tv Bloomberg Real Yield Bloomberg June 30, 2017 12:00pm-12:31pm EDT
jonathan: from new york city for our viewers worldwide, i'm jonathan ferro. yield.""bloomberg real ♪ coming up, central banks raining in risk. chair yellen says valuations look somewhat rich. mario draghi's word spark a bond can trumpet and sales of high-grade credit are on track to top the 2016 record. we begin with the big issue -- did investors misjudge draghi's speech? >> i think it was eloquently
put. confusing.s were >> of the titanic should we have been waiting for. >> the speech itself, i'm not sure the market is interpreted it. there is a very clear shift in the tone relative to the last policy meeting. quite a dramatic tone. >> backslide to expand how tightening is not really tightening. i think the hope was if you explain it that way, financial markets will not get into a tizzy. >> i did not read draghi's statement on tuesday to be anywhere near as bearish as the market is taking it. i take it the other way. i think it is a signal from draghi that even if there is going to be further support and tailwind in the economy, the central bank is still there. >> already late getting going. jonathan: so was eloquent or confusing? is jim me from new york
caron of morgan stanley. guy lebas of jenny montgomery. and margaret patel, with the wells fargo asset management. quote itselfthe from mario draghi. these are the words that seem to move markets. as the economy continues to recover, a constant policy stencil become more common -- stance will become more accommodative, and the central bank can adjust the parameters of its policies, not in order to tighten the policy stance, going to keep it broadly unchanged. jonathan: so there were the words of president draghi earlier this week. big moves in the bond market off of it. bundsry yields higher, absolutely plunging. jim caron, to the market misjudge the speech? jim: yeah, it is kind of
interesting. said hishat draghi 100% correct, that they're not looking to tighten, editing to remove excess accommodation -- looking to remove excess accommodation and keep them at levels consistent with where financials needed to be. i did you his talk -- i did not view his stock is overly hawkish. it is a reinforcement of what he was already saying. whent came at a time people were expecting a dovish comments and we look at inflation trends in the u.s., very low. nobody was expecting it to come out so strongly put by mario draghi, and it caught people by surprise little bit. thati would have to argue this is not necessarily about the short-term course of policy but the steepening in the ecb policy response function, which or six last, oh, five years since the "whatever it matter whath no
data comes out, ease ease ease. we are returning to a period where the policy response option goes from flat to a little bit steeper -- not where it was 10 or 15 years ago. jonathan: we have had repricing from central bank to central-bank throughout the week. whether it is the european central bank, bank of england, throw in the bank of canada as well -- across the board, expectations increased off of a loaded central-bank speech. margaret patel, do we have a market that is more in line with the direction of the central many, that in the words misjudge the speech? margaret: no, i think the banks will maintain the dovish posture. we have seen this pattern before with strong talk and weak action. it was a momentary reaction to the markets but i don't think it will be material change in
rates. jonathan: my colleagues here at bloomberg news in london are pointing out that there is a strange paradox at the moment, more inflation expectations are diminishing or completely rolling over, and yet central banks are redefining and recalibrating the reaction at the same time. i have on my screen a charge related to the central discussion -- inflation breaks even in the eurozone as compared has beenthe bund trading, and if you look at the reaction for the last two weeks or so, you can see the increase in inflation expectations. the reaction in bunds has been five inches worth of moves. i think it is a bit of an extreme reaction, particularly considering we have had swings much, much larger in terms of inflation expectations. jonathan: he want the answer to globalds the key to
rights we did you get the answer this week, jim? jim: i don't know if we got the answer this week but it reinforces what i was thinking. i think the u.s. has been dictated by what other central banks are doing. today is a great example. core pce comes out at 1.4%. yields are higher as expected, absolutely. inflation has been on a downtick for the last several months. i think we are in a position where what is mattering more is what the ecb is doing and what the bank of england is doing more so than with the u.s. data is telling us. jonathan: what is on the curve can what is on your bloomberg right now? im: my bloomberg right now, think perspective really matters a lot here. people have been talking about the yield curve flattening in the u.s., and there have been -- back inperiods 1994 and in 2004, the fed was
taking policy to slow down -- tightening policy to slow down the economy and kill inflation. , today, the yield curve has been planning since 2011. we haveom small blip, been in a flatten that trend is in's 2011. i don't think that the fed -- the fed really isn't trying to tighten policy right now. there try to remove excess accommodation. i call what they are doing today not tightening. once you move above 3%, that is tightening. jonathan: what we have had is a change in the way the curve is flattening. ,t was an aggressive long long-duration. now we have a bear flatten her. to: front end is pinned where the fed is selling it and the back end is free to move around a lot more based on inflation expectations.
