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Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.

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Speaker 2: Welcome to the Daybreak Asia podcast. I'm Doug Krisner. On Monday,

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Speaker 2: in the US, President Trump and Israeli Prime Minister Netanyahu

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Speaker 2: said they agreed to a twenty point plan designed to

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Speaker 2: end the war in Gaza. Now, this plan stipulates that

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Speaker 2: the conflict would end immediately if accepted by both Israel

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Speaker 2: and Hamas. Here's President Trump.

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Speaker 3: Working with the new transitional authority in Gaza. All parties

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Speaker 3: will agree on a timeline for Israeli forces to withdraw

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Speaker 3: in phases. Will be withdrawing in phasis, no more shooting. Hopefully,

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Speaker 3: as progress is made toward achieving these goals, Arab and

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Speaker 3: Muslim nations need to be allowed the chance to fulfill

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Speaker 3: these commitments of dealing with hamas they have to deal

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Speaker 3: with them.

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Speaker 2: In a moment, we'll get some analysis on this plan

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Speaker 2: from Kirsten Fontenrow of Red six International. But let's begin

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Speaker 2: in the States and the threat of a government shutdown.

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Speaker 2: Congressional leaders showed no signs of progress toward a deal

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Speaker 2: on a short term spending bill that after a meeting

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Speaker 2: late Monday with President Trump. So government funding is set

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Speaker 2: to expire at twelve oh one am on Wednesday, unless

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Speaker 2: Congress passes a short term spending bill. For a closer

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Speaker 2: look now at what a potential shutdown means for markets,

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Speaker 2: I'm joined by Bill Campbell. He is Global bond portfolio

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Speaker 2: manager at Double Line. Bill, thank you so much for

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Speaker 2: making time to chat with me. I'd like to start

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Speaker 2: if we can with the government shutdown that seems imminent

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Speaker 2: here in the United States. We have government funding set

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Speaker 2: to expire at twelve oh one am Wednesday, unless Congress

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Speaker 2: passes a short term spending bill. I saw yields come

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Speaker 2: in a little bit today, more so at the long end.

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Speaker 2: Is the bond market sensing a little bit of risk here?

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Speaker 4: Do you think?

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Speaker 5: Well? I think that.

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Speaker 4: We're all watching with anticipate, patient to see if we

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Speaker 4: can get a short term continuing resolution passed. I think

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Speaker 4: that the real question here. In the past, we have

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Speaker 4: seen eleventh hour deals, We've seen relatively short government shutdowns,

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Speaker 4: but they've come at times maybe when we haven't had

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Speaker 4: such large budget deficits or.

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Speaker 5: Debt to GDP issues.

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Speaker 4: My biggest concern, despite the move today, where you're going

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Speaker 4: to get an initial if we get a shutdown, I

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Speaker 4: think you might get an initial flight to safety response,

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Speaker 4: but the duration of this shutdown needs to be watched closely,

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Speaker 4: and if it extends through through this week out a

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Speaker 4: couple of weeks, I think there are going to be

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Speaker 4: some real questions that investors are going to have in

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Speaker 4: their minds about, you know, the quality of policymaking in

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Speaker 4: the United States. More specifically, there's going to be a

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Speaker 4: delay in the employment report, which obviously is key right

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Speaker 4: now to markets to focus on for a downshift in

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Speaker 4: the labor market. But one item that I'm catching on

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Speaker 4: that that's on my radar for you know, the government

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Speaker 4: shutdown risk is a delay potentially in the CPI numbers.

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Speaker 4: And obviously inflation is the other important component for the FED,

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Speaker 4: but for the tips market, if we don't get the

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Speaker 4: September inflation numbers in time, there's a technical procedure whereby

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Speaker 4: we would look at the last inflation print, annualize the

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Speaker 4: growth rate, and use that for pricing out and paying

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Speaker 4: the inflation component of you know, the tips payout. But

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Speaker 4: I feel that this is going to raise concerns about

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Speaker 4: the outlook for policymaking in general and bring eyes back

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Speaker 4: to one the trajectory of US fiscal policy, and two,

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Speaker 4: the trajectory of the pressure that's being put on the

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Speaker 4: FED around monetary policy, and do they have the appropriate

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Speaker 4: data to be navigating what is now becoming a much

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Speaker 4: more difficult decision on how much to lower interest rates.

