tv Bloomberg Real Yield Bloomberg October 29, 2017 1:00am-1:30am EDT
jonathan: from new york city, i am jonathan ferro with 30 minutes dedicated to fixed income. this is "bloomberg real yield." ♪ jonathan: coming up, the president is said to lean towards jerome powell as the new head of the federal reserve. the best back-to-back quarterly growth since 2014. draghi's stimulus plan helps insulate europe from political chaos in spain. we begin with the big issue. double lines -- good luck they can be the moment of truth for the bull market. >> the graveyard of investment strategists for the last two or three years. >> i think they have a right to
be a bit cautious or unnerved at this point. it seems the bias for rates is upward. >> the bond market has been in a 30 year bull trend. yields keep going down and returns are good. hate to argue with him, but i think he is maybe too pessimistic about where bonds are. we will be in a 2.4 to 2.7 range. >> we are in an environment where you will definitely see bond yields head back towards to 2.6 or 2.7 level. i am pessimistic about the probability we can get higher. >> it is just a question of pace and pass. how fast is that going to happen? we don't think it is going to happen externally fast. i don't think it is going to be are really distracted in that sense. jonathan: joining the around the table is kathleen gaffney, joern wasmund and jack flaherty. great to have you with us around the table. let's talk about the backup in treasury yields.
the tweet from jeff gundlach, the moment of truth has arrived for the bull market. it is the 2.4% line in the sand that bill gross has talked about, as well as janice anderson. how important is that 2.4% right now? kathleen: i think it is pretty important. i think it is a key level. i think if you look around the world, we are seeing global yields start to move up. the quakes are being felt in all the different markets. jonathan: is this the moment of truth? jack: i think he has got the direction right, but i'm not sure it's the end of the world in terms of the amount of movement we will have. i agree with kathleen. the rest of the world is showing good growth and rates should be going higher.
it is just inflation is not high enough to say it will go out of control. jonathan: if i came down from mars and somebody said 3% gdp and treasury yields on a 10-year around 245-240, i think i would be shocked. wouldn't you? joern: i would have short duration buys in general, but i think rates will only rise gradually, maybe to a level of 2.7%. markets are still distorted by monetary policy, and we still have very accommodative monetary policy around the world. the fed will continue to invest in spite of the withdrawal. jonathan: ray dalio was on bloomberg radio with tom keene. he talked about a risk in treasuries. a risk in bond market with the fiscal plan moving forward as well. does 240 make sense to you? kathleen: absolutely not. we are going higher and what we are seeing is a lot of foreign demand. that is what helped keep yields low.
when you look at some of the actions around the world, if rates start moving higher, that money can come home. i'm specifically thinking about japan. jonathan: i'm thinking about 3% gdp and 2.45 on a 10-year and a consensus in the market we will get a flatter yield curve. it is positioned for a flatter yield curve. you can see some speculative positions and you can see how much that spread between the short and long end have narrowed over the last year. that is a big consensus trade. a flatter curve. is that something you go with or go against? kathleen: directionally in the long-term, i think we are moving towards a flatter curve. it is the steepness or slope right now that is demonstrating the central banks are being less accommodative, or not tightening yet. they can be very stealth in their tapering this time.
that is really the key. it is very quietly happening in the markets. but when money starts to flow back to home, that is when things can really change. jonathan: what interested me with a gdp numbers a little earlier and the treasuries market started to move. then we had a headline that the president was leaning towards jay powell -- jerome powell to be the future fed chair. w reversed the move. can you make sense of that? jack: i guess people were putting some probability on professor taylor being the one named, who would have been a little bit less than the status quo, or following the yellen path. i think that explains this reversal. i agree with you. the numbers today were pretty strong. they were something that should have been for higher yields. jonathan: let's look at it on the bloomberg. regardless of who comes into the
federal reserve, whether they are more dovish versus john taylor, they are more hawkish versus the market. you see that through 2018, 2019 and going towards 2020. surely, jerome powell is in the mix here, the continuity candidate and therefore, he will be more hawkish than the market expects anyway, yes or no? joern: no. jonathan: why? joern: i think the market has priced in the probability between powell, yellen and taylor. because taylor has been much more hawkish, the market has already run ahead a little bit. in this respect, the fact that powell is now getting closer to being appointed means for me we see some continuous continuation and in this respect, i think the plots would be continued to be right in the middle or even a little below.
