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Speaker 1: Good morning. It's Thursday, the fifth of October here in London.

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Speaker 1: This is the Bloomberg Daybacurate podcast that I'm Caroline Hepkit and.

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Speaker 2: I'm Stephen Carroll. Coming up today. Barkley's analysts say it

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Speaker 2: will take a stock crash to rescue the bond market.

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Speaker 1: Rishi Sunak tears off a project championed by five of

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Speaker 1: his predecessors in a bid to reset his party's agenda.

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Speaker 2: Plus, as the downturn and the property market is hurting

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Speaker 2: owners and landlords, the imminent danger may be elsewhere. We

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Speaker 2: look at the struggles facing the firms who get things built.

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Speaker 1: Let's start with a roundoff of our top stories. Global

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Speaker 1: bonds are doomed to keep falling unless we see a

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Speaker 1: sustained slump in equities. That according to analysts from Berkley's.

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Speaker 1: The Global Chairman of Research at the Bank, aj Rajah Dax,

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Speaker 1: says that in the short term, the only scenario where

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Speaker 1: bonds rally materially is where risk assets fall sharply in

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Speaker 1: the coming weeks. Yields hit levels not seen since two

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Speaker 1: thousand and seven yesterday, but then rallied on weaker US

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Speaker 1: jobs data. Invesco's Stephanie Larasilier says that traders are watching

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Speaker 1: the current moves.

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Speaker 3: Closely, investors starting to take no heels that we haven't

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Speaker 3: seen over a decade.

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Speaker 4: I mean, every part of the curve.

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Speaker 3: Is at a decade plus ties, and we're talking about

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Speaker 3: a uni market where you know, in the past, when

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Speaker 3: we have seen these yields, they've usually meant that there

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Speaker 3: was some underlying fundamental questionable, you know, credit issues, and

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Speaker 3: that doesn't exist right now.

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Speaker 1: Stephanie Lowersilier's comments come as trade has remained on high

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Speaker 1: alert for a resurgence in volatility, especially if US non

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Speaker 1: farm payrolls data on Friday come in stronger than expected.

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Speaker 2: Bill Gross, the co founder of PIMCO and a man

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Speaker 2: once dubbed the bond King, has also been weighing in

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Speaker 2: on the recent market gyrations. He says stocks are clearly

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Speaker 2: overvalued and the bond yields will need to fall significantly

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Speaker 2: to justify current valuations. Speaking to Bloomberg, Gross also took

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Speaker 2: aim at retail investment is, saying they've also helped to

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Speaker 2: spook the market, acting as quote little bond vigilantes.

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Speaker 5: They've been spooked over the last week or so by

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Speaker 5: declines of two, three four percent in their etups, and

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Speaker 5: so I think.

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Speaker 6: They're joining the crowd in terms of selling.

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Speaker 5: And you know, we're seeing a little bit of an

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Speaker 5: oversol market here headed to five percent.

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Speaker 2: If I want to hear that full interview with Bill Gross,

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Speaker 2: you can get it on the Bloomberg Talks podcast all

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Speaker 2: of our key conversations in one place. Redemptions by individual

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Speaker 2: investors have helped to deepen their out over the past week,

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Speaker 2: as exchange traded funds were forced to sell holdings worth

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Speaker 2: hundreds of millions of dollars.

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Speaker 1: Now to the UK. After days of criticism for not

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Speaker 1: making a decision on high speed Rail two, the Prime

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Speaker 1: Minister has confirmed that he's scrapping the northern leg of

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Speaker 1: the one hundred billion pound infrastructure project. Soon made the

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Speaker 1: announcement in his Leader's speech out the Conservative Party confidence

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Speaker 1: and sought to frame the move in a positive light.

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Speaker 7: I say to those who backed the project in the

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Speaker 7: first place, the facts have changed, and the right thing

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Speaker 7: to do when the fact change is to have the

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Speaker 7: courage to change direction.

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Speaker 1: Richie Sonac says that he'll spend the thirty six billion

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Speaker 1: pounds saved on hundreds of other transport schemes instead, but

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Speaker 1: decisions to cut the project short go against the past

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Speaker 1: five Prime ministers, all of whom backed the plan. David

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Speaker 1: Cameron reacted to the news, calling it the loss of

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Speaker 1: a once in a generation opportunity.