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Speaker 2: We heard today from the head of the New York Fed,

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Speaker 2: John Williams. He was saying inflation risk have receded while

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Speaker 2: those for employment have moved up, and he said the

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Speaker 2: risk to employment and inflation are kind of more aligned,

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Speaker 2: or at least closer together, and therefore it's sensible now

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Speaker 2: to lower interest rates. Do you think he's underestimating the

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Speaker 2: potential for inflation in that statement.

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Speaker 4: Well, I think there is a diverse view of opinion,

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Speaker 4: And when you look at Governor Hammick, she said almost

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Speaker 4: the opposite, that inflation has missed to the upside for

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Speaker 4: the past four and a half years, and in her

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Speaker 4: modeling she thinks inflation could continue to be above the

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Speaker 4: Fed's two percent inflation target out to twenty twenty eight.

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Speaker 4: So I think that there is a lot What I

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Speaker 4: can say is there's a lot of uncertainty about the

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Speaker 4: outlook for inflation that has gone up. We've obviously gone

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Speaker 4: through the inflation spike we had a couple of years ago,

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Speaker 4: and now we have the unknown impacts due to tariffs

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Speaker 4: and changing trade policy that makes the outlook more unclear.

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Speaker 4: So when the outlook's unclear, we need more data, and

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Speaker 4: we need real time data in order to be able

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Speaker 4: to make the right decisions, and the Fed obviously needs

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Speaker 4: that data as well. It's my concern that if we

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Speaker 4: decide that the government is going to be shut down

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Speaker 4: for an extended period of time this time around, that

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Speaker 4: might actually, after the initial concerns that it could slow

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Speaker 4: growth maybe on the margin that helped yields rally just

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Speaker 4: a little bit today, that could actually build term premium

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Speaker 4: back up in the long end of the curve. So

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Speaker 4: those concerns that we don't have the data that we

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Speaker 4: need and that there's more uncertainty rising about the outlook

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Speaker 4: for inflation, I think that has the risk of keeping

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Speaker 4: longer and yields elevated. Which despite the rally that we've

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Speaker 4: seen over the past month, if you look at the

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Speaker 4: long bond, it's still up just under five percent around

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Speaker 4: four seventy, But the likelihood that it stays at the

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Speaker 4: upper end of its range or pushes higher over the

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Speaker 4: next couple of quarters is a big risk, and I

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Speaker 4: think is only complicated by these issues that we're facing today,

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Speaker 4: both on inflation uncertainty and where the US fiscal trajectory is.

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Speaker 2: Going day with the inflation point for a moment or

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Speaker 2: two last week at the end of the week, we

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Speaker 2: had a pretty tame reading on core personal consumption expenditures,

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Speaker 2: which obviously is the Fed's preferred measure of inflation. We

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Speaker 2: have a Bloomberg big Take piece today talking about AI

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Speaker 2: data centers are sending power bills soaring. Wholesale electricity cost

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Speaker 2: are as much as two hundred and sixty seven percent

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Speaker 2: greater than they were five years ago in areas where

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Speaker 2: we're finding these data centers being constructed and those costs

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Speaker 2: now are being passed on to consumers and I would

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Speaker 2: imagine businesses in those jurisdictions. Is there a lot more

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Speaker 2: about the inflation story that we have really yet to

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Speaker 2: grapple with. And then, kind of as another point, you

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Speaker 2: were talking about yields backing up at the long end,

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Speaker 2: and I'm wondering whether we could get to four and

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Speaker 2: a half on the ten year in no time.

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Speaker 4: Yeah, So let's take those in the order that you

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Speaker 4: presented them. On the inflation side, one of the surprising

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Speaker 4: elements I think is that services inflation has remained relatively

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Speaker 4: sticky and continues to do so. I think that on

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Speaker 4: the good side, we have seen fairly moderate goods inflation.

