Since yields sharply lower. U. S. Downgrade in boosted treasury auctions. We begin with a big issue, making sense of a wild week. It is a job report that has something for everybody. The u. S. Economy continues to power through. We curry whether the payroll numbers are telling we query whether the payroll numbers are telling the real story. U. S. Treasury market is not like the other bond markets. This is the year of the bond, right . You had a rich five to near part of the curve. You wonder what is the long and doing for you. It is hard to convince people to go towards the long end. Katie joining us now we have rbc play and earl davis of bmo from canadian banks which is a little bit fun. So is your own said, i will start with you. It is hard to know where to start. If you look at 10year gilts, there of 23 basis points through thursday only to fall 11 basis points today. How do you make sense of that volatility in benchmark treasury debt . Like a separate like the separate things out. You have the fundamentals and then after that, these become frothy and i think we crossed that line earlier this week. I think there are good reasons yields have moved higher and at some point you cross technical levels, volatility starts defeat on his cell. That which is higher. It is not surprising we are giving some of it back today but i expect we come out of this with higher yields overall. Katie could you quantify that . Well talk about why your yields, are we going to revisit those highs last fall . Blake possible. What will be key to seeing if we got back below the 4 level. Or we got back into the range. I think we are comfortable with the back in july with 4 being disabling. Seeing what happens this week and will reap all will be telling but i will say this whole thing started on a supply story. Thus one of the major catalyst. If you look back over that last year, yields werent really driven by what the fed is going to do the next meeting. That was responsible for the rates and i think we are moving into on the people of transitioning into a different environment where with the fed on hold, not likely to cut until mid 24, some of these other things that being on the back burner will become more important. Supply is one of those. Monday when this started to kick off, we got information from treasury that shopped markets and said that will be more supply. That is coming on the backdrop of we could demand. I think the idea that things that tend to drive bond yields is coming back and taking the volatility away from being entirely about the fed at. I think that is what we are entering into and why it is possible we hold into these higher yields for a well. Katie lets talk about supply. We got the refunding announcement and it was bigger than expected. 103 billion dollars of longerterm securities sold next week. Expectations i believe for 102 billion dollars. How much do supply matter in the worlds biggest bond market . Earl supply is one third of the equation created the other side is who is going to buy the supply. The past two years we take out two largest buyers, one of that is the federal government, through qe, we no longer have that and you take out largely the second largest buyer which is japan. They can by domestically. What happens in that environment since rates have to find a new level to clear, they have to reprice to the next marginal buyer. We believe that is that higher yields we saw at the highs of last year. Katie you have some big names coming out saying they are out right shorting the long end of the curve, bill ackman specifically here, saying on twitter, he is short and size he had a myriad of reasons but when you say rules have to reset higher from here, is there enough conviction to short this market . Earl there is one important tailwind that as to shorting the market. Because of the inverted yield curve, we are short, you make money every week when the market does not move because a native of kerry which is positive and you are short. This is not give it is a significant. Katie where did you go on the others of that . We have heard from the likes of elon musk replying to ackman on twitter. Saying tbills are nobrainer. If you do shortly long and, does that marry mary with staying in cash . Earl it makes sense to me. Cash has become a new asset class. Before we look at class as winter park, now you look at before was that cash as to where to park, now you look at it as i said. Asset. It provides you love the feds ability at a 5 rate. Katie i feel before this week or last week, the conversation around cash have been about opportunity cost. You do not want to stay in cash to long. It feels the conversation has changed. People are saying cash is in sweet spot. Where are currently on cash . Blake the yields are still attractive. If you look at how markets have taken down this bill supply, last time i was here we talked about the coming wave a bill supply, markets have done well with that. People are still interested buying cash. We have not seen these she been as much. I think there is still a lot of appetite for the cash. We have a lot of bill supply coming. We got the surprise monday, it is not just about coupon. It implies an increase in bills. More vehicles they are coming online. And that we see that she been but i think markets continue to take that down. Is that where overnight repo facility of the, it is come down. If you look at where the overnight repo facility of the fed is, it is come down. I still think that stuff stays well. Katie where is the man coming from . It is interesting hearing we have removed two biggest buyers from outright treasury bonds. Where is that demand coming from . Blake people like myself who was already 10 basis points on the bank deposit not