Speaker 1: Welcome to the Bloomberg Penl podcast. I'm Paul swing you,
Speaker 1: along with my co host Lisa Brahma wits. Each day
Speaker 1: we bring you the most noteworthy and useful interviews for
Speaker 1: you and your money. Whether at the grocery store or
Speaker 1: the trading floor. Find a Bloomberg Penl podcast on Apple
Speaker 1: podcast or wherever you listen to podcasts, as well as
Speaker 1: at Bloomberg dot com. There's time for us to check
Speaker 1: in with Bloomberg Opinion. Today we're joined by Bloomberg Opinion
Speaker 1: columns Kathy O'Neil. She's some a mathematician and also a
Speaker 1: columnist for Bloomberg Opinion. I want to talk about higher
Speaker 1: education as uh the father of two college age students myself. Uh, Lisa,
Speaker 1: you know it's really an issue here. We're paying full
Speaker 1: tuition yet they're not getting the on campus classroom experience
Speaker 1: and kind of calling it the question the value proposition there. So, Kathy,
Speaker 1: thanks so much for joining us here. What do you
Speaker 1: think is the future, at least in the near term,
Speaker 1: of some of these decisions parents and students and colleges
Speaker 1: need to make about pricing what is a much much
Speaker 1: different experience. Thanks for having me yeah. I mean, I'm
Speaker 1: looking right now at this Chronicle of Higher Education website
Speaker 1: that says that two thirds full two thirds of colleges
Speaker 1: are still claiming that they're going to have in person
Speaker 1: classes in the fall. I just don't think that's realistic.
Speaker 1: I think the ones that have copped to remaining online
Speaker 1: for the fall, which is only at six percent right now,
Speaker 1: are being much more honest with their students and parents,
Speaker 1: And for for now, we're just playing a game of chicken.
Speaker 1: We have parents and students who are strapped for cash.
Speaker 1: We have colleges who desperately, desperately need the tuition money,
Speaker 1: and that first tuition payment, as I'm sure you know,
Speaker 1: is coming due in a month or two, and they're
Speaker 1: just not going to tell us. It feels like I
Speaker 1: also have to college students at home. Um, they feel
Speaker 1: like they're just not going to tell us what the
Speaker 1: actual situation is until they get that tuition payment, which
Speaker 1: doesn't seem like a good deal for us. Well, and
Speaker 1: it seems like increasingly parents are wondering about the value proposition.
Speaker 1: And my kids are younger than college at age. But
Speaker 1: I'm a little bit nervous looking at how quickly the
Speaker 1: inflation has occurred in college price tags. I'm wondering what
Speaker 1: the pandemic and the disruption to in class attendance might
Speaker 1: mean in terms of colleges going out of business if
Speaker 1: parents do decide not to pay the bills, or potentially
Speaker 1: a rejiggering of more kind of technical colleges versus uh
Speaker 1: liberal arts educations. What do you think, well, exactly, And
Speaker 1: I think basically the value proposition has been for the
Speaker 1: last few dozen years that it's not just an education,
Speaker 1: it's a sort of certificate for the middle class or
Speaker 1: for certificate for a better than a middle class job,
Speaker 1: depending on which college you go to. So so parents
Speaker 1: have been shelling out more and more and more and
Speaker 1: and have as have students, not simply for the education,
Speaker 1: but also for the experience, for the socializing, for the
Speaker 1: connections if you will to good jobs afterwards, and if
Speaker 1: it's online, you clearly don't have all of that, you
Speaker 1: don't have the on campus experience, etcetera. And to be clear,
Speaker 1: colleges have been cashing in on this holistic approach to
Speaker 1: what they're offering just as much as parents have been
Speaker 1: buying into it. So it's it's just simply not about
Speaker 1: education and I and I hesitate to say this because
Speaker 1: I have many, many friends who are professors who are
Speaker 1: working their tails off in order to deliver as good
Speaker 1: an education as they possibly can in the context of
Speaker 1: online And it's not not to say that they're not
Speaker 1: doing a really good job, but that's really not the
Speaker 1: only thing we're paying for when we pay for college.