jonathan: kathleen, my point, i guess, is they will continue delivery rate hikes. if you look at the median year, -- next year, it is 2.2%. that is the policy rate. that is only 30, 40 basis points below where the 10-year is. either we get this flat yield curve or something is not going to happen that we expect to happen. kathleen: we will definitely move towards flattening. i think what the market is saying is, we really believe in lower for longer. we prefer powell over taylor. that is the market being entrenched and complacent that things will stay the same. jonathan: you think they will be disappointed? kathleen: they will be very disappointed. i think the carry trade, the reach for yield that has thrown markets out of whack, will be challenged. jonathan: what is the best way to counter the story? jack: the way we have been playing things is a core short duration in developed markets. given the fact that in general,
we have strength in the economiess and is continuing and seeing bigger growth elsewhere, the more positive risk stands to be taking is the one we have been playing and believe it can continue as well. how do we do that in the fixed income market? you stay long in emerging markets. there is some emerging marketplaces you can be. we like mexico, for instance. long mexico and short core europe. jonathan: you want to be longer -- do you agree with that? kathleen: i like long. i would not go short duration. that is a huge give up. currency is the key in the market. jonathan: kathleen gaffney, sticking with us along with joern wasmund and jack flaherty. coming up on this program, stranger things happening in the auction block this week. some really interesting supply coming to the market, including netflix. we will get to that in a moment. from new york, this is "bloomberg real yield."
♪ jonathan: i am jonathan ferro. this is "bloomberg real yield." i want to head to the auction block. netflix is burning through cash as it invests billions in programming. to invest those billions, they needed to raise the money into debt market. they sold $1.6 billion in bonds the largest ever sale. junk rated notes yielded 4.875%. in sovereigns, a few notable offerings in asia. the appetite for yields showed up in mongolia of all places. the companies -- country sold $800 million in 2023 bonds that received $5.5 billion in orders. meanwhile, in china, the country sold its first sovereign dollar bond since 2004. it priced under initial guidance. in the u.s., a $28 billion sale
in seven-year notes. the lowest since august of 2016. it had a yield of 2.28%. in europe, the big story for markets this week was president mario draghi. the ecb chief warned that they -- would remain cautious as it but its stimulus measure on the road to an exit. starting in january, the ecb will cut monthly purchases of public and private debt at 30 billion euros or current pace and continue that pace through september of next year. with me around the table, kathleen gaffney and joern wasmund and jack flaherty around the table. jack, looking at the situation in europe, the power of reinvestment, the stock affect and the flow of 30 billion a month. how powerful what i continue to be? jack: they are running out of
bonds to buy. that is really where we are getting too. it remains very powerful. his talk was definitely on the dovish side. he definitely left out the draghi put. jonathan: kathleen, one thing i always think about is when the federal reserve is that and where the ecb will be at. we can capture the story in the bund's treasury two-year spread. how much oxygen is left appear around 236, 237 basis points. what is left? kathleen: not much. i do think you will see that spread converge. it is going to happen slowly. draghi is being careful when you look at the catalan elections. it is very telling there is a lot of unrest. they don't want everyone heading for the exit doors all the one
-- at one time. the slope, the steepness, less accommodation, really important. jonathan: if i go on central banks' current guidance, ecb told me they will buy 30 billion through september. it won't be a sudden stop. they are implying they will taper through the end of next year. they can approach 2019 with a -40 basis point deposit rate. in 2019 the federal reserve will retake their guidance. they are approaching 2.5% on the policy rate. 2.5% in the u.s. potentially, a -40% ibo rate in europe. that can happen? joern: they can happen for some time. the indication is the monetary policy divergence will fade, it will just take longer than people previously expected. it will probably also keep rates here in the u.s. a little bit contained. jonathan: kathleen says the spread will converge. it will narrow again. do you believe that? jack: i think it will narrow but not that quickly. for me, the market is getting a little more correct than the dots.
i don't think we will get three hikes next year. i think that number, that terminal number of will be lower. one of the things that benefit -- has benefited the u.s. economy a lot was that the dollar did not run up this year like people thought it would. i think the administration and the fed are aware of that. if they start raising, and as you describe, that differential starts to kick in where it starts to bring a high dollar, they will see that as a bad thing. jonathan: looking at the situation in europe at the moment, these people out of their talking about shorting german bunds, how difficult will that be? i look at the current program. seven times net issuance is with the ecb is currently buying in europe. if you look at the adjusted net flow of what will come out of europe next year, many countries will be negative territory. the ecb function on the bloomberg, the adjusted net flow as it stands right now. germany -- the ecb is buying
more than is issued and more. the short bunds is a tough trade. kathleen: absolutely, but the rules have to change at some point because if there is a scarcity in bonds and at the same time you have unrest across europe, you still have italy and spain to deal with, they may not want to be driving yields that low. so i think they have to be careful there. i think asia is something we want to talk about, with china asserting itself and abe's election, they are looking at changing the constitution and a military buildup happening in asia. that, an investment will pull money away from the u.s. jonathan: and where? kathleen: back home in japan. jack: can i jump in before you leave europe. the one country you did not mention was the u.k. jonathan: we will get there, don't worry. jack: we are not quite out of there yet. for us, the best place we had short duration has been in the u.k.
