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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferro, along with Lisa Abramowicz and Amory Hoenert. Join us each day for insight from the best in markets, economics, and geopolitics. From our global headquarters in New York City, we are live on Bloomberg Television weekday mornings from 6:00 to 9:00 a.m. Eastern. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen. And as always, on the Bloomberg Terminal and the Bloomberg Business App. We begin this hour with stocks wavering on fresh tech fears. Bob Michael of JPMorgan writing, 'Investor disappointment in hyperscaler earnings is less from AI endeavors and more from traditional business whose revenues are paying for AI capex but growing at low double-digit rates.' Bob joins us now for more. Bob, good morning.
Good to see you. Talk me through the cracks emerging in your credit space right now. How isolated are they?
They're pretty isolated. We looked at yield changes quarter to date, and granted it's a small sample, but when you look at the AI and related, the hyperscalers, you're seeing credit spreads out 25 to 30 basis points. When you look at the rest of the deals, they're out 2 to 4 basis points. Yesterday was a great example with that. Oracle comes to market, it widens spreads a little bit, the deal ends up going fine. I think three and a half times oversubscribed. I mean, we've been here, but I've been here before. I've heard a lot of moaning about the high yield market and narrow credit spreads. And really, you have to buy stuff that's 200 over that 7%. And there you have it. You have triple-B rated Oracle 10 years at 8%. So that went well, but it was the non-tech AI-related deals that went exceptionally well. They were six times oversubscribed. So the differentiation is there, but there's still money coming into the bond market looking for yield.
There's still a lot of supply as well.
There is a lot of supply. It's not surprising. I think the issuers are becoming a lot more sensitive to that. Some of the deals were scaled back by 5 billion or so yesterday. That's a good sign. They're more thoughtful in telling us this is our plan. We're going to issue today, and then it will be three to six months before the next issuance. That's easy for us to...
This is the guidance that Lisa was talking about. By the way, Bram, you mentioned the same thing that we need to see more guidance from these guys about what they're going to issue and when they're going to issue it.
Well, and that's ultimately what Oracle did, and part of the reason why they had better execution was because they were going that way. By the way, I'm not moaning about what's going on in the high yield space. It's just...
Did I even say your name once?
You gave me like a serious death stare.
There is a sense though that at a certain point you're going to get so much pushback that certain companies are not going to come to market, or they're not going to be able to raise financing. Are you seeing any deals not come to market that you were expecting, or names decide to look for other creative ways of financing? Are you seeing the risk kind of shift away from public markets as a result of some of this pressure?
Well, the chip financing, the GPU financing, that's all out there. And I think when you look at RDMs and Bayonne, those transactions serve as a blueprint. I think those are pretty smart transactions. At times those older deals come to the market to make room for some of the newer deals. Those present value. There's a lot of conversation going on. So far there's not been a barrier to issuance. Everyone's happy to come up with some capital to place these deals. I'm with Amory though on the election. I've been following the gubernatorial races because I think that's critical, and we were trying to put together our own spreadsheet of what happens where. Happily overnight, Mike Zibel came out with a cheat sheet for us, and the three to watch are kind of like SEC football weekend. It's Texas, Oklahoma, and Georgia, because there the expectation is if the Republicans manage to win those gubernatorial races, you may see conditions around data center build, so the things that you were talking about where you'll build bridges and schools and roads and pay for power, versus the Democrats who are saying that there would likely be a pause. So you don't get the construction with conditions.
Does that make you more willing to lend or less willing to lend if you, for example, get some clarity on where data centers can be built, but they get a whole lot more expensive?
Yeah. And again, just looking at some of the work that Zibel did, there's 37 gigawatts of power production that are coming online next year. That's largely under construction. There's 97 that are planned for 2028. That's what's at risk with the elections. If there's enough populist pushback, we'll see. I mean, 2028 is a long way away. You've got a year and a half till you get there. And there could be a lot of bartering back and forth right now. We know that these companies have a lot of profits, so they can share that with communities.