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Speaker 2: Barclays is laying off roughly fifty senior deal makers as

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Speaker 2: part of its annual staff cut. The move is said

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Speaker 2: to be part of a planned to trim headcount by

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Speaker 2: about three hundred people across the Corporate and Investment Bank divisions.

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Speaker 2: That amounts to about three percent of the total headcount

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Speaker 2: in the unit, which also includes Barkley's trading operations.

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Speaker 1: The London Stock Exchange CEO Julia Hoggett says the City

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Speaker 1: of London is being hamstrung by low salary. The finance

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Speaker 1: executive says that luring top recruits with market changing talent

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Speaker 1: needs pay to match.

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Speaker 8: That person who would be game changing in terms of

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Speaker 8: unlocking that value for the UK company you're unlocking that

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Speaker 8: market would have to be paid more than the CEO

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Speaker 8: and wouldn't be able to have any performance related to

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Speaker 8: pay on top of what they started at and is

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Speaker 8: probably still taking a pay cup from what they be

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Speaker 8: paid to work for a Nation company, or a US

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Speaker 8: company or even sometimes a European company.

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Speaker 1: LC CEO Julia Hoggart speaking there to the Inner City podcast.

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Speaker 1: Median pay for footy one hundred CEOs increased by sixteen

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Speaker 1: percent to three point nine million pounds last year, and

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Speaker 1: you can listen to that whole interview wherever you listen

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Speaker 1: to your podcasts.

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Speaker 2: Your opinion, and diplomats have reached an initial agreement over

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Speaker 2: an overhaul of rules on migration. Officials agreed that in

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Speaker 2: a crisis situation, member states may request the relocation of

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Speaker 2: asylum seekers to other EU countries, as well as financial

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Speaker 2: contributions to support migrants. And migration have become an increasingly

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Speaker 2: urgent problem for European Union leaders meeting in Grenada and

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Speaker 2: Spain this week, with some countries taking unilateral measures to

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Speaker 2: Titan controls.

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Speaker 1: And finally, the twenty thirty Football World Cup will take

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Speaker 1: place across six countries and three continents. Spain, Portugal and

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Speaker 1: Morocco will stage most of the tournament, but it will

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Speaker 1: start in South America to celebrate one hundred years of

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Speaker 1: the competition, with Uruguay, Argentina and Paraguay hosting a match each.

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Speaker 1: The FIFA President Johnny Infantino says that the choice of

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Speaker 1: Uruguay is significant.

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Speaker 9: The first of these three matches will of course be

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Speaker 9: played at the stadium where it all began, in Montevideo's

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Speaker 9: medical Estadio Centennario, precisely to celebrate the centenary edition of

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Speaker 9: the FIFA World Cup.

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Speaker 1: Infantino went on to say that the organization is quote

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Speaker 1: bringing everyone together by awarding the competition to so many nations.

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Speaker 2: Welcome back back, sitting beside me after your trip to

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Speaker 2: Manchester this week, So much happened, of course, culminating in

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Speaker 2: the speech by Rishie Sineak yesterday.

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Speaker 1: Yeah, listen, it was great to be in Manchester. It

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Speaker 1: was difficult to get back, of course, because there was

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Speaker 1: strike action and so that was one of the things

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Speaker 1: that were sort of overhanging the last day of this

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Speaker 1: full day conference up in Manchester. It's a huge jamboree.

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Speaker 1: It's all the MPs, it's the Prime Minister and Chancellor

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Speaker 1: giving major speeches, and it's all the party activists there.

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Speaker 1: It's sort of meant to rally the grassroots of the

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Speaker 1: Conservative Party and so there was a lot of anticipation

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Speaker 1: around what the Prime Minister was going to say and

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Speaker 1: there was a lot of speculation about high speed rail too.

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Speaker 1: This is a huge infrastructure project that was meant to

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Speaker 1: end with fast, super fast bullets trains coming into Manchester Station.

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Speaker 1: Speculation that was going to be scrapped, and indeed that

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Speaker 1: is exactly what the Prime Minister did in that speech.

