tv Bloomberg Real Yield Bloomberg March 12, 2017 12:00pm-12:31pm EDT
♪ jonathan: from new york city to our viewers worldwide, i am jonathan ferro with 30 minutes dedicated to fixed income. this is "bloomberg real yield." ♪ jonathan: coming up, death, taxes, a rate hike all but guaranteed at next week's meeting. how long before the ecb follows suit? another ugly week for treasury bulls. yields at the highest level so far this year. in the face of rising rates and corporate prices, how much
longer is the window open to lock in low rates? we start with the federal reserve almost guaranteed to hike after a goldilocks job report. >> solid overall, especially good for wall street because it has a goldilocks element in the context of a fed hike cycle. >> to think these numbers, 240,000 jobs created, will continue is a stretch to my way of thinking. >> we think there is an enormous demand for american workers, and what we are seeing from the ceos coming into the white house, so that will grow demand for workers. >> this is just another report showing economic momentum is broadening and improving, and with it, confidence is starting to increase in a way we have not seen in this recovery yet. jonathan: the jobs report managed to arrest an ugly week
for treasuries, sending yields to 2017 highs. to discuss this, let's get to our guests. to you for the treasury markets, is that what we call it, the goldilocks jobs report? >> yes, it is a good report. no doubt economic strength on a global basis is with us, and the data continues to be very strong. the real question is is it strong enough and sustainable enough to put the fed behind the curve, or the data softens down the road? i think we can debate both sides at the moment. jonathan: let's have the debate now. for many people, the job report validates the pace of interest rate hikes.
the treasury yields are at 2017 highs, but the shape of the curve is hardly changed. >> the curve is telling us that there is growth ahead and it is undetermined how far behind the curve the fed is. we like to look at participation rate versus unemployment rate. in the months ahead, we need to see people come back into the employment pool, and that can help to slow down wage pressures. if we don't have a pick up in the participation rate with baby boomers waiting longer to retire, the fed will fall behind the curve in that case. >> i think it is silly we sit here and try to decipher every piece of data that should change the fed's mind. the reality is rates are well below nominal growth. they are too low.
they really should change trajectory. the fed is behind the curve. jonathan: what is the story for bunds? we had a story about rates over the ecb. here is the message from the ecb, the governing council expects the key interest rate to remain at present or lower levels and well past the horizon of net asset purchases. a question to you, we have learned from sources familiar with the matter that there was a conversation with the ecb that they might raise rates before qe ends. do you see that happening? >> it could happen, but mario draghi was asked that question. his answer was circumspect. i think that is where the situation is at the moment. they could do that. the rate could be raised, but i have a great difficulty
accepting that. that would be like the fed doing things with its balance sheet long before it raises rates. is it possible? yes. is it likely? the answer is no. jonathan: how far is the bund market behind the curve? 48 basis points? which one is anchoring which? is the bund market anchoring treasuries? >> treasuries are the anchor for the world. i don't believe that the ecb would want to raise rates while doing qe by any means. they have learned their lesson over recent years. they have tightened too soon in the past. there are still a lot of output gaps there. i think things are in control in europe and the states, in that the power of an individual rate increase a quarter-point
relative to where 10 year yields are now is very significant, so i have a concern that the supply element, labor and whatnot, keeps up and keeps inflation -- a true goldilocks scenario would be wages continue to move slly. jonathan: what is the potential for nd >> mario draghi and the bankers are under no obligation to telegraph what they would do. their job is to analyze the situation and do what they are supposed to. they don't have to tell us. jonathan: if you are a bond investor, you are at the mercy of the ecb. you see the chart. you completely rolled over. the average maturities come all the way looking at the chart. if you are an investor, how do
you deal with that? you're going to get crushed under the curve, aren't you? >> yes. for global interest rate markets, that is the biggest challenge. we have situations, not in the u.s. anymore, but other places where rates are negative. there are huge amounts of money piled into the front end of the curve. that brings me back to the comment the other gentleman was making. if the ecb does not give people some idea ahead of time, there is going to be such a massive move that they can't deal with that. for that very reason, when they are ready to do it, they will be telling us with a reasonable timeframe for us to be able to adjust our portfolios a bit. if they surprise us on that front, it will be a big problem for the bund market. jonathan: i wonder if bunds reprice to where they should be