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Speaker 4: But I would caution that I think the tariff passed

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Speaker 4: through story was initially anticipated to be a quick, one

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Speaker 4: off spike, a one off adjustment that then would be

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Speaker 4: corrected quickly. In fact, when we look at the Fed's

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Speaker 4: Beige Book, we see that many companies are talking about

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Speaker 4: the inability to raise prices too quickly, but the intention

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Speaker 4: to raise prices over the course of the next twelve months.

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Speaker 4: So I think that with sticky services inflation and the

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Speaker 4: potential that we could have a steady rise in goods inflation.

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Speaker 4: And then if we have any type of exogenous event,

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Speaker 4: like you point to an energy spike, whether due to

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Speaker 4: the data centers, a geopolitical event, or something that we're

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Speaker 4: just not anticipating, all of those present real risks to

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Speaker 4: inflation moving higher. I think that given markets trade on uncertainty, right,

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Speaker 4: so we both have point estimates, but we put a

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Speaker 4: band around those point estimates based on how confident we are,

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Speaker 4: and compared to the last two decades, I think one

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Speaker 4: thing we can easily say is those confidence bands have widened,

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Speaker 4: and I think that that demands an extra premium in

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Speaker 4: and of itself, and it's going to continue to demand

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Speaker 4: an extra premium. So it's my belief that we are

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Speaker 4: going to see over time in upward pressure on interest rates.

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Speaker 4: Whether we're going to see that the tenure hit four

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Speaker 4: fifty in the next week or so, you know, I

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Speaker 4: think that that is anybody's guess. Whether we in a

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Speaker 4: in a cycle where the FED is likely, you know,

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Speaker 4: cutting at twenty five basis point clips and maybe slowing

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Speaker 4: the pace after this year is over, that we have

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Speaker 4: a backup to four p fifty on the tenure, I

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Speaker 4: think is highly likely and highly probable.

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Speaker 2: I was struck by a story in the Wall Street

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Speaker 2: Journal recently about how Microsoft has lower borrowing costs than

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Speaker 2: the US government. We're talking about corporate bronze rated triple A.

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Speaker 2: Is that where you're focused right now and looking for

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Speaker 2: opportunities in the credit space.

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Speaker 4: Well, interestingly enough, yes, we are looking at you know,

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Speaker 4: shorter dated credit, you know, in higher quality credit. We

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Speaker 4: find we're finding some opportunities in the corporate sector. We

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Speaker 4: also are finding a lot of opportunities in the structured

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Speaker 4: product sector where we can get short duration assets with

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Speaker 4: higher yields somewhat in some cases significantly higher. Then you

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Speaker 4: get on the US Treasury bond market, and then you

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Speaker 4: get your cash returned to you over the course of

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Speaker 4: the next year or two. But one of the more

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Speaker 4: interesting plays for those who have a little bit who

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Speaker 4: have capacity to take a little bit more risk, is

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Speaker 4: we've been allocating to non dollar fixed income assets, more

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Speaker 4: specifically emerging market local currency bonds, and the idea there

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Speaker 4: is that we're having several factors that have both caused

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Speaker 4: the dollar to devalue this year and are likely to

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Speaker 4: keep pressure on the dollar going forward, and with a

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Speaker 4: FED cutting into not what is a recession and not

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Speaker 4: what is a current economic emergency, that likely is going

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Speaker 4: to extend the near term economic runway. We think that

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Speaker 4: the one sector in the global fixed income market that's

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Speaker 4: been under allocated to, you know, has been em local

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Speaker 4: fixed income and in many cases we're picking up high

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Speaker 4: single to load double digit yields and we're getting currency

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Speaker 4: appreciation on the back of it, so we're blending. It

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Speaker 4: depends on the specific strategy, but we're trying to blend

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Speaker 4: shorter duration where we're investing between the front end to

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Speaker 4: the belly and the treasury market, shorter duration, high quality credit,

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Speaker 4: and then we're adding, you know, in the strategies that

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Speaker 4: can take a little bit more risk the em local trade.

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Speaker 2: I'm wondering whether or not there's a conversation at double

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Speaker 2: line that has to do with a potential pullback in

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Speaker 2: the equity market and how money may get moved from

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Speaker 2: stocks into the bond space, and maybe you could see

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Speaker 2: some opportunity is for short term capital gains in certain

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Speaker 2: parts of the bond market. Is that something that you

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Speaker 2: guys are talking about.

