Interview: Co-chief investment officer at Oppenheimer & Company
>> treasury secretary john snow says federal spending to repair the damage caused by hurricane katrina will not have a significant effect on inflation. snow was in atlanta. the visit comes a day after president bush promised “one of the largest reconstruction efforts the world has ever seen.” bloomberg news asked treasury secretary john snow whether investors should worry about inflation.
>> i don’t think we’ll see inflation as a major problem growing out of this. there was the price spike immediately after katrina in energy prices. fortunately, i think in part due to the good actions, the prudent actions the government took, opening the s.p.r.o. and bringing in supplies from abroad and changing boutique rules, energy supplies adjusted and prices came back down. the overall environment, core inflation, remains well in check in the united states today.
>> snow says there will be elevated federal spending because of katrina primarily concentrated in 2006. let’s now continue to look at the bond market , reaction to what we’ve seen on the inflation front on the economic front in general. and what we can expect from treasuries as the federal reserve meets next week in order to decide on interest rates of the we’ll welcome in gregory hahn, co-chief investment officer at oppenheimer & company joining us in indianapolis. good afternoon.
>> hi, ellen.
>> these comments from the treasury secretary saying inflation will not be a major concern, certainly in terms of the bond market reaction this week, not necessarily read the same way. what is your take?
>> well, inflation is a concern and one of the reasons inflation is a concern is not because of katrina but because of the low level of interest rates that we’re coming from and the moves that the fed has made to increase interest rates. we’re making up for lost ground and that’s really why the fed’s backed itself into a corner with respect to the need to increase short-term interest rates.
>> what do you make of the bond market reaction that we’ve seen this week, specifically on the friday trade, given that you had those concerns about inflation trumping that slump in consumer confidence?
>> the move doesn’t surprise us. when you look at the long 30-year yield, has been tremendously resilient as short-term interest rates have increased. what we’re seeing right now is a corelary move in long-term interest rates with the expectation the fed will continue to increase short-term interest rates so we expect to see the yield curve continue to flatten but the last two weeks, steepening between 30’s and 2’s.
>> what does that tell you in terms of moves to anticipate in coming days if the fed moves and raises rates next week?
>> more of the same. the bond market is priced to perfection. interest rates have been too low for too long given the economic cycle and it’s the amount of foreign capital in the market sustaining the low levels of interest rates and helping subsidize our way of life, our standard of living and financial markets .
>> you mentioned the 30-year, i want to dwell there for a moment because you closely watch the 30-year. what is it telling you right now and what do you think the yields should be on the 30-year?
>> when you look at the 30-year yield right now, when you look at inflation running, core inflation running at 3.6% and layer on a risk premium, the 10-year yield at 4.25 should probably be closer to 5% to 5.10 at today’s rates and add 25 to 30 to that, and the yield on the 30-year should be around where it’s at. i expect to see the yield on the 10-year actually increase here.
>> given that, what are you buying or selling?
>> as an investor investing in securities, we’re not short, we’re long investors. and we’re looking actually in short-dated securities and securities that have resets on coupons so variable rate demand notes, floating rate securities that reprice off of a libor that resets. very much focused in the short end and trying to remain neutral in the 30-year and 10-year areas.
>> when you say “short,” are you talking two-year or different maturity? >> two years and in, the pivot point in the yield curve around the five-year area so trying to stay inside that five-year with really the focus on two-year and in. >> how important are inflation protected securities, t.i.p.s.?
>> we still like the t.i.p. sector. it’s one that we actually were looking at earlier this year and considering reducing exposure. we’ve kept it on, we’re very happy with the performance and will probably keep it ongoing into the fourth quarter. in the short end, also, looking at more in terms of high-quality bank type paper or variable rate demand notes.
>> briefly, with those t.i.p.s., what maturity are you looking at? >> both five’s and 10’s, but most in the five-year.
>> greg, thank you for joining us.
>> thank you, ellen.
>> have a good weekend. gregory hahn, co-chief investment officer at oppenheimer. opec will decide whether to raise production quotes next week. bob bowden has a preview coming up.
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Consumer spending -- June (slow)
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after consumer confidence fell to the lowest since 1992. the university of michigan’s preliminary index of consumer sentiment fell to 76.9. it had been 89.1 in august. with the federal reserve meeting on tuesday, we asked former treasury secretary robert rubin for his thoughts on the economy. he was at the clinton global initiative meeting in new york city.
>> we are at a critical juncture. we have great strength but also enormous challenges we’re not meeting, immense fiscal deficits, entitlements that accelerate rapidly middle of the next decade, large current account and trade deficits, hoe personal savings rate, competitive from china and india.
>> more on the economy coming up. but before that, settling numbers on the friday trading session -- even with today’s gains, the indexes ended the week lower. the dow and s&p losing .3%. the nasdaq down .7%. more on stocks in a few minutes’ time but first up, a closer look at the economy. consumer confidence plunged to the lowest in 13 years after hurricane katrina devastated the gulf coast and pushed gas prices to record highs. june grasso has more on the report that is raising concern about consumer spending.