if the ecb got out of the way? >> the fed told us they would be more aggressive than we were anticipating, so again, i would say at this moment, the central banks can't afford to surprise us. they have to prepare us and we will adjust our portfolios accordingly. if they surprise us, that is a new regime altogether. >> if the fed were to observe, as they had been, a rise in bund yields, that might give them more comfort raising rates because the dollar would be less likely to go higher and you get more of that goldilocks scenario potential. jonathan: what is the risk of the ecb is behind the curve in a significant way at this point, or is it too early? >> it is probably too early. central banks view their job as
to not only balance inflation and employment, but to worry about asset prices. as long as that is the mantra, they will do too little versus too much. i don't see that changing. are we behind the curve now? it is hard to say. jonathan: you guys will be sticking with this. this week, of course, a rush of high-yield issuance as rates climb. are investors heading for the exit? we discusse that in our auction block. this is "bloomberg real yield." ♪ ♪
♪ jonathan: from new york city for our viewers worldwide, i am jonathan ferro. this is "bloomberg real yield." a big week for treasury auctions this week. the 30 year auction, $12 billion, 3.17%, the highest since september 2014 in terms of yield. we saw a surge in issuance on the corporate side, $43 billion in investment grade, $17 billion in high-yield. thursday was the busiest day in high-yield in two years with $6.5 billion coming to the market. upside $3.25 billion in total, sold at richer levels than other debt on the market. i want to bring back in our roundtable. let's begin with you.
what did you make of the issuance so far this week? what was the signal? >> it was a record amount of issuance. so far we have had inflows. what has happened is -- the secondary market are tired of hang up on that debt. there has been pressure to bring supply, and bankers respond to pressure. jonathan: wonder how much of this from the company side of things, e windows slowly closing as rat rise higher, and they want to lock in rates? is there a story there? >> i'm sure there is a story there, but most of those people if they want to do that, they could hedge part of their exposure, that is do things by themselves before they actually issue. the real story is the fact that the demand for credit assets in the marketplace is
extraordinarily good, and companies see that and want to take advantage of it. the fact that rates are going up its them closer to issuance, but if they wanted they could hedge it. jonathan: how frothy are things looking? >> things are frothy, but not irrational. it makes sense that even if fiscal stimulus were to recede, a globally coordinated recovery, given the general strength of the consumer and corporations, that the default cycle will be pushed off for a couple of years longer than it should have been. it is not illogical to bid strongly. the other thing is the spread does protect you. to some extent it is protective unless rates rise too fast. >> i think it is frothy for different reasons. people need income, and there is an income out there.
if you are looking across asset classes, even equities with the run they have had, will i get the returns i have had? it is an income story. jonathan: spreads are still tight. these are high-yield spreads, still tight. the one thing this morning and today and this week is the jump on etf's and the outflows, rising rates, crude plunges, and we get a little bit nervous about junk bonds and the potential everyone srts going for it the exit. do those outflows get your attention? >> it is modest to what we have seen in the past. the last time we saw outflows was in 2014, 2015, a couple of
billion a week, so this is pretty modest. there have been a lack of places to go. how long have we been hearing about rates going up? yes, at some point it will happen, but until then, people get scared. until it really, really happens and people are convinced it will continue, you won't see outflows. jonathan: what is the trade in the united states? >> before i get to that, let me make one observation. if rising rates have a significantly negative impact on the equity market, then it certainly could, we will have a problem in the credit market at the same time. the likelihood equity markets correct because of higher rates and we don't go anywhere in the credit markets is unrealistic. the trade and credit has been the same for a while. i think loans, senior floated rate loans, are the best assets out there. not because they provide the highest yield, but provide a good amount of income with lower
risks, either in terms of prices going down or a potential default cycle leading to huge losses, so loans are the best asset classes in credit. >> two points. one, i completely disagree on loans. i think loans are a trap. as libor picks up, loans have been coming down. as more people throw more and more money, and that is the consensus view, loans will go down. if rates go up, it's not like it can impact equity markets and not credit markets. it will impact both markets. it will impact the equity markets more. the longest duration help their are equities, perpetual securities, so if we did get a much higher rate, you will not see the s&p trade at 19 or 20 times.
