tv Bloomberg Real Yield Bloomberg August 11, 2018 2:30pm-3:01pm EDT
jonathan: from new york city for our viewers worldwide, i'm jonathan ferro with 30 minutes dedicated to fixed income. this is "bloomberg real yield." coming up, turkey edging towards financial meltdown. authorities failing to stem the market rout. u.s. sanctions begin to rival trade tariffs for the biggest risk in emerging markets. and treasury markets rallying, sucking up a record-breaking week of issuance. we begin with a big issue, a meltdown in turkey. >> it is no longer about policy, it is about credibility. the central bank of turkey has almost no credibility at the moment. there probably needs to be
personnel changes. >> as far as turkey goes, we have been uncomfortable with the policy mix for a while. >> it is disconcerting what we have seen in the steps from the turkish government and erdogan's politicization of the central banking and his son-in-law is the head of economics. for investors, you want to be cautious on turkey. this is not the time to be considering turkey. >> the market still has a sentiment as to there is some lack of credibility, lack of action that means the currency can continue weakening. >> they need decent people in key positions like the central banks and ministry. they need real policy, higher rates, tighter fiscal. jonathan: joining me around the table is kathy jones, charles schwab, and coming to us from boston is kathleen gaffney.
we are going to get to broad em in a moment. i want to focus on turkey. looking at the way they have handled the situation, what can they do to regain credibility? >> they are running out of options. they do not have credibility and looking at currency, there is fear and uncertainty. it is also an important country in terms of geography, relationships, and trade for europe in particular. at some point, a solution must be found. jonathan: kathy jones, looking at this situation, is the management of the crisis a crisis or the crisis? >> they were already fragile to begin with because of the large current account deficits. since the election, since the changes at the central bank, you have a lack of credibility compounding it.
they do not have a lot of good options. they could raise interest rates, tighten fiscal policy, go to the imf. none of those are palatable. jonathan: they are not asking for help. for our u.s. audience, it is the equivalent of having jared kushner pushing out jay powell and the equivalent of having the president running the federal reserve. that is where we are at in turkey. >> that is true. a lot of concerns we have, we have had marc chandler say there is no interest rate at which the lira could be stabilized. when i hear things like that, i think this is totally management.
a couple of weeks ago, all we needed was for the central bank to act like a central bank should. this could move toward a general betterment of the situation. however, now we're talking, we need a fiscal package, imf involvement. and look at what is going on with turkish bank bonds. jonathan: i spoke with jane foley, and she said we need 500 to 1000 basis points of hikes just to stabilize the situation. does a rate hike in any size get it done? >> an interest rate hike of any size does not get it done. it comes down to the credibility and policy makers saying the right thing, backing down. turkey is too big in terms of its political connections to not back down. you're looking at, either way, no matter what, a hard landing for the country.
that means you have financial risk within the banks and tourism and trade go out the door. that is not sustainable. i do think the language is going to turn at some point. jonathan: let's move the conversation on. when a currency crisis becomes a financial one, when it becomes a systemic risk. are we going in that direction? >> fortunately, turkey's relationship with the financial system is not near what some countries would be. it can be contained, but i agree with kathleen, things have to be done quickly. as we saw in 1997-19 98, if you do not act quickly, it tends to make investors pull back and say i do not want to be invested in anything related to this situation. jonathan: it is not that people are expecting that to happen. it is that they question is being asked, reporting about the ecb having concerns, big lenders having concerns about loans denominated in euros. they are denominated in foreign
currencies, and all of a set you have a problem if you are a turkish borrower. is that the next leg of this? >> that is so, and i think that is what the market is showing you. we have moved on to the next domino. this is not the first day we have had the lira down. we have moved on. one way to put this in perspective is i do not think there is massive turkey exposures. but that concept of the sovereign bank doom loop, what that does to your capital, the expectation of italians will need to come in and then they lose value. i think that kind of situation would be if we saw it escalate next, where we would see it going. jonathan: i want to get the central bank response as far as you can see it developing and get the em call. the federal reserve unlikely to respond. jay powell was clear that he thinks people overstate the role of the fed in these situations. does the ecb have a role to play? to what extent do you think the situation threatens the ecb's ability to roll forward with this plan? >> at some point, that is going
to be the problem, because if it does affect the banking system, they cannot withdraw more liquidity when the banking system in europe is under stress. that would not happen. at some point, they have to be having discussions with the banks in europe to make sure those funding lines are open and i would assume they're reaching out to turkey to come up with some sort of interim solution to stabilize the situation. jonathan: if they accept or want the help. kathleen, do you think there is something on the radar for the ecb that changes expected policy moves in the coming months? >> there is communication going on through backdoor channels. it is not so much the european banks, but it is the lending to the corporations in turkey. when you think about these sovereigns, their largest importer is bulgaria. bulgaria exports about 5% of their gdp to turkey. with sovereigns of poland and hungary with bulgaria being at risk to turkey, the ecb has a tremendous amount of incentive to provide some liquidity.
