Credits Risks and the Market Outlook

Summary

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Bloomberg Surveillance – "Credit Risks and the Market Outlook"

Date: July 20, 2026
Host: Tom Keene, Paul Sweeney, Jonathan Ferro, Lisa Abramowicz
Guests: Paul Sweeney (Asset Manager), Scott Diamond (Goldman Sachs), Henrietta Trace (Political Analyst), Ozen Terman (Deutsche Bank)

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Overview

This episode of Bloomberg Surveillance dives into the state of credit markets—covering investment grade and municipal bonds—macroeconomic outlooks, US and European political risk, and the ongoing impact of AI and tech in global financial markets. Key guests from Goldman Sachs, Deutsche Bank, and political analysis provide data-driven answers to where risks and opportunities lie as 2026 unfolds.

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Key Discussion Points and Insights

1. Investment Grade Bond Market: Winners, Losers, and Fundamentals

Segment: 01:27–07:53

• Dispersion in Returns:
  Paul Sweeney highlights that the investment grade bond market has entered a phase of heightened dispersion, where careful credit analysis is essential.
  • "There's absolutely winners and losers ... The two things that people should be focused on are number one, the fundamentals ... number two, the supply side." (Paul Sweeney, 02:22)
• Earnings vs. Supply:
  Fundamentals (anchor in corporate earnings) and supply (major influx of new bond issues) are current key drivers; last week’s $40–45B in new deals were oversubscribed but saw performance diverge widely.
• Market Health:
  Despite supply "indigestion," inflows remain robust—12 consecutive weeks—fueled by attractive yields (5.25%+).
  • "The market's got a process ... but you've had 12 consecutive weeks of inflows ... I agree with you, the market's healthy." (Paul Sweeney, 03:24)
• High Yield and Credit Risk:
  Sweeney’s group supports selective risk-taking in high yield and leveraged loans. Triple-C bonds are lagging—heightened focus on bottom-up credit selection and creditworthiness.
• Return Outlook:
  Carry (coupon income) remains the main source of expected returns; prospects of 6–8% in fixed income, which "may not excite" equity bulls but is attractive versus GDP growth.
  • "The majority of your returns come from that carry or that coupon ... I'm not looking for massive, you know, capital appreciation from it." (Paul Sweeney, 05:06)
• Inflation and Rate Expectations:
  Discussion that recent data shows disinflation, with the Fed likely "on hold"—Fed and market expect inflation to move closer to (but likely not hit) the Fed's 2% target.
  • "This actually does feel more transitory. And we think the Fed's on hold." (Paul Sweeney, 06:00)

Timestamps

• Dispersion and new issuance: 01:27–03:23
• Market health and inflows: 03:23–04:52
• Total return vs. coupon: 04:52–06:00
• Fed/inflation outlook: 06:00–07:05

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2. Municipal Bonds: Supply, Demand, and Credit Health

Segment: 08:51–16:18

• Supply Surge, Demand Robust:
  Scott Diamond (Goldman Sachs) notes "record year" for muni issuance, with 2026 running 5–6% above even last year’s highs. New deals touch every sector—especially overdue infrastructure spending.
  • "We're going to do it again...running about 5, 6% ahead of what we had last year and as you said, a record year in 25." (Scott Diamond, 09:39)
• Demand for Municipals:
  Over $50B in inflows into mutual funds and ETFs YTD. Watch for potential second-half volatility if inflows slow amidst heavy issuance.
• Active vs. Passive:
  Active muni management "meaningfully" outperformed passive so far in 2026, due to the complexity and dispersion of issuers.
  • "In our view, you're leaving a lot of money on the table [with passive]." (Scott Diamond, 11:16)
• Credit Quality:
  Remains "really sound" post-COVID, with state rainy day funds still high—expected to be tapped but not dangerously depleted.
  • "Rainy day funds...remain at all time highs...even if they do [get tapped] they're still going to be probably well above where they were pre Covid levels." (Scott Diamond, 12:01)
• Research and Diversification:
  Goldman’s 11-person muni team covers states and sectors; political, school-district, and sector analysis are crucial.
  • "A lot of it comes down to politics and local politics." (Scott Diamond, 13:09)
• Sector Comments:
  • Higher education: Top state and Ivy universities relatively safe, but small liberal arts colleges under pressure.
  • Best current value: Select school districts, non-rated paper (example: 3% for a one-year note in New York).

Timestamps

• New issuance and supply: 08:51–10:17
• Demand and flows: 10:17–11:01
• Passive vs. active management: 11:01–11:42
• Credit quality: 11:42–12:28
• Research, diversification, sector focus: 12:55–16:18

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3. US & Global Politics: Legislative Gridlock, Election Risks, and International Trade

Segment: 16:48–26:18

• Congressional Dysfunction:
  Henrietta Trace asserts the US is on the brink of gridlock as the number of legislative days shrinks before fall elections.
  • "I think the legislative days are like 12." (Henrietta Trace, 16:58)
• McConnell’s Illness and Reconciliation:
  Senate Majority Leader’s health poses real risks to pending legislation, especially for at-risk Republicans.
• Voters' Mood:
  Both parties remain unpopular. Democrats are still likely, per Trace, to take the House with "90% likelihood," although by a modest margin—Senate is more of a toss-up.
• Trade and UK–US relations:
  The US is now in violation of its UK trade agreement due to tariffs, and this could be a flashpoint if not addressed.
  • "We are in violation of our own trade deal that we reached with the UK...come Friday, we're going to have a different landscape on the trade front." (Henrietta Trace, 23:20)
• Shutdown Watch:
  Must-pass: Avoiding a government shutdown on Oct 1. Democrats hope for a last-minute reconciliation bill, but odds low.
• Change Elections & Political Volatility:
  American politics cycles through "change elections," with voters flip-flopping towards/away from both parties.

