WEBVTT - This Market Says Maybe America Isn't So Great Again Yet 0:00:00.200 --> 0:00:04.160 America's GDP is growing at an amazing three percent. Unemployment 0:00:04.240 --> 0:00:06.960 is at the lowest level in sixteen years. The stock 0:00:07.000 --> 0:00:10.400 market is reaching a new record high every day. The 0:00:10.480 --> 0:00:13.680 U s economy is just going to keep on booming, right, Well, 0:00:13.760 --> 0:00:18.640 not so fast. Stocks might be surging, but investors trading 0:00:18.680 --> 0:00:23.480 in the sixteen trillion market for US treasury securities are 0:00:23.520 --> 0:00:26.479 taking a more nuanced view. If you look at what 0:00:26.560 --> 0:00:30.680 the bond market is signaling, not only is there not 0:00:30.800 --> 0:00:34.040 going to be a huge surge in growth, but things 0:00:34.040 --> 0:00:38.519 could conceivably slow down. At the very least, there's skepticism 0:00:38.560 --> 0:00:51.040 that inflation will ever become a problem. Welcome to Benchmark. 0:00:51.159 --> 0:00:54.800 I'm Scott Landman, an economics editor with Bloomberg News in Washington, 0:00:55.120 --> 0:00:58.680 and I'm Daniel Moss, economics writer and editor at Bloomberg 0:00:58.800 --> 0:01:01.960 View in New York. So, Dan, every time I opened 0:01:01.960 --> 0:01:04.479 my Twitter feed, it looks like President Trump is talking 0:01:04.480 --> 0:01:07.880 about how the economy is going gangbusters, the market is 0:01:07.920 --> 0:01:10.800 always at a record high. But I never see him 0:01:10.800 --> 0:01:14.039 talking about the bond market. Well, the stock market is 0:01:14.080 --> 0:01:18.000 easy for Twitter, good economic or financial news. The market 0:01:18.040 --> 0:01:21.639 goes up with the bond market. It's more complicated strong 0:01:21.720 --> 0:01:24.880 economic news is often greeted with a decline in the 0:01:24.920 --> 0:01:29.440 bond market, and the inverse is also true. All right, well, 0:01:29.480 --> 0:01:32.279 let's bring in our guest for some more insight. David 0:01:32.319 --> 0:01:35.880 Aider has been following the bond market for thirty years. 0:01:35.920 --> 0:01:40.520 He's currently the chief macro strategist at Informa Financial Intelligence, 0:01:40.840 --> 0:01:43.199 and he's been the number one ranked US government bond 0:01:43.240 --> 0:01:47.200 strategist by Institutional Investor magazine for more than a decade. 0:01:47.440 --> 0:01:50.640 He joins us on the phone from Connecticut. David, thanks 0:01:50.640 --> 0:01:54.840 for being with us on Benchmark. Good to be here. So, David, 0:01:55.280 --> 0:01:58.280 ask most people to talk about the markets and they'll 0:01:58.360 --> 0:02:01.040 start talking about the stock market it. But why should 0:02:01.080 --> 0:02:05.920 people care more about the bond market instead. Well, because 0:02:06.000 --> 0:02:10.680 people borrow money, Corporations borrow money. The government borrows a 0:02:10.760 --> 0:02:13.840 lot of money, not just this government, but governments around 0:02:13.840 --> 0:02:17.800 the world, and the bond market determines the cost of 0:02:17.880 --> 0:02:20.400 that money. So if you were to see the bond market, 0:02:20.400 --> 0:02:24.800 if you were interesting, interest rates rise, for example, presumably 0:02:24.840 --> 0:02:27.320 people will borrow less and that can have a slowing 0:02:27.400 --> 0:02:32.600 impact on economic growth, certainly on inflation. So it impacts 0:02:32.639 --> 0:02:35.200 us in a big, big way. So when people talk 