PPI and Market and Geopolitical Risks

SPEAKER_1 (0:02)

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Paul Sweeney (0:27)

Just think about some of these levels here. Ten-year treasury, up another four basis points, 488 I mean, we're on the 5% watch on the ten-year, let's be honest.

The 30 years at 5.32%, up another three basis points. Every day, these yields are pushing higher. What's going on out there? Well, fortunately, our next guest is a professional. He can answer these questions. Greg Peters, he's the co-CIO of PGIM Credit. Greg, what's going on in your treasury bond market?

Greg Peters (0:56)

Yeah, it's a repricing of a lot of different factors, actually. I think many observers like to point to a single factor, and I don't think it is a single factor. But a key driver, I think, one end, is the strong nominal growth. And I think that is something that market participants forgot, right? And if you look at just now this cheap and simple metric that has been forgotten, if you just think about the growth, nominal GDP growth versus the treasury yield, we're in an area that suggests that maybe there's still room for yields to match that nominal growth, right? It's about 160 basis points apart now.

You know, the kind of the minimum is, you know, decidedly negative, but the long-term average is 100 basis points. So, you know, I think there's scope for continued repricing here.

SPEAKER_4 (1:59)

Do you expect 10-year yields to kind of remain elevated? I mean, are we talking, is a 5% possible?

Greg Peters (2:05)

Yeah, it's definitely possible, quite plausible, in fact.

You know, I think the question you have to ask is kind of the opposite, which is, what would drive bond yields lower? And the only version that I can see driving bond yields lower would be a good old-fashioned recession. And I don't think that is something that, you know, consumers and investors want. So I do believe we're in this more normalized bond yield environment. I think the bias is for yields to push higher, not lower. And I think this is the regime that we're in. I think it's quite, quite normal, actually.

Paul Sweeney (2:55)

So is the crowd out from AI issuance in the investment-grade bond market, is that a thing?

Greg Peters (3:01)

100 percent, it's a thing. There is a competition for capital in ways that we haven't seen in a very long time.

And I think the critical aspect of that analysis is that these are two borrower bases that are price insensitive. So on one end, you have the sovereign bond debt market, which is actually slated to see a lot more supply in the coming years. So this is a lull, by the way. So this is a story that has yet to unfold. But these sovereign issuers have to come to the market, right? They have to fund themselves. And then on the other side, you have these hyperscalers, AI build-out, that's largely price insensitive as well. So I think those factors working together really contribute to this higher yield environment.

SPEAKER_5 (3:56)

Greg, we have about a minute before the bell. Where do you expect real GDP growth this year? About 30 seconds left.

Greg Peters (4:04)

Look, I think we're in a very strong growth environment. There's a lot of own goals, a lot of things working against the environment. But speaking of AI, that's a big contributor to growth. That's one, one and a half percent of GDP.

That's also driving the wealth effect, which is contributing as well. So I see a strong growth environment here.

Paul Sweeney (4:30)

Greg, you're going to stick around with us. We're going to get this market open. We're going to break some of that economic PPI news as well. But you're going to come back. We'll chat with you on this bond market. That's Greg Peters, co-CIO of PGIM Credit right now. The S&P down 18, the Dow down 20, and the NASDAQ down 220 points. This is Bloomberg.

SPEAKER_4 (4:56)

The August producer price index is out and it shows inflation at the wholesale level rising 0.4% compared with being unchanged in July. Year over year, wholesale inflation rising to 5.4%. That is slightly higher than the 5.3% expected and up from 4.7% the month before. If we exclude volatile food and energy costs, core PPI month over month rising less than expected, up 2 tenths of a percent. The street was expecting a rise of 3 tenths of a percent and that is exactly what happened the prior month when core PPI for the month rose 2 tenths of 1%.