the market's not overly short, so the technicals are are suggesting that you could actually get a push higher. So Tom, I think that we've already tripped that switch, and that we're already in the mode to get towards higher yields. Plus all the supply that's coming. Jim you talked about higher oil prices. We also talk about supply chain disruptions. Are these events Are

these appearances inflationary or disinflationary? Lisa, Absolutely, It's is a great it is a great point, and I'm glad we're

talking about this. This is inflationary. Um, what we're going to see our rolling supply shortages and so so yes, you know, one day it might be one thing, another day it could be natural gas, another day it could be oil, and and you're gonna start to see this just on a rolling basis going forward as the supply chains are getting readjusted, and then when price gets too high, demand will fall that ass price will come down and it will be another asset, commodity assets turned to start

to move higher. So I think this is getting embedded importantly into the psychology of consumers, that prices are going to stay perpetually high. That doesn't mean that we have runaway inflation. It just means it's going to be harder to get below two percent inflation. So now think about this. Even the people say the Fed was hawkish, the median dot in was at one point seven five for the

FED funds rate. But inflation is supposed to is supposed to be between two and two and a half percent, or at least it's being expected to be between two and two and a percent, which means that the real Fed funds rate is still going to be minus twenty five to minus fifty basis points. This is still very accommodative uh FED policy at the current moment. There's nothing hawkish about this. So, Jim, let's put all this together.

When you say it's hand to get below two percent on inflation, just explain to us and accountli of lines why it's difficult to get up one night s eight on a tenure yield. Well, well, for right now, we are still doing quantitative easing, so there is still some asset purchases that are going through. Bond yields around the world. Although they are starting to rise, we're seeing that in Europe are still very very low. So I think that there is an interest rate differential and then it will

come back down to the dollar. Dollar appreciation um At least in the near term. You could see some dollar appreciation that would keep foreign investors interested in the U. S. Treasury market, but that I think is a cycle. Tom. I'm a long term dollar bear. Eventually, these deficits and everything else that's going to catch up to the dollar,

and that's gonna push it lower. And foreign investors, which the US demand you know, relies on heavily for demand, is is going to require higher yields to indice entice foreign investors to come in and buy US treasuries. Jim, thank you, sir as all wise and have a good week. Jim Cannon, that of more can standing investment management of fixed income pull folio manager. We've got to start with a fantastic guest this morning, Jean Parvan, head of the

black Rock Investment Institute. John, you've got this framework, the new nominal, and allow you to explain that in just a moment, the conversation we're having once we start raising interest rates in America maybe the back end of next year. Who knows, Sean, I can't predict next year. How steep will that policy path be, How shallow will it be, How loose will any potential tiening be? The answer to that, John, I think it's gonna be the shallow as we've seen

in decades. Um. You know, we have to go back to maybe the fifties and the sixties to see the same kind of shadow pad as I think we're going to see so nothing of the you know, recent cycle. I think is is a guide much shadower, and I think we've seen more, much more, you know, ongoing evidence that they are, you know, on the slow path. I think they've been very deliberate to try to separate the taper discussion last week from from the liftoff and from

from what it's work. We cannot predict wate, we need two. But I think it's a eight twenty three story. The first rate hike jump a black rock in your team unabashedly say your pro risk I mean, you mean snow words about it. How do these changes, the worry worry, worry out there affect corporate thinking with a higher yield regime, with steepening of the curb and on and on, how does pro risk come over the corporate action? Yeah, so the pet had for for you know, equities and risk

assess break higher is getting narrower. So I mean, I just want I want to college that. And after a streak, I mean, you look at the chart of the smps you start in general, and you look at it and there's no way you can tell them in the pandemic. So, I mean this does race question. I think we're gonna be an environment where markets will be more primed to

look at risk and maybe more natility. But in that environment, we still think that the fundamentals are constructive for for the time being, and as a result, we would you know, look through that. That's where the pro risk on a

bashing version is coming from. How concerned are you about what's going on in China with respect to not only the scrutiny of the tech companies, but also what some people are calling an increasing energy crisis, especially as the regulators try to clamp down on fossil fuel usage ahead of the Olympics. Yeah, so I think, I mean broader story and in China is that you know, the direction of travel towards UH, a greater role of social objective

politics over economics is is unmistakable. Um, it's playing out and I think we should we should all acknowledge that it changes the lens eens of investment. However, Um, you know, we've seen a very steep decline activity throughout the course of one I mean, you know from earlier this year to queue Ford is going to look so for as far as we're concerned. So that's a pretty seem decline, and even a country that is, you know, on the path to put other objectives in front um, I think

they cannot ignore this weakening growth. So that makes us you know, we've been neutral on Chinese equities for for for the last few months, but we start to think now that it's time to dip our toe back or start to dip our though in the Chinese equities, given that you know, we see some easing of the various palty tools over the next few months. Can you elaborate on dipping your toe back into Chinese equities? Where do you see a sort of a safe place to park