-- >> there is communication going on through backdoor channels. it is not so much the european banks, but it is the lending to the corporations in turkey. when you think about these sovereigns, their largest importer is bulgaria. bulgaria exports about 5% of their gdp to turkey. with sovereigns of poland and hungary with bulgaria being at risk to turkey, the ecb has a tremendous amount of incentive to provide some liquidity. jonathan: the buzz word is idiosyncratic. let's talk about what this means to broader em. i keep getting told every time i bring up emerging markets, the problem is idiosyncratic and the spillover will remain local. have things changed?
>> today, you are seeing more of a broader risk off tone. that makes sense because what is happening is for those funds that have exposure to em, they're going to want to make sure they have enough liquidity. you go to the most liquid countries to raise that liquidity. we are seeing selloff in local markets, but i do not expect that to last. this is not the asian currency crisis. we have floating exchange rates. most countries have used external debt. you are seeing the weaker players selloff and that is where there will continue to be worries with the dollar rallying. i continue to believe em is idiosyncratic, not just an asset class at risk for further contagion. jonathan: kathy? >> i will take the other side of that trade.
>> every time i hear something is idiosyncratic, it is not. it may not be of the same magnitude of other crises we have seen. but it is hard in smaller, less liquid markets to separate out and isolate when you are in the throes of a situation like this. later on, there will be some bargains. but for the moment, it spreads from one to the other and it is never different. jonathan: when you look at the situation and you have this many countries that need to raise short-term rates aggressively, you start to choke growth, you start to choke earnings. before you know it, you've got a different kind of problem. >> i think so, but when we are thinking about contagion, we should be looking at countries that look like turkey. right now, it is not clear there is a country with ideal credit build up and external imbalances on the same scale or magnitude. kathy's point, one thing that could make this less idiosyncratic is you have this big move in the dollar. that would make problems more generalized. it is making problems more generalized, and that is the thing to watch. jonathan: been great to have you with me. sticking with me is kathy jones and kathleen gaffney.
jonathan: i am jonathan ferro. this is "bloomberg real yield." i want to go to the auction block now, where there were record auction blocks for the 10 year bonds and 30 year bonds. $18 billion for 30 year or so. it went fine. on the corporate side, more bonds sold than in the previous two weeks combined. one highlight was starbucks, which auctioned off $3 million of seven year, 10 year notes. issuance was nearly $9 billion, the second busiest week year to date and the most active since march. a high demand auction was bmc, it's saw $4.5 billion for the $1.5 billion issue. talking to securing funding, we now turn to elon musk and tesla. questions remain, is funding really secured or not? >> elon musk of tesla now tweeting he is considering taking tesla private. >> going private at that level would not make sense. >> there is no mention of financing at all. even though he tweeted funding has been secured, it is not anywhere in the blog post that would allow people to see how
this would be financed. there are a lot of question marks here. >> the general thing that everyone is focused on is when mr. musk said funding secured, was funding secured? >> we have not had any major investment banks come out and say the funding is lined up. if they cannot show that, i think this is a major negative. >> everyone has been talking about this as a leveraged buyout. you cannot do a leveraged buyout of a company that is burning cash and is already quite indebted, and needs to spend more to keep growing. >> i do not understand the idea of what was suggested for them to go private. that is obviously an incredibly large valuation to somehow take into the private market. jonathan: what a week for tesla. still with me, kathy jones and
kathleen gaffney. joining us now, joel levington. kathleen, your thoughts on what an episode we have had with tesla this week. how unusual is this for a credit like tesla to be acting like this at the top of the company? >> it is unusual. i do not know whether it is the heat of the summer, but egos are prevailing in the markets over the last week or so. it is also indicative of where the technicals are driving the market. it is all about, what will the market there? it was just over a year ago we were talking about tesla and how attractive the new issue was. on a relative basis, it looked attractive. all of a sudden, the market is shifting because there are demands in the public market. there is appetite for private debt because it seems attractive in terms of long-term returns.
