Speaker 1: America's GDP is growing at an amazing three percent. Unemployment
Speaker 1: is at the lowest level in sixteen years. The stock
Speaker 1: market is reaching a new record high every day. The
Speaker 1: U s economy is just going to keep on booming, right, Well,
Speaker 1: not so fast. Stocks might be surging, but investors trading
Speaker 1: in the sixteen trillion market for US treasury securities are
Speaker 1: taking a more nuanced view. If you look at what
Speaker 1: the bond market is signaling, not only is there not
Speaker 1: going to be a huge surge in growth, but things
Speaker 1: could conceivably slow down. At the very least, there's skepticism
Speaker 1: that inflation will ever become a problem. Welcome to Benchmark.
Speaker 1: I'm Scott Landman, an economics editor with Bloomberg News in Washington,
Speaker 1: and I'm Daniel Moss, economics writer and editor at Bloomberg
Speaker 1: View in New York. So, Dan, every time I opened
Speaker 1: my Twitter feed, it looks like President Trump is talking
Speaker 1: about how the economy is going gangbusters, the market is
Speaker 1: always at a record high. But I never see him
Speaker 1: talking about the bond market. Well, the stock market is
Speaker 1: easy for Twitter, good economic or financial news. The market
Speaker 1: goes up with the bond market. It's more complicated strong
Speaker 1: economic news is often greeted with a decline in the
Speaker 1: bond market, and the inverse is also true. All right, well,
Speaker 1: let's bring in our guest for some more insight. David
Speaker 1: Aider has been following the bond market for thirty years.
Speaker 1: He's currently the chief macro strategist at Informa Financial Intelligence,
Speaker 1: and he's been the number one ranked US government bond
Speaker 1: strategist by Institutional Investor magazine for more than a decade.
Speaker 1: He joins us on the phone from Connecticut. David, thanks
Speaker 1: for being with us on Benchmark. Good to be here. So, David,
Speaker 1: ask most people to talk about the markets and they'll
Speaker 1: start talking about the stock market it. But why should
Speaker 1: people care more about the bond market instead. Well, because
Speaker 1: people borrow money, Corporations borrow money. The government borrows a
Speaker 1: lot of money, not just this government, but governments around
Speaker 1: the world, and the bond market determines the cost of
Speaker 1: that money. So if you were to see the bond market,
Speaker 1: if you were interesting, interest rates rise, for example, presumably
Speaker 1: people will borrow less and that can have a slowing
Speaker 1: impact on economic growth, certainly on inflation. So it impacts
Speaker 1: us in a big, big way. So when people talk
Speaker 1: about government borrowing. They're not talking about the U. S.
Speaker 1: Treasury or the British Treasury walking down to city bank
Speaker 1: and saying, hey, can I have a loan? They're talking
Speaker 1: about these securitized lending facilities. So when when the government,
Speaker 1: when the U. S. Treasury borrows money, now, it doesn't
Speaker 1: go down to a bank and ask for a loan
Speaker 1: and fill out an application. It goes to the markets.
Speaker 1: And the markets do include banks, um, they include central banks,
Speaker 1: and they have an auction process which determines what the
Speaker 1: interest rate is going to be. So there's a demand
Speaker 1: factor that plays a huge amount um into how much
Speaker 1: how much it's going to cost the government to borrow money.
Speaker 1: So it's not quite like you or I going down
Speaker 1: to a bank, but still there is a market rate
Speaker 1: that is determined now, the market rate for borrowing. It's
Speaker 1: more it tells a broader story than just how much
Speaker 1: the government has to pay to borrow money. Uh. You know,
Speaker 1: one of the widely followed benchmarks, just like people follow
Speaker 1: the SMP five D for stocks, you have the treasury
Speaker 1: security maturing in ten years. You know, people just refer
Speaker 1: to it as the tenure. It's a pretty common benchmark
Speaker 1: and those are currently yielding somewhere around two point four.
Speaker 1: What does that mean? What? What does that tell? What?
Speaker 1: What kind of story does that? Well? You you you
Speaker 1: can look at the tenure, which indeed is the benchmark,
Speaker 1: but the treasury market, the the the runs the gamut
Speaker 1: from you know, short term bills sometimes a matter of
Speaker 1: weeks to thirty year paper, so that's known as the
Speaker 1: yield curve. The tenure is merely a point on the
Speaker 1: yield curve, which has become popular because you know, corporations
Speaker 1: tend to borrow in the tenure sector and the rest
Speaker 1: of the world um tends to borrow in the ten
Speaker 1: year sector. So two point four is only one um
Speaker 1: one spot on the curve. You could go down to
Speaker 1: look at the two year note, for example, which would
Speaker 1: be something on the order of about one eighty, or
Speaker 1: go out to the end of the curve to take
Speaker 1: a look at the thirty year which would be considerably higher,
Speaker 1: considerably higher, So you have what is known as the
Speaker 1: steep yield curve. The interest rate from the short term
Speaker 1: to the long term has has a spread, but actually
Speaker 1: not that steep right now, you know, when we're getting
Speaker 1: into a little bit of the market jargon. Now, but
Speaker 1: you hear a lot about the yield curve flattening, and
Speaker 1: people seem to think that that might not be such
Speaker 1: a great development. What is happening there? How would you?