0:02:35.240 --> 0:02:38.760 about government borrowing. They're not talking about the U. S. 0:02:38.880 --> 0:02:43.200 Treasury or the British Treasury walking down to city bank 0:02:43.240 --> 0:02:45.640 and saying, hey, can I have a loan? They're talking 0:02:45.680 --> 0:02:52.280 about these securitized lending facilities. So when when the government, 0:02:52.280 --> 0:02:55.960 when the U. S. Treasury borrows money, now, it doesn't 0:02:56.280 --> 0:02:58.119 go down to a bank and ask for a loan 0:02:58.160 --> 0:03:01.160 and fill out an application. It goes to the markets. 0:03:01.600 --> 0:03:05.920 And the markets do include banks, um, they include central banks, 0:03:06.520 --> 0:03:10.120 and they have an auction process which determines what the 0:03:10.160 --> 0:03:12.720 interest rate is going to be. So there's a demand 0:03:12.840 --> 0:03:17.280 factor that plays a huge amount um into how much 0:03:17.600 --> 0:03:20.600 how much it's going to cost the government to borrow money. 0:03:20.639 --> 0:03:23.000 So it's not quite like you or I going down 0:03:23.000 --> 0:03:25.560 to a bank, but still there is a market rate 0:03:25.600 --> 0:03:30.480 that is determined now, the market rate for borrowing. It's 0:03:30.560 --> 0:03:33.639 more it tells a broader story than just how much 0:03:33.680 --> 0:03:37.440 the government has to pay to borrow money. Uh. You know, 0:03:37.520 --> 0:03:40.920 one of the widely followed benchmarks, just like people follow 0:03:41.000 --> 0:03:44.680 the SMP five D for stocks, you have the treasury 0:03:44.720 --> 0:03:48.480 security maturing in ten years. You know, people just refer 0:03:48.560 --> 0:03:51.120 to it as the tenure. It's a pretty common benchmark 0:03:51.280 --> 0:03:55.600 and those are currently yielding somewhere around two point four. 0:03:56.680 --> 0:03:58.960 What does that mean? What? What does that tell? What? 0:03:58.960 --> 0:04:02.440 What kind of story does that? Well? You you you 0:04:02.480 --> 0:04:05.320 can look at the tenure, which indeed is the benchmark, 0:04:05.920 --> 0:04:10.760 but the treasury market, the the the runs the gamut 0:04:10.920 --> 0:04:14.960 from you know, short term bills sometimes a matter of 0:04:15.000 --> 0:04:18.599 weeks to thirty year paper, so that's known as the 0:04:18.680 --> 0:04:21.880 yield curve. The tenure is merely a point on the 0:04:21.960 --> 0:04:26.360 yield curve, which has become popular because you know, corporations 0:04:26.440 --> 0:04:28.599 tend to borrow in the tenure sector and the rest 0:04:28.600 --> 0:04:31.400 of the world um tends to borrow in the ten 0:04:31.480 --> 0:04:35.800 year sector. So two point four is only one um 0:04:35.960 --> 0:04:38.240 one spot on the curve. You could go down to 0:04:38.279 --> 0:04:41.239 look at the two year note, for example, which would 0:04:41.240 --> 0:04:44.359 be something on the order of about one eighty, or 0:04:44.480 --> 0:04:46.360 go out to the end of the curve to take 0:04:46.400 --> 0:04:50.040 a look at the thirty year which would be considerably higher, 0:04:50.400 --> 0:04:52.520 considerably higher, So you have what is known as the 0:04:52.640 --> 0:04:55.920 steep yield curve. The interest rate from the short term 0:04:56.200 --> 0:05:00.520 to the long term has has a spread, but actually 0:05:00.720 --> 0:05:04.440 not that steep right now, you know, when we're getting 0:05:04.480 --> 0:05:06.760 into a little bit of the market jargon. Now, but 0:05:07.400 --> 0:05:11.039 