is it just one more trap that tesla is getting into without understanding the way markets work? jonathan: the one-year anniversary is next week. for that maturity, a record low yield. what changes of that note? does that covenant get triggered with the plan that we know so far? >> it does not appear the covenant is going to get triggered because you need a controlling stakeholder, somebody that is going to be owning more than 50%. elon said that was not going to happen. given that situation, now you have a bond that, if it goes private, will remain outstanding and it brings up the issue of structural subordination. our framework is that leaders take a two notch differential between a corporate credit rating and where the unsecured's will be, meaning the debt that
will be piled up in front of the unsecured note holders. when you look at a triple c credit curve, it will tell you that in 2025 bond should be yielding that's the percent, which is five or six points below their the bond is today. jonathan: to putback graphic up, it is important. where we trade now on the tesla 2025 is in line with the single b curve. pretty much nowhere near the triple c curve. >> that's right. either the market is assuming nothing is going to happen, but it is not protecting against the downside risk if something does happen. if you are talking about convertibles, there is opportunity there.
if the deal actually closed at 420, our fair value estimate would be 137, terminal. -- on the terminal. jonathan: we are above 360 on the equity market. would that be positive for 2025? >> it would in the short term. there is $1.5 billion debt due in 2019. there is one big chunk on march 1, which is $920 million. that has a $360 conversion price. if you happen to be in the money, it gets rolled over. jonathan: i am not sure if you -- how much have things changed with you for junk debt? >> this one is idiosyncratic. the junk market has performed well this year. we are neutral because spreads are tight. you've not had any trouble with absorbing big supply. i think this one is a one-off, just a very strange situation. jonathan: kathleen, the supply dynamic changed this week.
we had triple c's come to market. we had record treasury issuance. to be clear, the market in the united states is doing fine, absorbing this, isn't it? >> it is, and the appetite reflects that reach for yield is still driving the markets. it is the technicals, and until we see rates move to the upside, the u.s. is looking attractive in terms of 10 year, 30 year, good demand, more attractive yield, and no one is worried about inflation. with triple c, reaching for yield no matter what the fundamentals are, i have yet to hear anyone talking about the importance of cash flow. that is a market being driven by technicals, not reality. jonathan: kathleen gaffney, joel levington, and kathy jones. i want to get a market check of where bonds have been, stable until today.
this is "bloomberg real yield." it is time for the final spread. over the next week, will be keeping an high on news around -- and i on any news around eye on news around tesla and a board review of elon musk. plus, we get retail data, brexit talks, and a ton of data coming out of the eurozone, including including cpi, and a lot on the u.k. including retail sales and more. still with me, kathy jones, joel
levington, and kathleen gaffney. this week, there is a news flow with a really important move from the most talented portfolio manager on the planet, dan iversen. now central banks are trying to step away from the accommodation they provided to the markets for many years. we think this means lower return and higher volatility. this combination creates a more challenging investment environment. is it time to get defensive? >> that has been one of our themes. as the central banks tighten monetary policy, the era of easy money is ending, and that is going to raise volatility and make it tougher to get those big outsized returns without risk premium. we think markets have to reprice because risk premium is tight. jonathan: a big concern is
liquidity, and you have seen some examples start to build up where there is not enough liquidity. is that a concern for you? >> absolutely. i think we are going to see more of it, and it is going to be a very challenging environment for investors. in terms of getting defensive, i'm not sure what that means since developed sovereign markets are expensive with rates likely to move higher and credit markets are tight as well. a lot of volatility and where the return potential is going to come from is non-u.s., particularly currency, because that is where the growth potential longer-term is likely to come from, and it is a big question whether china is slowing, but will it continue to provide enough liquidity to other markets? jonathan: final word, joel?
>> our strategist has gone with the stay short, stay defensive approach. energy stands out as being wider, communications because at&t and verizon make up so much. on the short end of the curve is clearly appreciates playing. jonathan: a fascinating week for fixed income. joel levington from bloomberg, kathy jones from charles schwab, and kathleen gaffney from eaton vance. that does it for us from new york. we will see you next friday at 1:00 p.m. new york time, 6:00 p.m. london. this was "bloomberg real yield." this is bloomberg tv. ♪