tv Bloomberg Real Yield Bloomberg August 11, 2019 11:00am-11:31am EDT
>> i am lisa abramowicz in for jonathan ferro. bloomberg real yield starts now. fears of a global recession reemerging with economic and political concern rattling markets. central banker struggled to keep up the defenses despite a round pulling the most from junk bond since 2018. where did all the bond bears go? >> bond bears are dead. >> the 10 year is headed back
down to test new lows. >> one in 3/8 percent. >> it is much lower than this. you could still get another 25 basis points. >> adding to 1.25%. >> 1% on ten-year treasury is not impossible. >> potentially all the way down to zero. >> that downside economic scenario if the economy is weak and the leading indicators do point to that scenario. >> we and the rest of the world are going to own long government bonds. >> bond bears are dead. joining me are kevin of raymond james and scott kimball of the mo. let's start with you, do you agree that there is no lower bound, let the basement be the ceiling? i think seriously the data
and in terms of creation we are going in that direction. there is going to be a limit in terms of how crowded it will get. i think we are getting to that stage in the next 25 basis points or so. limit and howa terms of how low they can go. the conversation around negative nominal yields in the u.s.. up on would have to give the fact that the u.s. economy has not found its way to a recession yet. there are some strong points in the economy that will keep yields from dropping a whole lot more than they are now. if the trade issue is the only issue we are going to talk about that will extend well into the next year and there is no other way to go but down in yields. if cooler heads can prevail we can look out -- look back at the fundamentals. there is a .20 or 30 basis
points below this where we will bottom out. lisa: there is a question of how crowded things are getting. they are plowing their money into treasuries. take a look at bank of america, surveyed saying investor base in u.s. treasuries -- the expectations of a much more aggressive fed cut cycle. at what point do we understand this to be an overcrowded trade or in theory a good one? >> the challenge is that we have seen that break in lower bounds. we lock invery time that rates are closer to zero that treasury values are more full. when we seek softer curves like we have seen in europe, it may put the bond bears out of business for a couple of days. when we think- about where global yields are the treasury seems to have a good amount of risk off property because the yields are still
positive. >> here is a question i have, will the federal reserve come through on market expectations? the st. louis fed president addressing issues saying the nature of a tit-for-tat trade war is that there are threats and counter threats occurring all the time. reasonable for monetary policy to respond to all these threats and counter threats. thatraises the prospect they will be disappointment from federal reserve for markets that are breaking in -- pricing in four rates cuts. >> i think i am being sanguine about the risk. did deliver disappointment in july in a sense that there was overwhelming evidence in my mind to stifle the 50 basis point cut to buy the insurance up front. , messagingo 25% about the future of rate cuts. there is a real possibility that they slow walk into a problem.
you see the curve refract that. we have a flattening of the curve that is in essence saying the fed is not taking this seriously enough. if they come back and say move 50 basis points in september, be aggressive and recognize the risks up front we will see the curve receipt. >> what happens if they don't do this? >> i wonder whether james was addressing the president in particular or the market in general. too think the fed will try hold onto as much of its independence as they can when they make a move. there is a possibility you could have a move before the september meeting. i think that move is in september. whether it is 50 basis points or not depends on the next two to three makes -- two to three weeks and what will happen. scott, from your perspective if the fed does not come through
for market expectations on rate cuts will they make a policy error that will result in a tantrum? >> i think tantrum is a good word for what that outcome will be. the fed cut rates by 25 basis points and conditions have tightened if you consider a flattening rate curve and increasing volatility i think the market is being set up for disappointment from the fed and that will lead to these problems being exacerbated and more pronounced selloff of risk assess the we have seen so far. lisa: how many rate hikes do you think there should be heading into the end of next year given the data we are seeing? >> zero rate hikes. lisa: should we have no rate hikes -- rate cuts whatsoever? >> i will frame it this way. the market is underpricing the probability that yields will fall to zero at this point. we are talking about 100 or 125. i think the real conversation is is there enough risk on the table at the moment toward the
fed cutting 200 basis points and taking it to zero. not necessarily because a recession is imminent but because we need that much insurance to make sure inflation expectations are stabilized and the economy continues on an even keel. >> the question is how low can you go. with a rate hike i am so used to saying that, that seems like the only possibility and here we are back in a cutting cycle. post" it is noog longer absurd to think that the nominal yield on u.s. treasury currencies could go negative. u.s. treasuries may be no exception to the negative yield phenomenon. thet, do you agree that u.s. treasury yield will at some point go negative? >> that is not our view. when we look at things that are driving the negative yields there is a lack of durability in other economies that we don't think exists in the u.s..