Speaker 1: How do you explain it? I'll put my economists head
Speaker 1: on and offer that it depends. But but what's going
Speaker 1: on is this? When when the yield curve is steepening,
Speaker 1: meaning one the spread between the very short terms borrowing
Speaker 1: to the long term is wide, it usually tells you,
Speaker 1: historically that we have a lot of growth in the economy.
Speaker 1: The set is is is allowing I guess you would say,
Speaker 1: um for some inflation concerns. The steep deeal curve tells
Speaker 1: you that the market is concerned about growth and inflation
Speaker 1: as a as an anecdote or a derivative of growth.
Speaker 1: The fact that there are two things going on. Not
Speaker 1: only has the yield curve been flattening, but it's been
Speaker 1: flattening only because short term rates arising. Long term rates
Speaker 1: aren't doing anything, and that is the concern, because that
Speaker 1: suggests that growth is slowing or will slow at least.
Speaker 1: The Marcus perception that inflation is going to remain low
Speaker 1: and that the said might be making a mistake. They
Speaker 1: might be hiking raising short rates too aggressively. Now let
Speaker 1: me just challenge you on that point. The lack of
Speaker 1: inflation has been a defining characteristic arguably of say the
Speaker 1: last twenty yes, certainly in the post financial crisis here,
Speaker 1: and yet economic growth has been solid, if unspectacular. There's
Speaker 1: been all sorts of warnings since the economy began growing
Speaker 1: in two thousand and nine that we're on the verge
Speaker 1: of a double dip, etcetera. Hasn't happened. You short signaling
Speaker 1: a slowdown? Am I sure signalians slow down? You know,
Speaker 1: this time might be different. The The difference might be
Speaker 1: that that we are facing an era. The next ten years,
Speaker 1: we're going to see UM a lot more treasury bond issues,
Speaker 1: a lot more treasury market issuance because the deficits rising,
Speaker 1: and if this new tax plan goes through, and it
Speaker 1: likely will, we'll see the deficit rise even more so.
Speaker 1: The treasury, our government has said that they are going
Speaker 1: to increase issuance UM at the shorter end of the
Speaker 1: yield curve. So you have the Fed hiking, you have
Speaker 1: more issuance at least in the near term at the
Speaker 1: short end of the yield curve, So it could be
Speaker 1: a concern about um simply supply and what the Fed
Speaker 1: is doing. However, historically speaking, the yield curve has been
Speaker 1: a very good um predictor or prognosticator of of economic activity.
Speaker 1: And while it is true we've had unspectacular that's how
Speaker 1: I would say it GDP growth, but we continue to
Speaker 1: have very, very very subdued inflation. And I think that
Speaker 1: the yield curve is giving us some warning that the
Speaker 1: Feds hiking in here when inflation is low. This is
Speaker 1: you know, we're nine years into this expansion and we
Speaker 1: still haven't seen inflation. We haven't seen it on the
Speaker 1: income or the wage front, and it we're getting kind
Speaker 1: of late in the cycle um to see that develop.
Speaker 1: And I think that's what the bond market is telling us.
Speaker 1: So are the bond market and the stock market telling
Speaker 1: two different stories about the economy, two stories that cannot
Speaker 1: be reconciled? Are they just telling two sides of the
Speaker 1: same story. Maybe that the stock market is showing that
Speaker 1: corporate profits are expected to keep increasing, yet the bond
Speaker 1: market set well, maybe just not at a spectacular pace.
Speaker 1: So you know, you're dealing with a bond guy, and
Speaker 1: as you said earlier, when the economy is doing poorly,
Speaker 1: me as a bond guy, I'm in my I'm in
Speaker 1: my my zone that I like to see that. So
Speaker 1: I would say that they are telling you two different stories.
Speaker 1: And one of the stories that's been going on with
Speaker 1: the stock market. Obviously we have we do have a
Speaker 1: recovery steady issue, if not spectacular, so we go that.