Speaker 1: And so the question is what will happen next. And
Speaker 1: I really do think if it becomes online, then people
Speaker 1: will say, wait, if it's just about education, I'm simply
Speaker 1: not willing to pay this. So, Kathy, I mean, it's
Speaker 1: interesting you mentioned tuition, how the colleges really need tuition,
Speaker 1: and I think that's so much about the really big universities,
Speaker 1: well known universities that have big endowments and that can
Speaker 1: perhaps weather the storm a little bit. I'm thinking about
Speaker 1: that this may be the second and third tier colleges
Speaker 1: and universities that really don't have those endowments and therefore
Speaker 1: really rely on funding their operating budget with two ocian
Speaker 1: What are those schools going to do? I think there's
Speaker 1: gonna be a lot of liberal arts schools, the ones
Speaker 1: that really like remate, like sort of rely heavily on
Speaker 1: this in local parentis concept um that we're going to be,
Speaker 1: you know, there for your kids, and it's going to
Speaker 1: be a full pledged liberal arts education. Those schools that
Speaker 1: rely that don't have a huge endowment are going to
Speaker 1: go out of business. I expect to see a whole
Speaker 1: a huge slew of colleges just closing shop in the
Speaker 1: next couple of years because of this disruption. Kathy, have
Speaker 1: you heard any of Scott Galloway's comments, the n y
Speaker 1: U professor who's been going on the airwaves and saying
Speaker 1: that basically a lot of colleges should go out of business,
Speaker 1: that they're overpriced, and that finishing schools essentially are the
Speaker 1: IVY Leagues will continue because they are sort of artificially
Speaker 1: propping up their value. I mean, you basically was comparing
Speaker 1: them to Gucci scarves. But I'm wondering, I mean, are
Speaker 1: you going to see this increasing bifurcation among the IVY
Speaker 1: League and everyone else as everyone else tries to justify
Speaker 1: the finishing school aspect of their business as sort of
Speaker 1: as you describe the holistic experience. Yeah, I mean I
Speaker 1: hope so. And and what what I really hope is
Speaker 1: that whatever we replace this with is less expensive, um
Speaker 1: and less like arduous for me and for their parents
Speaker 1: and I you know, like, look, there has to be
Speaker 1: some way to decide what job who gets right. It's
Speaker 1: a sorting mechanism, but it's just an unbelievably expensive sorting mechanisms.
Speaker 1: So my hope would be that we really do figure
Speaker 1: out a way, um that that works. Um. You know,
Speaker 1: look at the German model with an enormous amount of
Speaker 1: apprenticeships for example, where there aren't that many uh, sort
Speaker 1: of university educated students um relative to the number of
Speaker 1: students that take sort of apprenticeships after call after high school.
Speaker 1: There's nothing wrong with that model, except we don't do
Speaker 1: it whatsoever. Um. So if we could find a reasonable
Speaker 1: system that isn't nearly as expensive, that gets people um
Speaker 1: jobs sooner and less long term student debt, that would
Speaker 1: be fantastic. Kat the O'Neill, thank you so much, and
Speaker 1: uh from your lips to the higher education's ears ahead
Speaker 1: of my children having to go to college. Cathy O'Neill,
Speaker 1: a Bloomberg opinion columnist, a mathematician who has been a
Speaker 1: professor as well as a hedge fund analysts and data
Speaker 1: scientists and author of Weapons of Math Destruction. Definitely something
Speaker 1: on the forefront of our minds the price of college education,
Speaker 1: which is absolutely skyrocketed in relation to everything else, raising
Speaker 1: a lot of questions, especially given the student debt load
Speaker 1: right now that we're seeing come into the focus. Paul, Yeah,
Speaker 1: it's really interesting. And again, those fall semester payments are
Speaker 1: coming up, and I wonder if there's gonna be any
Speaker 1: pricing adjustment here for what is a very different product
Speaker 1: that we're getting now versus what we initially signed up for. Well,
Speaker 1: the up and down relationship between the US and China
Speaker 1: seems to be approaching another low, this time due to
Speaker 1: the new security laws that China has imposed on Hong Kong,
Speaker 1: and a response from the U s has not been positive,
Speaker 1: to say the least. Michael Herson, practice head at China
Speaker 1: and at Northwest Asia for the Eurasia Group, joins us. Michael,
Speaker 1: thanks so much for your time here one of for
Speaker 1: our listeners, if you could just summarize what these new
Speaker 1: security laws are in Hong Kong and maybe why China
Speaker 1: is doing it now. Sure so, China announced on Friday
Speaker 1: that it's legislature the National People's Congress will implement this
Speaker 1: law rather than go through Hong Kong's own legislature. And
Speaker 1: this has been a long, decades long sticking point. In fact,
Speaker 1: Hong Kong establishing a national security law and Beijing had
Speaker 1: left that to Hong Kong to take care of but
Speaker 1: basically ran out of patients. And there have been waves
Speaker 1: of protest over the last year and even earlier over
Speaker 1: Hong Kong um proposing this legislation on its own. So
Speaker 1: essentially Beijing said time is up. We're going to do