so long ago and seen the yields thats available on the front end. Maybe it is not the bulk of your Investment Strategy but as far as getting that Additional Return and seeing the numbers we see on the money front returns at this time compared to where they have been the past few years it is not surprised people continue to move out of lower yield instruments. Were not talking about people coming out of highyield securities into bills. This coming on the Bank Deposits and other places like that. Katie weve not talked about the fed that much which is amazing to me. We really are focus on supply here. We focus on fundamentals of this economy and what what the fed will do, we have a big data point next week in the Inflation Report and if you take a look at expectations, it is for a reacceleration, at least on yearoveryear number. Lots of that comes down to base affects. What is that potentially mean for the Federal Reserve . See reacceleration dynamic the expected reacceleration dynamic to continue . Earl the central bankers do not want to hike rates. That is obvious. But i think they will hike rates. The data has shown extreme resiliency. Not just economic data, but look at Earnings Results there are coming out. There is no earnings recession. Margins are robust. That tells me even though we are restrictive, we are not restrictive enough, and that is with the what the fed is looking at. I think they want to see wait to see to hike. I think they will wait. Because that is what you get is making new high rates tens and 30 years because demand is one third, supply is one third, the one third i did not talk about is a risk premium. If the fed does not high enough, that goes into the longer term as a risk premium. That is what we are anticipating this year. Katie to your point the fed does not want to hike anymore, we heard from atlanta fed president earlier saying he sees no need to hike anymore, that the labor market is slumming. Maybe they do not want to hike anymore. But what about the Balance Sheets, quantitative tightening . Would he think the urgency of the fed is when it comes to the Balance Sheet . Earl quantitative tightening is an unknown. It is the first time we are going through this. At this point, especially because of Financial Stability concerns in the background as we saw in march, they do not want to add another unknown to the equation. I think they continue as is no matter what happens. They do not want to add an unknown or increase the financial possible instability in the background. Katie i am curious to hear your thoughts not necessarily on how many more hikes we get if any, but the question about cuts. We expect to see the first rate cut from the Federal Reserve . Blake we push them out to Second Quarter of next year. I should say the path of the botched, we do not see a sharp case of cuts, a gradual process. Not a very urgent need to get back below accommodative levels. Katie is that due to recession or just get back blake more following inflation create their going to need to counteract that as inflation falls, the real side of the yield. That look at who to go higher so they have to start pulling the rates backs of the real yield design get tighter and tighter. Katie on that real yield note come is a good place to end it. Thank you both so much. Up next, the Auction Block, wells fargo returns again for another cell. This is real yield on bloomberg. He snores like an angry rhino. Youve never heard an angry rhino. Baby i hear one every night. Every night. Okay. Ill work on that. Save up to 500 on the new sleep number® smart bed. Plus, free Home Delivery when you add an adjustable base. 76 of 23andme Health Customers surveyed shop now only at sleep number®. Reported taking healthier actions. Because they know health isnt just a future state. Health happens now. Start your dnapowered Health Journey today with personalized insights from 23andme. Katie im katie greifeld. Time now for the Auction Block where europe was quieter than here in u. S. We had another day of zero sales in the region. The whole week in total saw one deal. We have seen 23 80 days this year. In u. S. It was a different story. Wiki volume top 34 billion led by another cell from wells fargo. In high yield supply hitting 100 billion for the year jumping by over 40 yearoveryear. It is the slowest for new issuance since 2009. Cities richard says fitchs you downgrade u. S. Downgrade has i think those companies benefited because i think if you look back a few years ago we had a european prices come he saw a number of investors replace sovereigns in the portfolio with multinational corporates. You could see that happen here. Unfortunately, the group of companies is small enough that you cannot, theres only so much you can do. Katie joining us now we have blackrock made outlining amanda, most of the conversation around the u. S. Downgrade has been related to the treasury market. Reading about Corporate Credit market, what potential ripple effects could there be from that downgrade . Amanda thank you for having me. Really what we are seeing is this combination of news flow the past two weeks where it was the japanese tweak yield curve control or the double great downgrade or treasuries apart reinforcing this higher cost of capital environment that we are expecting to be front and center for the Corporate Credit market, specifically expected of great issuers that are more sensitive to those borrowing costs. As a see long entries move higher it is reinforced that view. The other interesting thing that was not talked about that much this week was the recent data on bank lending and the previous significant contraction there. One of the things we have been emphasizing is the read through the Economic Activity might