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Speaker 1: This is Bloomberg Surveillance. I do think we're on the

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Speaker 1: verge of overregulating the major banks to the point where

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Speaker 1: it's difficult for them to earn a reasonable return on capitol,

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Speaker 1: and they become like a utilities that can't attract good people.

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Speaker 1: So much of the bad news has become the new

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Speaker 1: normal that I don't think the market's get shaken. The

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Speaker 1: big puggle for economy is, how is it the rates

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Speaker 1: are so low and inflation remains so low? Bloomberg Surveillance

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Speaker 1: your link to the world of economics, finance, and investment

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Speaker 1: on Bloomberg Radio. Good running, everyone, Michael mckayn Toime Kane

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Speaker 1: this Thursday. Coast to coast, Good morning, Bloomberg twelve, Boston FM, Washington, Baltimore,

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Speaker 1: A beautiful day in New York, Bloomberger eleven three oh

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Speaker 1: New York and on the West Coast nine sixty the

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Speaker 1: Bay Area. Good morning, good early morning in San Francisco,

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Speaker 1: and a course to all of you nationwide. I'm serious.

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Speaker 1: And XM channel one nineteen we say good morning. Is

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Speaker 1: well in Canada as well. I'm all pumped up, um.

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Speaker 1: I don't know if I'll be awake tomorrow. Mike I

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Speaker 1: usually watch a first period of a too late in

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Speaker 1: the evening hockey game, but I may stay up coming

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Speaker 1: coma coast tomorrow. H It is a good morning in

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Speaker 1: San Francisco, actually in San Jose and all points in between,

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Speaker 1: as the Sharks make the Stanley Cup Finals finally years

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Speaker 1: beat the Blues. Surprised me. I thought the Blues would win.

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Speaker 1: That would be cool. Golden State and San Jose. Well,

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Speaker 1: Golden States is in big trouble. They're down through one

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Speaker 1: and they could lose, but then the people in the

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Speaker 1: Bay area still have the Sharks, so they do. It's

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Speaker 1: like Boston when you know one team is not winning

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Speaker 1: the other team is. Well, that's the rumor at least

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Speaker 1: that we're unsure of that in Boston right now. Bloomberg's Surveillance.

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Speaker 1: I brought you this morning a Coast to Coast and

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Speaker 1: the New York Cone Resnec Accounting Jack's Advisory, look Ahead,

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Speaker 1: Gain Insight, Imagine More. The professionals at Cone Resnick can

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Speaker 1: help your business breakthrough. Find out more at Cone Resnick

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Speaker 1: dot com. C O H N R. E Z and

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Speaker 1: I C K cone Resn dot com. George boy with

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Speaker 1: us as well as far Ago Looking at the bond

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Speaker 1: market and how bonds will move assuming FED rate rises.

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Speaker 1: Do they move with lockstep? George, what's the history of

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Speaker 1: when a FED normalizes over say the next twelve to

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Speaker 1: eighteen months. What do corporate bonds actually do? Hey, Tom,

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Speaker 1: good morning. Corporate bonds, investment grade corporate bonds will typically

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Speaker 1: track pretty closely with treasury moves. So if treasury yields

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Speaker 1: are going higher and bond prices are falling, corporate bonds,

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Speaker 1: investment grade corporate bonds will typically move pretty pretty close.

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Speaker 1: They'll they may lag a little to the spread between

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Speaker 1: the two might tighten um, but on the high yield

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Speaker 1: side you tend to get a little bit more kind

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Speaker 1: of diversification, so that the there there's a more meaningful

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Speaker 1: lag between say HI yield and UH and treasuries. And

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Speaker 1: that's simply because a yield is going to be more

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Speaker 1: connected to say, equities and growth than say UH than

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Speaker 1: say investment grade. And as you mentioned, you know, with

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Speaker 1: the FED sort of creeping towards the potential of a

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Speaker 1: rate hike, we're starting to see the flow through of

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Speaker 1: that on the corporate bond side. Investment grade corporate bond

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Speaker 1: prices have dropped pretty meaningfully, at least in bond terms.

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Speaker 1: Over the last week or so, high yields held up

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Speaker 1: a little bit better, as I mentioned before, but we

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Speaker 1: are starting to see some downward pressure prices as bond

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Speaker 1: yields go up. But in what maturity that's the question

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Speaker 1: for the FED as they raise rates and so many

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Speaker 1: people want into US markets, that seems like the long

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Speaker 1: end doesn't move very much. Yeah, that's a good point.