jonathan: what do you say back to that? >> the first thing about loans is interesting. loans are not cheap by any measure, but the safety and loans relative to a high-yield bond is obvious. that is the likelihood that loans will under perform meaningfully and high-yield bonds would do well in that context. it is just not possible. the high-yield bonds, loans have been getting repriced, but at the same time, they still provide you significant income and are safer than high-yield bonds. i think that is the right way to think about loans. >> sorry, go ahead. finish. >> as far as the equity market and the impact of higher rates on the equity market, just remember that valuations are
extraordinarily dependent on where rates are going to be. ignoring rates altogether the customer earnings will go up 7% or 8% does not make any sense. if rates rise, let's say quite rapidly, and go above let's say 3% or 3.5%, there is going to be a correction in the equity markets, and at that point, there will be a correction and credit markets as well. >> i agree with you. if loans selloff a lot, it's not like high-yield will remain unscathed. my argument is that they will have similar downside, but high-yield has more upside, and loans reallyave no upside. jonathan: you are sticking with us. let's get a market check. treasuries, big repricing across
♪ jonathan: from new york city for our viewers worldwide, i am jonathan ferro. this is "bloomberg real yield." coming up, a big week for central bank decisions. thursday, the limit on the nation's debt, otherwise known as the debt ceiling, reinstated as part of a 2015 deal. still with us is our roundtable.
as we look ahead to the rest of the week next week, the big fed decision come almost everyone expecting that headline to drop across the bloomberg which says rate hike. what else are you looking for? >> the hike itself is a given. i think it is more interesting in terms of the dot plot and what people are thinking with respect to how many tightenings in 2017, 2018, and 2019. the risk now is that we see more than three for the potential hikes and 2017. if that is the case, the bond market would have trouble dealing with the news. >> i think that is a remote possibility. rate hikes do tighten financial conditions.
the fed will pace whether it is june or later against what they see as financial market conditions evidenced partly by where equities are, lending and the like. the last thing the fed wants to do is cut off this apparently strong recovery. >> i must be the only one who is rooting for higher rates. i think about the investor getting choked like not having enough income. yes, on price, i feel bad when rates go up, but to the extent it will help investors generate income, that is what people need. jonathan: higher rates better for the investor, yes, fine, but higher rates broadly? >> i think more people might come into the marketplace you are currently out of the market. the unemployment is falling, but there is more to do. i think this should pace accordingly. jonathan: as we look ahead to
next year, 2018, and the dot plot, many dots, those people will not exist at the fomc. how much attention do pay when they just want be there? >> i think what 2018 and 2019 tell you what they are going to do in 2017 and what the risks are relative to 2017. it is important in that perspective than anything else. the challenge for the fed is how do they deal with the current synchronized global recovery that is going on since the second half of 2016? if they believe this is permanently unsustainable, then they should tighten faster. i don't think they are convinced, but if data continues to be as strong as it has been, they may not have operating freedom, and that is what we have to learn about over the
next few meetings. jonathan: final question, one rd ansrs. by the end of the year flatter or steeper? >> flatter. >> flatter. >> flatter. jonathan: this is easy, isn't it? my thanks to my guests. we get them to agree at the end of the program, just, just. happy friday. next friday, we come on earlier, 30 minutes earlier, 11:30 a.m. new york time. that will work out at 3:30 p.m. in london because of the clock change, and 11:30 p.m. in hong kong. next week, 30 minutes of fixed income from new york city for our viewers world wide. this is "bloomberg real yield." ♪
♪ jason: it's a $2.5 trillion industry populated by some of the most influential investors in the world. i am jason kelly and i am here in berlin. it's the biggest gathering of private investors of its kind. we talked to some of those investors about what's on their minds. in a world awash with money, they make dealmaking more difficult going forward. our first conversation is with david rubenstein.