Episode summary
Upward Pressure on Yields and Equities | Bloomberg Surveillance
Bloomberg Surveillance
· · 33 min · Hosts: Tom Keene, Paul Sweeney, Lisa Mateo, Michael Barr · Guests: Matt King, Ken Leon, Larry McDonald, Selma Hepp
Summary
The discussion centered on how higher real yields, heavy Treasury supply, and a growing reliance on repo and money-market plumbing are pushing bond markets toward strain without yet triggering a full break. The guest argued that yields are rising less because of inflation expectations than because of who is borrowing and how deficits are being financed, and said the system is getting close to the point where money rotates out of equities and back into cash, even if it has not happened yet.
The bank earnings preview suggested the major lenders still have room to deliver solid results, with capital markets and investment banking offering support even as rate sensitivity, deposit competition, and trading risk remain in focus. The bank analyst said valuations have become more reasonable and that consumers appear resilient enough that credit quality should stay fairly stable in the third quarter.
The most bearish segment warned that stress is building beneath the surface of the equity market. The guest pointed to a “last saloon” in the convertible bond market, weak internals under a headline index that is being driven by a narrow set of stocks, and increasing use of tail-risk hedges by family offices. The housing economist said 30-year mortgage rates around 7.51% are freezing turnover, while rates below 6% had briefly revived demand in weaker markets.
Key takeaways
- Matt King said bond yields are being pushed higher more by financing dynamics and Treasury supply than by inflation alone.
- Matt King said repo outstandings have climbed to $7 trillion, which supports markets but also increases liquidity-shock risk.
- Ken Leon said bank valuations look more reasonable and expects capital markets and investment banking to help third-quarter earnings.
- Ken Leon said credit quality still looks neutral, with no significant rise in loan-loss provisions expected in the third quarter.
- Larry McDonald said the market’s internals are already weak, with a narrow index masking broader declines and more tail-risk buying underway.
- Selma Hepp said 7.51% mortgage rates are stalling home sales, while 8% would likely trigger broader deterioration in prices and activity.
Notable quotes
“It is the real yield but it's actually more about who's doing the borrowing and their desire to borrow that keeps pushing these yields up”
“we're getting closer to the point where that causes money to rotate out of equities and back into cash. But we haven't got there yet”
“We're up to $7 trillion in terms of the repo outstandings”
“The market's already crashed internally. This is an this is a 1987 crash”
“30-year 7.51%. Not like Fed talk or yield talk. What do people actually do”
How the episode opens
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This is wonderful. from England. Matthew King joins us. Matt King is founder of Sator Insights truly iconic at Cityroup over the years and thinking about the big picture. I love the single sentence Matt King in your note which is what so many people are thinking. Why hasn't anything broken? Why does this just continue on if so many are feared of the future?
Thanks very much for having me. I think there's lots of ways we could tackle that and one of them is earnings. But I think there's something important about how deficits have been financed and about how that is changing which is also part of the explanation and it and it too kind of points to to getting closer to things breaking but not being at that point yet.
the the the in the near term you've got bond yields backing up and the lots of people like to say oh it's growth that's driving it because it's the real yield moving and not inflation break evens and not oil prices and I don't really think that's the whole story. It is the real yield but it's actually more about who's doing the borrowing and their desire to borrow that keeps pushing these yields up. And we're getting closer to the point where that causes money to rotate out of equities and back into cash.
But we haven't got there yet. Hey Matt, how important is the rate of change here? I mean, it's been fast at times and then it's been more of a grind and acceptance of either higher growth or, you know, tighter policy path.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- bond yields
- treasury buying
- bank earnings
- mortgage rates
- bond market stress
Companies and tickers mentioned
- Satori Insights
- CFRA
- The Bear Traps Report
- Cotality
Watch the episode
Watch “Upward Pressure on Yields and Equities | Bloomberg Surveillance” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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