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Speaker 1: And I think the reads through there is sort of

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Speaker 1: is how effective is the FED policy? Um, the long

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Speaker 1: end as repriced modestly. You've seen ten year yields come up,

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Speaker 1: you know, ten fifteen basis points um, and the thirty

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Speaker 1: years the long end has come up a little bit

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Speaker 1: about the same. And and corporate bond yields have kind

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Speaker 1: of tracked incrementally, uh, incrementally higher. But the front end

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Speaker 1: is moving faster. So the curve itself is flattening, and

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Speaker 1: and that typically is it's not a great signal for

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Speaker 1: for growth in the in the future. Of flatter curve

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Speaker 1: usually implies some degree of slow down as the cost

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Speaker 1: of borrowing at the front end goes up, kind of

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Speaker 1: tightens up monetary policy. And uh, and then that ultimately

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Speaker 1: starts to flow through to to the real economy, and

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Speaker 1: that's one of our big concerns. Corporate America has been

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Speaker 1: a huge beneficiary over the last couple of years of

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Speaker 1: of the monetary policy backdrop low rates um the drive

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Speaker 1: the push lower of of rates has forced investors to

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Speaker 1: kind of creep out along the curve, and it's really

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Speaker 1: encouraged corporate America to to borrow considerable amounts of money.

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Speaker 1: So any reversal of that trend, as yields start to

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Speaker 1: creep a little higher in the curve flattens starts to

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Speaker 1: create a headwind to that. What is right now a

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Speaker 1: relatively virtuous cycle. What do you expect CFOs will do.

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Speaker 1: Do they try to get out in front of FED normalization,

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Speaker 1: do they try to gain the system, or do they

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Speaker 1: actually go by strategic need. I think there's a little

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Speaker 1: bit of gaming the system. You've seen a pretty significant

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Speaker 1: upticking issuance in the first quarter of this year. UH

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Speaker 1: this month alone is on track for almost two hundred

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Speaker 1: billion dollars of gross new issuance in the in the

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Speaker 1: dollar UH corporate bond market. So I think there's a

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Speaker 1: little bit of preemptive funding that's going on, but there's

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Speaker 1: there's plenty in the pipeline as well. You know, companies

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Speaker 1: are making strategic long term decisions to buy each other,

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Speaker 1: to consolidate industries, to pay out significant amounts of money

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Speaker 1: to equity holders. With that comes some some meaningful financing requirements.

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Speaker 1: And that's one of the concerns is that if that

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Speaker 1: vertu who a cycle starts to break down, the borrowing

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Speaker 1: need of the corporate sector remains pretty high. There's about

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Speaker 1: eight and a half trillion dollars of debt outstanding in

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Speaker 1: the corporate sector. Overall, that money, you know, needs to

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Speaker 1: be refinanced and or paid back as we moved through time,

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Speaker 1: and that creates very meaningful borrowing requirements. So you can

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Speaker 1: only get to go far ahead before you kind of

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Speaker 1: run into, you know, some some issues. I'm like, I'm

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Speaker 1: looking at a and I'm gonna say it in the

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Speaker 1: German way buyer a G Pharmaceuticals sixty year paper six zero,

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Speaker 1: the three and three quarters do two thousand and seventy four.

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Speaker 1: They've got a call feature. They're trading in a discount.

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Speaker 1: So I guess you gross up from change up to

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Speaker 1: a hundred as you wait seventy years sixty some years

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Speaker 1: for your capital game. Um, that's amazing. Yeah, that's like perpetuity.

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Speaker 1: I can't spell it, but radio if um the I

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Speaker 1: mean if you you know, if you look across the

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Speaker 1: corporate sector, as you mentioned, financing UH levels are very attractive,

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Speaker 1: and I think that's one of the that's a big

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Speaker 1: driver of a lot of M and A activity right now. Um.

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Speaker 1: And and so companies can secure they're all in cost

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Speaker 1: of financing in many instances, like you said, three and

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Speaker 1: three quarters at a discount, so you know seven years out,

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Speaker 1: so maybe that's a four and at four or four

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Speaker 1: and a half percent all in yield. But if you

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Speaker 1: look at the total cost of financing for for bear,

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Speaker 1: you know it's going to be somewhere in the call

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Speaker 1: it two to three percent kind of range, especially if

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Speaker 1: you emphasize shorter data maturities are going to euros or yen.

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Speaker 1: The global cost of borrowing is at record lows, and

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Speaker 1: so companies have responded to that. They're using it, but

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Speaker 1: they're using it to buy each other. They're paying dividends,

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Speaker 1: they're buying back. They're stuck. There's a little bit of

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Speaker 1: capital spending, but not a lot. And as a creditor.

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Speaker 1: That's what we worry about. How is that money being

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Speaker 1: used And right now it's being used basically to UH

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Speaker 1: to help the shareholder, which is not a bad thing,

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Speaker 1: but you know, it doesn't necessarily benefit m that's a

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Speaker 1: remarkable like the coupon on that is excuse me. The

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Speaker 1: yield current yield is four point I gotta center at

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Speaker 1: four point zero five. It would be my center time. Well,

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Speaker 1: I would want seventy years. I personally want more compensation

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Speaker 1: given what's happened in the last seventy years in the

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Speaker 1: in the world. But it brings me to a question.