How are you viewing the election in terms of do you think it's a clearing event for the bond market?
We've looked at it two ways. We looked back on this year, and there were two things you had to get right. One is the repricing of the Treasury market, yields went up over 100 basis points from below 4% to above 5%, and the other is the amount of AI issuance. And I think we talked about watch the governor races for AI. For us, thinking about the potential for a blue wave here and sweeping Congress, I think it's mixed for the bond market. I think it's good for Treasuries, and I think it puts credit at a bit of risk here because you're going to have a Congress that can be emboldened to antagonize the administration. There are all the things about the appointments to the Supreme Court, to the Federal Reserve. Those are going to be controversial. There are going to be debt ceilings and all kinds of stuff. And credit risk doesn't like that kind of animosity in Washington.
What would be the worst case scenario for the bond market?
It would actually be a Republican sweep. I imagine the equity guys would be rejoicing because they'd be thinking about some continued fiscal spend. Is it $5,000 checks for everyone? But there would be...
I know it's not going to happen, but there will be a lot of talk of that, and the demons will set into the bond market again. And if you're at the Federal Reserve, you've got to think about, uh-oh, the floodgates are open on borrow and spend. We need to push back on that. But that looks like the smaller of the tariffs, frankly.
The Treasury is going to be in focus tomorrow as well. Right on brand, this program will be covering the quarterly refunding announcement while the rest of the country focuses on the election. What kind of changes are you expecting?
I'm going to help the Treasury out right now.
Get rid of the 20-year. Nobody likes it. It's applying the long end. Why do you issue it? It made sense in another era. It doesn't make sense now. Just say it's done for. It was an orphan issue. We're going to just dump it into the front end where there's eight trillion in money market fund assets plus a lot of other liquidity sloshing around the system. We can finance ourselves there with ease.
Is that sufficient? You get rid of 20s. Do you rebalance supply demand of the long end sufficiently?
Well, don't forget they're still coming into the market and buying about the 6 billion a month in the long end. You put the two together, you get some pretty nice support out there. It is the equivalent of what Yellen said, paint drying. It just happens. Nobody's really talking about it anymore. It will create a level of support that us holders of the long end will like.
This bond market has been nothing like watching paint dry for the year so far. How much support has come from the deceleration on the equity side in the tech trade? How much support is coming from that?
Well, it first started when we went from below four to above five, and I was on and I said we had been buying, and that now looks like a good decision. And we had a blowoff top, and then you just run out of adrenaline if you've created a big short in the market. Where do you cover? You're at 530. Do you wait for 550? Do you think like it just started the covering, and I think that brought us down closer to five. I'd have liked to have stopped there. It would have given our clients a lot more time to buy. But now it's the anxiety about what's going on in the AI buildout. I think the bond market went through its demons from March to September into October. Now the equity market, which held up pretty nicely, is going to go through some of its demons, and the bond market will benefit from that.
You think we were through the worst of that then? It's over for the bond market.
Yeah.
Yeah. I think we're at a point now where we can easily see the Fed funds rate and the Treasury yield curve converging around 4 and a half percent. We put that out there in September. We still believe it. Are there going to be fits and starts along the way? I think 480 is an interesting first level to reach because that's the 100-day moving average. It's a Fibonacci retracement level. There's all kinds of stuff there. But I think the days of pushing well above 5% are in the past for now.
Super flat curves. Basically what you're looking for. That's what it sounds like.
Yeah, it feels like it because I think there is an expectation that higher rates do exact a cost on the economy. They do help to slow things down. I think everyone's parsing through the economy, and we recognize the third quarter was a strong quarter. There will be some payback in the fourth quarter, and I think everyone's getting comfortable like, hey, you know, the Fed funds rate can get into the mid-fours, I don't know, 4 and 3/8, 4 and 5/8. That's still a heck of a lot higher than zero where we were a few years ago, and it's a lot higher than 3 and 5/8 where we were a few months ago, but it's not at 5 or 6% yet in this cycle.