Speaker 1: this for you under its own interpretation of the law
Speaker 1: that governs China's mainland China's relationship with Hong Kong. Now,
Speaker 1: what the law actually does is well, first off, I
Speaker 1: should say we won't know the details because the law
Speaker 1: has not been drafted yet, and that will likely be
Speaker 1: something that happens over the course of the summer. But
Speaker 1: essentially it gives likely some fairly broad powers for Beijing
Speaker 1: to extend its authority over Hong Kong in areas that
Speaker 1: it regards as anti government uh and treasonous activity. A
Speaker 1: lot of people are saying that the US should and
Speaker 1: will step in. We've seen Congress come out and threatened
Speaker 1: to take action, including potentially provoking the special trading status
Speaker 1: that the US has with Hong Kong. What does China
Speaker 1: stand to lose if Hong Kong loses some of its
Speaker 1: special status with respect to its reputation financially around the world. Well,
Speaker 1: I think for China, the economic importance of Hong Kong
Speaker 1: has diminished quite a bit relative to the size of
Speaker 1: China's economy, So I think the biggest threat for China
Speaker 1: at this point would be if these actions create fundamental
Speaker 1: financial instability in Hong Kong. That would be bad and
Speaker 1: could have ripple effects for China's economy and financial system.
Speaker 1: But generally speaking, losing Hong Kong's vitality as a global
Speaker 1: business hub is not positive for China, but it doesn't
Speaker 1: represent any kind of systemic risk. I think it's fair
Speaker 1: to say that mainland China has has moved on beyond that.
Speaker 1: So Michael does realistically, does Hong Kong have any recourse here?
Speaker 1: Hong Kong, I think to be blunt, No, not really,
Speaker 1: And of course Hong Kong's government is at this point
Speaker 1: the the administration of Carrie Lamb is moving essentially in
Speaker 1: lockstep with Beijing. So really the question mark at this
Speaker 1: point is not so much whether or not Hong Kong
Speaker 1: has recourse, but as you suggested, what the US responses.
Speaker 1: There's also a question about other power graphs that China
Speaker 1: is making right now. There was a one point for
Speaker 1: a trillion dollar investment program in its technological infrastructure that
Speaker 1: they announced. They've been trying to get a vaccine through
Speaker 1: faster than the United States. What's behind this at this
Speaker 1: point and is China getting the upper hand? Well, I
Speaker 1: think there are some areas that you can call this
Speaker 1: a power graph, but there are other areas where China
Speaker 1: is just behaving opportunistically. The world is in crisis, China
Speaker 1: is more stable than a lot of other countries, and
Speaker 1: so it's it's looking to gain an edge, and I
Speaker 1: think that's the case with the stimulus program, in the
Speaker 1: investment and a lot of these strategically important sectors that
Speaker 1: you mentioned. UM. Generally speaking, China is trying to use
Speaker 1: the crisis to expand its influence, uh. And it would
Speaker 1: do that through vaccine diplomacy, through the assistance that it's
Speaker 1: all already offered to countries um for medical supplies. And yes,
Speaker 1: I think it's fair to say that China see this
Speaker 1: as an opening, especially at the time when when China's
Speaker 1: economy is recovering earlier than most other large economies, to
Speaker 1: really expand its influence. So I wonder if you can
Speaker 1: just give us a sense of the the health and
Speaker 1: the strength of the presidency of President g given the
Speaker 1: COVID christ pandemic, given the impact to the Chinese economy,
Speaker 1: given that some you know, international condemnation, perhaps China was
Speaker 1: somehow involved in the origination of this pandemic. What's the
Speaker 1: standing of the president right now? I think right now
Speaker 1: his footing is quite secure. In fact, you can even
Speaker 1: make the case that for now she emerges stronger from this,
Speaker 1: and it's because of China's ability to contain the virus
Speaker 1: and to recast the narrative at home by showing that
Speaker 1: the party has been successful, his leadership has been successful,
Speaker 1: whereas the U. S and West has had a far
Speaker 1: more fumbling response to the pandemic. Now, I don't think
Speaker 1: that means he's out of the woods. Unemployment is rising
Speaker 1: in China. I think it's going to be a quite
Speaker 1: gradual recovery. But what it means is that to strengthen himself,
Speaker 1: she will continue to ramp up patriotic sentiment at home
Speaker 1: and and portray China success whereas others have failed. And
Speaker 1: that is going to mean that these issues like Hong Kong,
Speaker 1: like disputes with the US over Taiwan, over the South China, see,
Speaker 1: all of these I think are going to stay at
Speaker 1: quite a high temperature, and it means real risks for
Speaker 1: the relationship now through the election. This is when I
Speaker 1: don't really understand. It seems like mark markets are shrugging
Speaker 1: off the prospect of an escalating, escalating trade war or
Speaker 1: cold war between the US and China, and yet it
Speaker 1: seems like things are escalating. What's the tipping point at
Speaker 1: which it really will bleed over into the global economic recovery.