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Speaker 1: George tom and I UH looked yesterday at the term

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Speaker 1: premium on treasuries and how it is for a tenure

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Speaker 1: running negative right now, um and with spreads the way

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Speaker 1: they are, you know, the term premium has come way

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Speaker 1: down on corporate So I mean, investors are awfully sanguine

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Speaker 1: about the risks they're running. It appears that's exactly right.

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Speaker 1: I mean, you're making some pretty big assumptions about the

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Speaker 1: future of inflation and the future of defaults. Um You know,

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Speaker 1: inflation has been low, but it's creeping higher. You know,

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Speaker 1: we're looking at as oil prices creep higher. That will

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Speaker 1: drag inflation both headline and ultimately core higher. And uh

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Speaker 1: and if we look at default rates, that's all they're

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Speaker 1: also creeping higher. We were roughly at about a two

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Speaker 1: default rate about eighteen months ago. Today it's closer to

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Speaker 1: six percent. So it's tripled in eighteen months. It's probably

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Speaker 1: going to continue to creep higher. And uh And the

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Speaker 1: FED is, you know, trying to kind of tighten up policy. Um.

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Speaker 1: So the two main risks for a corporate investor are

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Speaker 1: interest rate risks and and and and credit risk. Uh.

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Speaker 1: And it looks like the best of days for both

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Speaker 1: of those risks are behind us. It doesn't mean we

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Speaker 1: immediately go careening into a wall, but it does mean

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Speaker 1: that the head winds are mounting and the credit cycles

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Speaker 1: are long and drawn out. This credit cycles pre advanced.

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Speaker 1: You know, if you think about it as a clock,

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Speaker 1: we think we're closer to ten o'clock that we are

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Speaker 1: at to two o'clock. Okay, well, then within that, George

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Speaker 1: very quickly here, how do you allocate with incorporate bonds

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Speaker 1: or do they all go up and down in lockstep?

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Speaker 1: I think he had to be pretty selective. You look

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Speaker 1: for stability of cash flow. You know, there are plenty

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Speaker 1: of companies out there that have good core, stable earnings. Um.

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Speaker 1: You know, we look at, say like the telecom sector

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Speaker 1: is a is a perfect example. It's in a pretty

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Speaker 1: good spot, did a lot of consolidation a few years ago.

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Speaker 1: It's generating very predictable cash flows. I think the financial sector,

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Speaker 1: from a bond holder's perspective, is also doing pretty well.

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Speaker 1: We've had a little bit of a rumping bond stocks recently,

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Speaker 1: but they're heavily regulated, they're very capitalized. There's a lot

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Speaker 1: of trimity on the balance sheet and the George brilliant

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Speaker 1: George Borie Wells Fargo, thank you so much. Futures up

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Speaker 1: three down, Futures up thirty three. This morning, I'm now

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Speaker 1: checking with Michael Barin. Got the latest world and national headlines.

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Speaker 1: Mike Tom, thank you very much. President Barack Obama and

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Speaker 1: other leaders of the G seven nations are gathered in

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Speaker 1: Japan for talks that include what to do about the

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Speaker 1: sagging world economy. President Obama also says G seven leaders

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Speaker 1: are rattled by Donald Trump. A large tornado damage to

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Speaker 1: destroyed as many as twenty five homes in a rural

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Speaker 1: area of northern Kansas. Officials say last night swister came

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Speaker 1: within a mile of hitting the small town of Chapman.

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Speaker 1: The National Weather Service says it was on the ground

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Speaker 1: for about an hour and a half and there were

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Speaker 1: no reports of injuries or fatalities. Officials in Kansas also

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Speaker 1: say that the area of Chapman was hit back in

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Speaker 1: two thousand and eight by another tornado. Global News twenty

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Speaker 1: four hours a day, powered by our two hundred journalists

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Speaker 1: more than a hundred fifty news bureaus around the world

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Speaker 1: Now Michael Bartto and MICHNNA thanks so much at sharing

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Speaker 1: in the foreign exchange market. Yeah, and one ten oh

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Speaker 1: seven year old dollar one eleven sixty eight. Of course,

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Speaker 1: the backdrop West Texas fifty point one one, Brent fifty

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Speaker 1: point four zero worldwide to Bloomberg's surveillance. The news update

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Speaker 1: brought you by tech Computing, a new kind of by

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Speaker 1: t solutions companies but works all mobility and infrastructure. Locom

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Speaker 1: explain how their expertise can help you gain greater business value.

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Speaker 1: Is a tcho computing dot com