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tv   Bloomberg Real Yield  Bloomberg  March 3, 2017 12:00pm-12:31pm EST

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jonathan: with 30 minutes dedicated to fixed income, this is bloomberg real you. coming up, the final word along to chairman yellen. after a week of fed speech shakes of the treasury market. french presidential candidate gains ground in the poll has issuance. . is said toche bank be reviewing options to raise
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capital. what he is getting out of that sector. we start with a big issue, the potential move in march. the march meeting live. >> there will be a wage hike -- a rate hike in march. >> i think the fed has been itching to raise rates for some time. >> i don't think there is going to be a hike, but i understand the odds from where they were. >> i think they want to move early. >> feta seek has been front and center. official seemed to be leaning toward a hike, even if the fed's chief staff said it will likely be appropriate soon to remove additional combinations. a guess now for the next 30
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minutes, chief investment income. a fixed in terms strategist. the journey before the federal reserve is going to get a bit earlier in 2017. the ultimate endgame, has that changed at all? >> the fed is in a period of trantion. the janet yellen bloomberg dovish fed has got vacancies. there is going to be a presumptive's -- presumptive change. i don't know if we can make any on where productions the fed wants to take the environment. but indicates a change in the
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marketplace as it relates to the near-term probability. the reality is the fed talks an awful lot. hear the same thing out of them, they would love to raise rates. they redefine what those targets would be. certainly there is a higher probability of the fed going at its next meeting in march. on the other hand the quotes you put forward a few moments ago indicated what she said was soon. soon doesn't mean march. a very poor record of actually doing what they said they were going to do. >> not only does the fed have a poor record -- in general if we any investor trying to
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-- ict rates, it is failed jonathan: comparatively earlier yes, but as the fed behind the curve to some extent already? >> the way to fed defines it, even the way they define it they are somewhat behind the curve. properlyay it should be defined, which is not just a focus on inflation that rather a focus on the amount of leverage in the system, the amount of financial excess. i think you can make the case they are years behind the curve
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as it relates to normalizing rates. perhaps going back to the taper 2013.m of we should remind ourselves that's 0% rates was an extraordinary measure. it was taken as an emergency response to a dire situation. >> i want to bring up what you said and that is leverage. leverage has been building up over the last year or so. is, leverage has been climbing. what has been the message for you? >> business cycles, asset price
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cycles are killed by excess of leverage. the investment grade area is indeed one of them. i put the statistic in front of you. generally in marks the out of boundary of what rating agencies have considered to be investment-grade. the medium to half of the investment-grade universe is beyond the traditional metrics, which implies there is a high
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degree of readings risk. be an economic recession, we are probably going to see a massive amount of downgrade. >> explain that for me. think the points that are made are very valid. there has been a tremendous amount of debt issued. there are a couple of offsetting factors. look at net leverage it is not as high. when you are seeing some of the company issuing debt it are those -- it is those that can afford to issue debt. therefore they can't access that cash, but the net leverage is quite low. debt that has been
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issued, which may be a problem at some point, has been at low rates. the low interest coverage is actually quite high. what gets investment-grade companies into trouble a lot of times is the ability to roll over debt. would say companies have done a good job of turning out the huge so you don't have debt maturities. >> i think the broader question is are we seeing a bond bubble? and i don't think it i applicable specifically to credit. broadly yields are at multi-year lows. it is how much incremental
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compensation are you getting for the incremental risk you are taking on. when you looking at the markets from that prism. all of that is moving purely off of interest rate risks. to give you an idea, double 30 basis trading at points off their all-time low. 200 to 50 basis points. if you suffer egregious losses, you're compensated to take the risk. that is not how investors to find safety. jonathan: we talked about credit, let's talk about treasuries. we come into a new year when it
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cams off of sovereign. i'm looking at a 10 year breakeven. if just of this. >> reflation, i think we should -- postelection the interpretation is twofold. it is to recognize monetary irrelevant itnot isn't the be-all end-all to the cycle. in political regime indicated that fiscal policy was going to become ch more component of the valuation proposition in the treasury market. that is a fancy way of saying tax cuts are certainly in the
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cards in the near-term. expand theng to federal borrowing requirement that all things are equal. i think you are quite right as ,t relates to the market becoming more concerned about the prospects of inflation as conventionally defined. i think the conventional metrics are pretty narrow. of the consumer price index, while not the preferred measure of the fed, the 35% of the cpi is a made-up number. it is a manufactured number. presenting you a relevant picture of nascent price pressures. morningscuss in our meetings that people talk about the trump reflation trade.