Speaker 1: I think it's a very good point. I think markets
Speaker 1: tend to focus on the issue of tariffs because those
Speaker 1: are the most visible and easy to quantify in terms
Speaker 1: of tensions and argue at this point, and it's not
Speaker 1: a it's not a firm conviction, but we think that
Speaker 1: the Phase one deal will last through this year because
Speaker 1: neither side has the incentive to to re escalate on trade.
Speaker 1: We put that at about so I think the markets
Speaker 1: should be aware that there's a risk of breaking down.
Speaker 1: But they also need to keep in mind that non
Speaker 1: tariff measures that are harder to price in are I
Speaker 1: think having a very significant impact. I mean things like
Speaker 1: US restrictions against Wally, new US restrictions against a further
Speaker 1: set of Chinese technology companies, the tensions that we're seeing
Speaker 1: in Hong Kong. These do have significant impacts on the
Speaker 1: global economy. They just harder to price in, and I
Speaker 1: think markets may be missing that. Michael Herson, thank you
Speaker 1: so much for being with us. Michael Herson practice ahead
Speaker 1: of the China and Northeast Asian regions for eur Asia
Speaker 1: Group joining US based in New York. Definitely in the
Speaker 1: four front as these escalating tensions, yet markets just don't care. Paul, Now,
Speaker 1: the market, it disappears, as we've been discussing this morning, Lisa,
Speaker 1: really focusing on the pandemic. What stage are we in
Speaker 1: the pandemic? And I think the markets obviously looking forward
Speaker 1: a little bit and seeing some gradual reopening around the globe,
Speaker 1: including here in the United States, and that's where the
Speaker 1: bed is. Yeah, people are hoping for a world that
Speaker 1: returns to something more normal than what we've all been experiencing.
Speaker 1: One of the big stories over the past few months
Speaker 1: has been an unprecedented surge in borrowing, and that's from
Speaker 1: investment grade companies that have sold a record more than
Speaker 1: a trillion dollars of bonds so far year to date.