Timestamps

• Election calendar, Senate risk: 16:48–17:55
• National mood, polling: 19:06–20:34
• Trade with UK: 23:20–23:59
• Shutdown risk, legislative agenda: 24:13–24:43

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4. Global Macro: Markets, Currencies, and the AI Trade

Segment: 29:28–36:20

• Equity Market Positioning:
  Ozen Terman (Deutsche Bank) notes that angst over a 2% S&P pullback is disproportionate, indicating a "crowded tech trade" that could unwind as seen earlier in the year.
• Macro Calls:
  • Short US rates vs long EUR—"pain trade" for crowded shorts.
  • Europe’s reforms mean US–Euro rate spreads should keep tightening.
• Currency and Fed Outlook:
  The US dollar remains "stuck"—a higher euro requires Asian currencies to join the rally; possible repatriation of Japanese funds could be a surprise factor.
  • "If Japanese money finally flows into their own assets that may strengthen..." (Ozen Terman, 31:28)
• War Uncertainty:
  Continued global instability means FX volatility is likely to remain range-bound; best risk/reward may be in EM carry trades (Brazil, Mexico).
• Fed Chair’s Approach:
  Current chair "wants to talk tough not talk much get rid of forward guidance and end up not touching [rates]." (Ozen Terman, 33:34)
• AI Tech/Rotation:
  The AI trade is no longer about magnitude but about picking which tech names really deliver on earnings. Rotation and volatility are ongoing, with Google/Microsoft results seen as key inflection points.
  • "Positioning washout will continue ... I'm not even sure in the sixth seventh inning. This, this has legs but Paul, earnings are important." (Ozen Terman, 35:32)

Timestamps

• Market angst, callouts: 29:28–31:11
• Currency, rates: 31:11–33:19
• Fed outlook: 33:19–34:12
• AI/tech market rotation: 35:15–36:20

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Notable Quotes and Memorable Moments

• “There’s absolutely winners and losers… so we're moving solidly into earnings season. The two drivers are, what are the earnings, and what’s the supply side?”
  — Paul Sweeney (02:22)

• “Twelve consecutive weeks of inflows into the investment grade corporate bond market. And I agree with you, the market's healthy.”
  — Paul Sweeney (03:24)

• "Active is very much ahead of the passive options [in muni bond management]."
  — Scott Diamond (11:16)

• "We're going to do it again. We're running about 5, 6% ahead of what we had last year...record year in ‘25."
  — Scott Diamond (09:39)

• "The one thing that has to get done is that we do need to avoid a shutdown on October 1st."
  — Henrietta Trace (24:13)

• "My official Surveillance call of [EUR/USD] 1.20 has more chance… but a higher euro really needs Asian currencies beyond China to join—Japan, Korea, Taiwan, those are way too cheap."
  — Ozen Terman (31:28)

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Segment Summary with Timestamps

• Credit Market Dispersion & Fundamental Analysis (01:27–07:53)
• Municipal Bonds: Supply, Demand, Active vs. Passive (08:51–16:18)
• US Political Uncertainty, Election & Policy Gridlock (16:48–26:18)
• Global Macro View, Market Positioning, AI & Tech Rotation (29:28–36:20)

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Tone and Language

The episode maintains a collegial, data-driven, but informal tone—peppered with banter, market wisdom, and occasional humor (from World Cup jokes to asides about London and Lawrence the Cat). The panel displays skeptical optimism about markets, sober realism about politics, and focused selectivity about where true value lies in credit and macro.

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The Bottom Line

For 2026, credit markets remain surprisingly healthy, supported by persistent demand and attractive yields—especially for those with the research depth to exploit dispersion and avoid danger zones. Municipal bond supply is robust, with credit quality sound, but the best returns accrue to careful active selection. Politically, markets enter the second half of the year facing US legislative uncertainty, trade frictions, and election volatility. Globally, currency and tech trades are increasingly nuanced, with "AI winners" and geopolitical risk requiring nimble adaptation. As one guest summarized, "enjoy the forward motion while it lasts, but be ready to rotate."

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Transcript

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[Interviewer (possibly Tom Keene)]

Joining us now, Kay here. She's been very patient here watching the festivities again. Sarah will show images of the iconic Buckingham Palaces. We await some news from there with the instabilities of British politics. I love you have a pro paragraph. I'm not going to waste time and read, but you talk about the dispersion within investment grade bonds. They're winners and losers now who's who?

[Paul Sweeney]

Say good morning. Lovely to be with you too. I mean the fun thing is I never know what we're going to talk about and I never know. Tom, I never would have imagined you would be wearing a red sock jersey.

[Interviewer (possibly Tom Keene)]

I've been watching the World Cup.

[Paul Sweeney]

I know. That's what I might have thought. Spain, something.

[Interviewer (possibly Tom Keene)]

Oh no, we're doing Spanish music here, you know. Yes folks, we will play Macarena. You should have seen Care doing the Macarena years ago. Tell me about the spread and a long time there's winners and losers.