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Speaker 1: He canceled it. He did talk about reinvesting all of

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Speaker 1: the money in one hundreds of other projects road and

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Speaker 1: rail in the North of England and the Midlands. But

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Speaker 1: there was really a furroy after that. And so I

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Speaker 1: spent the afternoon after the Prime Minister's speech going to

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Speaker 1: the press conference held by the Greater Manchester Mayor Andy Burnham.

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Speaker 1: He was surrounded by.

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Speaker 2: Who you'd spoken to earlier in the week of about.

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Speaker 1: Absolutely I had spotted him roving around the conference hall,

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Speaker 1: you know, speaking to people. He's obviously a labor politician,

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Speaker 1: but you know was was welcoming the Conservative conference to

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Speaker 1: his city and yes, so I caught up with him

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Speaker 1: then in a one on one conversation. The palpable frustration

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Speaker 1: and really anger because Burnham was surrounded by a number

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Speaker 1: of business people and also the chair of the Greater

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Speaker 1: Manchester Business Board, lou Cardwell, who's herself an entrepreneur. So

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Speaker 1: I spoke to both of them and there was real

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Speaker 1: sort of anger. It doesn't help build business confidence. What

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Speaker 1: Andy Burnham was saying he didn't understand how the Conservative

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Speaker 1: Party could call itself the party of business or bring

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Speaker 1: growth to the regions that they didn't. The particular point

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Speaker 1: they made again and again was that Richie Sunac was

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Speaker 1: in the city to make the decision affecting the city

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Speaker 1: and did not consult business people and all himself in

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Speaker 1: the city when he was their There was a real

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Speaker 1: sort of anger about that Prime ministerial government decision and

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Speaker 1: seems to be potentially building to push back.

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Speaker 9: Yeah.

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Speaker 2: Look, it's something that we're going to be hearing plenty

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Speaker 2: more about as well, and the ramifications without decision being

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Speaker 2: made and whether or not party members from the Conservative

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Speaker 2: Party and indeed voters will buy the alternative plan that

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Speaker 2: Richie put forward in his speech yesterday. First, we're going

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Speaker 2: to turn to the markets and bring you more of

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Speaker 2: our interview with the Pimcoke co founder Bill Gross. After

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Speaker 2: that historic sell off that we've seen on bond markets,

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Speaker 2: driving yields to their highest levels since two thousand and seven,

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Speaker 2: the man known as the bond King, says the market's

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Speaker 2: looking a little over sold. Bill Gross has been speaking

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Speaker 2: to Bloomberg's Katie Greefeld and remain bustic.

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Speaker 5: I think pe rachel's are coming down. Katie explained it

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Speaker 5: in terms of an equity risk premium being close to

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Speaker 5: you know, basically the bond market and meaning that there's

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Speaker 5: little risk in terms of stocks relative to treasure bills

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Speaker 5: or short term treasure notes. I would put it this way,

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Speaker 5: give me thirty seconds for an example, that APE ratio

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Speaker 5: at twenty, turn it up signed down as an EP

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Speaker 5: ratio at five. So an earnings ratio at five, a

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Speaker 5: PE ratio of twenty was a year and a half ago,

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Speaker 5: and since then, real yield says Katie pointed out, I've

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Speaker 5: gone up by.

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Speaker 6: You know, a good three hundred and fifty basis points.

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Speaker 5: If and I'm not saying this is going to happen,

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Speaker 5: but if the earnings yield ratio, the EP ratio went

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Speaker 5: up from five to eight and a half percent, then

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Speaker 5: PE ratios would be down around twelve or thirteen.

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Speaker 6: And that's it's a little old school.

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Speaker 5: It's Gordon discount dividend discount model type of thing. But

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Speaker 5: it does indicate the direction in terms of pe ratios

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Speaker 5: that they might move if we see a situation really

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Speaker 5: real yields still at the two point four zero.

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Speaker 10: Percent, and let's break down what we've seen in terms

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Speaker 10: of nominal yields. As you mentioned, real yields very high

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Speaker 10: and they've been in the driver's seat really if you

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Speaker 10: think about this rise in the ten year yield, talk

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Speaker 10: to us though about break evens. Do you think that

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Speaker 10: inflation expectations should be higher here given what we're seeing

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Speaker 10: in the energy market.

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Speaker 6: Yeah, I think it should.

