Bond Volatility and Energy Flows

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This is the conversation of the day. Virginia Mazenov is so acclaimed. with all of her work across investment, finance. Nobody cares. It's about the protest in the street. It's about the fracturing of her France. And we're honored she could be with us today. From World War II, there have been four, five, six uncountable republics. It's not like America.

There's an inherent instability. Do you worry about a fracturing of the French Republic?

That's a really good question. We're in a situation where budget deficits are pretty high, as you know. And with demographic trends that we're seeing, there's very little rooms to maneuver, which was what promised, if you want, in terms of pension, in terms of benefits. And this is at the heart of the issue that we're seeing today. And of course, it has an impact on how voters will vote at the next election.

What is the polarity of Paris with the rest of France now? We know it's extreme. There's really, maybe it's a New York, LA equivalent, but it's different and unique. In this crisis, what is the polarity of Paris with the rest of the nation?

So there's always a relatively big gap between the farmland and the city, and Paris is still the very strong center There's been many attempts for many years to decentralize, if you want, economic activity across the country. And I think the key things about the protests that we're seeing now is in retaliation, if you want, to this proposal of a budget. Spending has to be cut. to keep with the rules of the EU, and it means a freeze, or at least a proposed freeze on salaries for government officials or government employees.

That has had a big impact.

Of course, teachers, many different people who are already working in overcrowded rooms, that creates tensions that are very hard to reconciliate from a mass standpoint when you look at the budget. And of course, that has an impact on Europe.

Of course, right.

And I want to talk about France as sort of a bellwether for global stress, especially when you look at the bond market.

Yes.

Because now France's corporate bonds are trading as if they were safer than the government's bonds in France. What does that tell you just overall about sentiment?

Well, I think what it means is the perspective on government and the ability of the government— to deal with this situation. We've had quite a few, as you know, governments in the last few years, and really very little, I would say, very little traction in bringing the country together to put the finances together.

So when you look at.

The spread versus boons, for example, we've never seen this, really. And if you look at the spread versus the periphery, remember, the problems used to be Greece, Italy, and Spain, and especially Greece, right? And this is the world in reverse, if you want, but it is, in my view, the result of 15 years at least of that path that has really led us where we are now.

Is this a France issue, or is it a greater issue that could sort of start to envelop the Greases and the Spains?

Well, I think if you look at the transmission mechanism, you have several. Number one, how does ECB roll, if you want, in this world? Because France and Germany were always the core, right? When you have two very different trajectories, what do you do? The second is the transmission through banks, because banks own a lot of French debt.

How is that working?

Then impact on the euro. As you know, the euro has been weak. year to date, minus 4% versus the dollar, that has an impact on imported energy costs, which are fueling inflation, which have led to increasing rates. So this is how we could look at the map of how the impact of France can propagate through Europe.

Is there an analog to Sweden in that there was a liberality and socialism in Sweden for decades, and then they shifted conservative? Can France do the same thing?

It's hard for me to compare it to Sweden, but what we know is the trend towards populism and with the election coming in May, April and May 27, and Marine Le Pen having such a strong support is the voice of discontent from a country that hasn't found its rooting in fiscal discipline.

Does the ECB step in here? And if so, what do they do?

Well, that's hard, right? That's what I meant by having the two core countries, if you want it this way, Germany and France, having such different conditions for their current growth, inflation, environment.

And now we see the challenges of a euro, right, 10 years later. The challenges of bringing all of these economies together.

And the fact that France is outside its deficit boundaries. So for the ECB. This is a big issue.

Okay. You're not here for this. Can you get me a reservation at Tour de Jean somewhere after Christmas?

Tom, do you know, I don't have that magic wand. I'm sure we could try.

You have to know people.

You have to know. I mean, the view of Notre Dame, it's like, are you kidding me? Expect Cary Grant and Eva Marie Saint to walk in.

Eva Marie Saint, who we lost this past week.

Yes, yes. Virginie, thank you so much. This has been wonderful. Virginie Mazenov here today. Really, really appreciate her time and energy to give us a briefing there on France with some real trouble. The French-German spread, as she mentioned, has really rebounded off the Le Pen speech of two days ago.

Stay with us.

More from Bloomberg Surveillance coming up after this.

You're listening to the Bloomberg Surveillance Podcast. Catch us live weekday afternoons from 7 to 10 a.m. Eastern. Listen on Apple CarPlay and Android Auto with the Bloomberg Business app. Or watch us live on YouTube.

Joining us now, we get a great set of conversations. Kay Hare, who had all of the Yankee boxes booked for J.P. Morgan here. Oh, boy. Here we go. Thank you for coming in. Instead of me finding a narrow question, what is the worry on the bond desk at J.P. Morgan right now, given the cacophony of bids slipping away?