you hear a lot about the yield curve flattening, and 0:05:11.240 --> 0:05:13.840 people seem to think that that might not be such 0:05:13.880 --> 0:05:17.320 a great development. What is happening there? How would you? 0:05:17.360 --> 0:05:19.960 How do you explain it? I'll put my economists head 0:05:20.000 --> 0:05:24.520 on and offer that it depends. But but what's going 0:05:24.560 --> 0:05:29.039 on is this? When when the yield curve is steepening, 0:05:29.080 --> 0:05:32.599 meaning one the spread between the very short terms borrowing 0:05:32.680 --> 0:05:37.480 to the long term is wide, it usually tells you, 0:05:38.400 --> 0:05:43.000 historically that we have a lot of growth in the economy. 0:05:43.279 --> 0:05:47.960 The set is is is allowing I guess you would say, 0:05:48.560 --> 0:05:52.160 um for some inflation concerns. The steep deeal curve tells 0:05:52.200 --> 0:05:55.280 you that the market is concerned about growth and inflation 0:05:55.720 --> 0:05:58.280 as a as an anecdote or a derivative of growth. 0:05:58.680 --> 0:06:01.240 The fact that there are two things going on. Not 0:06:01.320 --> 0:06:04.720 only has the yield curve been flattening, but it's been 0:06:04.760 --> 0:06:09.440 flattening only because short term rates arising. Long term rates 0:06:09.480 --> 0:06:13.600 aren't doing anything, and that is the concern, because that 0:06:13.800 --> 0:06:18.960 suggests that growth is slowing or will slow at least. 0:06:18.960 --> 0:06:23.279 The Marcus perception that inflation is going to remain low 0:06:24.360 --> 0:06:27.240 and that the said might be making a mistake. They 0:06:27.320 --> 0:06:32.040 might be hiking raising short rates too aggressively. Now let 0:06:32.040 --> 0:06:34.880 me just challenge you on that point. The lack of 0:06:34.960 --> 0:06:39.440 inflation has been a defining characteristic arguably of say the 0:06:39.520 --> 0:06:44.080 last twenty yes, certainly in the post financial crisis here, 0:06:44.720 --> 0:06:49.400 and yet economic growth has been solid, if unspectacular. There's 0:06:49.440 --> 0:06:52.320 been all sorts of warnings since the economy began growing 0:06:52.320 --> 0:06:54.480 in two thousand and nine that we're on the verge 0:06:54.520 --> 0:06:58.760 of a double dip, etcetera. Hasn't happened. You short signaling 0:06:58.760 --> 0:07:03.360 a slowdown? Am I sure signalians slow down? You know, 0:07:04.760 --> 0:07:09.320 this time might be different. The The difference might be 0:07:10.320 --> 0:07:14.120 that that we are facing an era. The next ten years, 0:07:14.160 --> 0:07:18.640 we're going to see UM a lot more treasury bond issues, 0:07:18.640 --> 0:07:21.520 a lot more treasury market issuance because the deficits rising, 0:07:22.160 --> 0:07:25.480 and if this new tax plan goes through, and it 0:07:25.720 --> 0:07:30.360 likely will, we'll see the deficit rise even more so. 0:07:31.680 --> 0:07:35.080 The treasury, our government has said that they are going 0:07:35.120 --> 0:07:38.680 to increase issuance UM at the shorter end of the 0:07:38.760 --> 0:07:42.280 yield curve. So you have the Fed hiking, you have 0:07:42.440 --> 0:07:46.080 more issuance at least in the near term at the 0:07:46.120 --> 0:07:48.440 short end of the yield curve, So it could be 0:07:48.480 --> 0:07:53.480 a concern about um simply supply and what the Fed 0:07:53.600 --> 0:07:59.920 is doing. However, historically speaking, the yield curve has been 0:08:00.120 --> 0:08:06.560 a very good um predictor or prognosticator of of economic activity. 