tv Bloomberg Real Yield Bloomberg April 20, 2019 5:00am-5:30am EDT
jonathan: from new york city, for our viewers worldwide, i'm jonathan ferro. "bloomberg real yield" starts right now. ♪ jonathan: coming up, getting a mixed read on the u.s. economy. retail sales looking good, services data disappointing. signs of weakness in europe. german manufacturing struggling to bounce back. all of the uncertainties bringing a bid back to government bonds. 10 year bund yields heading back toward zero. we begin with the big issue, struggling to get a read on the global economy. >> china, europe. >> the eurozone. >> the u.s.
>> china forming a bumpy bottom. >> close to a recovery. >> data is encouraging. >> very encouraging. >> encouraging. that is pretty much in the data. >> europe has many existential issues. >> structural hurdles. >> structural problems in europe. >> too many to name. >> disappointed this year worse , than people expected. >> pretty weak data. >> so awful over recent months. >> the u.s. economy is doing well. >> a strong u.s. economy. >> the u.s. is not doing poorly. >> the u.s. economy maybe stuck here a little bit. >> it is a sequencing, the u.s. was stable last year. there is a pass off to china and improvement occurring in china. europe is also stabilizing at the moment. jonathan: a big week for economic data worldwide and to discuss, joining me around the table priya misra, gorshon , distenfeld, and victoria fernandez. victoria, your take, we have had u.s. retail sales, data out of china, and eurozone pmi. what is your conclusion this week?
victoria: i think we did get a mixed bag as the people on the clip were saying. it is still trending where we are still going to have positive momentum going into the second half of this year and as long-term investors that is what we're looking at. you had positive numbers out of china. retail sales doing better gdp , was where they expected, industrial production was good. you are seeing the stimulus finally starting to feed through, and beijing is probably not done yet. we will continue to see measures put in place. that is going to be positive and you should have that feedthrough mechanism to go through to other em's, especially those with the supply chain, vietnam, taiwan. and again into europe. germany needs china to do well. hopefully having this turnaround will help the european numbers. jonathan: what do you think? priya: i would agree with victoria. i think what we saw the last two weeks is the u.s. economy is growing around trend. still i would say around 2% gdp. the china data has come in
better. europe is still a laggard but what this is telling us is that the fed and other global central banks have managed to extend the cycle. the big fear or something the market was grappling with is has the fed extended the cycle? or did they just signal the cycle has ended? the fact that the data is telling you growth is ok in the u.s. and china growth is picking up, therefore we should back in the reach for yield carry trades. this divergence between rates as well as risk assets, the fact that rates have broken out to the upside a little bit is telling us that risk assets are ok. gershon: i agree with everything that was said so far. i will add there seems to be some natural law that we have to be toward the end of the cycle, as if it is a baseball game in the third out in the ninth inning, the game is over. that is not the case. we were talking before about australia has been expanding for
30 years, china, korea, india. you can go on and on. there is no natural law. the fed is off the table. they're willing to let inflation run hot if need be. they will not take the punch bowl away. i think the fears in europe -- no one is going to say europe will be gangbusters growth. countries like germany are much bigger exporters than the u.s. some of the consumer numbers are not consistent with going into recession. do we expect strong growth? no. the idea will going to worldwide depression is overblown. jonathan: a few dynamics we will work our way through. let's start with united states and the idea that we are late cycle. victoria, i would love your insight into this. there are so many people who believe we are late cycle. when you ask them why, they will tell you it is because it has been going on for a long time. can you define late cycle bylo? victoria: no. it's like what you were saying a moment ago, it can go on for a much longer time.
