tv Bloomberg Real Yield Bloomberg November 17, 2017 12:30pm-1:00pm EST
jonathan: from new york city, i am jonathan ferro. this is "bloomberg real yield." ♪ jonathan: coming up, republicans inch towards tax cuts. the treasury curve is even flatter. the difference between short and long-term yields is the narrowest in a decade. a week for credit. a long correction, at least for now. we begin with the big issue, a signal in the treasury market. >> the fed operating on the short end of the curve, global markets operating on the long end of the curve.
i don't think it is that problematic, but it is telling if there different players in different parts of the yield curve. >> it is not just the shape of the u.s. curve. it is the differentials in other curves as well. that's a testament to the influence of other central banks. >> the rest of the world is still printing money. ecb, bank of japan. they promises they will do that until september of next year. it is hurting duration and credit risks. they ultimately end up in the u.s., and that is a very important driver. >> one of the weirdest things as we are doing it against the backdrop of the fed and potential tax cuts next year. you got hundreds of billions of extra supply coming into the u.s. market next year. my guess it will be much more difficult for the curb to continue to flatten in the next year. >> if i don't get some pickup in inflation and the fed stays, two
years it will go higher in the curb will go flat. jonathan: joining me in new york is vishwanath tirupattur, lisa hornby, and coming to us from london is iain stealey. we want to go straight to a chart of the curve rolling over and getting flatter. what you see is how supportive the federal reserve has been at the front end. it has inched higher and higher. the 10-year has stayed in there as the gap has narrowed. is there a signal in a projection? vishwanath: i think there is something here. we expect this flattening trend will continue to be there and extend beyond the 10-year point in the curve is what we think. there is a clear expectation about inflation. the market does not believe there will be substantial pickup
in inflation over the course of the next several months. that is what is driving the shape of the yield curve. jonathan: below 62 basis points. is that what you take away from it, the message? iain, that was a message to you? yes.ain: deals are pretty stable at the long end. low yields in europe, ecb is still buying a lot of bonds, bank of japan is buying a lot of bonds. the fed will continue this normalization process in december and into next year. jonathan: how important is that? fixed income debts with negative yields of around $9 trillion. is it any wonder at this rate
weighing down on the long end of the yield curve in the united states? lisa: that is something we have been focused on for many months. it is not just affecting the race market, it is affecting the credit market as well. by nondomestics investors is basically gone up 50% since the crisis. that is all because yields are peopletive or so low have been basically swapping to markets. jonathan: with potential changes to the tax code, have a done anything? we just erased it all. the tax overall is happening. they are inching forward in d.c., if the treasury market is not moving the way people expected it would. vishwanath: our expectation is looking at the house bill in the senate bill we are not going to go beyond the $1.5 trillion deficit number that has been talked about. the expectation that somehow we
will have a substantial boost coming in here is not what is in the cards. the ultimate fiscal impact is modest. it can impact credit markets in greater detail. the expectation is we will not see massive increase in the deficits. it is of the deficit, what is keeping the yields where they are today. jonathan: how much flatter can the curve tget? vishwanath: it will get more flatter. jonathan: what are we talking? vishwanath: it's hard to come up with a number right now but it will be flatter. ain, look at what the federal reserve is said to do next year. look at the forecast for next year. they are looking at interest rates, the median forecast, we
median2.215 for their and of the year forecast. we are 20 basis points north of that on a 10-year treasury, right here, right now. can you try to make sense of that for me? that's exactly what i have done this year. they wanted to raise rates three times. they will do that in december. they will continue to normalize rates, continue to take rates, real rates, close to zero. the login continues to be active. 275 is whether think the terminal rate is. a 10-year treasury at these levels is not one million miles away from that's a maybe that is right. jonathan: if you get that dynamic where they go with a savior going to go in treasury yields do not push higher, is that a policy mistake? something they can ignore? iain: the reality is treasury
with the competition is going to be of the fomc. i agree with you on this. that that mayn not be what might be in the future point. that is a pathetic want to have. lisa: there is some speculation one of the first orders of business will be looking at the inflation target. seeing 2% is actually the right place to be our little higher? that introduce term premium to the curve. a lot of people are positioned and flat nurse because they affect the cycle that produces flatteners.-- vishwanath: in terms of premiums, the significant
difference at the long end of the curve in the short end of the curve, negative term premiums the flat of the curve. it is fervently rational and makes sense to exploit that by continuing to flatten absent a big change in the direction of the fed. jonathan: vishwanath tirupattur, lisa hornby, and iain stealey. coming up on the program, the auction block. canada taking advantage of its own flattening curve. the tightest since 2008. from new york, this is "bloomberg real yield." ♪
this is "bloomberg real yield." i want to head to the auction block. the united states not the on ly one with a flattening yield curve. canada selling for -- $392 million worth through 2064. spain also went long, selling 1.4 billion through 2066. and with better demand for the previous auction. despite the volatility in high yield, weight watchers at his sell in five years. still with me, vishwanath tirupattur. lisa hornby and iain stealey. can we have a conversation about what is happening with high-yield? money coming out of five yield. money going into
