Upward Pressure on Yields and Equities

PodcastBloomberg SurveillanceMatt KingOct 12

The discussion links rising real yields to borrowing demand and warns that a shift from risk assets into cash has not yet materialized. Speakers also point to pressure in repo financing, potential market vulnerabilities, and questions around bank valuations, credit, and AI-related earnings. On housing, Selma Hep describes persistently weak sales and limited use of home equity, while saying demand strengthened when mortgage rates fell into the low 6% range.

Interest Rates Equities Market Liquidity Risk Management Banking Corporate Earnings

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Key Takeaways

The guest says final domestic demand is relatively inelastic to interest rates, while pressure on Main Street and capital expenditure is pushing up nominal GDP; alongside a 0.6% month-over-month CPI increase, he says the Fed is more concerned about credit and underlying weaknesses. He also describes consumer conditions as very tight, citing 30%–35% drawdowns in McDonald's and Home Depot.

The guest argues that rising real yields reflect who is borrowing and their desire to borrow, not simply stronger growth; although he says higher yields could shift money from equities into cash and money-market funds, that rotation has not yet occurred and technology equities have driven the market. He also says the U.S. repo mechanism—whose volumes have doubled since about 2020 to $7 trillion and supports basis trades and Treasury and equity financing—is coming under pressure, while bond volatility and tail risks are rising.

Ken Leon says bank stocks have returned to more reasonable valuations and sees opportunities in capital markets and investment banking, while large banks are building recurring fee income to support stable earnings and higher multiples. He also says mobile banking intensifies competition for deposits; separately, a speaker describes large-bank credit quality as neutral, with no significant rise in loan-loss provisions and no third-quarter risk in view.

ECONOMY

Demand And GDP — The guest says final domestic demand is relatively insensitive to interest rates, limiting how much monetary policy can influence it. He also argues that pressure on Main Street and capital expenditure is pushing nominal GDP higher.

“One of the challenges here is that the actual driver of final domestic demand is really inelastic to where rates are and to hence where policy can move…”—

CPI And Credit — The guest says reported CPI rose 0.6% month over month. He adds that, behind the scenes, the Fed is more concerned about credit and underlying weaknesses.

“Now we have CPI Wednesday, and that's already a six... 0.6 month-over-month, which is a crazy number if you analyze it…”—

MARKETS

Yields And Rotation — The guest says rising real yields reflect who is borrowing and their desire to borrow, not simply stronger growth. He argues higher real yields could draw money out of equities and other risk assets and into cash and money-market funds, but says that rotation has not happened yet. Recently, technology equities have driven the market.

“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…”—

Repo Vulnerability — The guest contrasts France's reliance on foreign buyers to fund deficits with a U.S. system involving money-market funds, hedge funds, and repo. He says the U.S. mechanism has been effective but is coming under pressure. Repo volumes have doubled since about 2020 to $7 trillion, supporting basis trades, Treasury financing, and equity financing while also creating vulnerability.

“So whereas countries like France are having to rely much more on foreigners to fund their deficits, and that's a lot of the reason why markets have become more yield…”—

Rising Tail Risks — The guest says bond volatility is picking up even as day-to-day equity volatility remains very low, and that tail risks are rising as stress spreads from bonds into credit and other markets. He also says large family offices are starting to buy tail-risk funds, including credit default swaps on credit-exposed companies such as MetLife.

“A lot of what bothers me is day... You're getting…”—

FORECASTS

Rate-Cut Positioning — A speaker says more people in the Bloomberg chat are betting on cuts than hikes. He says he is on the cut side of the question of whether 75 basis points of cumulative cuts or hikes will come first.

“Like, if you had a bet right now, Tom, which comes first? 75 bps of hikes or 75 bps of cuts? Mhmm…”—

AI Nasdaq Share — The guest predicts AI will account for 50% of the Nasdaq, or 55% after the referenced IPOs come in.

“Right? It'll be Meta... I'm sorry. It'll be NVIDIA and Apple, a 130,000. And after all these... After after OpenAI gets in and then and then…”—

Real Yields And Cash

Matthew King argues that borrowing demand is pushing real yields higher, but the rotation from equities and other risk assets into cash has not yet begun in earnest.

Bank Earnings And Valuations

Ken Leon sees more reasonable bank valuations and opportunities in capital markets, while emphasizing durable fee income, manageable credit quality, and competition for deposits.

Repo Risks And Credit

Lawrence McDonald warns that rising repo activity and convertible issuance may signal vulnerabilities, with tightening public credit markets potentially foreshadowing broader credit stress.

AI Financing And Market Breadth

McDonald describes fragile market breadth and growing AI-related financing, questioning the durability of off-balance-sheet borrowing, chip collateral values, and projected earnings.

Housing Sales And Mortgage Rates

Selma Hepp says housing turnover remains depressed amid poor affordability, while demand improved when mortgage rates fell to the low-6% range and most homeowners remain reluctant to tap equity.