with the central banks where they are, the federal reserve on pause, you had india cut rates, you have a situation where things can continue for a longer period of time. there is no set timeline on how long this has to be as long as you have fiscal policy and monetary policy situated in a place where it can continue to boost that, i think you can keep going. that is where we seem to be now. priya: i completely agree. historically, the fear is business cycles do not die of old age, they are murdered are the fed. -- murdered by the fed. if you look at real rates, 10 year real rates hit 1.2% late last year. i'm nervous that if the fed continues hiking or let the balance sheet runs off, if real rates continue to rise, they -- the economy cannot handle it. they will not go above neutral and then they stop the balance sheet run-up. that has taken these much lower. they are not trying to murder
the economy. they might be able to achieve what no other fed has been able to do, which is essentially not murder the business cycle. jonathan: let's talk about what is happening with treasury yields. it has been interesting. the fed has backed away. the data looking ok in the united states. yet we still cannot unlock materially higher treasury yields in terms of nominal and in terms of real yield. what are your thoughts? gershon: the market is saying they do not believe the fed will be able to generate inflation. it is pretty clear. you would expect, if we were to go into a recession and the fed was going to start to raise, the short end would be rallying more than it is. you would see a steepening. there are two ways to get a steepening. you have the short end rally or the long end selloff. we are going to need to see some inflation. i'm just as bullish as the others but it is not like there are not risks out there. much like in the fourth quarter, everything was terrible, the world was firing apart, we could do nothing right. it is not 100% rosy. we do not have a finalization on the trade deal.
europe is still, despite not as bad as people think, but it is not rosy over there. we need central banks to keep doing what they have been doing, and there is always the unexpected we do not know about it jonathan: let's talk about . the gravitational pull of the rest of the world and yields worldwide. ill a positive real yield in the united states and i wonder if that is an incentive to go lower for a lot of people. in germany, you do not have positive real yields. you have negative real yields across the whole of this -- the euro zone. is that where we get this sucking sound for the u.s. treasury yields, from everywhere else? priya: even though we are not looking for the economy to slow down, we're looking for over 2% gdp. we forecasted the 10 year stays 2.60. if the 10 year in europe is stuck around zero, how high can the spread go? if the front end is going to be anchored around 2.40, i think the long end for the 10 year will struggle to go above 2.75. jonathan: victoria, i want your
view. you can be constructive on the global economy and very constructive on the u.s. economy. it does not mean you are as bearish on treasuries, does it? victoria: there are uncertainties. as you were saying a moment ago, they are out there. we are not looking through rose-colored glasses. there are things keeping rates lower on this side. besides the fed saying they are on pause, you do have the global issues pulling things down. look at the spread between bunds and u.s. treasury. that has come in a little bit, we were at 2.50 last week and we are at 2.35 now. that has come in. there are going to be uncertainties, whether headlines from north korea, that could be a pullback. we have flight to quality because of a long weekend. we still have the china trade issue. brexit is still there, we don't know if we will get a hard brexit or not and we will not know that until later in the year. there are a lot of issues still.
we have to be careful. we have seen huge inflows into investment grade and munis over the last couple weeks. people like to go in when yields are low. we need to be a little careful, make sure you position yourself properly so if we see yields go higher, you are prepared. jonathan: let's talk about one of those risks. a base case for a lot of people is china improves as the year goes older. i will go with that, fine. they keep pushing stimulus. the nature of stimulus has wonder whether the degree of the spillover has changed? take the eurozone pmi. some people take comfort that in germany it will take a while to get there. what if it does not get there at all because the stimulus china has put into the economy will not be enough to get the degree of spillover we are used to? gershon: you touched on everything we've talkd about. what does it all mean in terms of portfolios? we are uncertain about a lot of things and uncertain about how it will affect markets. what should a fixed income investor do?