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Speaker 4: I think that if you had a short a larger correction,

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Speaker 4: near term correction in the equity market, I think the

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Speaker 4: front end of the yield curve would respond, the front

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Speaker 4: end to the belly of the yield curve would respond

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Speaker 4: more than the long end. My concern is that, similar

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Speaker 4: to what we saw after Liberation Day, I think that

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Speaker 4: many international investors are watching very carefully their exposures to

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Speaker 4: the US, and I'm thinking that it's more likely that

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Speaker 4: if you get a equity correction in the US, some

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Speaker 4: of that money right now, it stands at about sixty

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Speaker 4: trillion of foreign savings that sits in the US could

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Speaker 4: get repatriated out of US markets back into home markets internationally.

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Speaker 4: I think that that would, you know, support a little

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Speaker 4: bit of a lower dollar trade, which is different than

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Speaker 4: what we've seen in equity corrections prior to this year,

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Speaker 4: but it is in line with what we've seen with

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Speaker 4: the equity correction around Liberation Day or at the beginning

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Speaker 4: of this Trump administration. So I think that we still

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Speaker 4: remain cautious even in that scenario of flight to quality

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Speaker 4: on the long end of the curve. We think that

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Speaker 4: fiscal issues and inflation uncertainty and this over owning by

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Speaker 4: the international community that may have an itchy trigger finger

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Speaker 4: keep risks on the long end of the yield curve

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Speaker 4: out more towards the thirty year sector. But the front

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Speaker 4: end of the belly still will have those risk aversion

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Speaker 4: flight to safety qualities. But this time around high quality

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Speaker 4: fixed income assets internationally, you know, may have the ben

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Speaker 4: fit that the dollar may not go up in this

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Speaker 4: next equity correction but may actually go down.

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Speaker 2: Bill will leave it there. It's always a pleasure, thank you,

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Speaker 2: So very much a Bill Campbell there. He is Global

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Speaker 2: bond portfolio manager at Double Line. Joining us here on

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Speaker 2: the Daybreak Asia podcast. Welcome back to the Daybreak Asia Podcast.

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Speaker 2: I'm deg Prisner. On Monday, President Trump unveiled a plan

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Speaker 2: for a ceasefire in Gaza. It was framed as a

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Speaker 2: landmark deal to bring peace after two years of catastrophic violence.

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Speaker 2: Standing alongside Israeli Prime Minister Neknyahoo, Trump unveiled a proposal

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Speaker 2: which both men had agreed to and if it's agreed

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Speaker 2: to by Israel and Hamas, this proposal would end war

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Speaker 2: in Gaza and free the remaining hostages. For more, we

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Speaker 2: heard from Kirsten Fontenrose, president of Red six International. She

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Speaker 2: spoke with Bloomberg TV host Sherry On in April on

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Speaker 2: the Asia trade.

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Speaker 5: I think we should expect Hamas to be spoilers. Initially.

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Speaker 5: They tend to follow a playbook.

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Speaker 6: Where they will participate in negotiations and then put new

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Speaker 6: demands on the table right before this is final. But

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Speaker 6: in this case, they're seeing a unified voice from the

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Speaker 6: Arab States, which is a little bit surprising and really impressive,

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Speaker 6: that will pressure them to accept these conditions, accept as plan,

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Speaker 6: so it'll be more pressure than they've seen previously. I

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Speaker 6: think they'll also listen to President Trump's words saying that

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Speaker 6: if they do not agree to this plan that has

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Speaker 6: received eight Arab and Muslim states input as well as

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Speaker 6: Israel's input, that if the plan falls apart because of

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Speaker 6: their non compliance, then Israel would have his full backing

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Speaker 6: to finish the job of destroying the threat of Hamas

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Speaker 6: inside Gaza. So they will be thinking about taking that

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Speaker 6: seriously about what an unleashed Israeli defense forces with no

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Speaker 6: US reigning the men would look like if they chose

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Speaker 6: to say no to this one chance for the war

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Speaker 6: to stop immediately.

