tv Bloomberg Real Yield Bloomberg June 16, 2017 12:00pm-12:31pm EDT
jonathan: i am jonathan era. 30 minutes dedicated to fixed income. this is "bloomberg real yield." ♪ coming up, janet yellen hikes interest rates once again as data in the u.s. starts to soften. 10-year gilts drop to new -- yield dropped a new lows. raise cash literally today. we start with a big issue, hawkish fed chair janet yellen.
>> this statement forecast is more on the hawkish side. >> they are trying to nudge the market in a direction that is more favorable to the vet. -- fed. >> they will go until the evidence is overwhelming and the other way. >> patient have looked at the data this morning and said this is really dovish. >> we can talk as much as we want about the taylor rule and phillips curve and all that, but this has proved that all of those are things of the past. >> we should be seeing the gradual upgrade inflation inflation that we saw for a while -- in inflation that we saw for a while and then stopped, which i think she did too. >> i think of them as being violent and a plane that are in ag to soft -- pilots
plane that are trying to soft land the plane. >> joining me today from blackrock's rick rider, alongside him jeffrey rosenberg, and have local bird -- pablo goldberg. thank you for having me in your house. thank you for having us. let's begin with the federal reserve. hawkish bias from the chairman. was: i think it definitely hawkish. i think it was the best press conference from chair yellen. she was directed, committed, unwavering. there were questions that were distracting. she laid out the plan. this is our plan and we're sticking to it. quite frankly, some of the short-term data, she rightfully ignored o. she is much more focused on financial conditions. she was committed to this is
where we are going. jonathan: last year we talked about a fed that did not stick to their forecasts, they had a credibility. now they are ignoring the data and making a policy mistake. are they stuck between a rock and a hard place? jeffrey: i want to walk back what you said. it is not clear they are making a policy mistake. they moved off of data dependency. there are good reasons for that. they stated the inflation data being temporary. but now it an error, is not clear that it is at all. it is important that we understand the disconnect. the market is still data dependent, but the fed has moved to forecast dependency. jonathan: one minute your data dependent and now you're not. pablo: broadly they are data dependent, but that is not week to week. data dependency has to be over what is the cycle we are
operating. data dependency also has to reflect where we are in terms of market conditions, financial conditions. i think they are data dependent. i would argue the two years prior they were much less data dependent. i think they are being very sensitive to where we are. jonathan: tell me about where you are in the tina blackrock is relative to what is the price in the market. pablo: a couple of things are happening. i feel like there's this great misconception. 2%.ave to be at their mandate is not 2%, it is price stability. technology is pressing down. talking about m&a today in terms of what amazon did, taking some of the inefficiencies out of the system, dynamics happening today when you think about this inflation report, places like we show here, extraordinary things happening with services. the inflation around services has been stable. the only place trending down is
wireless because of cuts. inflation pressing down on inflation. if you look at goods inflation, technology is pressing down. the central bank cannot lift, ,nd it is good for the consumer net disposable income. the pressure you have seen on wireless, these are all good things for disposable, whether .t is apparel we have to hit 2%, if technology is helping the consumer and lower income by pressing down on inflation. pablo: we need to think about a ed that is dealing with two important different forces. the fed is looking at long-term inflation implications. the second one is how they are going to indicate the structure and cyclical move. changey the high bar to
the policy of unwinding the balance sheet as they are going to be doing, but on the other hand they still have the ability to hike or another hike or cut. this is going to be counting going forward. jonathan: the market is going somewhere else, breakevens rolling over, five years have been rolling over for quite a while. the 10-year treasury yield is lower than when they started hiking at the back end of 2015. i find those two things hard to reconcile. do you? >> to take today's movement in terms of the yield curve, and i had another chart we were going to allow as well on this. that may not be the chart. we have expectations on fiscal policy that were part of the yield curve steepening, part of the increase in rates that is unwinding as well. you have a inflation potential
between how much of this is inflation and inflation expectations, clearly this happening in the same week. a lot of the trends to lower rates were proceeding that. that is unwinding some of the expectations for much bigger impact on fiscal policy. pricing that out of the market. the fed is not forecasting rates, medium forecasts at 2.1%. 10-year treasuries are just north of 2.1%. either someone is wrong or we are going to have a very flat yield curve. which is it? ed can influence the front of the curve directly. if they are not doing qe or reducing it, they cannot control the back end of the curve. i would argue the ecb and bank of japan are as much influencing the long end of the yield curve. rss are reasonable. -- our assets are reasonable.