All right. First off, I want to clarify, I was not at the Yankees game. I haven't been a Yankees game in probably 20 years.

Maybe that's the problem. Maybe you need to go and change their lock. Let's be clear.

That was that was not where it is. Tom, Alexis, good morning. Thanks for having me.

We're Bond people. We worry about everything all the time.

Which of the slipping bids has your attention this morning?

Oh, you got her mid-coffee gulp.

Tea, technically.

Oh, tea.

I like that. They're very British of you.

Exactly.

We're being European this morning. So what's worrying me this morning, a lot of this move has felt very technical driven. So in Bond land, you've got, okay, we've had some economic resilience that I think has surprised people. Go back to the beginning of the year and people thought we were going to be in a Fed-easing environment. We've had a lot of hyperscaler and corporate supply. And then we've had questions about the Fed reaction function. So I'm less worried about the Fed reaction function. I'm not too troubled about supply. And I think you all were just talking about France, which is not my bailiwick. But I think if you look at this, We're in a world where yields are attractive and people can be choosy about what

they buy. And I think we're back to, you know, I spent a lot of my life as a credit analyst, Tom, and I think that's becoming a cool profession again. I think the world needs credit analysts. And I think you can't just say, oh, well, I'll pick up some extra spread. It turns out there's a big difference between a AAA sovereign and a single A sovereign and a single A sovereign that might even be generously rated. given how their actual financials look. I think people have just kind of thought it's an environment where you can pick up spread.

So to answer your question, Tom, I worry about ensuring that we've done the bottom up fundamental credit analysis and we've picked the right ones that were, you know, if you think about managing a core plus portfolio, we're picking up yield on top of the ag and we need to do it in a risk adjusted basis. So that's what I'm keenly focused on. Have we done the bottom up work?

So if this is a market where you're choosy, you're picky, what are your clients choosing? Where are they gravitating toward?

Yeah, a couple of things. I was actually out on the road in Detroit and Grand Rapids. I spend most of my time in the office managing portfolios and working with people. But I was out on the road a couple of days. And I would say we've got a lot of interest in core and core plus strategies. But I think there's also some concerns about the fact that people are losing money in bonds again, and that gets them nervous. That's never supposed to go down. And they're like, gosh, is this 2022 again? And we feel pretty strongly this is not 2022 again for a couple of reasons, the first of which is starting coupons are much more attractive.

You've got what we would call a coupon cushion. We're not at a 2% treasury yield, whereas Tom just discussed five and change on things. But I think one of the things that people are really interested in is total return fixed income, a little bit go anywhere and a little bit less benchmark focused. So our income strategies or our flexible bond strategies has been of particular interest. But I would note that broadly, we're still seeing flows into fixed income into our strategies. And I think it's the attractive yields that people are intrigued by.

Without giving away trade secrets, what is the tone of issuance? What is the dialogue between the broad spectrum of issuers of paper and a big bank right now? Are they calling up saying, here's the paper, take it? Is it tough to get the paper you want?

I think we've been successful in getting what we wanted, but we've been discriminating about it. So we've got money to put to work. I think, you know, if you look, new issue concessions have still been relatively skinny, you know, as in four basis points or something like that. I think where they are wider is when the market is surprised by something.

So I think.

Well, you look, I don't want to... The Paramount deal was just to be kind of ugly. I mean, that did not go well.

I think that's a fair statement. You know.

I mean, Bob Michael went to the roadshow just for the merch, but, you know.

He's a merch guy, so that's not surprising to you, is it?

But how does the Paramount bust the ramifications of that across the adult finance world?

The adult finance world?

Wow, that's a compliment.

You're calling the bond market adults.

They don't want all the drama on Paramount. It's just, give me the paper, and the paper didn't work out.

So the bond market tends to be very lumpy.

Right?

And I think people have to have an expectation. We like to know what's coming, Tom. We don't like to be surprised. And I think some people were actually surprised when Paramount came. There were some debates about, is it going to come this week? Is it going to be later? Are they going to get all the approvals? And I think maybe people hadn't quite made enough room in portfolios for that. So if you're not getting in net flows, then you've got to make room for something. I think broadly people were positioned for a fair amount of supply in September, but that was a little bit more than I think people expected.

Folks, there is a vignette into the reality of portfolios. It's not just the chit chat in the media. It's the give and take between paper coming in. I got to find a hole for it versus paper going out. It's a very physical business in the morning or 24 seven now. when you say, how am I going to fit this piece into my portfolio? It's not easy.