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Speaker 5: And you know, the break even rate for the ten

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Speaker 5: uere amazingly is rather stable between two and two point

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Speaker 5: three percent today, I think around two point three four percent,

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Speaker 5: and so that's the expectation for inflation. I would say

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Speaker 5: it's more like three. Getting down to two is going

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Speaker 5: to be very difficult going forward. And so you know

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Speaker 5: that to me means that nominal treasuries take the tenure

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Speaker 5: again at four point seventy five or four point eight,

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Speaker 5: that nominal treasuries are basically based upon an expectation for

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Speaker 5: a three percent PAD funds rate over a long term basis.

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Speaker 5: There is an equity risk premium that you talked about

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Speaker 5: there is a term premium for bonds as well of

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Speaker 5: about one to one on a quarter percent, because that's

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Speaker 5: the risk of owning a tenure versus a treasury bill.

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Speaker 5: And so if FED funds settle around three to three

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Speaker 5: and a half percent, you know, a five percent tenure

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Speaker 5: treasury is decent value, it's not great value.

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Speaker 4: What is great value?

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Speaker 6: Though?

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Speaker 10: When you think about five percent on a ten year treasury,

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Speaker 10: we haven't seen that for fifteen years plus.

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Speaker 4: If that's not great, what is great?

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Speaker 5: Well, it's great er, there's no doubt about that. But

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Speaker 5: five percent again, would would be a normal bond term

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Speaker 5: premium of about one or a quarter percent hunder three

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Speaker 5: percent inflationary expectations.

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Speaker 6: So that's okay.

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Speaker 5: And I know corporate spreads have winded out a little

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Speaker 5: bit and that makes them attractive. But what what I

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Speaker 5: think has happened, Katie in the past several weeks and

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Speaker 5: the market is beginning to recognize treasury supply, you know,

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Speaker 5: based upon a two trillion dollar deficit. They're beginning to recognize,

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Speaker 5: you know, basically the selling of bonds by the.

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Speaker 6: Fed in terms of the QT.

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Speaker 5: They're beginning to recognize higher for longer as well, and

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Speaker 5: so those two factors have been important in terms of

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Speaker 5: the current rise. What I've seen in the last week

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Speaker 5: is that the bond vigilantes, to the extent that they

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Speaker 5: are now individuals owning you know, billions and billions, hundreds

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Speaker 5: of billions of bond ETFs, they've been spooked over the

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Speaker 5: last week or so by declines of two, three, four

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Speaker 5: percent in their ETFs, and so I think they're joining

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Speaker 5: the crowd in terms of selling. And you know, we're

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Speaker 5: seeing a little bit of an over soul market here

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Speaker 5: headed to five percent.

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Speaker 6: Certainly over sold.

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Speaker 11: But I do worry bills about some of these external events.

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Speaker 11: Of course, yesterday there was a lot of hoopla around

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Speaker 11: basically the Speaker of the House losing his position here

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Speaker 11: and whether this was symptomatic of just the dysfunction in Washington.

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Speaker 11: You mentioned the federal debt. We know debt servicing costs

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Speaker 11: have gone up from sub two percent here for the

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Speaker 11: government too, I think now somewhere in the four to

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Speaker 11: five percent range here on average. How much of that

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Speaker 11: ends up becoming a factor in investment decisions or can

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Speaker 11: you ignore it?

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Speaker 7: Well?

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Speaker 6: I don't think you can ignore it. You know, We're

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Speaker 6: going to see the point again thirty days.

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Speaker 5: From now, in which they have to vote and we'll

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Speaker 5: have a new speaker, I assume. But to me it indicates,

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Speaker 5: you know, disruption in terms of the process, additional disruption

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Speaker 5: based upon what we've seen because Henry Republicans ten concerned

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Speaker 5: are Republicans basically are running the show and the house,

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Speaker 5: and so that will increase volatility in terms of all

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Speaker 5: markets and curly as a negative.

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Speaker 2: So that was the Pimco co founder Bill Gross there

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Speaker 2: speaking to Bloomberg's Katie Greifeld and remain bustic.

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Speaker 1: Now we're going to Germany for our next story, where

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Speaker 1: the property downturn driven by higher interest rates is starting

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Speaker 1: to claim some big victims. A swathe of German developers

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Speaker 1: are facing insolvency. That's leaving construction projects in limbo across

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Speaker 1: the country and creditors potentially facing hefty losses are distressed

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Speaker 1: debt reported. Libby Cherry has been following this story. Libby,

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Speaker 1: great to have you on. Firstly, what's just prompted this

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Speaker 1: particular wave of businesses to file for insolvency?