>> the drop in the university of michigan’s preliminary index of consumer sentiment surpasses the decline following the 9/11 terror attacks. it’s the biggest decline since december of 1980. consumer sentiment fell to 76.9 this month from 89.1 in august. this is one of the first releases that takes into account the aftermath of katrina and with the relentlessly negative coverage from the press and the media, i can’t really say i’m too surprised that that number came out. i’m a little surprised, frankly, that the market ‘s reaction to it has been as muted as it has been.
>> the survey reinforced concerns that record gasoline prices and katrina’s wake may slow consumer spending and hurt sales at retailers like wal-mart and best buy. government reports yesterday showed the hurricane pushed up consumer prices in august, drove manufacturers’ costs higher this month and prompted the biggest weekly jump in jobless claims in nine years.
>> with katrina, i believe people began to really embed in their thinking a much higher level of energy prices going forward for a longer period of time. and so therefore consumers feel as if they may not have made as much progress in terms of their personal income or personal wealth situation in the last couple of years.
>> economists say the index is responding to the shock of katrina and policymakers are likely to view the decline as just temporary. the fed is forecast to raise its benchmark interest rate next week for the 11th straight time to 3.75. kevin harris, chief economist of informa global markets , says once upon a time fed officials routinely spoke of confidence. you don’t hear that right now. back to you.
>> thanks so much. confidence down, but treasuries lower, as well. pushing yields higher. with today’s move, the 10-year recorded its biggest weekly decline since march. su keenan was following that action and joins us now.
>> a combination of factors weighing on treasuries, concern about rising inflation and growing budget deficit and as we’ve just heard, hurricane katrina clearly playing a role. lawmakers expect cleanup from the storm to cost $200 billion and that will boost the supply of government debt to pay for it. this helped push 10-year yields to the highest in four weeks and those yields are likely to move even higher after next week’s fed meeting, the view of lord abbett’s zane brown, managing more than $30 billion in bond investment.
>> i certainly expect the fed to increase rates, not only at this meeting and september 20 but probably again before the end of the year and we expect that will adjust yields on the 10-year treasury higher than where they are now and push prices lower.
>> american century investment’s dave macewan echoes that view and predicts we’ll see the fed funds rate at 4.25% at year’s end.
>> bond investors need to be cautious and they’re really going to be looking towards the federal reserve to make sure that the fed is protecting the economy from the ravages of inflation and higher interest rates. so i think we’ll see the fed tighten next week. as a result of that, also, i think they’ll tighten each of the next three meetings for the year.
>> when it comes to tightening, you get a different view on the fed from the m.i.c. school of management, saying the post-katrina inflationary measures are temporary.
>> i think the odds of their staying on hold have gone up.
>> it’s worth noting that goldman sachs, which previously forecast a pause in the fed’s tightening trend because of katrina, has changed its view. goldman sachs’ latest note to clients said the fed will will likely raise the funds rate to 3.75% next week.
>> we want to move from bonds to stocks because talks of a promising economy and rebuilding in the gulf boosted stocks today. we’ll get more from deborah kostroun.
>> it was the busiest day of trading so far this year at the new york stock exchange. we saw that above-average volume with the expiration of futures and options and the final stage of the s&p 500 shift to a new calculation method. with all of those changes today, it’s hard to pin point if the market is more focused on that or the fact that the economic outlook and corporate profits positive with the rebuilding of the gulf coast as president bush talked about in his speech last night. we also saw the drop in oil prices would certainly help. inflation, a word coming up a lot right now and when there are concerns about inflation, that means gold goes up and gold rose to a 17-year high as it is seen as a safe haven and also a safe haven as we’re talking about surging consumer prices and energy costs for consumers. many of the gold stocks performing quite well. those concerns about and talk about inflation and also talk about rebuilding, raising concerns about the increase of the supply of government debt to pay for the cleanup, that led the 10-year treasury yield to its highest in four weeks. crude oil on the day, it was down $1.75, closing at $63 a barrel. oil down to a one-month low but since katrina, the friday before katrina, we saw crude oil, it was down 4.7%. gasoline, it is actually also down 3.7% since the friday before katrina. natural gas, however, is up, almost 14% and the s&p energy index also performing quite well in that time period. exxon-mobil upgraded by deutsche bank on the day and stocks like halliburton, that stock has jumped 13% since the storm hit on august 29 because katrina has created even more demand for oil field services and work as they’re trying to get on the damaged offshore rigs. coal stocks on the day hitting 52-week highs. i’m deborah kostroun at the new york stock exchange for bloomberg news.
>> israel’s foreign minister says his country will not allow palestinians to vote in parliamentary elections in the west bank if hamas is on the ballot. in an exclusive united states interview with bloomberg, silvan shalom says since israel controls the west bank, it will block voting there in january. he says palestinian leader mahmoud abbas is not doing enough to suppress extremists.
>> it looks like he doesn’t have the will to implement the commitment and fight extremists and we have said to president bush, very clear, that israel will not enable hamas to participate in the election because they are calling for the destruction of the state of israel.
>> mr. shalom did not elaborate on how israel would block hamas’s participation and said he was referring to elections in the west bank, not gaza, where israel recently withdrew forces and demolished israeli settlements. shalom said israel was improving relations with muslim nations including turkey, jordan. he said those strengthened ties would help the peace process with the palestinians. when we return, gregory hahn of oppenheimer will talk to us about the bond market . keep it here.
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