tv Bloomberg Real Yield Bloomberg May 20, 2017 3:00am-3:31am EDT
jonathan: from new york city, i am jonathan ferro. with 30 minutes dedicated to the fixed income, this is "bloomberg real yield." ♪ coming up, the biggest crisis of the trump presidency. investors ask, is the trump trade dead? treasury yields grind down. will the chaos in washington throw it off course? is it a wake-up call for em? markets fray. we start with the big issue. week -- a week of messy
politics. >> ultimately, you want to have a functioning washington. it is the most important government andconomy in the world. if that all comes to a screeching halt because of these issues, that is not good for anyone. >> that is the thing we have to gauge. do people have confidence that this administration will not only get the big names out there, but deliver on them? you want to keep everyone happy, he has to do real policy stuff, and not send out tweets. >> this trump trade that we have embraced and that has driven the market to new highs in equities, is coming to an end. news andgreat for reality tv playing out in politics. to have a tends short-term nature in terms of politics. i think investors will take this in stride. jonathan: joining me around the
,able today, that horn back lisa, and jim. great to have you with us on the program. how much of the trump element in the reflation trade has brought down the markets? at theou are looking up 10 year treasury yield, you'll find that it has come down a bit from the postelection highs. one of the ways i like to look at it is by looking at term premium. i think it is a nice measure of how people are thinking about the trump presidency and its affect on markets. we find that quite a bit has come out of the treasury market. a little more than you would expect if you just look at the 10 year treasury yields themselves. one of the things i like to do is looking at our 10 year treasury premium measure. you can see here is we have taken out quite a bit of the
postelection jump in term premia. two-yearn look at the tenure spread and see the narrowing. it is at the narrowest since the election. that igood like at how the trump trade has been narrowing. markets have not bought into the trump trade as much. jonathan: we will get to the spreads and the curve in a moment. in june.e move we ought to move in september. is fading the fed the right thing to do on the back of political drama through the week? >> i think it is too soon to say for sure. stories are hitting the tapes with a frequency we are not used to. i think it is probably too early to hit the fed. our theory is the fed will hike rates in june, and continue telling the markets that they will probably try to get another one in this year. broadly, for em more
is it a favorable environment from the medical -- from the federal reserve? your view onor in the federal reserve, looking at em's pacific lee, -- >> the key is the u.s. dollar. when you take the reflation trade out, as matt has been discussing on the treasury market, we have also done so aggressively in the u.s. dollar. a weaker dollar historically is always great for emerging markets. a virtual cycle kind of. in emerging markets, where inflo a coming in currencies are appreciating, growth aspects are improving. we are in a pretty good spot, actually. optimismtruck by the
not reflected in some of the numbers we have seen in the first quarter. i am looking at particular -- in particular at the household numbers we saw from the fed that showed consumer debt has reached an all-time high, $12.7 trillion that you can see on this chart. this is important, especially at a time that we are saying .elinquencies in auto loans if it does not signify some kind of broader economic demise, it certainly will signify slower go -- slower growth going forward. this should factor into people's expectations. thethan: let's get to what president of the st. louis fed said. it has moved in the opposite direction, and this may suggest that the contemplative path is too aggressive. i know a lot of viewers will be have a vote doesn't and doesn't set the tone anymore. what can that argument bleed
through the rest of it? >> bond market is pricing a pretty gradual as it is. i do not think james bullard has much to worry about from the bond market perspective. ifhe fed continueso hike rate, hethe suggested may not be happy with that. but the monde market is on -- the bond market is on his page. jonathan: we have broken 100 basis points. down toward 90. is there a message in the curve for the fed? >> yes, it is that the more they hike, the more long-term growth will come down. it will be a problem. the economy is not accelerating. jonathan: why do you see a steeper curve from here? >> part of it is the idea that the more the fed hikes interest rates, the closer they will come to the point that they will have to start cutting interest rates again. this is what they are telling us they will do in the face of another downturn, they will
lower interest rates. >> are you saying it will steepen because the fed will soon have to lower interest rates again? >> it will keep the intermediate sector of the curve mi -- much richer than you would expect. >> you think this will cause the fed to have 2 -- >> absolutely not. if you look out a year or two, it is reasonable to expect there is some probability of a recession. the markets will always put some probability on recession when you look to, three years out. if you look at the new york fed survey, that is part that is what they are telling the fed. in two and a half years, there is a 20% probability that the fed will have to revisit the lower bound. this is not news to anyone. jonathan: i was speaking to someone earlier this week said call.hey made the phone they wanted to know why this week was so different and why the market was reacting to the drama in d.c. what was your view on that?