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Speaker 12: Hi that so it's a bit of a perfect storm

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Speaker 12: really when it comes to these developers. So, as you said,

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Speaker 12: we've seen this very rapid rise in interest rates and

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Speaker 12: that's feeding through into higher financing costs for these developers,

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Speaker 12: the loans that they often take out in order to

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Speaker 12: fund a project to completion. And then on the other side,

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Speaker 12: you've had inflation, so that's increased the cost of building materials,

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Speaker 12: that's increased the cost of labor, and that's eating into

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Speaker 12: their margins as well. And you know, often they can

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Speaker 12: find themselves at a point where they're halfway through a

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Speaker 12: projects and they're left without the money to finish it.

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Speaker 12: And you know, at that point, you know, if your

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Speaker 12: lenders aren't willing to provide you with more money, you know,

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Speaker 12: you sometimes you face a little choice but to yeah,

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Speaker 12: to file for insolvency proceedings.

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Speaker 2: So what are the broader repercussions then for Germany cities.

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Speaker 4: Well, yeah, it's a good question.

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Speaker 12: I mean these cities, you know, they these projects, you know,

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Speaker 12: they can be in the middle of these cities, they

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Speaker 12: can become iceols. You know, often construction has been delayed

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Speaker 12: while negotiations are going on anyway, and once you enter

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Speaker 12: an insolvency process, you can find that some of the

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Speaker 12: existing contractors walk away. There's then a problem of having

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Speaker 12: to tender for you know, for new contractors to come in.

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Speaker 4: You can start having.

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Speaker 12: Some of the people that decided to buy the building

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Speaker 12: getting called feet and it becomes a.

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Speaker 4: Political issue as well.

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Speaker 12: I mean, no one wants these you know, gaping issols

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Speaker 12: in the middle of their cities.

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Speaker 4: So you do see some kind of yeah, you know, the.

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Speaker 12: Mayor's office or some of the sort of local politicians

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Speaker 12: also you know, getting involved.

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Speaker 1: Yeah, and so then what are the lenders doing about this?

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Speaker 1: What's their attitude?

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Speaker 12: So, I mean many of the you know, a lot

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Speaker 12: of this is kind of bank financing, and there can

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Speaker 12: be situations where you know, it's it's in their interest

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Speaker 12: to fund the fund the project or completion, so they

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Speaker 12: might be willing to, you know, in certain cy situations,

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Speaker 12: you know, provide a bit more new money to kind

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Speaker 12: of get the project to completion and sell the building

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Speaker 12: and move on.

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Speaker 4: But negotiations can become more difficult.

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Speaker 12: You do see, you know, for instance, there might be

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Speaker 12: some of these smaller pension funds which have invested in

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Speaker 12: funding these developments, and for regular true reasons, they might

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Speaker 12: be limited in the amount of new money they can provide,

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Speaker 12: So yeah, it can lead to quite sort of difficult

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Speaker 12: negotiations for sure.

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Speaker 2: What's the outlook then for the sector? Maybe given that

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Speaker 2: interest rates are where they are and as we're being

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Speaker 2: told by central banks, will remain higher for longer.

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Speaker 12: Well exactly, I think obviously the sort of macro outlook

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Speaker 12: is quite is quite uncertain. But certainly some of the

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Speaker 12: people that we were speaking to that deal with these

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Speaker 12: kind of cases were saying that they do.

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Speaker 4: You know, anticipate more of these insolvencies going forward.

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Speaker 12: And you know, as you say, if you know, central

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Speaker 12: bank and just way to stay where there are, there

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Speaker 12: will be this period of adjusting. Let alone, if we

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Speaker 12: get see some kind of you know, downturn in the

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Speaker 12: economy as well, you know, I feel that, you know,

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Speaker 12: I think a lot of the responses that we've got

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Speaker 12: with sciss a business model which relied a lot on

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Speaker 12: cheap financing.

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Speaker 4: But you know, perhaps in the.

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Speaker 12: We might be able to reach a new equilibrium.

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