0:08:06.680 --> 0:08:10.480 And while it is true we've had unspectacular that's how 0:08:10.520 --> 0:08:13.760 I would say it GDP growth, but we continue to 0:08:13.800 --> 0:08:19.080 have very, very very subdued inflation. And I think that 0:08:19.160 --> 0:08:22.520 the yield curve is giving us some warning that the 0:08:22.560 --> 0:08:26.760 Feds hiking in here when inflation is low. This is 0:08:26.800 --> 0:08:29.560 you know, we're nine years into this expansion and we 0:08:29.600 --> 0:08:32.160 still haven't seen inflation. We haven't seen it on the 0:08:32.200 --> 0:08:35.600 income or the wage front, and it we're getting kind 0:08:35.640 --> 0:08:39.080 of late in the cycle um to see that develop. 0:08:39.120 --> 0:08:41.199 And I think that's what the bond market is telling us. 0:08:41.720 --> 0:08:45.000 So are the bond market and the stock market telling 0:08:45.240 --> 0:08:49.240 two different stories about the economy, two stories that cannot 0:08:49.240 --> 0:08:52.640 be reconciled? Are they just telling two sides of the 0:08:52.720 --> 0:08:56.000 same story. Maybe that the stock market is showing that 0:08:56.160 --> 0:08:59.400 corporate profits are expected to keep increasing, yet the bond 0:08:59.440 --> 0:09:03.280 market set well, maybe just not at a spectacular pace. 0:09:04.160 --> 0:09:06.440 So you know, you're dealing with a bond guy, and 0:09:06.480 --> 0:09:10.800 as you said earlier, when the economy is doing poorly, 0:09:11.480 --> 0:09:14.160 me as a bond guy, I'm in my I'm in 0:09:14.200 --> 0:09:16.520 my my zone that I like to see that. So 0:09:16.640 --> 0:09:19.800 I would say that they are telling you two different stories. 0:09:20.040 --> 0:09:21.920 And one of the stories that's been going on with 0:09:21.960 --> 0:09:24.840 the stock market. Obviously we have we do have a 0:09:24.920 --> 0:09:29.800 recovery steady issue, if not spectacular, so we go that. 0:09:30.520 --> 0:09:33.440 But one of the things that has helped um In fact, 0:09:33.480 --> 0:09:36.880 maybe the thing that has helped the stock market over 0:09:36.920 --> 0:09:40.280 these last few years is low interest rates. Why because 0:09:40.360 --> 0:09:44.440 corporations have been borrowing a huge amount of money, tremendous 0:09:44.480 --> 0:09:47.920 amount um. They issue bonds like the government, and what 0:09:47.960 --> 0:09:49.880 are they doing with that cash. What are they doing 0:09:49.920 --> 0:09:53.600 with the bonds that raise money for them? They're buying 0:09:53.640 --> 0:09:57.520 back their own stock. So you've seen you there is 0:09:57.679 --> 0:10:02.760 less stock out there today then there was five ten 0:10:03.040 --> 0:10:06.480 years ago, the buy back situation, and so that has 0:10:06.520 --> 0:10:09.520 been one of the things that has helped prop up 0:10:09.640 --> 0:10:11.920 the stock market, the fact that they've been using so 0:10:12.000 --> 0:10:15.440 much cash to buy back their their own stocks. They're 0:10:15.480 --> 0:10:18.480 the biggest buyer of the stock market, and that happens 0:10:18.559 --> 0:10:21.719 when interest rates are low, and the this spread with 0:10:21.840 --> 0:10:25.760 the corporate bond spread between you know, treasuries and corporate 0:10:25.840 --> 0:10:28.640 bonds is also very tight. So it makes a lot 0:10:28.679 --> 0:10:31.319 of sense, but they're not investing, and I think that 0:10:31.320 --> 0:10:33.480 that will prove a problem. That's why I