[Paul Sweeney]

There's absolutely winners and losers. And I think the two things that people should be focused on are number one, the fundamentals. So we're moving away from last week, which was an economic heavy week. If you had tier one data, you had a lot of Fed speak, a lot of focus on Marsh. This week we're moving solidly into earnings season. We're in The Fed blackout period. So don't expect any Fed commentary. We've got a lot of earnings this week and next week. I think the two drivers are the fundamentals investors are looking at what are the earnings, what are the returns going to be from these investments that companies are making. And then the second is the supply side. Tom, as you and Paul know, the issuance in the investment grade corporate bond market can be very lumpy. So last week, investment grade bond market priced 40, $45 billion, interestingly, four times oversubscribed, something like a 2.3 new issue concession. But if you look at those deals from last week alone and there wasn't any hyperscaler issuance, the best performing deals 10 tighter, the worst performing deals 10 wider. It's really a function of what our expectations are.

[Interviewer (possibly Tom Keene)]

So the market's healthy.

[Paul Sweeney]

The market's healthy. I think there's a little bit of indigestion. You look at some of this issuance, we had nine issues that are greater than $20 billion each. That's a big deal. You know, go back last year, there was one of those. So the market's got a process, but you've had 12 consecutive weeks of inflows into the investment grade corporate bond market. And I agree with you, the market's healthy.

[Co-Host (possibly Jonathan Ferro)]

Where do you guys find the cash to buy all these new deals? Like, where does it come from? Literally, like when Morgan Stanley calls you your desk and says, and you take down a big chunk and all your

[Paul Sweeney]

steady inflows into our mutual funds, into our ETFs, our ETFs in particular. We've also seen strong inflows from our, into our institutional accounts. There's strong demand for fixed income here. And I think the answer, Paul, is people like the yields here, you know, north of five and a quarter in investment grade high sixes, low sevens for high yield bonds, you can get attractive yields and securitized credit as well. So I think investors are back to realizing there's yield and fixed income and that that's what drives the inflows.

[Co-Host (possibly Jonathan Ferro)]

So talk to us about the high. If I want to take more credit risk, do you guys support that or how do you guys think about the high yield and leverage loans and all that kind of stuff?

[Paul Sweeney]

Yeah, again, I think so. Yes, absolutely. If I look at across our portfolios, you know, in our core plus strategies, we've got about 8% in high yield corporate bonds, so. Absolutely. But again, I think what's really interesting, and I think this is another sign of the health of the market triple Cs are lagging this year, so there's a lot of focus on individual credit analysis.

[Interviewer (possibly Tom Keene)]

Okay, forward into the end of the year, even into 2027. Is this really important question for me, Are you investing for the coupon or is it actually a total return forward vision?

[Paul Sweeney]

So I think both. When you think about fixed income in general, the majority of your returns come from that carry or that coupon. So the carry is the biggest predictor of what your future returns are. And you're looking at these yields right now. I mean, my expectation would be fixed income delivers the yields. I'm not looking for massive, you know, capital appreciation from it. But you pick up your carry. That's, that's, maybe that's not attractive if the equity market goes up 30% every year. But, you know, 6, 7, 8% returns in fixed income are, I think, exactly.

[Interviewer (possibly Tom Keene)]

My dumb math is you make a coupon 5 and a half, 6%, you drop 2, 2% on top of that total return, you're way above nominal GDP.

[Co-Host (possibly Jonathan Ferro)]

That's fine. That works out just nicely. I'm looking at the WIRP function, K, I guess the market's pricing and maybe one rate hike and that's kind of it. How do you guys think about it?

[Paul Sweeney]

So that's a great question. I think there's been so much focus on the inflation data, and last week we saw some softness, finally of some, some deflation and disinflation and an expectation that PC is moving down in the direction closer to the Fed's target. On the other hand, the Fed inflation hasn't been at the Fed's target for the last five years. So the market still, the Fed's been reluctant to call this bout of inflation transitory because they missed that last time. So that's a. Yeah, I hear you grumbling. That's a bad word, Tom, but. So the Fed's been reluctant, but this actually does feel more transitory. And we think the Fed's on hold.

[Interviewer (possibly Tom Keene)]

How do you interpret for all the Kasman and company here, there was a wonderful tweet this week in her LinkedIn, I can't remember which, which said, you know, since time began, we're running near a 4% inflation rate. I'll cut them some slack. They had Covid, you know, they had a medical event. But are we supposed to get used to 3 and a half or 4% inflation? I just see that in my textbooks.

[Paul Sweeney]

No, I don't think we get used to three and a half or four percent. But is it two or two and A half? Yeah, I think that's more likely.

[Co-Host (possibly Jonathan Ferro)]

So how are you guys looking at the markets these days? I mean are you looking, are you trying to screen for sectors, for factors? Where do you guys look for value these days?

[Paul Sweeney]

Yeah, we tend to do both top down and bottom up. From a top down perspective, we're looking at return expectations and where we can find yield. From a bottom up perspective, it gets to my earlier point on dispersion and returns. We're looking for, you know, broadly across corporate America. Look at the investment grade. Corporate market margins are at 25 year highs. So we're going to see what earnings look like this week and next week. Last week from the banks, they were very strong. So we found opportunities in banks, we find some, some opportunities in some of these tech issuance, but a lot of it's really old fashioned. Roll up your sleeves, bottom up issuance, you know, consumer debt, we find a lot of opportunity and securitized credit.

[Interviewer (possibly Tom Keene)]

So thank you so much JP Morgan. Stay with us. More from Bloomberg Surveillance coming up after this.