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there is a compelling argument to be made there are two separate trades going on. there is a cyclical reflation trade. the cyclical trade may be getting longer in the tooth. they may be coming. >> thank you very much. the markets this week, big repricing for treasury. two-year yields up. 19 basis points on the week so far. coming up next on this program we take to the auction block. you are watching bloomberg.
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jonathan: from new york city, you are watching bloomberg real yield. auctiono take you to an block where games are helping stoke demands in europe. morereasury in paris saw than $7 billion in debt and investors aided up with 10 year bonds jumping to the highest since october. that risk created some optimism and the spread to the french 10 year bonds. and proving corporate issues that having hostage's by politics, we have coca-cola and pfizer try the of about 14 billion euros.
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to talk europe and all things credit i want to bring in our roundtable. what do you make of a credit market, sovereign debt market held hostage by a single election. >> the european market is held hostage by a number of things. the ecb owns 10% of the european corporate bond market. roughly 100 of them are negative securities. it is going to be evaluated in the context of the sovereign risk. it is a precarious opposition because you are dealing with the end of the purchase program.
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the probability of her winning cannot be completely dismissed. victories are somewhat not clear. let's look at the situation in europe. i wonder what takes is higher. fundamentally you need growth, you need reforms. is that going to happen anytime soon? >> i think it is not a fundamental issue in the , which is that if you it through these elections think the focus starts to turn again on ecb exit and what that means. you had the same cyclical upturn in growth. it seems like it is more cyclical than structural. i don't think a lot has been done to address the growth potential issue.
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i think the fundamentals argue for low rates. >> the broader conversation is about the banks in europe. the rising yield curves are a positive. you talk about the year p.m. bank purchase program, they have not received support from that program.
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i think there will be -- there entrye better points into those markets, certainly into the european bank markets. jonathan: is an entry bank down the road -- entry point down the road? >> yes, there will be better entry points. i think you have to look no further than the problem loan ratios at the european banks to recognize your business even close to having dealt with the issues from the last cycle and we should remind ourselves for every problem loan there is a problem company on the other side of the loan. until you do something about those problem companies your growth problem is going to be with you. the political challenges massive and we haven't even begun in any meaningful way. jonathan: deutsche bank in the news, potentially a capital raise. are they top-down issues?
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>> they came to the u.s. markets, the capital markets. this is about three or four months ago. they paid about four or 5% for it. a money center bank was borrowing in dollar term at tt spread levels. the capital markets have spoken, which is to say these -- itutions have not gained jonathan: capturing these two stories come optimism in the united states and pessimism and europe. ride --out to euro arab euro era wide's.
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you're watching bloomberg real yield. ♪
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jonathan: from new york city you are watching bloomberg real yield. it is time for the final spread cominge look at what us up over the week. we have a speech from fed chair janet yellen. we could close with the u.s. payrolls report. volumes surged across fed funds , tightening as of this year. still to roundp the program, roundtable. the fed chair speaking in 30 minutes time.
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you look at the technicals and treasury? have talked about the fundamentals, the economic fundamentals that are going to drive yields, hopefully. somethingut there is else going on. we do know there is 600 billion dollars of material coming off of the fed balance sheet. fed has indicated they are going to be looking to reduce the size of their balance sheet. when you look at the largest holders of treasuries, both of them have reduced their holdings due to the economic picture in their countries. finally when you look at what the banks have done because of regulatory requirements, they have doubled their high quality assets. if the current administration stars to reduce the regulatory pressure and change some of the regulatory guidelines, what does that mean for technical support?
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it is really hard to argue there are any markets there. we can look at the balance sheet and the federal reserve. 2017, 100 64 billion. that is 425 next year. speaks a little bit later, we all will be looking to comments on rates. when did they get serious about the balance sheet? >> as you indicated what they have said north of 1%, i think more realistically as rates rise fed faces a the dilemma. as your polling around trillions of dollars, the fed is going to be accountable. i believe they will be much more sensitive to that as they go forward. , or at abably coming time where they have to start thinking seriously about the accumulation.
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>> we get an upside surprise. do we get a flatter curve because of it? >> yes. jonathan: thank you to our roundtable on bloomberg real yield. in just 30 minutes time from now, you had a week full of fed speak. yellenhe fed chair janet , speaking in chicago. bloomberg markets will have full coverage of that speech for you. we will be here same time, same place next week.
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mark: attorney general jeff sessions will meet today with the -- the meeting suggests the justice department would pursue fewer federal investigation with troubled police departments. leaders say sessions policy changes signal a threatening decline in the country's commitment to civil rights. a man has been arrested in connection with threats made to a jewish community centers and see -- and the anti-defamation league's headquarters. -- is accused of making those threats. they allegedly use the victim's name while making some of the threats. he is joined a federal court in missouri today. theresa may says it is a personal priority to keep scotland in the u k. may spoke at the


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