the fed can move the front-end up, and it is really hard to move the back end higher until the ecb or the bank of japan does something. think of canada, the world is moving very glacially towards normalizing policy. until you get other central banks moving, our 10-year rates will stay low. jonathan: will we continue to see a curve that stays flat? >> possibly. i want to go back to what ray was just saying -- rick was just saying. there is a lot of focus on the fed and u.s. cpi disappointment. it is not just the u.s. yield curve that is flattening. global yield curves are flattening. while we are very interested in the shift in the language and the future balance sheet robbed
him of the world is still far behind. the pace of that change will be glacial. we can anticipate that at some point this should be about bringing term premium back into the market. for now the term premium is under incredible pressure because of the combination of negative interest rates and ongoing, aggressive qe in the ecb at boj -- and boj. you are still in an environment where the effect of that is a huge dampening on the term premium. jonathan: can you get -- >> no. we live in a global world. we live in this demographic where the rest of the world is aging faster. , everybody in the marketplace are going to the place where you get the best risk-adjusted yield. rate is of risk free
the u.s. >> we need to reconcile two more things, the dollar, what happens if we get a flat yield curve? what will happen with the dollar? in europe they will be removing accommodation in the long and, but not anything on the front-end. we used to use as the slope of the yield curve in the u.s. and make an assumption about the state of the economy. how will the fed, and will the market reacted to that as well? >> this is a really important point that the interpretation of yield curves is a textbook interpretation as pablo just talked about. you have to throw the textbook out when it is about negative interest rates and massive qe so that as you get further into the expansion and get further along when you might have expected flatter curves, we see steeper
as it is the impact of global withdrawal of policy. jonathan: i wonder if something else is going on? keep looking at the yield curve. a lot of people have approached the situation as something is wrong. you just touched on it. if the two-year reprice is based on what the fed is doing, is the market determining the fed is going to quickly too soon and taking away inflation and growth from the future, and therefore the backend is less supportive because of that not because of the ecb? is there an argument there? somewhat there i think there is this debate going on about is the equity market right, the rates market right? both markets are right. there is extraordinary demand for income in the world. like not think anybody in this generation has seen before. where do i get healed? -- yield? that pull does not go away. the stability of inflation will be much better than it ever was. oilthink a decade ago with
gyrating extraordinarily, from $40 to $150 in back. we are going from $40 to $55 now. much more stability. you can be comfortable holding for much longer. jonathan: you're sticking with us for the next 20 minutes. 's rick reader, jeffrey rosenberg, and apollo gold and berg. weighing in with some forecasts for more volatility. from new york, this is "bloomberg real yield." ♪
jonathan: this is "bloomberg real yield." from blackrock's trading floor in new york city, jeffrey going my making more headlines this week. saying the days of low volatility markets are probably numbered. if you are a traitor or speculator, you should be raising cash today. bill gross recently said that u.s. markets are at the highest risk level since before the 2008 financial crisis. with us to discuss our rick reader, jeffrey rosenberg, and pablo goldberg. talking about the return of volatility. equity, fixed income, the lot, does that make a risky environment? >> i am getting in the habit of disagreeing with your premises.