You've got big tech selling massive amounts of debt to fund AI. They've been doing it successfully thus far, by and large, but this heavy borrowing binge is causing credit spreads and yields to widen. What happens if and when, because one must assume the appetite is not going to be as voracious for these sales?

Yeah, so a couple of things. First, I think if you look at the investment that people are putting into this. It's running like north of three and a half percent of GDP. That's a big investment. and at least a third of it, if not more, is being debt financed. So that's a glut of supply on it. And that is combined with relatively a fair amount of government supply as well. So you've got kind of this crowding out.

You've got both governments that have not exactly been fiscally disciplined, and you've got CapEx. On the plus side, This is a productive use of capital. We've got a resilient US economy. We're moving out of a zero interest rate environment world. We've got yields that are attractive. We have productive uses for capital for these companies. Where we're getting at is being discriminating about who's gonna earn a return on that.

We need our money back, Alexis.

I brought up here because Tom Secunda taught me how to use the YA screen in the Bloomberg a few years ago. The 40-year Amazon piece- enjoying a 7.0% yield today, prices migrated from 99 to 89. Does anybody care about that or they just say, oh, we'll hold it to maturity?

So, yes, we do care about dollar prices, but remember, yields go up, dollar prices go down. Nailed it.

Bond math, it's complex, Tom.

But yeah, we do look at that. I mean, that's been a sell-off, but that actually can provide a buying opportunity, you know?

Okay, I have to go to a hurricane. No, not Kelsey Barrow, a real hurricane.

She's not a hurricane.

Thank you so much, JP Morgan. Stay with us.

More from Bloomberg Surveillance coming up after this.

You're listening to the Bloomberg Surveillance Podcast. Catch us live weekday afternoons from 7 to 10 a.m.

Eastern.

Listen on Apple CarPlay and Android Auto with the Bloomberg Business app or watch us live on YouTube.

This is wonderful. We're going to just slip right into it. Tobin Marcus with us now, head of public policy and politics at Wolf Research, with just a real nice tone to the midterms. Tobin, do you have any clarity or are the midterms a mystery?

Well, there's certainly a little bit of a mystery, but consensus increasingly is shifting towards a clear outcome, which is Democrats winning both the House and the Senate. So taking some of that mystery off the table and consensus expectations. And I guess I think it's still more mysterious. We think it's closer to a coin flip, probably leaning very slightly to Republicans and some expectations for Democrats.

With all your great academics, should our audience trust the polls? The polls do have value.

In the 2018 and 2022 midterms, the national polling was quite good, but we still got some state errors. The pattern that we're seeing in the polls right now looks similar to the pattern that we've got in polling errors in cycles past. We've gotten much bigger blue shifts in redder places, which is a bit of a suspicious pattern.

We do see reason to think they're overstating times again.

Are we overstating the blue wave and what it might actually mean for this country, but also for the markets? I mean, is this going to be a massive market catalyst? I have to think traders have already baked in the possibility of a blue wave.

Yeah, I don't think it's going to be a giant market catalyst, even completely distinct from my views about the odds of a Democratic Senate win, which I'm also taking the under on. In terms of significance, I just don't see much from a concrete policy perspective, really anything from a concrete policy perspective. The Democrats can do with the Senate majority that they can't do with the House majority.

So the vibes might be a little different. You can imagine some narrative shifts in markets coming out of it, but I don't think the policy outlook is different.

How does it change for President Trump, given that Tobin Marcus... I guess, victory for the Democrats, but not that big of a victory. How does it change the presidency?

I think President Trump is going to approach 2027 a lot like he approached 2026. I think he has a lot of unilateral tools he can continue to use on tariffs, on export controls, on foreign policy. Even if we manage to wind down the war in Iran, Cuba is looming as the next thing. And of course, he has the triumphal arch in the ballroom and so forth to work on.

So I think he'll he'll have plenty to do and not much ability for Democrats.

To restrain him.

But Tobin, in your note, you say that there are signs out there that the polls may be overstating the leverage the Democrats have in the midterms. What what are some of those sort of signals for you?

So I mentioned earlier that we're seeing bigger blue shifts in redder places.

That is a suspicious pattern.

It's a pattern that looks very much like the pattern of polling errors in the past several cycles. Similarly, we're seeing Democrats look quite strong across upper Midwestern states like Iowa, Michigan, Ohio, which have been ground zero for polling error in Iowa. in the Trump era. And then there are just some individual results that strike me as facially implausible. You know, South Carolina is not a one-point race. And when we see results like that, it makes me look askance at some of the other numbers we're seeing.

Wolf Research, do you have any wisdom on turnout? Are there tea leaves that tell you we will be shocked at a lack of turnout or an excessive turnout? I think turnout's going to be strong.