think the 0:10:33.480 --> 0:10:38.040 bond market is more right or more correct than the 0:10:38.080 --> 0:10:41.319 stock market, because if we do see interest rates rise, 0:10:42.480 --> 0:10:44.840 or if we were to go into an extended period 0:10:44.880 --> 0:10:48.280 of the slowdown, I think all that corporate barring could 0:10:48.280 --> 0:10:52.320 prove to be a problem. Now we've often heard not 0:10:52.480 --> 0:10:56.240 just from government officials, but from investors as well, this mantra, 0:10:56.760 --> 0:11:00.600 the U s Treasury market is the largest, most liquid, 0:11:01.040 --> 0:11:07.240 most secure asset class in the world. Does what's going 0:11:07.280 --> 0:11:11.240 on in the US treasury market now reflect things that 0:11:11.280 --> 0:11:14.360 are going on outside the United States as well as 0:11:14.480 --> 0:11:20.520 issues like Treasury Department sales, tax plan FED Well, it 0:11:20.640 --> 0:11:24.520 certainly does. You know, the bond market is I mean 0:11:24.640 --> 0:11:28.960 our bond market. All bond markets are are international. The 0:11:28.960 --> 0:11:32.880 the largest holders of US treasuries are overseas, and one 0:11:32.920 --> 0:11:36.360 of the largest holders are foreign central banks. Well, when 0:11:36.679 --> 0:11:40.120 they they have had their about of what is known 0:11:40.160 --> 0:11:44.280 as quantitative easing meeting. Central banks have been buying bonds 0:11:45.040 --> 0:11:48.400 to keep interest rates low. They have negative yields in Europe, 0:11:48.480 --> 0:11:53.680 for example, and so we have we have positive yields. 0:11:53.760 --> 0:11:57.080 I mean we don't. You don't have to pay the 0:11:57.160 --> 0:11:59.559 government when you buy a bond. So the point is 0:11:59.600 --> 0:12:02.640 the point is that the demand for U. S. Treasuries 0:12:02.760 --> 0:12:07.320 is very much influenced by activity overseas where there is 0:12:07.360 --> 0:12:10.320 some growth going on. Absolutely, but there are not a 0:12:10.320 --> 0:12:13.200 lot of bonds around because other central banks have bought them, 0:12:13.360 --> 0:12:17.199 and the yields and bonds overseas in many cases are negative. 0:12:17.240 --> 0:12:19.840 There's something on the order of ten trillion dollars worth 0:12:19.880 --> 0:12:23.160 of bonds overseas and have a negative yield. Well, if 0:12:23.160 --> 0:12:25.160 you want a positive yield, come to the US are 0:12:25.240 --> 0:12:28.600 yields might be low or appears to be low, but 0:12:28.600 --> 0:12:31.559 at least there's a yield, right, But does that necessarily 0:12:31.640 --> 0:12:33.400 mean there's going to be a slowdown? I guess what 0:12:33.440 --> 0:12:37.839 I'm saying is we've heard this idea multiple times since 0:12:37.920 --> 0:12:40.280 two thousand and nine, that the economy is headed for 0:12:40.280 --> 0:12:44.760 a double dip. Hasn't happened. I'm just wondering whether this 0:12:44.880 --> 0:12:49.680 reflects the relative attractiveness of the US versus others. The 0:12:49.720 --> 0:12:53.640 other economy that the US is often compared with is China, 0:12:53.760 --> 0:12:57.800 and yet their bond market very different and much more 0:12:57.840 --> 0:13:02.520 difficult for foreign investors to access. So, I mean, it 0:13:03.120 --> 0:13:05.760 is a good question. And of course, at any given 0:13:05.840 --> 0:13:08.120 moment in time, you know, we try to make it simple. 