that is the purpose of the show. we tend to lump fixed income into one bucket. it is more important than ever to balance the credit risk you take, whether u.s. high yields, e.m. debt european high yields, , and your rates risk. interesting fact, if you just balance those risks equally you end up getting 80% of the yield of the high-yield market and much less volatility. and much lower drawdowns. priya: i would agree with that. when the curve is flat, when spreads are tight, when volatility is low, we have to do far more fundamental credit work also balance our liquidity , risk. if you are in a risk asset portfolio, having some duration is a nice hedge. i think some of those easy carry trades where you can just go along -- just go along and roll along the curve that is all , gone. i would say maybe a portfolio makes more sense than if we were late cycle buying high-yield, for example. jonathan: final word. victoria: we're looking at short
to medium-term at the moment. we take a conservative approach. whether tax-free or taxable. we are looking at higher quality issues. when you look at spreads, higher quality issues have come in more than high yields. they are still 30 or 40 basis points higher than the levels we saw last year. i would be a little leery of high-yield as we get into a risk of trades seeing 10 year come , down. i would stick to more investment grade, high-quality short to intermediate-term bonds. that is what we looking for in our portfolios. jonathan: my guests sticking with us. coming up, the auction block. soft banks record bond sale seeing heavy demand as they sell therefore .5 billion in bonds on day one. this is "bloomberg real yield." ♪ ♪
♪ jonathan: i'm jonathan ferro, this is "bloomberg real yield." i want to head to the auction block, where we begin in the united states. in cor --e -- even the spotlight in the u.s. high grade market. walmart issuing $4 billion of debt. its first debt sale this year. proceeds going to general corporate purposes including maturing debt. in asia, softbank selling japan's biggest ever corporate bond. $4.5 billion of notes maturing in april of 2025. the offering was fully subscribed on the first day as the pricing attracted strong demand. in europe germany selling 25 , year bunds this week. 776 million euros were sold at a yield of 2.5% with investors offering to buy more than two times the amount of ite
sold. let's start with europe. priya, you have an interesting call on the periphery i want to explore. it is the idea that after years of behaving like credit, the periphery can start behaving like a sovereign again. walk us through it. priya: the biggest reason the periphery traded like credit was this redenomination risk. the idea the eurozone can break up. i think draghi and the ecb have put an end to that. i think that should get priced out. that is already getting priced out. the other thing is on the ecb. the ecb has told us they are not hiking until the end of the year. they have done the tltro program. they are going to help the periphery. what they are trying to do is extend the cycle as much as they can in europe. european growth is weak. there are big structural issues with europe. if there is a reach for yield in europe, where do you go? in are at zero e and -- zero
bunds. you want to go into the periphery. i think the periphery spreads will continue to tighten. gershon: we tend to do with the extremes. it is sovereign or all risk, but in reality it is somewhere in between. there are idiosyncratic examples. italy, a lot of populism. there are debt problems. all of these economies are susceptible to the region in general. you have to pay attention to both. this will be a systematic component that goes along with how the european economy goes. there will be idiosyncratic components about how the individual countries work out their issues. victoria: you and i have spoken before when it comes to europe, how we feel there are a lot of things going on particular to the individual countries. it is not all about china or about global growth slowing down. you have auto manufacturing in germany protests in france, , political issues in italy. these things have to take a backseat before we see things get better. welld see services pmi do
in germany today. france was solid. there are bits and pieces that can see a turnaround but it will be a long time coming. jonathan: is there risk that we try and infer a signal from price when there could just be a monster reach for yield across the continent? gershon: there is always that chance. you showed it in the walmart deal. the demand for that is probably more than we scared everyone to thinking bbb's will get downgraded. most of them are trading as if they will get downgraded. it is not only a reach for yield, high yield em debt people need a lot of income. even in the lower yield, we are scaring people and crowding them out of stuff that is priced as if it has problems already. people are chasing some of the higher quality stuff jonathan: being fearful of credit risks has some pain through 2019. you said to me that high-yield could return to 10% and i laughed, so more fool me. walk me through what is going on next. we have had big price moves. we have had 8% or non-percent on