it is a much more open economy. the lower pound has contributed to some inflation even of the -- even though their growth has not been so great. that has been a better way to play the short developed market. jonathan: i got a question from a bloomberg user i want to address to you. is inflation the only answer for the german long end? assuming prolonged ecb asset purchase program is going to firm up the prospect in europe? jack: i think it is. i think inflation is the key across the world. i live in new york city. i feel inflation more than seems to be reported. nonetheless, if we are staying below target rates, that will affect what their policy is going to be. jonathan: thoughts on german debt? joern: i would not be short bunds at the moment. i am much more optimistic about europe overall than kathleen is. i think -- we will see some riots and dramatic pictures in
catalonia over the next couple of weeks, but overall i would consider this more of a buying opportunity. overall, i believe if spreads widen as they did to 135 basis points over bunds, that would be a fine buying opportunity. jonathan: at the moment the policies of draghi, is that rational to think that way from markets or is that another sign of complacency? in the same vein as when we talked about treasuries? kathleen: no, i think that is what is going on there. you are keeping things as calm as possible, but it's still driving with the low rates. it is driving the retreat yields -- that reach for yield into supply, as you said with netflix and china and mongolia, it is an issuer's dream market.
jonathan: an issuer's dream is not really an investors dream. kathleen: not at all. jonathan: what do you think about the next flicks issue question -- netflix issue? kathleen: absolutely insane. you were not compensated for the credit risk you are taking. jonathan: kathleen gaffney, joern wasmund and jack flaherty. just want to get you an update on the race for the fed chair. the president of the united states is said to announce a fed chair pick next week, that's according to dow jones. not bloomberg, dow jones. trump is said to announce the fed chair pick next week. the story on the board is where treasuries have been this yield. yields grinding higher this week. levels we have not seen since march of this year earlier this week. we traded at 294. on the u.s. 30 year. those colors are confusing. still ahead, the final spread. the u.k.'s unreliable boyfriend, the bank of england's mark carney. this is bloomberg real yield. ♪
♪ jonathan: i am jonathan ferro. this is "bloomberg real yield." time now for the final spread. coming up over the next week, a trio of central bank decisions from the bank of japan, bank of england and the fed. plus, the u.s. jobs report and president trump's trip to asia. it is widely expected his fed chair decision will be known by then. still with me around the table, kathleen gaffney, joern wasmund and jack flaherty. jack, you mentioned the u.k. the bank of england in focus, potentially the first rate hike in over a decade. i looked at some u.k. retail sales figures that came out and they dropped off a cliff. i looked at u.k. gdp, it was like 0.4% better than expected but not compatible with what i would call a time for a rate hike. jack: yeah, but the inflation has scared them a little bit. the weaker pound inflation has come through. it is a very open economy and i think that is what they want to address.
i think it is important they address things now rather than later. they will potentially need some ammunition later on. jonathan: kathleen, if you google "unreliable boyfriend" and go to images, i found out this week that governor carney's picture comes up everywhere. it happens because he guided us towards a rate hike several years ago. he did it again and then did it again. a famous politician in the u.k. came along and called him the unreliable boyfriend because you cannot rely on guidance for the bank of england. can you rely on guidance from the bank of england? kathleen: i think it is tough, he is pretty unreliable. but as jack pointed out, i think he is reacting to what is going on in the economy. wanting to keep money at home. brexit is a big deal. jonathan: what is the appropriate trade? walk us through. be more specific if you can, jack. jack: in general, being short the long end of the gilt is in a
-- been a good trade and can continue to be a good trade especially on a relative value basis. jonathan: do you trade the same way and have the same thoughts on the gilt market? joern: i believe he is doing a policy mistake. but to some extent, he is reliable because this is well telegraphed. it is similar to draghi or yellen. the central banks are well telegraphing this. jonathan: he telegraphed it back in 2014, 2015 and it never came. joern: now he will do it, i am pretty convinced. will it have a big effect on the pound, probably not. this is more about the transition negotiations, whether or not they will come through. i am a little doubtful. jonathan: guys, i am going to get to the rapidfire now. i will ask you a series of questions and you keep the answers as short as possible. is the next fed chair janet yellen, taylor, powell or a wildcard? yellen, taylor, powell or a
wildcard? kathleen: yellen. joern: powell. jack: powell. jonathan: is it the beginning of the end of the bond bull market? kathleen: yes. joern: no. jack: yes. jonathan: next week we could get a first rate hike in over a decade from the bank of england. we have heard it before from governor carney. he has given us some forward guidance in 2014 and 2015, it never came. do we have an unreliable boyfriend or the first hike in over a decade in the united kingdom? kathleen: yes. joern: hike. jack: hike. jonathan: thank you very much for joining us. kathleen gaffney, joern wasmund and jack flaherty. that does it for us from new york city. we will see you next friday at a different time. 11:30 a.m. in new york. that will be 3:30 p.m. in london.
so look out for that and remember, next week before the president goes on his trip around asia we should have the next chair of the federal reserve. will it be chair yellen, will it be governor powell or will it be john taylor? i look forward to bring the news on bloomberg real yield. from new york city to our audience worldwide, you are watching bloomberg tv. ♪
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