Speaker 1: This just raises all sorts of questions to me. Yes,
Speaker 1: their investment grade, but yes, they are adding leverage in
Speaker 1: a quest to just get as much cash onto their
Speaker 1: belt to survive through this next period. Joining us now
Speaker 1: as someone who buys some of that debt, Josh Lomier,
Speaker 1: head of North American investment grade credited Viva Investors, which
Speaker 1: oversees four hundred and thirty eight billion dollars firm wide,
Speaker 1: enjoyces from Chicago. Josh, have you been out there seeing
Speaker 1: opportunities and some of this new issuance at a time
Speaker 1: of so much uncertainty? Yeah, we really have. I mean
Speaker 1: you mentioned that over a trillion dollars of new issuance
Speaker 1: during a period of unprecedented volatility. There will always be
Speaker 1: opportunities to find value in that kind of environment. So
Speaker 1: Josh kind of give us a sense here, you know,
Speaker 1: given where we are in the credit in the economic cycle,
Speaker 1: are you concerned that risk assets have gotten a little
Speaker 1: bit ahead of themselves. I mean, it's sure to have
Speaker 1: just more and more economic pain to come across the economy. Yeah,
Speaker 1: I think you're right, And I think you know, if
Speaker 1: if we just think briefly back to the last recession,
Speaker 1: the global financial crisis, you had the first iteration of
Speaker 1: you know, wobbling of volatility around Bear Bear Stearns in
Speaker 1: the first quarter of tow that O than eight, and
Speaker 1: then you know Lehman Brothers in the in the majority
Speaker 1: of the volatility we didn't feel till the fourth quarter
Speaker 1: of two thous eight. And so I think any recession
Speaker 1: or recessionary environment is going to feel a lot more
Speaker 1: like a roller coaster. Maybe that first hills the biggest
Speaker 1: and the most scarier, perhaps, and then we we hit
Speaker 1: different peaks and valleys throughout. But I think I think
Speaker 1: we are at the early stages of this recession, and
Speaker 1: it's going to take some time to really figure out
Speaker 1: how deep the damage is done and how quickly we
Speaker 1: can recover. Well, how worried are you about the fact
Speaker 1: that companies that are worried about their futures, worried about
Speaker 1: future revenues, have started odd leverage have started to reduce, uh,
Speaker 1: this sort of emphasis on deleveraging and shoring up their
Speaker 1: balance sheets. Right now, has that affected what you decide
Speaker 1: to buy? It really does. And if you think about
Speaker 1: it right now, and this is the whole market is
Speaker 1: really just focused on ken things survive. A lot of
Speaker 1: this reaction function of just adding as much dead as
Speaker 1: they can to preserve liquidity is a is a survival
Speaker 1: technique and I just want to get through the next
Speaker 1: couple of quarters, and that's fine. But the reality is
Speaker 1: is when you do start to recover, when economies do
Speaker 1: start to open back up. Now, what we have, what
Speaker 1: we will have to worry about then is what are
Speaker 1: the second derivative impacts of all of this Because now,
Speaker 1: best case scenario, we enter a shallow recession. And when
Speaker 1: you enter a shallow recession and companies are a half
Speaker 1: a turn one turn two turned higher leverage into that
Speaker 1: slower growth shallow recession, if you start to have to
Speaker 1: worry about their ability to earn their way out of
Speaker 1: that larger hole, if you will. So, what are you
Speaker 1: are you seeing in terms of credit quality across your portfolio?
Speaker 1: We've seen a couple of bankruptcies just over the last
Speaker 1: several weeks gives a snapshot of kind of that where
Speaker 1: you think the credit quality is in the space you
Speaker 1: look at. Yeah, so there's you know, there's gonna be
Speaker 1: a lot of fit stuations where you know, we all
Speaker 1: we all can see, you know, real estate, retail sectors
Speaker 1: are some of the biggest you know, on the very
Speaker 1: front lines of this, and other sectors like telecom and
Speaker 1: cable um and certain areas of healthcare and even packaged
Speaker 1: goods where you're not really as an impact because you're
Speaker 1: actually getting some tail winds from this environment. And so
Speaker 1: what we're really thinking through is who does have who
Speaker 1: who is less impacted, who is the most impacted? And
Speaker 1: for the ones that are the most impacted, you know,
Speaker 1: you can start to steal how big of a drop
Speaker 1: in their ratings are they going to have as you
Speaker 1: start to project out significantly reduced earnings and revenues relative
Speaker 1: to these higher debt metrics. And that's kind of all
Speaker 1: the hard credit work that needs to go into making