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[Bloomberg Announcer]

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[Interviewer (possibly Tom Keene)]

Joining us right now. This is really timing. This came up three times this week. And Scott diamond on municipal bonds co head of Municipal Fixed Income, Goldman Sachs Asset Management. Can you form easily diversified portfolio of double tax or triple tax free bonds or is it just finally the institutions on the market?

[Scott Diamond]

It's a little bit of both. So to answer your first question, yes, you can do it but it's going to help if you have an institution behind you. I think about the execution side from an institutional perspective and I think very importantly from the credit research side from the institutional perspective, talk to us about new issuance.

[Co-Host (possibly Jonathan Ferro)]

I mean your market's been crazy record years of issuance in 20, 24, 25. How's 26 been?

[Scott Diamond]

We're going to do it again.

[Ozen Terman]

Wow.

[Scott Diamond]

We're going to do it again. We're running about 5, 6% ahead of what we had last year and as you said, a record year in 25. We're seeing it in new money issuance. We're seeing an increase in refinancings. We're seeing it across multiple, multiple sectors. I don't look at this as a big concern. I actually think it's probably long overdue. We have municipalities that maybe haven't been investing as much as they should have been in infrastructure. They've had other things they've had to deal with. So it's good to see us finally catching up. The big question in my mind is how's demand and will it be sufficient to take down the supply?

[Co-Host (possibly Jonathan Ferro)]

Does all this supply weigh on the performance of municipal bonds or has the demand been out there?

[Scott Diamond]

It's impressively been out there so far, year to date. If I think about commingled vehicles, and that's mutual funds, that's ETFs. Whether it's passive, ETF, active ETF, they've taken in over 50 billion in inflows year to date. That's impressive. However, we still have another half a year to get through, right? We've got some 300 plus billion so far. When I pull the street, they're all saying the same thing. Second half is going to be heavy. So in my mind, is it going to be that same steady demand that we've seen in the first half? And if not, if it falters, then it could cause some good volatility in the muni space.

[Interviewer (possibly Tom Keene)]

Describe the actual track record of passive versus active municipal bond management. I think all of our listeners and viewers sort of get the equity dynamic there. What in muni bonds is the difference between a passive act of performance?

[Scott Diamond]

You know what it, it can be quite meaningful leaning into active. You know, there are, we all know, 50 states, right. And all those states have lots of towns. So that means a lot of different issuers to take a passive approach to that. In our view, you're leaving a lot of money on the table. If you look at the performance of active over passive so far, year to date, active is very much ahead of the passive options.

[Co-Host (possibly Jonathan Ferro)]

How's credit quality out in the municipal bond market? You know, I don't read anything too much anymore about like, you know, Illinois or Chicago.

[Interviewer (possibly Tom Keene)]

That 11% Illinois I bought. Exactly. It was 18% 4 tax free.

[Co-Host (possibly Jonathan Ferro)]

It was. So what's, how is credit quality out there in municipal America?

[Interviewer (possibly Tom Keene)]

Let's see.

[Scott Diamond]

Overall it's going to be really sound. We're coming out of COVID where a lot of monies were, were handed out. We have rainy day funds that remain at all Time highs. They're starting to get tapped as we would expect. We expect them to get tapped this year and into next year. But quite frankly, even if they do, they're still going to be probably well above where they were pre Covid levels. So for now credit looks really sound.

[Interviewer (possibly Tom Keene)]

Bloomberg Surveillance across America around the world the way you choose to listen to us. Thank you so much for a wonderful June. We're deep into July with Scott diamond of Goldman Sachs co head of Municipal Fixed Income James Wilcock is at 10 Downing Street. The new prime minister at Buckingham palace after seeing King Charles the Third. We have word he may speak shortly. We'll continue to monitor the festivities. In London, Paul Sweeney with Scott Diamond.

[Co-Host (possibly Jonathan Ferro)]

I'm looking at your notes here, Scott. You say you now have an 11 person researcher team. What do these people look at? What are your, what's your research team looking at? How do they go out and look at a, I mean some municipality in the middle of Nebraska. What do they know about that?

[Scott Diamond]

We love those municipalities in the middle of Nebraska. Listen, we have 11 folks. They are what I'm going to call generalists. So we have each of them assigned specific states and their municipalities. That's important when you think about municipals. A lot of it comes down to politics and local politics. So let's make sure we keep our team focused on that. And then we've also asked them to get very deep in a specific sector. So one of them is going to be our expert in hospitals. One will be our expert in student housing or universities. That's how we kind of canvas the entire market for opportunities.

[Co-Host (possibly Jonathan Ferro)]

How about talk to us about taxable municipal because I own municipal bonds in New Jersey because I live in a high tax jurisdiction, but I do it for the triple tax free treatment. Now you tell me there's a taxable municipal bond market. What do those people do?

[Scott Diamond]

There is a taxable municipal bond market. It's probably 8 to 10% of the overall muni market. If you think about munis, I suspect the IRS is not a big fan. And so you have to check the boxes on what you're using the money for to to issue tax exempt. If you don't check the box, issue taxable munis. So they're quite popular with our institutional clients. Think insurance or pension funds. And in some cases for some of our US residents, they may make sense there as well.

[Co-Host (possibly Jonathan Ferro)]

So what's the area you're staying away from? I hear sometimes higher education. Talk to us about that part of the world because I know it's facing funding pressures from the government, research funding and all that type of stuff. And maybe not as many kids are going to college. Talk to us about high ed.