investment-grade. it was like a flight to quality to some extent. is that what you see? vishwanath: we have been advocating this for some time, the upper quality trade. we see several challenges on the lower end of the spectrum. we think the challenges are numerous. for example, the buildup of leverage over the course of the last several years has been a norm is. it has not been anyone sector. it has been across many sectors with the buildup and leverage. compensators are getting paid for taking on the leverage. it is nearly at an all-time low. we think it makes sense to keep going up and the quality spectrum at this time. jonathan: j.p. morgan asset management stayed bullish high-yield. the message is don't get greedy. is there something you guys are
still thinking about as you look at this situation? is this just a buying opportunity for you? iain: definitely. when we look at yields a month or so ago, 5.4%. it was probably a little too low. we have seen a decent backup. rounding out around the 6% level. spreads are about 40 to 50 basis points wider. please the default rates remaining low. rates -- wedefault see default rates staying low. jonathan: i want to use sprint as an example. the deal breaks down for a merger, the debt breaks down. i have pulled it up on my bloomberg. we traded north of 110 and then with below par. a company north of $30 billion worth of debt in a competitive sector, whether you compensate
for the yield north of 6.5%? iain: i think when you look at companies like that we have seen profits improving. -- profits improving. the overall state of the economy should be good for this sort of company. the things that happens to these big, large issues with the big components of indexes, when you see the outflow that we have seen from the etf's, they are going to take ahead. for us it creates opportunities and pick them up at higher yield and get better returns. jonathan: you debate this throughout the year. n would have17, iai been right. this moving twice before. we saw it in the spring, spreads widened and then tightened. then we saw it in august. we are seeing it again. why is it different this time around? vishwanath: we probably did have this debate with iain on this
topic. looking at the fundamentals and how much you are being compensated for taking on this leverage. we don't see the corporate fundamentals in the same manner. the tail continues to deteriorate. year to date, triple c bonds have underperformed than double b bonds of. -- bonds. space, theorate year-to-date the terms are lower. that is basically what the market is telling you. you are not getting paid to go down that triple c. jonathan: the message in the previous segment was about sovereign debt and the weight on the long end of the yield curve. does the same apply for corporate credit? the you have to think about of the amount of foreign flow coming into the united states
spurred by the ecb and president draghi? that has been the story of the last several years. 40% is now owned by foreigners. thechange in the dynamic, relative value dynamic because of the cross currency basis or because of spreads in the u.s. no longer offering value have to be watched closely. we could see an exit of demand. jonathan: goldman sachs in their top 10 for 2018, late cycle imbalances. they are not talking about leverage. they are talking about illiquidity. how much concern the you paid illiquidity in spaces like high-yield and do you promote a more active approach with these kind of things going forward from here? what is the late cycle story? iain: i think this is the perfect environment for credit analyst to do their homework, make sure you are in the right credits. we are not daytrading bonds.
we want to buy companies we think are going to give a return to capital and income over the next five to 10 years. there are some worries out there. there is definitely some names you want to avoid. we like the market overall. credit selection, absolutely vertical late cycle. vishwanath: i agree it is critical. i think it is important to note the market has not appreciated program the fed's qe has enabled credit. that youust embarked should take that precept and we are embarking on it because of qe. there has to be some extent an important effect. we think the liquidity in the market where tremendous liquidity has been infused, it
remains very substantial. we begin to see some of that liquid taken out of the system by the fed. lisa: we completely agree with that view. if you look at the difference between the purchases by the central banks this year and by the central bank and 2018, there is about $1 trillion in debt more from other was in 2017. that have to have an impact on valuation. jonathan:. you guys are sticking with me. vishwanath tirupattur, iain stealey, lisa hornby. it is a much flatter yield curve. up at the front and by six, down at the long goodbye 10. we are around 278. after this, the final spread. this is "bloomberg real yield."
jonathan: it is time for the final spread. it will be a shortened trading week in the united states with the thanksgiving holiday coming up. we will have details of the recent meeting by the federal reserve and the ecb. janet yellen will be speaking as philip hammond makes his budget lisa,, let's see where you see the opportunities are right now. is there anything i should be looking at the pickup? lisa: we are cautious on risk generally but right now it's about taking risk down and having some carry on in the portfolio. you can get relatively short data bonds.
pickup 89 basis points. there's another area rethink it is idiosyncratic. vishwanath: i agree with lisa. both of those things have been what we are recommending. iainhan: i imagine disagrees with you both. iain: there have been decent real yields a loss of a lot of countries. overall it looks good. is a buying opportunity to pick up some bonds, 6% yields trading 60, 70 basis points lower. jonathan: what you say we still have the hunger to buy. it is the timing again. vishwanath: i look from the portfolio managers, the index to the benchmark indices.
what is happened over the last several years has been red credit and underway mortgages. they could have been bought by them. that is changing now. reallocateforced to -- jonathan: we will wrap things up with the rapid fire around. three questions, short answers if you can. two versus ten's. do we see zero before 100 this year? vishwanath: yes. lisa: no. iain: yes. jonathan: long credit risk or long-duration risk? vishwanath: high quality. lisa: high-quality credit risk. iain: definitely credit risk. jonathan: we have a bit of a selloff in high-yield, and a bit of a bounce back as well. to credit set of taken a beating over the last couple of weeks.
sprint ore pieces of tesla? vishwanath: tesla. lisa: tesla. iain: i will take the sprint. jonathan: great to have you with us. vishwanath tirupattur, iain stealey, lisa hornby. that does it for us here in new york. we will see you next friday at 12:30 new york time. this was "bloomberg real yield." this is bloomberg tv. ♪
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