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Speaker 7: It does seem quite a positive development as you raise

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Speaker 7: that you're seeing that unity among Gulf states in backing

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Speaker 7: this plan. How do you see the role of the

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Speaker 7: Qataris in a potential implementation as crucial to this plan

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Speaker 7: actually walking out?

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Speaker 5: They will be crucial as well.

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Speaker 6: Frankly every other state that was involved in this conversation,

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Speaker 6: perhaps with the omission of one or two. But remember

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Speaker 6: you saw eight Arab and Muslim states here, So Kada

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Speaker 6: will be critical in bringing Hamas around to this, and

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Speaker 6: Kada will be going to them with a message saying

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Speaker 6: We're not here to get your demands anymore.

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Speaker 5: We're not here to go back and forth. This is

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Speaker 5: on the table.

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Speaker 6: All the Arab states are aligned, and plus Turkey, plus

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Speaker 6: Indonesia plus Pakistan, you literally don't have anyone who is

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Speaker 6: going to have your back in negotiations should you choose

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Speaker 6: to turn this down. So Kada will be delivering a

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Speaker 6: tough message. But then you have Indonesians offering to send troops.

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Speaker 6: You have several states that will be called to provide training,

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Speaker 6: like Egypt and Jordan for Palestinian police forces. You'll have

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Speaker 6: funding for redevelopment coming from other parts of the Golf.

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Speaker 5: So each one of these states is playing a role.

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Speaker 1: You know, it was interesting how President Trump set up

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Speaker 1: that phone call between Prime Minister Nadanahu and the Katari

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Speaker 1: Prime minister, given of course, that attack on Doha that

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Speaker 1: did not sit well for the Middle Eastern state. But

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Speaker 1: what do we think about the increasing isolation of Israel

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Speaker 1: despite the fact that Hamas may be backed into a

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Speaker 1: corner because of this cooperation and understanding between Golf states

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Speaker 1: and the plan that President Trump has in place, the

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Speaker 1: fact that Israel continues to be isolated on the international

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Speaker 1: stage and is receiving a lot of criticism. Will they

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Speaker 1: have the bandwidth to go against Hamas if this seal

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Speaker 1: is rejected, They would.

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Speaker 5: Have the bandwidth militarily, but would they have the bandwidth

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Speaker 5: in terms of international goodwill? Likely not.

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Speaker 6: This may be doing Prime Minister Natanyahu a little bit

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Speaker 6: of a favor because while he is the face of

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Speaker 6: this policy, a lot of the preference for a hard

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Speaker 6: line military operation are coming from right wing factions within

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Speaker 6: his government, and this insistence by a unified Arab and

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Speaker 6: Muslim world, and by the US government and by European

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Speaker 6: states as well, may give Bbe the power to turn

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Speaker 6: to some of those factions and say we're in a

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Speaker 6: corner now as well.

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Speaker 5: We don't have a choice.

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Speaker 6: This is an all or nothing offer, and if we

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Speaker 6: say no to President Trump's personal invitation to be a

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Speaker 6: part of this peace board he wants to set up,

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Speaker 6: we may not get another chance from the US that

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Speaker 6: will be in our favor.

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Speaker 1: The terms of this plan also reference of future where

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Speaker 1: the conditions for policy and state could finally be in place.

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Speaker 1: Do you see this as a potential ground work for

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Speaker 1: broader me these.

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Speaker 6: Peace It could, but Honestly, there's still quite a bit

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Speaker 6: to be worked out.

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Speaker 5: Specifically.

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Speaker 6: On that note, the plan put forward by President Trump.

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Speaker 5: Does not use the phrase two states.

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Speaker 6: It says that the new Peace Board will oversee development

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Speaker 6: in Gaza until the Palestinian Authority is reformed and can

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Speaker 6: take back control of Gaza.

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Speaker 5: Does not mention a Palestinian state.

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Speaker 6: Then you have the joint statement from the Arab and

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Speaker 6: Muslim states, who are briefed on the plan and will

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Speaker 6: be central to it, calling for governance to eventually be

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Speaker 6: handed over to a then reformed Palestinian authority that would

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Speaker 6: administer an integrated Palestinian state of both Gaza.