Speaker 1: But one of the things that has helped um In fact,
Speaker 1: maybe the thing that has helped the stock market over
Speaker 1: these last few years is low interest rates. Why because
Speaker 1: corporations have been borrowing a huge amount of money, tremendous
Speaker 1: amount um. They issue bonds like the government, and what
Speaker 1: are they doing with that cash. What are they doing
Speaker 1: with the bonds that raise money for them? They're buying
Speaker 1: back their own stock. So you've seen you there is
Speaker 1: less stock out there today then there was five ten
Speaker 1: years ago, the buy back situation, and so that has
Speaker 1: been one of the things that has helped prop up
Speaker 1: the stock market, the fact that they've been using so
Speaker 1: much cash to buy back their their own stocks. They're
Speaker 1: the biggest buyer of the stock market, and that happens
Speaker 1: when interest rates are low, and the this spread with
Speaker 1: the corporate bond spread between you know, treasuries and corporate
Speaker 1: bonds is also very tight. So it makes a lot
Speaker 1: of sense, but they're not investing, and I think that
Speaker 1: that will prove a problem. That's why I think the
Speaker 1: bond market is more right or more correct than the
Speaker 1: stock market, because if we do see interest rates rise,
Speaker 1: or if we were to go into an extended period
Speaker 1: of the slowdown, I think all that corporate barring could
Speaker 1: prove to be a problem. Now we've often heard not
Speaker 1: just from government officials, but from investors as well, this mantra,
Speaker 1: the U s Treasury market is the largest, most liquid,
Speaker 1: most secure asset class in the world. Does what's going
Speaker 1: on in the US treasury market now reflect things that
Speaker 1: are going on outside the United States as well as
Speaker 1: issues like Treasury Department sales, tax plan FED Well, it
Speaker 1: certainly does. You know, the bond market is I mean
Speaker 1: our bond market. All bond markets are are international. The
Speaker 1: the largest holders of US treasuries are overseas, and one
Speaker 1: of the largest holders are foreign central banks. Well, when
Speaker 1: they they have had their about of what is known
Speaker 1: as quantitative easing meeting. Central banks have been buying bonds
Speaker 1: to keep interest rates low. They have negative yields in Europe,
Speaker 1: for example, and so we have we have positive yields.
Speaker 1: I mean we don't. You don't have to pay the
Speaker 1: government when you buy a bond. So the point is
Speaker 1: the point is that the demand for U. S. Treasuries
Speaker 1: is very much influenced by activity overseas where there is
Speaker 1: some growth going on. Absolutely, but there are not a
Speaker 1: lot of bonds around because other central banks have bought them,
Speaker 1: and the yields and bonds overseas in many cases are negative.
Speaker 1: There's something on the order of ten trillion dollars worth
Speaker 1: of bonds overseas and have a negative yield. Well, if
Speaker 1: you want a positive yield, come to the US are
Speaker 1: yields might be low or appears to be low, but
Speaker 1: at least there's a yield, right, But does that necessarily
Speaker 1: mean there's going to be a slowdown? I guess what
Speaker 1: I'm saying is we've heard this idea multiple times since
Speaker 1: two thousand and nine, that the economy is headed for
Speaker 1: a double dip. Hasn't happened. I'm just wondering whether this
Speaker 1: reflects the relative attractiveness of the US versus others. The
Speaker 1: other economy that the US is often compared with is China,
Speaker 1: and yet their bond market very different and much more
Speaker 1: difficult for foreign investors to access. So, I mean, it
Speaker 1: is a good question. And of course, at any given
Speaker 1: moment in time, you know, we try to make it simple.
Speaker 1: The yield curve says this UM, and there are these
Speaker 1: other influences we've We've not experienced, you know, in in
Speaker 1: my thirty years a lot of time when there's ever
Speaker 1: been negative yields. So certainly there's a component to that.
Speaker 1: There's certainly a component to it. But I do think
Speaker 1: that we can't dismiss the yield curves shape, or or
Speaker 1: the low yields that we're having UM as simply a
Speaker 1: matter of you know, there's there's a strong demand from overseas,
Speaker 1: you know, because of these negative yields. The fact of
Speaker 1: the matter is here we are nine years into a recovery.
Speaker 1: That's a very long time. That's a very long time.
Speaker 1: So when I say we're late cycle, you know, we're
Speaker 1: closer to the next recession than we were now. The
Speaker 1: yield curve may be hinting at that UM not yet,
Speaker 1: but maybe on on the radar. But the other thing
Speaker 1: is inflation, so we're dealing with like we saw today
Speaker 1: with the with the core CPI number very low, came
Speaker 1: in a little bit lower than expectations. We look at
Speaker 1: the other measures of inflation also very very low one
Speaker 1: point three percent, one point five when we're looking at
Speaker 1: the Fed's preferred measures, so low interest rates, particularly at
Speaker 1: the long end of the Yelk curve. The longer maturities
Speaker 1: are always a reflection of both current inflation and inflation expectations,
Speaker 1: whether it's the surveys that come out or other uh known,
Speaker 1: what the said would call market measures of inflation. Those
Speaker 1: two are pointing to very low inflation um in the
Speaker 1: coming months, in the coming year. David will have to
Speaker 1: wrap it up there. Thanks for explaining that story. It's
Speaker 1: definitely not something that we normally hear out of President
Speaker 1: Trump's Twitter feed at eight. Are great to have you
Speaker 1: on today. Benchmark will be back next week with our
Speaker 1: two part year and special. In the meantime, you can
Speaker 1: find us on the Bloomberg terminal, Bloomberg dot com, our
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Speaker 1: You can follow me on Twitter at at scott Landman Dan,
Speaker 1: you are at Moss Underscore Eco and our guest David
Speaker 1: isn't on Twitter, but you can find insights from his
Speaker 1: firm at at I f I Underscore. Financial Benchmark is
Speaker 1: produced by Topor Foreheads and Magnus Hendrickson. The Head of
Speaker 1: Bloomberg Podcasts is Francesca Levy. Thanks for listening, See you
Speaker 1: next time.