>> at the end of the day, there are stories coming out that are making people question the longevity of what the administration is going to be ableo put through. keep in mind, we are expecting and hoping we will get progress on health care reform. w are expecting and hoping to get progress on tax reform. i think all of these publications may just extend the timeline. investors get worried when you talk about extending the timeline. been fading have the reflation trade for quite a while. spreads are getting flatter. there is a story there. away from whatever is happening in d.c.. we are fading a lot of it. i think the opposite should apply. at the beginning of the year, i was told that the trump trade did not begin reflation trade. it did not begin until the middle of last year. therefore, actually the trump trade is not what is ending here, it is the reflation trade, isn't it? haven't we reached peak reflation already? >> when you look at the
five-year index, -- the reflections -- reflation index since the election, we go back a year or so, you can see that there was already a ramp-up in these break even reflation rates. .ven here, we had optimism then you saw the election, and a big jump in the reflation rate. since then, it has gone sideways. jonathan: if i asked people about the reflation trade, they would have pointed to china. they would have told me to look at chinese tpi's. to rollre starting not over dramatically, but flatten out. for our viewers and listeners, give me the view on china. >> china had a great first quarter, but china is over is stabilitytive in the economy. they have their hands in so many to target growth.
they had a good first, now they are scaling back credit growth of it. ony are very focused stability, and they have done a great job. you can see that to the currency action. jonathan: can you have that reflation trade, that steeper curve still on without a buoyant china? >> absolutely you can. part of it is thinking what will the fed do with the balance sheet. let's face it, when the fed starts to reduce its balance sheet, the treasury will have to make up for that lost funding. they will have to increase issuance. bond prices are going up, and that could cause premiums and the curve to rise. >> i think it is consecrated. i wrote a story saying that and i got a lot of valid arguments about why that will not lead to higher yields. it is not so clear, i would say. jonathan: what are the basic arguments? >> first of all, you have an aging population that is piling more into longer-term debt.
the second is it is political to increase the deficit. third argument is that in general, any rolling off the budget would have no effect. these thicoming together lead to not a big move. >> don't get me wrong, i think we are talking about two different time frames. over the long-term, interest rates will find a hard to move higher. our forecast for the 10 year yield is to 50. that is below consensus. i'm not looking for much higher interest rates, myself. jonathan: i keep asking this question. have we seen it yet? >> it depends on what the administration can get done by the august recess. jonathan: sticking with us, alongside lisa and matt. coming up, the auction block. in investors -- investors in brazil. this is "bloomberg real yield." ♪
♪ jonathan: from new york for our viewers worldwide, this is "bloomberg real yield." i want to head to the auction block where apple had its first sale since 2015. it marks seventh in the currency. the tech giant in the oversubscribed offering rates $2.8 billion to fund share buybacks and expansion plans. over and sovereign, $11 billion in indirect bids marking the biggest share of data since 2003. in brazil, the political drama causesding the president
problems in bonds. surprise, surprise. ichanged abruptly following reports that president temer approved payments of the man who impeached his predecessor. they are now grouped by chaos. are my guests. jim, this is your world. you talked about what a surprise this was. >> the market reacted like it was a shocker. but this is brazil. there has always been a bit of a taint around it, and there has always been this massive since the corruption scandal, which is now about two years old. there has always been a suspicion that it might reach up now it seemsnd
like potentially it might be confirmed. about the market reaction, and i am struck by the -- you can see the blue line is the cost to insure against a brazilian default in the next five years. it is jumping up towards the white line. the white line is argentinian default rates. this is shocking to me. argentina has default it seven times. five times at its local debt. now we have brazil jumping up to nearly the same levels as the cost to protect against a default in argentina. it seems like a marked in important move. at my screen, you can see what the currency did. it was limited down for the rest of the morning. we think it is overdone because of the point that lisa made about credit default probabilities being priced into the market. but second, local rates are wiping out the central bank.