depending on where the inflation expectations go -- so far we -- that isn a lull going to produce a flatter curve. plus, we have the excesses of qe , all the bonds that many central banks have bought. that is also keeping the demand or supply of duration very low in the markets. that is keeping yields, particularly on the back end, very low. jonathan: how important is that an does that give the fed more accommodation to move? likewise for the ecb, financial conditions, on the periphery as well, is that an automatic stabilizer to get out of the corner? margaret: it does give them a little more flexibly and they can unwind their portfolio or raise short rates. that is a little flexibility they didn't have. but i don't think it changes the fundamentals. their actions will have very
little effect on the real economy. it is more of trading reaction. as long as inflation is low, it will be content. jim: federal reserve starts managing the long end of the curve on a regular basis and we go into our bunkers. i have the strong is 10 in the entire market by a long shot -- they have the strongest hand in the entire market by a longshot. so far the wind-down cap discussed in june really doesn't include any management on the back end of the yield curve. one thing that is lost in the equation is that each year that progresses, every three months that progresses, the fed stock portfolio comes shorter in duration. whereas the markets for the most part are extending right now. there is plenty of duration and supply of duration in the markets. i'm not too concerned about the stock affect, at least not in u.s. dollar terms, compressing long rates anymore. the precursors of compression is changes to the supplementary liquidity ratio rules. jim: i also think we cannot look
past the high levels of cash and one of the ways to pick up yield is to extend duration. as long as we see the benignly positive growth environment where the inflation is taking up, you'll see more demand for longer-duration assets. guy: we started this whole conversation about the 210 spread in the chart you showed. historical basis, we are in the 46 percentile of what that spread is. all the drama of a week ago, flattening yield curve will only a little below average. jonathan: drama of the week -- opposite story of the one we have last week. you just wonder, are we trapped to 260 range of 250 and we bounce around between it? guy: yes, short answer. just this morning, took down our downcast range from 240-280
to 220-260. inflation in the united states is essentially a random variable and it has down-shoulded -- downshifted a little bit and we are stuck in that range. jonathan: margaret, do you agree with that as well? ippy -- a w bond marketh bond market committee is, but this is an inflection point? margaret: we haven't broken out certainly on the upside in which people have been hoping. inflation is anchored at a very low rate, so where can rates goes even in the intermediate term? nowhere. that is why we are cycling around. jonathan: price, you are sticking around. coming up next on this program, "bloomberg real yield." the auction block.
jonathan: i am jonathan ferro. this is "bloomberg real yield." we told you about a few debt deals. charter communications sold $1.5 billion of bonds. it sold secured debt and the unsecured offering plan just last week. over an investment grade, we have hit the midpoint of the hit 2017 sales of high-grade corporate sales are on track to pass the 2016 record. total volume reached $768 billion, 4% ahead of last year's
kelly at this time. in sovereigns, treasuries, $20 billion of seven-year notes drew a yield of just over 2%, lowest since shower current -- lowest since january. with us, jim caron of morgan stanley, guy lebas have jenny montgomery scott, and margaret patel of wells fargo. earlier this week we heard from the fed chair, and we had a series of central bankers increasingly worried about financial stability, asset prices, and risk it did you take notice of what they said about asset prices? margaret: welcome i think what they really were saying, they are extremely sensitive to upsetting the financial markets. most of the zero rate policy they followed has caused money to flow into financial assets rather than raising the economic growth rate. of course they are very concerned about the reverse
happening, lower financial asset prices in the real economy. but the real economy looks pretty good at this point. the real economy looks good, but what interests me engines of risks -- bonds were plunging from investment-grade credit just kind of tough. i.g. spreads, still pretty tight. why was credit performing so well when the rest of the market was experiencing jitters? >> kind of like what we were describing the left segment, yields were in range. at least that is the way the markets are thinking about it today. where else are we going to go for the yield? investment-grade, securitized assets? there is different things you can do. the bottom line is, you are right, there is an insatiable demand for the product and we will see 12 months from now if the rates rise. but that has got to be the
catalyst. you need to see the rate rise, are on the other side, financial type of event take place. jonathan: was it a center resiliency -- sign of resiliency or complacency? sided --he i.g. hopefully you can's human on my screen -- one of the big keys has been the sources of issuance. increasingly we are seeing tech colonies be the dominant issuer of new debt. guess what was buying the debt? in many cases, tech companies. apple -- i am picking on them for no particular reason. they buy bonds and they issue bonds in the u.s. to avoid basically the tax arbitrage. they're both the source of supply and demand. i wonder if you strip out that number whether there is an increase in net supply for 2017. i doubt it. jonathan: is that the story here, that the headline numbers