[Scott Diamond]

Yeah, it's very much a focus area for us. I hesitate to say we're staying away from it because as I mentioned, there's a lot of issuers, there's a lot of universities. So it comes down to can you pick the right ones? State universities, I think they're doing just fine. The top tier AAA ivies also doing just fine despite some of the political pressure. Where we're seeing pressure is think of it as a smaller, maybe liberal arts school, somewhere around thousand, two thousand kids. And they're having a tough time drawing those applicants in from a smaller applicant pool.

[Co-Host (possibly Jonathan Ferro)]

So what's the sector here that screens particularly well for you guys?

[Scott Diamond]

I tell you, we're finding value in a number of different spots. One, from a sector perspective, I would say school districts are starting to come under pressure, headline pressure. But if you find the right school district, you can get a lot of extra yield. For example, in New York last week in our New York etf, a non rated school ban. Not many individuals will want to do the homework on a non rated offering.

[Interviewer (possibly Tom Keene)]

Right.

[Scott Diamond]

But for us, if we can get 3% for a one year piece of paper for a New York resident, that's

[Interviewer (possibly Tom Keene)]

like you suggest how in the New York etf, how diversified is it?

[Scott Diamond]

How diversified? We've probably got about 45 to 50 in. No, you're right. Actually it's 100. I'm wrong again. It's 100. Yeah.

[Interviewer (possibly Tom Keene)]

That's near 100 items in a portfolio.

[Co-Host (possibly Jonathan Ferro)]

Yep.

[Scott Diamond]

With a research team that will go through and make sure that they earn the right to stay in that portfolio.

[Co-Host (possibly Jonathan Ferro)]

There you go.

[Interviewer (possibly Tom Keene)]

Thank you so much. Scott Diamond. Greatly appreciate it with Goldman Sachs. Stay with us. More from Bloomberg Surveillance coming up after this.

[Bloomberg Announcer]

You're listening to the Bloomberg Surveillance podcast. Catch us live weekday afternoons from 7 to 10am Eastern. Listen on Apple CarPlay and Android Auto with the Bloomberg business app or watch us live on YouTube.

[Interviewer (possibly Tom Keene)]

The American political landscape. It is tons of fun right now. Henrietta Trace joins us for a wonderful morning brief. Are we closer to the midterm elections than we think?

[Henrietta Trace]

Oh, we are right up on it, absolutely. Especially when you think that they're leaving on Friday, they'll be gone for five weeks, they come back in for just a couple of days and then they leave again for the entire month of October. So I think the legislative days are like 12.

[Interviewer (possibly Tom Keene)]

How important is Senator McConnell's illness.

[Henrietta Trace]

It's extremely important when you think about the reconciliation package that they may want to pass as the war perpetuates, as gas exceeds $4 a gallon nationally and consumers continue to express that the president's war is unpopular, the tariffs are unpopular, inflation is a problem, they're going to want to do something to show voters that they're paying attention. We all saw what happened with the housing bill. They're going to have a last bite at this in September. And if McConnell is not there and able to vote, that makes it really tough on members like Susan Collins and the other at risk members.

[Co-Host (possibly Jonathan Ferro)]

What do we know about Senator McConnell, his case, and then what happens if he's unable to vote or participate? What do we know about all that?

[Henrietta Trace]

Well, there's a couple options. I mean, certainly you could have a situation where Andy Beshear, the governor in Kentucky, provides a stand in and the event of a vacancy. But anybody who's worked in the Senate or anybody who's been there for the last 30 years knows that Mitch McConnell is not going to go out voluntarily. So this is going to be a long standing issue as long as he makes that choice.

[Co-Host (possibly Jonathan Ferro)]

I mean, it seems like the, the news flow for President Trump, the polling for President Trump are really, really headwinds here. What's the Republican National Committee? How are they kind of framing this out? What do they hope will happen? What do they think will happen? Because this could be difficult for them.

[Henrietta Trace]

Yeah, well, the hope is to just talk about Democrats as communists as any word that they can throw at it. They talk about the far left, they talk about the populist wing of the party. And it's interesting because you see some very real similarities between those candidates and some of the agenda items that President Trump has. So it's a sort of a mixed bag. I would say that we should expect the Senate, the congressman on the Republican conference, to trick, to trickle back into immigration and crime as core issues going into the election.

[Co-Host (possibly Jonathan Ferro)]

And if you're the Democrats, I don't know. I guess I feel like I'm surprised they haven't taken this. It seems like it's on a silver platter for them here to just step up their rhetoric. I don't hear it. I don't see it. I don't feel it. I'm shocked that they haven't because every poll says they should just be, you know, really on the offensive here.

[Henrietta Trace]

Oh, absolutely. The president is inordinately unpopular, but both the Republican and the Democratic parties are also extremely unpopular. And Democrats are even Less popular than Republicans. They've closed the gap. Instead of, you know, eight or nine points more unpopular, it's three or four. But they. They don't have a core leader. And so there's no direct equate the

[Interviewer (possibly Tom Keene)]

upset of France with Le Pen coming back in an amazing presidential election coming up, or what we're witnessing right now. Sarah, give me the images of London right now as you can on YouTube. Seven prime ministers in 10 years, which Harkins back to Peel. And I think Canning died. And my history tells me Peel's before Disraeli and Gladstone. Okay. It was. It was before that. It was back when the tots last one. That's when it was total disarray in the United Kingdom. We're no different, are we?