that was a key indicator. clearly, inflation is on a structural decline in brazil. it will take a pretty negative series of events and a lot of noise over a long. of time to get the central bank to markedly change their cycle. so all of a sudden. we got something in brazil. we have seen the flows russian. one of the most popular -- one of the flows rush in. we see money going in, and i think the question for many people, for the nontraditional investor aka the tourist in this market, whether it becomes a story. jim: i think what happened yesterday is all of the tourist in brazil see a headline like that. they do not want to explain to their investors while they have the portfolio in
brazilian assets. it is better to sell the assets and ask questions later. rededicated guys were looking at some realalue, values opened up because currencies have been a one-way ride for about 16 months. lisa: you say that some opportunities open up. not that many flow out of the cash flow out of it. if you take a look at the bloomberg, this is the gap between yields on emerging markets versus u.s. investment-grade debt. it has collapsed. he plugged getting the smallest amount of premiums to own emerging markets debt versus topical debt in the u.s. since 2013. matt, in your world, does this sound alarm builds -- alarm bells? matt: we think u.s. investment spreads are already two tight.
a doublelking about whammy. we focus on the u.s. we think at some point, the bell will toll for u.s. investment-grade credit. jonathan: investors in the u.s. think id is too tight. what do you think about i at -- about em? jim: there is not a class on the planet that is too cheap. we have a relatively robust spread to the global government bond. it is not just treasuries. you have an awful lot of dem buyers from there. currencies were down on a by 50%.basis we wiped out a lot of currency overvaluation in em. now we have cheaper currencies, and look at really yields an
emerging markets versus emerging -- a lot of investors see values in emerging markets. jonathan: i keep hearing the year 2013. can they really get on a balance sheet reduction path on the federal reserve without seeing significant trouble? view ofthink the fed's the balance sheet is at full they want to use in a passive way. forget it.et it and if they get a couple more rate hikes this year, that is what they will start doing in 2018. i think the fed it will be able to get the balance sheet moving lower. jim: it always depends on market expectations. if they begin to unwind it come a signal to the market in a rational manner and treasury yields don't jump, it has the potential to be a somewhat nonevent. jonathan: sticking with us.
get a g-7 summit a little bit later in the week as well. -- ourth us for our rand roundtable, matt, lisa, and jim. the fed minutes. what are you looking from that? for moreare looking details on how the fed intends to wind down its balance sheet. will they go at treasuries and mortgages? we will get more details. hopefully, we will get more details on the pace at which people are expecting that balance sheet to come down. lisa: everyone is focused on the balance sheet. there have say will look at risk factors, though they come too late on some risk factors. jonathan: how much time is left before they need to provide a neck supplant? -- before they provide an exit plan? jim: i think they want to avoid another taper tantrum.
they want to give us some idea of where things are heading by the june meeting. jonathan: where do you think there is a consensus on the exit strategy of the balance sheet? matt: it is the size they wanted to get it to. it is a large range. billiond go from $200 production in 2018 -- reduction in 2018. lisa: it is also about the political backdrop. jonathan: let's get plans here with the rapidfire. we have some quick questions. one word answers only. for the first question, will the hike,ck off from a june yes or no? flatter or steeper? hike, yes orwhere is the best insulatn from a storm in d.c., e.m. or europe? here is one for you.
♪ david: so, what did your family think? did they say that there's something wrong with this young man? he just wants to do computers? bill: it was considered a little strange. david: have you thought how much tter your life would be if you got your harvard degree? bill: i am a weird dropout because i take college courses all the time. david: what about steve jobs in those days? what was your relationship with him? bill: we were both there at the very beginning. david: you are the wealthiest men in the world for 20 years or more. is that more of a burden than a pleasure, to be the wealthiest man in the world? >> would you fix your tie, please? david: people wouldn't recognize me if my tie was fixed. let's leave it this way. all right.