Speaker 1: decisions in over the next two quarters. So let's talk
Speaker 1: about where you're seeing opportunities. What have you actually been
Speaker 1: buying recently? You don't I know, you don't want to
Speaker 1: talk specific securities, but if you could talk sectors, types
Speaker 1: of ratings, etcetera, that would be awesome. Yeah. I think
Speaker 1: one one important strategy we've deployed over the last couple
Speaker 1: of months is really to go down in quality into
Speaker 1: some of the sectors that we feel have been least impacted,
Speaker 1: and I mentioned some telecommon cable as as an area
Speaker 1: where that that can work, including some healthcare, and then
Speaker 1: going up in quality in some of the sectors that
Speaker 1: are most impacted, i e. In the energy space, focusing
Speaker 1: more on the high up and quality integrated companies or
Speaker 1: the stronger midstream credits where you have much more forward
Speaker 1: looking or they have more levers they can pull to
Speaker 1: reduce leverage, as well as a bit clearer cash flow
Speaker 1: guidance in the current environment for commodity prices and so
Speaker 1: kind of barbelling your risk in that regard is a
Speaker 1: way to keep some beta in your portfolio while avoiding
Speaker 1: the lowest echelons of quality and some of the most
Speaker 1: impacted sectors. What kind of returns are you looking for
Speaker 1: given the pretty significant returns that we've seen. It just
Speaker 1: gives people a perspective. So far in May investment grade
Speaker 1: bonds in the United States have returned to ten point
Speaker 1: eight percent. I mean, it's been a dramatic increase, and
Speaker 1: it's been both on the right side as well as
Speaker 1: on the credit spread size side. Is it basically a
Speaker 1: coupon clipping exercise from here? I think so. I think
Speaker 1: we've you know, if you just looked at the credit
Speaker 1: spreads on the market as a whole, it's still wider
Speaker 1: than you know, um the types we've seen even year today,
Speaker 1: by a pretty meaningful amount. And so as the market
Speaker 1: recovers longer term, you can still see value in the
Speaker 1: compression of spreads. I think rates have come down a ton,
Speaker 1: so you probably won't get as much of a kicker
Speaker 1: from a rally, and just broad interest rates and spreads
Speaker 1: are still wide, but I think spreads are more fairly
Speaker 1: and accurately reflecting the risks we still have in front
Speaker 1: of us, and so there's not going to be easy
Speaker 1: money left on the table, per se, from a spread
Speaker 1: compression perspective or a yield drop perspective. And so now
Speaker 1: we're back in that period where things might be fair
Speaker 1: more fairly valued with lots of uncertainty, and the expectation
Speaker 1: is we're going to see some more volatility here over
Speaker 1: the next coming quarters. So, Josh, I know, again you
Speaker 1: don't want to talk about individuals individual securities, but Macy's
Speaker 1: is just out with some news does they're gonna try
Speaker 1: to tap the markets for one point one billion dollars
Speaker 1: and they're going to use their real estate as collateral.
Speaker 1: What do you think of that structure? Is that is
Speaker 1: that something that's common for the retail space or is
Speaker 1: this something unique reflecting very unique times. I think it's
Speaker 1: unique because it might not be that uncommon for high
Speaker 1: yield or leveraged credits, but for investment grade credits, it's
Speaker 1: clearly a lot less common. And I think this is
Speaker 1: kind of back to that point we talked about earlier
Speaker 1: around companies in survival mode, and one of the biggest
Speaker 1: risks to unsecured deadholders, which are most of the investment
Speaker 1: grade bonds out there, are the ability of credits when
Speaker 1: they do see periods of stress to prime your debt,
Speaker 1: which what what that means is put secured debt in
Speaker 1: front of your unsecured debt. And so what that means
Speaker 1: is if this, if this works, if this ends up
Speaker 1: working out for someone like Maze's, it gets them through
Speaker 1: this crisis so that they can grow at some point
Speaker 1: in the future, then everybody's going to be okay. But
Speaker 1: if something doesn't happen with these types of credits in
Speaker 1: these situations, that that increases your tail risk and reduces
Speaker 1: your return on a a bankruptcy scenario or your recovery
Speaker 1: rate because you're now you now have another debt holder
Speaker 1: with security on their real estate ahead of you that
Speaker 1: wasn't there before. So it's not a good thing for
Speaker 1: the investment grade market, unless, of course that works out
Speaker 1: in the end. Josh Lomar, thanks so much for joining us.