screen and all being sucked up but something else is going on? margaret: i think it shows you that there's a continued for gracias demand for higher-income -- continue to voracious to make for higher-income securities. over half of the gross issuance has been to take out other debt to pay off bank lines and existing coupon and higher yield bonds. they have improved the balance sheets, that is what makes the spread so resilient. they cannot go right when the fundamentals are so good. guy: at the same time, credibly tight on the historical basis -- spreads are credibly tight on the historical basis. they are in the 40th percentile historically that includes be spreads are extraordinarily high during the crisis. nonetheless, that does not scream which to meet like in the high-yield markets. jonathan: do you think of it as
a spread or nominal yields? they are incredibly low. guy: they are incredibly low. in the high-yield because there seems to be a little bit of a floor for many real an absolute return investors, i would have to argue that it is nonlinear to some degree. nonetheless, spreads and high yields are relatively tight and yields are quite low. not as low as we saw in 2014 an absolute bottom. jim: jon, you are hitting on the right question. there is a duration component to this risk. when you think of putting together a portfolio of bonds, there is the duration component to it. the lower the yields go, the more duration exposure you have. you are exposed to the higher move in rates. that is something of what we do and morgan stanley, we try to balance the risk, and the more actively managed funds can we strip of the interest rate component and isolate the credit component. i agree with guy.
one we look at spreads and yields, they can be somewhat attractive, but as long as we are crimes and an of the risk for higher rates. jonathan: do you see that as well, margaret? margaret: well, when i look at are not taking duration risk, you are taking fundamental credit risk. i think it is better to have the longer than average duration risk in high-yield, because it is not the risk -- you still have the hundred 50, 360 basis points to absorb. when you look at the default rate, 2%, that is a low-risk market and you are being paid to extend duration in the high-yield market and get the extra yield. jonathan: the risk over the last 10 years has been central-bank policy. is the central bank still your friend? guy: they are going the wrong way to be good friends. likely the next step for the ecb tightening. the bias is probably in that
direction. the only friend we have been central-bank land is over and asia, bank of japan, for the most part now. that said, whether the central bank is supporting or detracting from demand in a given market is defined by whether they are tightening faster or slower than what is priced in. what is priced in right now for most central-bank action is a relatively gradual pace of tightening. if we generally do get tightening that is not priced in, that poses a modest problem for risk assets. i doubt it is a huge one. the issues with high-yield are really aboutif we generally do t tightening that is not priced vs to the equity market rather than direct central-bank policy. jonathan: everyone seems to be confused by bank of england policy. jim caron with guy lebas and margaret patel. let's get you up to speed on the markets. what a week it has been. yields higher by a margin of
jonathan: from new york, for our viewers worldwide, i am jonathan ferro. this is "bloomberg real yield." coming up over the next week, shortened trading week with an early close on monday and the markets close entirely on july 4. the fed will release minutes as well. also, the jobs report. plus, president trump and president putin will apparently
be meeting at the g-20 summit in germany still with us to wrap it up, jim caron, guy lebas , and margaret patel. jim, the heavy lifting for the bond bears is coming up for the central bank this week. will they get it for next week? jim: i think we should see some recovery. payrolls is about the survey estimate right now. i think that is a good number. anything above 120,000, in my book, is a good number right now. guy: the markets are not going to treat that as a good number. is for economics prices to drive this a lot further. jonathan: he will the rapidfire around very quickly. short questions, one word if possible. due the markets misjudge draghi, yes or no? jim: no. guy: negatory.
margaret: yes. jonathan: he likes, by giving the ecb? jim: bank of england. guy: by giving win by sheer accident. margaret: b of e. jonathan: where is the most risk? jim: high yields. guy: i yields but you are paid for a better. margaret: bunds. jonathan: we'll wrap it up there. from new york city, that does it for us. we will see you next friday at 12:00 new york time, 5:00 p.m. in london. from new york, this is "bloomberg real yield." ♪
vonnie: from bloomberg world headquarters in new york, here are the top stories we are following on bloomberg and around the world at this hour. rocky end to the second quarter and the big rotation to finish so the month. money pouring out of technology stocks. off its biggest rally on a rosier sales outlook. plans to the company's sell on amazon and instagram. z drops his first album in at 4 years on black -- backget to the markets with abigail plus -- abigail doolittle.