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Speaker 5: And the West Bank.

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Speaker 6: And then you have Israel saying it does not see

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Speaker 6: a role for the Palestinian authority because, to their point,

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Speaker 6: Palestinian authority has had thirty years to prove it can

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Speaker 6: govern and has failed to do so and has been

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Speaker 6: rife with corruption. So you have similar generic language saying

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Speaker 6: we're looking toward Palestinian control of at least Gaza.

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Speaker 5: But you have three different framings right now.

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Speaker 6: It seems like each party has said we're okay with

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Speaker 6: that for the moment, because we really.

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Speaker 5: Just need to get this approved.

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Speaker 6: We need to get this across the line so that

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Speaker 6: the war itself can stop and we can have a partialist,

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Speaker 6: real withdrawal and return of hostages. They're not as concerned

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Speaker 6: about exactly what that means right now. They're talking about

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Speaker 6: pathways to two states, they're talking about reformation of the PA.

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Speaker 6: Those are long term eventualities. So right now the emphasis is,

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Speaker 6: let's come up with language we all agree on so

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Speaker 6: we can begin.

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Speaker 7: And potentially make some hidway on this. It could also

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Speaker 7: mean Trump's role as a peace broker gets bolstered. But

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Speaker 7: to your point and Sherry's point earlier about how Israel

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Speaker 7: doesn't seem quite bald as a stage about how it

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Speaker 7: is being isolated in the international community, how do you

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Speaker 7: see Trump potentially exerting pressure on Nitan Yahuo if things

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Speaker 7: don't pan out well.

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Speaker 6: I think him offering to pose himself as the chair

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Speaker 6: of a peace board, which is really uncommon for a

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Speaker 6: president of a large nation to offer to put that

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Speaker 6: kind of time and effort into a single individual world issue.

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Speaker 6: They almost can't say no because if they say no

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Speaker 6: to that, and the President says, then we're done paying attention.

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Speaker 6: You're on your own Israel will be fighting, perhaps not

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Speaker 6: a war on the ground against all the Arab states,

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Speaker 6: not that no one wants, none of them want that,

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Speaker 6: but a unified voice of the Arab states that would

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Speaker 6: be in Washington, would be in Europe.

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Speaker 5: They haven't had to face that before, and I don't

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Speaker 5: think they relish the idea of that.

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Speaker 6: And that strike in Doha that you referenced earlier is

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Speaker 6: exactly what finally brought all these voices that often come

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Speaker 6: to Washington complaining about each other into one voice saying,

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Speaker 6: we have to have a solution for this going forward.

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Speaker 6: Israel cannot be unchecked. Hamas we agree, cannot be in

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Speaker 6: charge of Gaza.

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Speaker 5: We're all going to agree.

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Speaker 6: On the basics so that we can get Israel to

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Speaker 6: start withdrawing, get Palestinians put back in charge of their

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Speaker 6: own territory, and start to try to rebuild from there.

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Speaker 5: So I think he's seeing the pressure is not.

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Speaker 6: Only from Washington, and it's from globally, but it's also

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Speaker 6: not only from the administration. It's from President Trump him self,

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Speaker 6: who's saying I will invest personal time and effort. Boy,

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Speaker 6: that's really hard to turn down if your country is

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Speaker 6: reliant on that person's individual support for your military to

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Speaker 6: sustain its own operation.

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Speaker 1: Kristin funten Rose, always good to have you with us.

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Speaker 1: Thank you so much for your INSIGHT's President and Red

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Speaker 1: six International.

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Speaker 2: Thanks for listening to today's episode of the Bloomberg Daybreak

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Speaker 2: Asia Edition podcast. Each weekday, we look at the story

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Speaker 2: shaping markets, finance, and geopolitics in the Asia Pacific. You

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Speaker 2: can find us on Apple, Spotify, the Bloomberg Podcast YouTube channel,

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Speaker 2: or anywhere else you listen. Join us again tomorrow for

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Speaker 2: insight on the market moves from Hong Kong to Singapore

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Speaker 2: and Australia. I'm Doug Prisoner and this is Bloomberg