not be as direct in this cycle relative to past cycles. It is been well telegraphed that Bank Lending Conditions have not been this tight except for previous recessionary episodes. The big difference between now and those part goes have been a Significant Growth of the private debt market and ability to diversify Funding Sources so we think as the contracting, continues which survey made clear it will come we think that opens up an opportunity for private debt to expand its adjustable market and increase the pricing power. Bring it back to the corporates, i really think there is not really relief insight from a cost of capital perspective so you have two pivot to what is the second what implication, it is this version and an uptick in defaults which we expect. I would say that is true even without a recession. Katie we did get the fed senior loan officer Opinion Survey on monday. That feels like a decade ago. It did show a continued tightening that credit is becoming less available. We think about investmentgrade market from a sector standpoint, where does that leave you on financials . Amanda john we think investmentgrade Corporate Market devaluations are stretched. We hit a tight last week of 112 on the index. We state right now about 119. We bounce off of 165 three different times this year. We think the market is price for perfection. The big banks are benefiting from higher rates. If you look at net interest margins and the Earnings Releases this past cycle, they all show a certificate of take. Significant uptick. I met with one of the largest banks in spain recently and they are paying zero Interest Rate on 40 of their deposits. Despite what we heard the regional banks and Silicon Valley situation, banks are still paying significantly lower than they can earn the fed. You are seeing that flow through to net interest markets. Katie and money market mutual funds which are at another alltime high in terms of assets. Amanda you midget you see it as a tailwind for private credit mentioned you see it as a tailwind for private credit. How big of the market get . Amanda the Global Market is 1. 5 trillion, slightly larger than u. S. Highyield bond index and the u. S. Leverage loan index. There is significant scope for growth on that market we think one because of the opportunity to expand the adjustable market we outlined. When you think about and using data from investor allocation to private debt, relative to more mature Asset Classes like private equity, there is probably scope for private debt allocation to grow. We think about investors that do asset liability matching and are looking for longterm investment , think insurance companies, pensions, and almonds. We expect a Significant Growth back drop. In the near term is probably most interesting or Corporate Credit investors is that in this backdrop of elevated inflation, the fed perhaps not being in a rush to cut rates, we agree with that. In the environment we have higher cost of capital, perhaps below trend growth, a challenging growth inflation policy makes, you want to protect yourself with structural protections and credit selection in an environment where defaults are picking up brightly bro adly. Private debt public this is self well to introduce the granular elite into the portfolios. Katie potentially the starts aligning for the private debt market but i want to go back to the Corporate Credit market. When you look at overall investmentgrade and highyield spreads there is not been a lot of action. Volatility is low which is striking his own but you consider the treasury market, which is in a basket case. When this volatility returned to credit markets . John credit markets are dependent on the quiddity. Look at the growth of the investmentgrade market, it has grown fivefold since 2006. Look at Balance Sheet provided by Market Makers they have shrunk and in that time so when you hit the ability to see spike in spreads. You can see it on the graph. More liquid products like treasuries and mortgages tend not to see that i am volatility because it is a Higher Quality asset tend not to see that heightened causality because it is a Higher Quality asset. That is a part of the reason we feel at 120 on the index youre not getting paid for the risk of that type of liquidity event you can see in marketplace. Katie we have about one minute left. You have seen the dynamics flipped a bit where the treasury asset class is more volatile than Corporate Credit. Does that potentially make high Quality Company dead a better hedge they treasuries . Amanda i think for the corporate sector, the most important thing is this upcoming wall of maturities and the refinancing risk of the needs to get flowed through. High yield spreads in particular have been snug, relative to the volatility we have seen in other Asset Classes and we think the very low supply figures have been a big part of that. You noted we see an uptick in supply but from the Historical Context supply is light and 2022 was a record low level. Theres been a drought in supply. The one thing i think is important for Corporate Credit investors is in leverage loan market the higher finance because rb relies immediately because borrowing costs financing cost be relies immediately. We expect that to flow through ns those borrowing calls flow through maturities move closer you see more volatility in highyield spreads. Katie thank you both so much. Still ahead the final sprint to come of the week ahead, key inflation print on deck. This is really yield on bloomberg. From unitedhealthcare. And how a plan like this helps you take charge of your health care with lower outofpocket costs. Heres why. Medicare alone doesnt pay for everything. 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