Speaker 1: Josh is head of North American investment grade credit at
Speaker 1: Aviva Investors, talking all things across the credit spectrum at least,
Speaker 1: so what's interesting talking about some of these lenders are
Speaker 1: saying come to the market like a Macy's, uh, you know,
Speaker 1: really trying to get creative and innovative to to really
Speaker 1: short up the balance sheets. But it is certainly a
Speaker 1: risky time for credit investors. One of the most creative
Speaker 1: parts of the market has been the cruise liners, and
Speaker 1: some of them have put islands up for sale. I
Speaker 1: think Norwegian Cruise Lines put an island up not for
Speaker 1: sale for for collateral for some of their bond sales,
Speaker 1: and we've seen them put up cruise ships. And we've
Speaker 1: seen this, of course in the airline industry as well,
Speaker 1: with United not gain traction because people didn't necessarily want
Speaker 1: the aircraft they pledged as collateral. Uh, they thought that
Speaker 1: those those airline aircrafts were not valuable enough. But it
Speaker 1: just highlights the desperation, right, how do you lure in
Speaker 1: new investors at a time when leverage is already high,
Speaker 1: at a time with such great economic uncertainty? Really question
Speaker 1: it is. And you know, since you see the price
Speaker 1: action today in the market, certainly gave risk on feel
Speaker 1: to the market. And you know, it's just I think
Speaker 1: the president, you look across the Bloomberg termina looking at
Speaker 1: the news, a lot of it is just kind of
Speaker 1: positive expectations for a gradual reopening of the economy and
Speaker 1: and what that could mean for uh, you know, the
Speaker 1: economic statistics that have been so devastating for the markets
Speaker 1: over the last couple of months. As we've come to
Speaker 1: grips with the economic impact from the pandemic, a lot
Speaker 1: of people are wondering the Federal Reserve has done so much,
Speaker 1: what more can they do? And people are definitely looking
Speaker 1: at yield core of control. The idea of managing yields
Speaker 1: at all different maturities of treasuries is the next likely
Speaker 1: step for the US Central Bank. Ira Jersey Bloomberg Bloomberg
Speaker 1: Intelligence chief interest rate strategist joining US now, Ira, I'd
Speaker 1: love to get your take on what this will mean
Speaker 1: for bond traders if the Federal Reserve actually does this.
Speaker 1: How many more longer maturity bonds does the Federal Reserve
Speaker 1: have to buy? Well, they would have to buy a lot.
Speaker 1: I mean that the idea of yield curve control would
Speaker 1: be for the Federal Reserve basically to say we're going
Speaker 1: to set this rate um, you know, maybe it's thirty
Speaker 1: year yields at two percent, or maybe it's five year
Speaker 1: yields at one percent, I mean some number, and say
Speaker 1: we're going to buy as many bonds as we need
Speaker 1: to in order to keep rates there um. I think
Speaker 1: initially the market would probably test the resolve of the
Speaker 1: Fed and say, well, let's see if you'll really do that.
Speaker 1: So initially, I think the Fed would have to buy
Speaker 1: a lot of bonds, you know, a couple of hundred
Speaker 1: billion probably over a month or two, and then after
Speaker 1: that they probably won't have to buy as much, primarily
Speaker 1: because the market now would know that if we get there,
Speaker 1: we know that there's going to be an active buyer, so,
Speaker 1: um so we're not going to be you know, very
Speaker 1: short the markets. So I think it could be a
Speaker 1: pretty efficient way for the FED to do that. Now,
Speaker 1: the political challenge there is is that, you know, does
Speaker 1: that mean that, um you know, is the Federal Reserve
Speaker 1: doing this because it wants to keep government borrowing clus low? So,
Speaker 1: you know, is the separation of the Federal Reserve and
Speaker 1: the federal government has blurred even further. And I think
Speaker 1: that that's a political challenge that that the FED ed
Speaker 1: will have to ultimately have to tell Congress, like, you know,
Speaker 1: explain why they're doing this exactly. So I, um, I
Speaker 1: have not in my career seen this before. Um is
Speaker 1: this market manipulation to some degree? Have we seen this before? Well,
Speaker 1: it is market manipulation for sure, but so is regular
Speaker 1: quantitative easing that the FEDS done on and off for
Speaker 1: the left decade or so. Um so. So, Yeah, in
Speaker 1: the nineties and fifties, during World War Two, the Federal
Speaker 1: Reserve cap thirty year government bond yields at two and
Speaker 1: a half percent. So UM, so there's a not unprecedented
Speaker 1: in the US. UM. In Japan they did the same
Speaker 1: type of yield curve control UM idea. Of course, their
Speaker 1: their interest rates were even much lower than ours are now,
Speaker 1: but the Japanese did it for the better part of
Speaker 1: three or four years. So UM. So it's it's it's
Speaker 1: it's another tool in the toolbox. And basically the the
Speaker 1: important thing that I think something like yield curve control
Speaker 1: would say is, firstly, we don't want long term interest
Speaker 1: rates to go much higher because if they do, that
Speaker 1: could be detrimental to the economy because you have the
Speaker 1: rollover of corporate debt for example, or people getting mortgages. Um,
Speaker 1: we don't want those interest rates to go high because
Speaker 1: that could have a detrimental effect on the economy. UM.