amid still a lot of ongoing on certainty. I should I should qualify the back because we've just broken out the Chinese equities as a as a stem alone asset class for the first time in June or Minion outlooks, so I mean, there's no bad aspects. So but we're dipping our toes in the sense that you know, you've seen on the performance of the Chinese equities over US

equities for good reasons. That's where we were neutral. But at the same time, that's a pretty the gap as has been pretty material in terms of the two regions. And while there's a lot of uncertainty, I mean that means the recipium has increased quite considerably. And now I

think it's the time to think about opportunities reappearing. I'm thinking about the broad market exposures here as opposed to specific and um But that broad market explosure, that broad market story, I think is a repriced quite a bit. John just quickly find a question, how do you reconcile your bond market call, your federal reserve call with where you want to own in the equity market domestically here

in America. So we think the bad market call. Just to clarify, as we think rates on the way way up on the ten uere We've been like increasing our underweight US treasuries over the course of the last few months. Our conviction has not waned, despite the fact that it has been stubbornly low over the course of the last few months. But we think that the direction is up.

That said, it's in the context to go back where we started, where we're going to see a very shallow normalization of policy rate in the US and as a result, and some more inflation coming. But this combination of an inflation coming through with very oh rate um, it's it's um.

It's a real rate environment that's very negative and contin used to be and that will be um you know, supportive of of equity or risk ascid even the U S. We're neutral on US equity though, just to be clear, uh and I think that's more coming from this the juncture, the fiscal policy landscape on the tax front, that ceiling. Uh and and we're gonna we're gonna hear more this week. We want to just right there, just I want to make that clear. You care about the dead ceiling. We

think there's headline restaurant the dead ceiling. Ultimately, we put out a note last week where we say, uh, you know, there's gonna be noise. The market is prone to be reacting to noise and this juncture, like we said, but we will advise looking through. But the headline risk is there. But again we haven't certainly around the how big this package will be. As a result, we haven't certainly around corporate taxes and the like. And that's a neutral the

neutral sense on US equity. Joan, thank you, Jean Bavan. There of blank Rock the Investment Institute had right now joining us on a political moment and what it means for economics financial investment. Gregory Vellier joins us with a g F Investments always a stude on the moment a hand, Greg, I am dumbfounded by Democrats taking a victory now like it was sixty four sixty five and the resounding win of L. B. J Lyndon Baines Johnson off of the

assassination of JFK took sixtent of the vote. Biden took fifty one point three percent of the vote. How much of a majority does the president have to ram through this set of legislative pieces. He doesn't have much, Tom. I think that that is one of the big realizations over the last weekend. Nancy Pelosi, of all people, said that we're not going to be at three point five trillion. That was a big concession in my opinion. And then she threw out another concession, Tom, and that is that

we're not going to have a government shutdown. At the end of this week. They'll do an extension. So those two thinks make me a little more up to stick. And I'm not euphoric, but I think the chances of a major crisis are still remote. And then one final point, I urge everyone to read the Wall Street Journal piece on the Fed's tools. If we were to have a debt real debt crisis and a default crisis, the FED has options. They can sell some of their treasuries, they

can buy defaulting treasuries. So this this is a serious story, but it's not an apocalyptic story. Greg, very importantly, do you sense negotiations that are normal, that they have a give and take and a back and forth among well meaning politicians. No, I don't see it yet. I think that there's a lot of anger at Mitch McConnell because the Republicans spent like drunken sailors for four years with tax cuts and a lot of spending. I think there's a lot of resentment toward him right now. Frankly, I

think the negotiations that really matter are among Democrats. You still got to get a full of very important moderates on board. That's coming, But I think a deal with Republicans comes later in the fall. Greg, you mentioned this Nick Timorrow story in the Walster Tournal. Let's go there. This idea that the FED could be thrust once again, it's the political spotlight actually taking a role in trying

to stave off a political default. How much is this a risk for the Federal Reserve that when Congress stalls out and can't get stuff done, the Federal Reserve has to sort of be left holding the bag and takes a lot of heat as a result on all sides. Yeah, Lisa, it's a good point. They dread this. They don't want to get an image of being the you know, the lender of last resort. Uh And I think they would

make it clear this is an exception. But you read the piece that they've been there before, they've considered these options. There's a lot of controversy with them, including some of the active traders at the FED, and now there's going to be controversy over this. Well, you know, that's just the way things are right now. It's a very controversial, dysfunctional period and w it's the way things are, especially at a time when FED Chair J. Powell is up

for the potential renomination by Jerome by President Biden. There's a question though here how much inflation is starting to concern Democrats more than it had previously, and perhaps this is one of the reasons for some of the concessions the Nancy Pelosi made. Do you really feel like that's the case? Yeah, I think that more and more voters around the country are linking together higher prices and big spending.