Turnout in all the midterms since President Trump was elected in 2016 has been structurally elevated relative to where it was in the 90s and early aughts. The higher turnout is, the better for Republicans, I think, because Democrats are the more reliable turnout coalition at this point, in general and certainly in this midterm where there's an enthusiasm issue. But I think we're going to get reasonably healthy turnout.

On both sides.

I don't think that there's going to be a complete collapse for Republicans.

We look forward to speaking to you often, Tobin. Really love this. Tobin Marcus, thank you so much with Wolf Research. Stay with us.

More from Bloomberg Surveillance coming up after this.

Now we're going to speak to an authority on hydrocarbons, even on diesel, but particularly on natural gas. Leslie Pulte-Guzman is founder of Energy Vista. I give up. Open question. What's the biggest mystery as you write your weekend note?

Good morning. We're starting with a big question. And thanks for having me.

You know, for me, there is a lot of anxiety potentially right now in Europe ahead of winter. I think that we could be more bearish because Qatar has two cards to play. And the first card is the trickle-through scenario where we're going to see more LNG shipments going through Hormuz through the U.S.

Protected route.

This is, I think, what the UAE has been doing. And so I think the reason why Qatar was not doing it was potentially more for political reason than for technical or operational reason. And the second car is that Qatar Energy also has a project in the U.S., the Golden Pass LNG project, which is likely to ramp up.

So far, it has been disappointing in terms of number of cargoes that have been sailed. So providing there are no technical reasons, we could see more cargoes heading to Europe.

So in October, how prepared is Germany for winter, given that they've busted the relationship with Russia? Yeah.

So you remember that during the Ukraine-Russia crisis, the government in Germany had asked its state-owned company to take action and basically go after any spot market, spot cargoes in the market, even at a very, very high price, to attract them into Germany. And a few days ago, the German government asked the same thing, to.

Be in a more.

relaxed position when it comes to storage because Germany is the country in Europe right now that has among the lowest storage inventories.

So how does Europe hedge, if at all, as winter quickly approaches?

There is always the unknown component of the weather that none of us control.

Right.

Providing that it's not such a long weather, not cold weather, I think we need to look at supply and demand. On the supply side, US LNG projects are still ramping up. Corpus Christi, Plaquemine. I just mentioned Golden Pass. This is additional volumes likely to hit the markets. And then we have a new wave of US energy projects into 2027 that could add supply and elsewhere around the world. What you need to understand is that all the suppliers right now have an interest to max out their capacity and sell as much as possible because prices are high.

Gas up. Excuse me. A gallon of gasoline up. Oil up. Brent 105. Diesel up. Why isn't NG1, natural gas... Why is that price not up like everything else on the planet?

So it's a regional price.

The U.S.

Price on Rehub is only around $ 3 per million BTU because the U.S. has an abundance of natural gas. When you look at Europe and Asia, because they are importing nations, we are looking at much higher prices. The spot market right now in Asia and Europe is above $ 20 per million BTU.

It went up recently at $ 25 per million BTU.

But we're seeing a big disparity because of the different positioning when it comes to hydrocarbon production.

Within energy, where should we be looking to diversify right now?

So I'm a big advocate and I've been mentioning that for years. I think every country is right now diversifying. are doing what I called multi-energy hedging. So it's the idea that because there is so much uncertainty in terms of different energies and on the demand side too, countries are diversifying their fuels, but also they're different kind of looking at new energies, diversifying in terms of entry points Inside their countries, shipping routes, sources, countries as a supplier.

So a lot of diversification. I don't think.

Fuel switching is not an easy turn. I mean, doesn't that take time?

Yes.

So in the past, we used to do more coal to gas switching.

Right now, with this crisis, we've seen.

Some countries potentially returning to coal for power generation.

Hmm.

Or keeping coal longer because either they have domestic coal, which is cheaper and doesn't need to be imported, but it's not great for the environment.

Your thoughts on diesel? Maybe you have to remind me, but I don't buy it for a minute. You're expert on this. Yes. Your thoughts on a gallon of diesel gas?

You know, what was interesting to me is that we had this debate last week about a.

Ban or no ban. From the Trump administration. From the Trump administration.

And, you know, many voices raised to say that it would actually raise the prices. And so I think there is an understanding on the policy side now in the U.S. that whether you talk about an LNG ban or a diesel ban, this is going to be even more negative for the U.S.

Economy.

And I think momentarily prices are higher, but it's not going to last because globally we see an abundance of energy on the LNG or on the oil side.

Let's see Paul DeGuzman. Thank you so much.

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Bond Volatility and Energy Flows

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