jonathan: i throw a premise. >> your premise is everything is rich. we are on the fixed income side. on the fixed income side it is not so much about rich or cheap. it is about are you pay for the risk -- paid for the risk? you don't get the outside, and you get a lot more downside risk. on equities, valuations change. we think equity valuations are better outside of the u.s.. the key differential is you have upside as similar to the amounts of downside you are taking. in fixed income, you don't get that. that is part of what you're hearing from the caution. spreads are at high levels, and the risk is more asymmetric. european credit is absolutely rich. it is highly affected by central
bank behavior. you have negative interest rates forcing people into underwriting levels that are not economic conomic you have a non-e driving force. jonathan: there will be a lot of people watching this program that agree with the premise. >> equity markets are less expensive than fixed income markets. there are areas of the equity markets that are more attractive. the key issue is we are valuing equities against an environment where you are not going back to a 5% or 6% interest rate or environment. if you are persistently low interest rate environment, the whole paradigm has to be rethought. jonathan: pablo, em, it is like trade. europe is that becoming somewhat crowded? significante seeing
amounts of flows into the asset class. they are mostly driven by flows in this drop in volatility worldwide. theou value em today with vix where it is, -- the where it is, em is not that expensive. changes a little bit. markets,to emerging emerging market rates, that is one of the portions of the asset last that is better price, not that expensive. jonathan: rick? said, ispablo volatility too low in the world? it is ridiculously low. that is what the fed is pushing back on. this does not necessarily mean
things have to go down. that is an important point. what drives financial assets? central banks of real rates down and then you inflate some assets. your point is about going to emerging markets or europe. emerging markets are away from the distortions. the ecb is not by mexico, so you trade closer to equilibrium. they run out of assets. what ends up happening, do you buy places like emerging markets where you can get easier policy while developed markets are raising rates. going into europe, i don't think a lot of people say you have to get european rates close to zero, but where the discount rate stays low and growth can be good, they will drive the equity market up in europe. there is still value in fixed income. volatility going out. -- up. we like to buy a lot of securitized assets, create
balance in your portfolio so that you don't have to much beta attached. onethan: em has been directional trade for a lot of people. does that change in the back half of this year? >> i think it does. we will see way more dispersion in the second part of the year. theere expecting some of promises in the campaign of the u.s. election to generate dispersion in emerging markets. wind-up having none of that. i think the second half of the year will be more out the driven, relative value than the first act. jonathan: always causing trouble. we will talk during the commercial break. rick reider with us. let's look at our markets have been. the 215 and 10 year here and now.
♪ jonathan: this is "bloomberg real yield." live from the lack rock trading -- in new york, let's brexit talk commences as well. data on u.s. housing. with me to wrap it up is rick, jeff, and pablo. let's wrap it up with your things look better. i wonder what that means for the bond market. >> growth is better. we think growth will be better.
you are seeing consumption and employment pickup. we thank you have a runway where europe is better. core inflation is not picking up fast enough for the ecb. you have growth is good and a central bank is going to be accommodative for a longer. were of time. is this a recipe for a steeper curve? isn't that a recipe for steeper curve? >> it could potentially be when the markets have the potentially price that in. potentially pushing downward on interest rates and pushing out expectations around when that turn may occur. run, when we're talking about balance sheet normalization first in the u.s. and in europe, further behind in
the bank of japan, that is your recipe for a steeper curve. it is a glacial pace. down andill taper probably start announcing it somewhere closer to september. then you start reducing, tapering in the beginning of the year. then you wait and do the deposit rate after that. it is going to be super slow. people don't really appreciate even if you taper down, $60 billion a month out of the market is huge. maybe you move at $40 billion a month. vonnie: -- jonathan: is it the ecb moving? >> for a number of reasons, the fed has edible window to move. absolutely, there is a lot of talk about issuing long debt the u.s. what is more important today is where these other central banks go. jonathan: we're going to get you
to answer some short questions with one word answers. , or too farurve ahead? for the federal reserve. >> behind the curve. jonathan: european high-yield or u.s. high-yield? >> u.s. high-yield. jonathan: long europe or south africa? >> long brazil. jonathan: yes or no? >> no. jonathan: short or long? >> short. jonathan: chair yellen to hike three times next year? -- i would say yes. that is the general direction of travel. jonathan: because of lack rock. ♪
vonnie: from bloomberg world headquarters in new york city, here are the top stories around the world where following. n will by wholezo foods for $13.7 billion. investors rent their top three market concerns for the second half of the year. we look at the plans for french luxury brand to grow its business in the united states. let's check the markets with abigail doolittle. a majort anticipate megadeal on friday, but that is what we got. [no audio]ephanie: [no audio] at this point we are looking at very small moves for the average. -- abigail: at this point we are looking at very small moves