[Henrietta Trace]

We're no different, but you are like a human computer. That is an amazing recollection of all of it. Yeah, no, we're no different. And people. The American public swings back and forth and what happens is you get these big change elections. Voters vote for change and then they realize once they get it, they don't actually like it and they go back right in the other direction.

[Interviewer (possibly Tom Keene)]

So like 1890, like Grover Cleveland Alexander was president twice. It's like. That was a joke. Paul Grover Pitcher. Yeah, I used to call him Grover Cleveland Alexander. Anyways, it's like the 1890s. So we're just going to bounce around for the next decade.

[Henrietta Trace]

Well, I mean, I think it's very normal to see that in a midterm, especially when one party has such control over D.C. the problem for Republicans here is not that Democrats are popular, it's that their margins are so slim. So, you know, my black swan event for this entire year has been what if one of the chambers flips hands just through attrition? You got 6, 69 members retiring or moving on. Next year they're going to be younger, they're going to be focused on AI. We're going to go through. We are going through a decade of very real change.

[Co-Host (possibly Jonathan Ferro)]

Funding the war. Does Congress have any say here?

[Interviewer (possibly Tom Keene)]

Excuse me. The Prime Minister coming out right now with Mrs. Burnham obligatory London Ways. I mean, Henrietta, it is a pomp in circumstance. I remember the day Prime Minister Cameron, after Brexit, staggered out of the door of 10 Downing street with Lawrence the Cat to his right. And from that moment on, I would say John Farrell leading our coverage in London. From that moment on, it's been chaos in the United Kingdom.

[Henrietta Trace]

It really hasn't. It's a constant turnover. And how can anybody really hit Their stride. This is an unpopular opinion, but I don't like term limits because you need that institutional memory. You need that knowledge of how to, you know, work a room, create a deal.

[Interviewer (possibly Tom Keene)]

I mean, Paul, the Range Rover, there's like 14 of those where you live in New Jersey.

[Co-Host (possibly Jonathan Ferro)]

Yeah, sure.

[Interviewer (possibly Tom Keene)]

It's like hot and cold running Range Rover.

[Co-Host (possibly Jonathan Ferro)]

Absolutely.

[Interviewer (possibly Tom Keene)]

On the Jersey Shore. So I guess no comments here. No, we would presume. I'm guessing they'll help me in the control room. Our royal correspondent Robert Bragg is on top of this. We look for comments at 10 Downing street with our James Wilcock at 10 Downing street it's about a mile back. Coming out of the acclaimed gate. My grandfather had a puzzle of Buckingham Palace.

[Co-Host (possibly Jonathan Ferro)]

Oh yeah, okay.

[Interviewer (possibly Tom Keene)]

We would sit there, he'd sit there with his third Old Fashioned and I would complete the puzzle. But it's coming down now. We'll see here, folks. For those of you on radio, it's as beautiful as you can imagine thanks to the royal drone that's, that's helping out with the camera. Do they go down the Mall or. I don't think they worry about traffic on one.

[Co-Host (possibly Jonathan Ferro)]

They're good.

[Interviewer (possibly Tom Keene)]

I think we're. Yes, we're going down the acclaimed Mall wards, the arch and all the symbolism of 18th and 19th century London. Of course. Remember this from the funeral for Queen Elizabeth the Second as well. We'll continue to monitor that. And we continue with Duchess Henrietta Trace with us as well. Is it a special relationship with London? I don't sense it right now.

[Henrietta Trace]

It's hard to sense right now. One thing that I think about a lot is the fact that we're currently in violation of our trade deal with the uk. I think this is underappreciated. But as tariffs are set to expire this week and the President has to migrate into new rates, one of the things that we agreed to with the UK because of our special relationship was a very low 10% reciprocal tariff rate. But now, of course, every other nation on earth also has a 10% tariff rate, which means we are in violation of our own trade deal that we reached with the UK to give them preferential treatment. They don't have that right now. They're staying calm about it for the last 150 days. But come Friday, we're going to have a different landscape on the trade front.

[Co-Host (possibly Jonathan Ferro)]

And that's not even on the, on the burner anywhere for most folks. I think at this point. You say there's 12 effective working days for this Congress in the remainder of the year. Did they have any agenda to get anything done here? I mean, is there something that has to get done or.

[Henrietta Trace]

Well, the one thing that has to get done is that we do need to avoid a shutdown on October 1st.

[Interviewer (possibly Tom Keene)]

Okay, we're back to a shutdown, basically.

[Henrietta Trace]

Yeah, we are. And last time you saw what Dems did, they shut down the government for what, 43 days or something? So they're playing with fire. Republicans are trying to get out in front of that. They have a bill that they introduced very early to pass a CR that will extend us past the election. So they know to be anxious about it. That's the one thing we really have to pass.

[Interviewer (possibly Tom Keene)]

Right.

[Henrietta Trace]

There's an optimistic hope that we would get a reconciliation bill, but I'm only at 30% on that.

[Interviewer (possibly Tom Keene)]

So what is your summary right now? Middle July, as you say. They're taking off five years or whatever coming up here. Do the Democrats still take the House?

[Henrietta Trace]

Yeah, I'm at 90% that Dempsey large. Yes, I feel pretty comfortable with it. I mean, it's just historically correct to think that one party control would alienate.

[Interviewer (possibly Tom Keene)]

So how do you respond to Terry Haines articulate essays at Pangea saying henrietta Tracy's right, that's the zeitgeist. But are the Democrats that fragile with the Terry Haines?