0:13:08.200 --> 0:13:11.520 The yield curve says this UM, and there are these 0:13:11.559 --> 0:13:15.760 other influences we've We've not experienced, you know, in in 0:13:15.960 --> 0:13:18.839 my thirty years a lot of time when there's ever 0:13:18.920 --> 0:13:22.240 been negative yields. So certainly there's a component to that. 0:13:22.280 --> 0:13:25.720 There's certainly a component to it. But I do think 0:13:25.760 --> 0:13:30.960 that we can't dismiss the yield curves shape, or or 0:13:31.280 --> 0:13:35.640 the low yields that we're having UM as simply a 0:13:35.679 --> 0:13:39.559 matter of you know, there's there's a strong demand from overseas, 0:13:39.600 --> 0:13:42.200 you know, because of these negative yields. The fact of 0:13:42.240 --> 0:13:46.160 the matter is here we are nine years into a recovery. 0:13:46.200 --> 0:13:49.559 That's a very long time. That's a very long time. 0:13:49.640 --> 0:13:52.240 So when I say we're late cycle, you know, we're 0:13:52.280 --> 0:13:55.560 closer to the next recession than we were now. The 0:13:55.640 --> 0:13:58.960 yield curve may be hinting at that UM not yet, 0:13:59.000 --> 0:14:02.440 but maybe on on the radar. But the other thing 0:14:03.120 --> 0:14:06.920 is inflation, so we're dealing with like we saw today 0:14:06.960 --> 0:14:10.800 with the with the core CPI number very low, came 0:14:10.800 --> 0:14:13.440 in a little bit lower than expectations. We look at 0:14:13.480 --> 0:14:18.200 the other measures of inflation also very very low one 0:14:18.200 --> 0:14:21.520 point three percent, one point five when we're looking at 0:14:21.520 --> 0:14:26.040 the Fed's preferred measures, so low interest rates, particularly at 0:14:26.040 --> 0:14:29.960 the long end of the Yelk curve. The longer maturities 0:14:30.400 --> 0:14:37.760 are always a reflection of both current inflation and inflation expectations, 0:14:38.160 --> 0:14:42.360 whether it's the surveys that come out or other uh known, 0:14:42.720 --> 0:14:45.880 what the said would call market measures of inflation. Those 0:14:45.920 --> 0:14:49.480 two are pointing to very low inflation um in the 0:14:49.520 --> 0:14:52.120 coming months, in the coming year. David will have to 0:14:52.160 --> 0:14:55.200 wrap it up there. Thanks for explaining that story. It's 0:14:55.200 --> 0:14:58.600 definitely not something that we normally hear out of President 0:14:58.640 --> 0:15:01.080 Trump's Twitter feed at eight. Are great to have you 0:15:01.120 --> 0:15:05.640 on today. Benchmark will be back next week with our 0:15:05.720 --> 0:15:08.960 two part year and special. In the meantime, you can 0:15:09.000 --> 0:15:11.760 find us on the Bloomberg terminal, Bloomberg dot com, our 0:15:11.800 --> 0:15:15.120 Bloomberg app, as well as on Apple Podcasts, pocket Cast, 0:15:15.200 --> 0:15:17.680 and Stitcher. While you're there, take a minute to rate 0:15:17.720 --> 0:15:20.120 and review the show so more listeners can find us 0:15:20.400 --> 0:15:21.880 and let us know what you thought of the show. 0:15:22.160 --> 0:15:25.840 You can follow me on Twitter at at scott Landman Dan, 0:15:26.040 --> 0:15:30.640 you are at Moss Underscore Eco and our guest David 0:15:30.760 --> 0:15:33.080 isn't on Twitter, but you can find insights from his 0:15:33.200 --> 0:15:37.680 firm at at I f I Underscore. Financial Benchmark is 0:15:37.680 --> 0:15:41.120 produced by Topor Foreheads and Magnus Hendrickson. The Head of 0:15:41.120 --> 0:15:44.760 Bloomberg Podcasts is Francesca Levy. Thanks for listening, See you 0:15:44.840 --> 0:15:45.280 next time.