I'm not sure the correlation is there, but the voters believe that, and as long as they do, I think at price tag like three point five trillion is just too rich. Greg I was looking at ed case of Hawaii. It's a hugely democratic state, and he is clearly a moderate Democrat as well. What does Speaker Pelosi have to offer moderates blue dogs like Ed case of Hawaii, Well, not a lot to on That's that's one of the problems here. Maybe she's gonna for him a better chance

of getting reelected. An awful lot of Democrats I talked to, or their staffs anyway, are saying they're scared about. The issue is not will the Republicans win the House? The issue is by how much? Will they win the House by ten, twelve, fifteen, twenty seats. When you start talking about numbers like that, a lot of people, like the gentleman from Hawaii run for cover. So just before we let you go, you said that three and a half

trillion dollar plan is a pipe geam. Even Nancy Pelosi said that what are you seeing in terms of what the likely bill will look like in terms of size and in terms of taxes, well under two. But there's so many gimmicks. Some of these programs are five years, some or seven, some of ten. Some will expire and then get shoved shoved off to the States. There's a lot of gimmickry. But I think that let's say something more around two is far more likely, and it's not

him if investments. Gregg, thank you on the week ahead and beyond. We have a rare treat right now. We'll get right to a Lloyd Miner is one of the most different physicians I know out there. He has someone with world class first order research on the balance of the ear. He has taken that over to medicine and the management of hospitals and all among other things that Johns Hopkins a residency at Duke a few years ago in olds Court and Palo Alto. Right now, what's your

biggest headache right now? Dean? I think our biggest concern right now is to make sure that we continue to provide outstanding healthcare, that we take care of our students eighteen thousand students back on our campus, and that we comply with the federal mandate that the Biden administration is issued with regard to the vaccine mandate. What is your strategy with your unvaccinated staff. Well, first time we have a highly vaccinated it's between within your hospitals, within our hospitals, yes,

and and around the university. It's similar. I mean, we're still gathering that information. We want to make sure that that we're providing those who wish to apply for a religious or medical exemption, that we provide the avenue to you know, issue that application and have it reviewed. But we know that these vaccinations are among the safest and most effective vaccinations ever developed. We want to make sure that we answer any questions people have and ultimately get

a fully vaccinated workforce. Meanwhile, Dr Minor over in New York State, there is a mandate that healthcare workers get vaccinated and actually the governor and Kathy Hokel has said that she may bring in the National Guard to fill empty healthcare rules once this mandate goes into effect, which is this week. What do you make of all this? It's really important that our healthcare organizations, hospitals, clinics be

able to continue to provide outstanding care. You know, the real tragedy early on in the pandemic was in places like New York where the healthcare workforce became overwhelmed. We had too many patients overwhelming our facilities and our workforce. So I think having skilled, trained healthcare personnel, and if that's the National Guard, uh, then then perhaps that's appropriately making sure we continue to provide care to patients when they need it by skilled personnel is going to be

really important. Dr Dr Miner. If there are people who doubt the efficacy or doubt the potential risks of the vaccine, what does it send them in terms of messaging that a lot of healthcare workers are not getting vaccinated themselves. I think it's a difficult message and uh and one that concerns me a lot. We we have a highly vaccinated healthcare workforce where we are, and I think that's

true across most areas of the country. It's the pandemic has been overwhelming and overwhelming experience for all of us. But I think the steps at the FDA, the c d C have taken to ensure the safety and efficacy of these vaccines are remarkable, and we need to do the best job we can in healthcare to communicate that message so that more people feel reassured and get vaccinated. Our listeners are viewers have to be confused by the cacophony of politics. F D a federal this maybe world

health organization, but certainly c DC. What's your desire for c DC and Washington officials to get on the same page, Tom, I think it's really important that that federal agencies UH and the FDA and CDC in particular are aligned, and I think Dr Willinsky. Director Willinsky of course ultimately issued a ruling aligning the CDC recommendations pretty much with the FDA recommendations. But there was, as you described, there was a lot of back and forth with the advisory committee.

It's important to have advisory committees. They represent a diversity of opinions and areas of expertise. But at the end of the day, it's up to the leaders to make sure the alignments. There is this one off like is this something new for you with all of your decades of experience, or is this sort of the way the sausage is made within the vaccine bacteria community. Well, COVID is certainly one off for all of us. But and I think ordinarily Tom these disagreements do exist in a

healthy way between regulatory agencies. But we're in the midst of a huge crisis, and so alignment and coordination is particularly important getting us through this crisis. Dr Monner, there was a study that came out of Oxford University that came out this morning that said that American men lost more than two years of lifespan as a result of the COVID pandemic. When we look back on this period,

what will be the healthcare legacy of the COVID pandemic. Well, I hope the legacy will be how we responded as a as a nation and how we responded as a healthcare community. Certainly, there are many aspects of that response that we wish were different, but I think we've all

learned a lot and are learning a lot. I am just so proud every day to work with an amazing group of dedicated healthcare professionals where I am at Stanford, and I would say that about really healthcare workers around the country and supporting our healthcare workforce during these trying times is going to be particularly important as we all

get through this together. Just a Miner, thank you so much for joining Bloomberg today, and you're greatly greatly appreciate that Lloyd Miner has been with us many many times year across the arc of this pandemic. And we look for further conversations of course Stanford University School of Medicine, Diana as well. 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 Bloomer