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00:00:19:06 - 00:00:22:21
Welcome everybody back to Mizuho's Markets Mindset,
00:00:22:21 - 00:00:25:04
our quarterly update on the bond market.
00:00:25:04 - 00:00:30:21
And Moshe, I said quarterly, but we are halfway through July,
00:00:30:21 - 00:00:34:21
so it's kind of like the mid-summer update.
But a lot is going on, so
00:00:34:21 - 00:00:38:00
we'll give you a quick recap and we'll try to get
right into it with some of your thoughts here.
00:00:38:00 - 00:00:41:20
So Moshe, year-to-date supply is
running ahead of last year,
00:00:41:20 - 00:00:47:06
and we're currently on pace to have
the second-largest year of issuance ever,
00:00:47:06 - 00:00:49:18
only next to Covid 2020 year.
00:00:50:17 - 00:00:56:07
$969 billion in market, that's a 3% increase
over last year, led mostly by financials,
00:00:56:07 - 00:00:57:17
and we'll talk about that a little bit later on.
00:00:57:17 - 00:01:00:00
Corporates right now, basically flat year over year.
00:01:00:00 - 00:01:00:16
And got to be honest, when you look at the technicals around the new issue market,
00:01:00:16 - 00:01:07:07
And got to be honest, when you look at the technicals around the new issue market,
00:01:07:07 - 00:01:12:21
we're talking about, year-to-date, we've had
3.78x oversubscription, but
00:01:12:21 - 00:01:16:04
every week, but one in the last eight
weeks has been above that.
00:01:16:12 - 00:01:20:12
We have new issue premiums that have
settled into 0 to 5 basis points.
00:01:20:18 - 00:01:25:14
We've got movement off of IPTs at their highs above the year-to-date average.
00:01:25:14 - 00:01:30:18
Everything is fitting in place in this market,
and it feels almost too good to be true.
00:01:30:19 - 00:01:31:09
Wouldn't you say so?
00:01:32:00 - 00:01:33:03
I'd call it scary good.
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Now, scary good.
00:01:35:10 - 00:01:36:18
Where is that coming from?
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When we think about all the factors that have gone on this year, we'll talk about tariffs and
00:01:41:12 - 00:01:43:13
the ambiguity around rates, et cetera.
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Why are we where we are right now from a technical perspective in the new issue market in IG?
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We have, and this isn't just an IG phenomenon, I would say this is a broader capital market trend.
00:01:55:14 - 00:02:00:06
We have a copious amount of excess liquidity in the marketplace right now.
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You said that we had a trillion dollars, we're near a trillion dollars of issuance for the year in IG.
00:02:06:20 - 00:02:14:20
Well, behind that a trillion dollars is approximately
$5 trillion of demand all coming into our market.
00:02:14:20 - 00:02:24:04
So what liquidity does, it suppresses volatility, it minimizes risks, and frankly, it breeds complacency.
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So we talk about liquidity.
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Where is the liquidity coming from?
00:02:28:04 - 00:02:31:22
So, I think it's coming from four different spots.
00:02:32:13 - 00:02:34:10
One is government spending.
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If you look at the data, we're basically spending
the same amount of money
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that we did when the economy was shut down.
00:02:41:21 - 00:02:42:21
2020. Covid.
00:02:42:21 - 00:02:43:10
Exactly.
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And the economy is anything but shut down right now.
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So that money is going to work its way through the system.
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Private credit is another one.
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Assets under management in private
credit are approaching $2 trillion.
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That's money that historically the banks
and the capital markets would manage.
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That's not there anymore.
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So they have to deploy that liquidity somewhere else.
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And that's fueling valuations.
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You also have a good economy with stimulus on the come.
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And the other thing which I think is important,
Victor, is the front end of the yield curve.
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So you have about $7 trillion that have been
hanging in money market accounts.
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You have the President telling you that he's going
to bring in someone to the Fed
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who's going to cut rates fairly substantially.
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So all of a sudden, my 4%+ type of return that I've been getting in money markets is now in jeopardy.
00:03:33:10 - 00:03:37:07
So I’ve either got to move that out the curve
or throw that into equities.
00:03:37:07 - 00:03:39:10
And I think both of those are happening right now.
00:03:39:10 - 00:03:41:12
You talk about the rate move.
00:03:41:15 - 00:03:48:05
When I look at the supply that's come to market
right now, I think about the idea that
00:03:48:05 - 00:03:52:07
we're a little bit ahead of last year on financials,
but pretty flat on corporates.