Speaker 1: But at the same time, UM, the it's in the
Speaker 1: Federal Reserve doesn't want to have to do some other
Speaker 1: draconian type of things like UH, cut the Fed funds
Speaker 1: rate into negative territory, which might which they might have
Speaker 1: to do if they don't do something like yield curve
Speaker 1: control or more massive quantitative easing like they did back
Speaker 1: in March. If they do yield curve control, and considering
Speaker 1: the fact that they've purchased about se the maximum of
Speaker 1: what they can purchase of longer term bond issuances recently
Speaker 1: from the Treasury Department, how big do you think their
Speaker 1: balance she could get in the next year. Yeah, so so,
Speaker 1: I mean, we we've we've been forecasting that the FEDS
Speaker 1: balance sheet will get well over ten trillion dollars um.
Speaker 1: Now part of that is also predicated was predicated on
Speaker 1: well over trillion dollars of some of these other facilities,
Speaker 1: and it seems like maybe those other facilities, like the
Speaker 1: credit facilities for example, won't get quite as large as
Speaker 1: we initially thought. Um, primarily because of of what's happened
Speaker 1: in the markets and where credit spreads have gone over
Speaker 1: the past couple of months or the past couple of weeks,
Speaker 1: I should say, Um, the uh, the the Even though
Speaker 1: the Fed owns seventy of a lot of bonds, they
Speaker 1: still there's a lot of off the run securities that
Speaker 1: they don't own that many of yet, so they still
Speaker 1: have plenty of room to buy um, to buy a
Speaker 1: significant amount of maturities, and of course the FED, the
Speaker 1: Treasury Department is also issuing a lot of new securities
Speaker 1: as well. So you know, they just issued a new
Speaker 1: twenty year. The FED doesn't own any of those. They
Speaker 1: they're going to issue a new Uh, they just issued
Speaker 1: a new thirty year. The FED also doesn't own any
Speaker 1: of those, although it will um over the next couple
Speaker 1: of weeks, so you have they still have a lot
Speaker 1: of ability to buy a significant amount of So I
Speaker 1: give us you mentioned that twenty year bond. Um, how
Speaker 1: did that go? Because that's a new Security Act. So
Speaker 1: so it's the first time that that the Treasury Department
Speaker 1: issued a twenty year bond, a new twenty year since
Speaker 1: six and it went pretty well actually so um it
Speaker 1: came at at slightly higher yields than the market was expecting,
Speaker 1: but within a basis point, so I call that noise
Speaker 1: anything within a basis points basically noise and and and
Speaker 1: the bitter statistics went pretty well. So it had um,
Speaker 1: you know, good demand from end user investors where people
Speaker 1: wanted to wanted to own the security. All right, thanks
Speaker 1: so much for it. Joining us as always, Ira Jersey
Speaker 1: Teeth us interest rate strategist for Bloomberg in talentence joining
Speaker 1: us on the phone. At least that's I think this
Speaker 1: is a new term for me, yield curve controls, and I
Speaker 1: I have to brush up on that a little bit more.
Speaker 1: But think its another tool. I guess Bank of Japan
Speaker 1: has been doing this for a long time, and it
Speaker 1: raises a question about frankly, quidity in the bond market.
Speaker 1: When the Federal Reserve clamps down to such degree and
Speaker 1: sucks up such a significant portion of the outstanding debt,
Speaker 1: does this reduce liquidity in the existing bonds? What does
Speaker 1: this judist how to chist? What does it do the
Speaker 1: whole industry of of the bond market if it's completely
Speaker 1: controlled by the central bank. Yeah, it's it's really interesting,
Speaker 1: and I'm not sure it's something you know. I'm sure
Speaker 1: a lot of market participants have different views about it,
Speaker 1: but certainly, you know, we've given the Fed credit since
Speaker 1: the beginning of this whole pandemic for taking decisive action,
Speaker 1: for taking early action. Uh, and this appears to be
Speaker 1: just another tool in the toolbox that they're prepared to use.
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