[Henrietta Trace]

But I think if you want to say, but the better way to do it is to talk about what the margins are going to be. So Democrats are not going to get 30, but they're going to get 12 seats. They'll get eight seats.

[Interviewer (possibly Tom Keene)]

What about in the Senate?

[Henrietta Trace]

The Senate? I'm at 60% that Republicans hold as we're seeing. And to your point earlier, I mean, Democrats barely have a main candidate. We are just a couple of weeks out from the election. Early voting starts September 15th. You know, temps are needed to get this.

[Interviewer (possibly Tom Keene)]

Can I ask a rude question?

[Ozen Terman]

Sure.

[Interviewer (possibly Tom Keene)]

I actually read two articles on the Maine disaster of the Republican Susan Collins and the 47 people. It's like the traditional kind of politicians we used to have. I have such an admiration for Mr. Cohen and Mr. Mitchell of Maine, both of who folks grew up dirt poor and achieved. It's like those people. It's like the will William Cohen and George Mitchell, like May in Margaret Chase Smith, who I remember. It's gone.

[Henrietta Trace]

Yeah, yeah.

[Interviewer (possibly Tom Keene)]

Where are those candidates?

[Henrietta Trace]

Well, they're not in Maine this cycle, but they are elsewhere. You know, think about Roy Cooper in North Carolina, just doing it sort of the old fashioned way. Tons of fundraising, very popular, very moderate. And you have a similar dynamic in Kentucky, as we talked about with Andy Beshear, those members do exist, but this one is wild, you know, for another classic candidate. Look at Mary Paltola in Alaska. Couldn't make a better candidate. And it's very homegrown. Native to the state, works with the, with the local community, loves to fish.

[Interviewer (possibly Tom Keene)]

Mrs. Keene emails and she goes, what's Henrietta's look today? What are you wearing? Who are you wearing this morning?

[Henrietta Trace]

Oh, my daughter picked this out for me. She is in the green room with me.

[Interviewer (possibly Tom Keene)]

We'd love to meet her as well. The cars are back at 10 Downing Street. I thought they were going to talk at New Bond street to see the new Hermes store, the new maison that Hermes put. Hermes put together five different stores. It's the talk of London right now. But they've gone to 10 Downing street where they will meet members of the Labour Party, the For Americans, the Paul, the move in, move out thing. Yeah, move out, move in thing.

[Co-Host (possibly Jonathan Ferro)]

Right.

[Interviewer (possibly Tom Keene)]

It's shockingly abrupt.

[Co-Host (possibly Jonathan Ferro)]

Is it? Okay?

[Interviewer (possibly Tom Keene)]

It's like literally cardboard boxes going out the back door off camera. If you're lucky. They don't take Lawrence the Cat. We'll have to see on there. But this pageantry is extraordinary. From Westminster Abbey. Downing street is away from the traffic flow. It's, I'm going to say, I'm guessing north about three blocks. And you sort of, Paul, you're walking along as a tourist and then all of a sudden, and all of a sudden it's, oh, that's it.

[Co-Host (possibly Jonathan Ferro)]

That's it. Yep.

[Interviewer (possibly Tom Keene)]

And it's just.

[Co-Host (possibly Jonathan Ferro)]

I recognize this TV shot.

[Interviewer (possibly Tom Keene)]

Exactly. And it's too Buildings or Henry, have you been there? Have you been to 10 Downing Street?

[Henrietta Trace]

I have been to the outside. I haven't been to the inside.

[Interviewer (possibly Tom Keene)]

Did you meet Lawrence the Cat?

[Henrietta Trace]

I did not meet Lawrence the Cat, but I do imagine all of the cast of Love actually walking by. So, you know, so do I.

[Scott Diamond]

Unassuming kind of building. When I passed it to her, I

[Co-Host (possibly Jonathan Ferro)]

was like, oh, is this.

[Interviewer (possibly Tom Keene)]

This is it.

[Scott Diamond]

This is it.

[Interviewer (possibly Tom Keene)]

Yeah.

[Nathan Hager]

Okay.

[Interviewer (possibly Tom Keene)]

Prime Minister Burden greeting his supporters, many, of course, from his northern great Brit. Stay with us. More from Bloomberg Surveillance coming up after this.

[Podcast Host (Francine Lacqua / Carol Massar)]

This week on Leaders with me, Francine Lacqua. I speak to tennis legend Rafa Nadal about how he stayed competitive despite injury.

[Co-Host (possibly Jonathan Ferro)]

I was able to enjoy the victories probably more than if I will not have this issue.

[Podcast Host (Francine Lacqua / Carol Massar)]

One iconic match in my mind was

[Co-Host (possibly Jonathan Ferro)]

I am almost dead.

[Podcast Host (Francine Lacqua / Carol Massar)]

And whether he misses playing, I don't

[Co-Host (possibly Jonathan Ferro)]

miss Dennis because there's nothing else to

[Podcast Host (Francine Lacqua / Carol Massar)]

offer listen and watch leaders with me, Francine Lacqua on Bloomberg Television or wherever you get your podcasts.

[Bloomberg Announcer]

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

[Interviewer (possibly Tom Keene)]

Ozen Terman joins us right now. Vice Chair, Global Macro Deutsche Bank I look goes on at your note and then I look at SPX down 2%. We've had a massive drawdown in 2% but the angst there seems so much greater than a pullback of 2% from record highs.