00:03:52:07 - 00:03:57:18
In fact, I would argue if you look at the net supply, right,
net of maturities, corporates are well behind.
00:03:57:18 - 00:04:00:12
The spread funders seem to be taking
advantage of the market, right?
00:04:00:12 - 00:04:02:05
We have index spreads that have—
00:04:02:05 - 00:04:07:08
They've bounced off, I use the Bloomberg Index, they've bounced off 77 twice now, earlier in the year
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and just a short while ago.
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But we're hanging in that very tight window that's
0 to 5 basis points off the year-to-date tights
00:04:13:19 - 00:04:18:07
and within spitting distance again
of the 1998-since tight levels.
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So the spread funders are taking advantage of that.
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Coupon funders seem to be sitting a little bit more on the sidelines, especially in the net basis, not refunding.
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What are your thoughts around coupons,
yields, et cetera, going forward?
00:04:31:07 - 00:04:32:06
You just talked about the Fed.
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Maybe we're going to have somebody who eases,
but where do you think yields are going
00:04:35:07 - 00:04:36:22
given we just passed the Big Bill
00:04:36:22 - 00:04:42:22
right, big spending bill, and we have not yet seen inflation really permanently come down below 3%,
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and we have not seen the crack in
unemployment at this moment?
00:04:46:06 - 00:04:50:15
So I'm in Steve Ricchiuto's camp, our chief economist,
00:04:50:15 - 00:04:56:08
and his view has consistently been that the economy is stronger than the market is giving it credit for.
00:04:57:00 - 00:05:02:05
And I share that view. It's July 17th right now.
00:05:02:06 - 00:05:03:22
We're at the start of the earnings season.
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We've already heard many of the big banks report.
00:05:06:20 - 00:05:09:10
And what was a common theme that we
heard from all of them?
00:05:09:15 - 00:05:11:06
“The economy is in good shape.”
00:05:11:06 - 00:05:13:06
So we're about to add a stimulus
package that's very front-loaded.
00:05:13:06 - 00:05:16:16
So we're about to add a stimulus
package that's very front-loaded.
00:05:16:16 - 00:05:19:04
Our economics team did the math.
00:05:19:07 - 00:05:28:02
I think it's $900 billion of net stimulus from the OBBB, and 30% of that is coming within the next 12 to 18 months.
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And any of the cuts that were associated with
the bill are happening after the midterms.
00:05:34:10 - 00:05:40:13
So we're throwing even more logs on what is
apparently a fairly strong economic fire.
00:05:41:04 - 00:05:45:01
So that makes me think that rates are too low.
00:05:45:13 - 00:05:49:19
But I have to be honest, again,
we're sitting here on the 17th.
00:05:49:21 - 00:05:53:13
We've had a fresh slate of tariff headlines.
00:05:53:13 - 00:05:57:17
We had news that Trump was going
to fire Powell imminently,
00:05:57:17 - 00:06:01:01
and the 10-year still can't break
above the 4.5% yield.
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I have to respect that, but all the fundamentals
are pointing me to higher yields.
00:06:06:10 - 00:06:08:21
So think about this for a second.
00:06:08:21 - 00:06:13:11
You have stock markets making highs,
it seems, every other day.
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We've got spreads at their tights.
00:06:15:14 - 00:06:20:07
We have yields, I will say, based on the economic
view you just threw out there,
00:06:20:07 - 00:06:22:11
behaving themselves actually pretty well.
00:06:23:13 - 00:06:25:11
Liquidity is fresh in the system.
00:06:25:11 - 00:06:31:07
CP balances have gone up and that market's
been very liquid and available to people.
00:06:31:07 - 00:06:34:13
Bank lending, as you pointed out, has been available.
00:06:35:15 - 00:06:36:22
Everything seems too good.
00:06:36:23 - 00:06:37:21
And you said scary good.
00:06:38:10 - 00:06:40:05
What are we looking at that's going to go wrong?
00:06:40:08 - 00:06:43:04
Where do you see the risks or the surprises?
00:06:43:06 - 00:06:48:06
Because it seems like every piece of news that comes out,
if it's good, it's only going to get marginally better.
00:06:48:17 - 00:06:53:01
But I think the big thing I worry about when everything looks that good is what's the thing that's going to go wrong?
00:06:53:01 - 00:06:54:08
What's the thing that's going to surprise people?