high-yield. we have had a big move. what now? gershon: the reason we can get to 10% return is because we started at much higher yields. now we are definitely more in a carry environment. we have to be balanced. we are not going to recession, or it is very unlikely. we are also not trading at the it is unlikely. levels we were in the fourth quarter. we need moderation. that's why it is so important to not only load up on the riskiest bonds. don't put all of your portfolio in high-yield. balance it out with some of the higher quality stuff. that will work together in the portfolio. jonathan: you are making the same point? priya: i would agree. in just the rate space, i would say you're getting paid for duration risk. i would stay in the front and. -- front end. if you have a risk portfolio, the front end does not help you. it gives you liquidity but it is not a good hedge. if you have a risk portfolio, only 10 make sense. particularly at the 2.60 level. that will be a huge inability for the u.s. 10 year to go much higher. that is a decent level. two weeks ago, when the 10 year
was at 2.35, i was saying that was pricing in the recession. at that point i found it odd that credit spreads were still pretty tight. if we go back to 2.35, i think here owning some 10 against a risk asset portfolio makes sense. jonathan: victoria? victoria: the one thing we need to speak about is the demand. the demand is out there, whether for municipal bonds because of salt and tax reasons, corporate bonds because people are looking for yield, the demand is there and the supply has shrunk. we are 30% less issuance than in 2018. that will put some pressure on spreads -- excuse me. they keep coming in tighter. jonathan: you need to get some water. take a break. my guests will be sticking with us. in the markets, a check on treasuries. two scum attends, and 30's, -- ten's, and 30's yields
♪ jonathan: i'm jonathan ferro. this is "bloomberg real yield." it is time now for the final spread. coming up next week, larry kudlow speaking at the national press club in d.c. and plenty of central-bank action, including rate decisions out of canada, turkey, indonesia, and the bank of japan. the week wrapping up with u.s. gdp on friday. my guests still with us. i want to begin with this line we got from blackrock's larry fink earlier this week. forecasting a melt up on the call.y's earnings
he was referring to equities and he said there are huge money sitting on the sidelines. clients are underinvested, not over invested. we see more upside, especially in equities. does that apply to credit as well? is that just the stock story? does that apply to fixed income? he took a lot of inflows on the fixed income inside at blackrock through the quarter. priya: fixed income has gotten the influence. the lowest risk asset have got most of those inflows. the fed told us earlier this year they are done with hiking. i think people felt more comfortable about fixed income, but in the last couple of months, there is a fear we are going from goldilocks to a recession. if you're nervous about that and the fed is not hiking, you put your money in the front end. money market flows have been extremely high. that is not investing in the riskiest assets, so i see where he is coming from. gershon: as much as i hate to agree with larry fink, he is right. the results show it.
people put a lot in fixed income. that does show people are not investing enough in risk assets. in equities and other risk assets. i do not think that is anything new. how many studies have to be done to show the s&p returns 11%. the average investor gets 3% or 4% of it. they buy high and sell low. everyone was so nervous in the fourth quarter last year. 16% ont we are up 15%, the s&p year to date, people are chasing it. jonathan: let's explore this a little further. the belief people will re-risk and begin to participate as the year progresses. any faith in that idea? victoria: we believe that is true. as you have uncertainties get removed from the marketplace, that will give investors the opportunity to come back in. you will see it on the equity side, especially with earnings doing as well as they are doing, beating expectations for the most part. that gives an opportunity on the fixed income side. it allows inves ok at their portfolio allocation, see their where they need diversification. we saw flows out of fixed income last year and we are seeing them come back in this year, especially this past month.
we will see some flows come in. jonathan: what will drive capitulation, price or better data? which typically brings people back to the table? gershon: people chase returns. you see it in study after study. people chase returns. priauld dd, it is a more dovish reaction function and that is clear. the data starts improving, inflation does not pick up a lot and the fed does not talk about more hikes, people realize there will not be any hikes than the cycle can extend. the cycle can extend. jonathan: let's get to the rapidfire round. three quick questions. three quick answers. i asked this once before. i will ask it again -- have we seen the low for the year on the german ten-year yield? have we already seen it? yes or no? priya: yes. gershon: no. victoria: no. jonathan: big rally on the
periphery in europe including greece. do you buy it or fade it? priya: buy it. gershon: fade it. victoria: fade it. jonathan: the bank of america research team says the rally of ccc's is inevitable. we will get another leg higher. they say don't chase it. do you fade it or chase it? priya: chase it. gershon: cautiously chase it. victoria: i will fade it. too risky for us. jonathan: fantastic to catch up with all of you. really interesting stuff. that does it for us from new york. we will see you next friday at 1:00 new york time. p.m. that is 6:00 p.m. in london. this was "bloomberg real yield." this is bloomberg tv. ♪
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