[Ozen Terman]

I hear you Tom and so so good to be here. And this morning already we're trying to bounce a bit with these Ceasefire hubs. I think the major part of it is positioning, especially on tech. It's starting to get a bit crowded, a bit like the October to February periods. My Binky Chadha his 8000 used to be very exciting for people as a target. Now it's almost conservative. So with everything going on in the chip sector and the semis, we're questioning the whole rotation but I think down the line will still be all right.

[Co-Host (possibly Jonathan Ferro)]

So what is your top call right here when you think about global macro here? What are we doing here? What's your top conviction call?

[Ozen Terman]

It's getting trickier and trickier. I think the one top call is that the crowded trade of earlier summer shorting US rates versus going long euro rates that's going to continue to be unwant and there will be a pain trade there. And when Wash first walked in talking tough keeping long and in control through that people really believe that that was that would send U.S. rates higher and higher and that Europe would go through summer doldrums well not exactly playing out on US data on Europe. Germany finally going through delivering key reforms. So I think that spread between German European space and US will continue to tighten.

[Co-Host (possibly Jonathan Ferro)]

We kind of came into the the year thinking weak US dollar and I think that was kind of working. And then a war and then a war started in Iran. Then we saw and then we got the DXY index back up close to 101 here what you're calling the dollar

[Ozen Terman]

here in just the current that's a bit stuck poll so on its own if it's a bit depends on yet again the AI trades if US exceptionalism comes back then all these calls of 110, 111 may be back. If we go through these choppy times more rotation then my official surveillance call of 120 has more chance One thing a higher euro softer dollar really needs is Asian currencies beyond China to join Japan, Korea, Taiwan those are way too cheap and one go though that may finally come is Japan repatriation the headlines of last Friday and then Takechi emphasizing it again if Japanese money finally flows into their own assets that may strengthen

[Co-Host (possibly Jonathan Ferro)]

the why would that happen?

[Ozen Terman]

That's why I quote ago it hasn't happened for a long time this time government is pushing it and giving some gimmick giving some carrots But I hear

[Interviewer (possibly Tom Keene)]

your skepticism how can you model forward given just as a general statement a war or two wars I just the certitude I mean I get the idea people have to sell a message but how can you do it given the headlines I'm seeing from Friday

[Ozen Terman]

I completely hear you that's why as long as world growth stays as high as it is given all this war uncertainty et cetera I think the right trade will continue to be a bit frustratingly sell volatility it's not going to want RIP to 1/11 it's not going to soften to 117 either it's going to be continue to chop chop chop chop effects unfortunately G3 G4 effects won't be the place to be emerging markets carry especially on high oil exporters that may continue to work your Brazils, your Mexico's that that may be the place to be

[Co-Host (possibly Jonathan Ferro)]

in effects we've now heard from our Federal Reserve chairman a few times here inflation is intolerable in his mind the message seems to be fighting inflation is job one. How do you view kind of what we've heard from our new Fed chairman

[Ozen Terman]

so far he's passing the test. First of all these CPI's and PPIs data also helped I think deep inside he wants to talk tough not talk much get rid of forward guidance and end up not touching it. I'm not too sure he's too keen to hike. His other hawkish members like Hamak on Friday will continue to help him as well is if data continues to come like they did the past week I think we may end up with no hikes at all though I have to respect my Matt does it as always I have to emphasize our official call is two hikes.

[Interviewer (possibly Tom Keene)]

Okay I mean I mean that's right we're going to go I mean within the combine that David Folkert's Lando put together there's Matthew Lizetti. He hangs out he's over at the ready the Time Warner building. Yep they renamed it I'm still Calling it the building the Deutsche bank building. Matt was that he's over there framing out an economy with a huge bull market attached. Do you just say I think of binky Chad. You just say forward motion and enjoy it while it's, while it's going.

[Ozen Terman]

Love match, respect him. But compared to him I have a bit more more of a sympathy to the economy arguments as well.

[Interviewer (possibly Tom Keene)]

Yeah.

[Ozen Terman]

So on its own, you know, for 1%, 4.1% all the AI arguments, inflation arguments, yes I do hear them. But most people in this wonderful country still live paycheck to paycheck. All this tight economy won't help with their mortgages. So that's why at the end of the day Deutsche bank is a democracy. I'm not too sure about those two hikes coming in.

[Co-Host (possibly Jonathan Ferro)]

So what is in your mind or the AI trade today? Because we see just it used to be just buy in anybody who's spending money who's spending the Capex. The hyperscalers and and the chips I guess are still a nice way to play it. But how are you guys thinking about how do you think about the AI trade? Because people are trying to figure out winners and losers.

[Ozen Terman]

Yeah. It's becoming like magnitude 7 doesn't necessarily cut it anymore. I think we will the rotation that I began with will continue. The positioning washout will continue a little bit. I'm not sure World cup right. I'm not sure we in the even 6 5th 17th in it yet or my dear Tom's Red Sox. I'm not, I'm not even sure in the sixth seventh inning. This, this has legs but Paul, earnings are important. What keeps going this binky story is earnings delivering and this time around SK Hynix delivered price action didn't. TSMC delivered price action didn't. I think this Google Wednesday is very important followed by Microsoft and Apple. If Google again slams it, it's the winner anyway. But despite that price action is so so August may be a bit more nastier for cloud positioning than people thought.

[Interviewer (possibly Tom Keene)]

Ozen term on thank you so much Vice Chair Global Deutsche bank this is

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