00:06:54:08 - 00:06:57:00
The thing I've been focused on
all year is the bond market.
00:06:57:05 - 00:07:03:13
If the bond market stays in check, i.e. below 4.5% in 10’s,
00:07:03:13 - 00:07:08:14
and more importantly, with suppressed rate volatility,
then we can keep on going.
00:07:08:14 - 00:07:13:01
Because remember, we're in an environment where we're going to put in a big dose of fiscal stimulus.
00:07:13:04 - 00:07:14:20
We're also going to deregulate.
00:07:14:20 - 00:07:16:07
All those things are bullish.
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And so even though we're overbought,
00:07:18:18 - 00:07:26:13
actually, in some cases, ridiculously overbought, the fundamentals underlying it are getting stronger.
00:07:26:13 - 00:07:33:12
But they will get their legs chopped out from under them if the bond market ends up going sideways in a pretty big way.
00:07:34:01 - 00:07:38:04
I know maybe it's not the question you want to answer, but it's a question everybody's going to ask is tariffs.
00:07:38:11 - 00:07:38:18
Yep.
00:07:38:20 - 00:07:39:03
Right.
00:07:39:03 - 00:07:40:16
You've talked a little bit about Powell, et cetera,
00:07:40:16 - 00:07:43:01
but where is the risk in tariffs?
00:07:43:02 - 00:07:49:19
Because from my perspective, when I talk to accounts, it seems like the market wants to believe that
00:07:49:19 - 00:07:56:04
the delays, the negotiations all get back to something that's more moderate, like a 10% plus or minus kind of
00:07:56:04 - 00:07:58:06
average tariff across the board.
00:07:58:06 - 00:08:01:22
Where does it go wrong with tariffs that it affects the market?
00:08:01:23 - 00:08:05:09
Or is it something that's a delayed situation with prices?
00:08:05:15 - 00:08:08:03
You think about what the market's pricing in right now,
00:08:08:03 - 00:08:13:21
the market is pricing in basically that tariffs
are not going to be a big economic headwind.
00:08:13:21 - 00:08:20:00
They're also pricing in that tariffs are
highly likely to be non-inflationary.
00:08:20:00 - 00:08:27:16
So if any of those two premises get tested
and fail to pass that exam, that's a problem.
00:08:28:08 - 00:08:30:20
So we got the duration bid in the market still going on.
00:08:30:20 - 00:08:31:13
We know that, right?
00:08:31:13 - 00:08:34:04
We've got pension money coming back in from equities.
00:08:34:10 - 00:08:37:12
We've got insurance money coming into the sector.
00:08:37:12 - 00:08:38:16
Spreads at their tights.
00:08:39:07 - 00:08:40:11
What are you telling your issuers?
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When is the date you want to get stuff done by?
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When do you not want to take the risk?
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Are you just pounding the table, “Now is the time to go”?
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I want to get it done yesterday.
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When I look at this market, I see one that’s the
risk factor is rates not spread.
00:08:54:04 - 00:08:59:16
And I just walked through how I don't necessarily
think rates are priced correctly.
00:08:59:18 - 00:09:00:02
Right.
00:09:00:02 - 00:09:04:03
So my view is that liquidity is a tide.
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Sometimes it's high.
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Sometimes it's low.
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We're in a high tide right now.
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When we're back in low tide, then
the fundamentals get exposed.
00:09:13:01 - 00:09:17:22
So where do you think spreads go if we get a grind
higher in rates above 4.5% or we start going back to
00:09:17:22 - 00:09:20:10
4.75%, we start going back higher on the 10-year?
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If it's a slow march higher, we go tighter.
00:09:23:09 - 00:09:24:12
How much tighter?
00:09:24:12 - 00:09:26:01
Do you think we break through that 77?
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You think we get to test the 25-year tights?
00:09:29:23 - 00:09:30:17
I think we do.
00:09:31:06 - 00:09:32:01
I think we do.
00:09:32:06 - 00:09:34:17
As again, I'm going to say this caveat all the time.
00:09:34:18 - 00:09:36:07
As long as the bond market plays ball.
00:09:36:15 - 00:09:37:23
All right, Moshe, that's a wrap, I guess.
00:09:37:23 - 00:09:40:17
Thank you again for always being here with the insight.
00:09:40:17 - 00:09:43:15
And thank you everybody for watching here
on Mizuho's Markets Mindset.
00:09:43:22 - 00:09:44:14
Until next time.