we respect that from a qualitative standpoint enough to accept every time we have said negative yields in the bank or bond market they cannot persist. willve to accept that we not be completely free of that if we enter a deep recession. our question is not will we see another recession in the u.s.? we know that will happen. the question is what type of recession and given the resilience we have seen in consumers and the freedom we have seen with a lot of the investment capital being permeated through more productive parts of the economy than overseas will keep us away from that hope to leave. lisa: negative yields in the u.s.? >> i think it's a matter of time frame. real yields happen dramatically. real yields20 years across the developed world have come down systematically. they are close to zero right now on ten-year tips. can nominal yields follow them? deflationlation and
starts to ratchet down. fails to stabilize inflation expectations i think the process -- prospect of negative nominal yields becomes a real possibility. lisa: negative nominal real yields or are we talking negative yields in the u.s.? think you will see negative yields in the u.s. in our lifetime. on the still predicated potential of a trade deal. i cannot seem to get it out of my head that whether this is -- we know the trade war is not inflationary so it is a pretty clear trend of where we would go if it continued. also not sure, the rest of it is political and it is a timing issue to see the u.s. and china have a trade deal. trade dealnce of a will continue to drift lower and all likelihood and it will probably drive the fed to lower rates. dealhere out there is a
that gets done that changes 40 or 50% of this. i hold that in the back of my pocket and i don't see negative yields anytime soon. we have a chance to go up a bit. lisa: somewhere out there there is a trade deal. i am wondering where you see the lower bound for 10 year treasury yields in the current circumstance as we see them with no trade deal? we are at 1.72% now. >> we have been using a range of two and 2.25 as our estimate. we think we are at it. >> over the next three to six months or 1.5 for the next year or marginally higher a lot will depend. at 2.25 and i am at 1.5 now. lisa: you are all sticking with me. coming up, the auction block, blue young -- blue monday for high-yield. that conversation coming up next. this is bloomberg ♪
lisa: i am lisa abramowicz in for jonathan ferro. this is bloomberg real yield. treasury sold 27 billion dollars in 10 year note at a yield of 1.67%. demand fell relative to the last auction of securities with the same maturities with the weakest ratio since may. raising 13lly billion dollars with the biggest demand for a debt deal since aramco. underwriters lowering the yield on the offering from the initial guidance. recent volatility from intensifying trade concerns claiming a victim from the high year to -- high-yield market. they have announced they are
pulling out of plans to return when conditions improve later in the quarter. u.s. credit spreads widen to route the week with money delivering the biggest blowout since 2011. invesco's analyst weighing in. outlook thatour things stay to live in the back half of the you're looking much better from an economic standpoint that widening was the opportunity that a lot of people were waiting for since the rally began in the early part of the year. scott, i want to start with you. are you seeing the recent selloff we have seen in the high-yield market as a buying opportunity? >> we think there are some opportunities that present themselves. this sellout has been dispersed and not everything sold off equally. we look to try to normalize valuations in our fund for factors with investing great versus yield.
in high-yield we have seen 40 or 50 basis points come out of treasury yields since high-yield spreads were at their tightest. looking for areas where the spread widens the most. there are some pockets where you andlooking at a few bonds the window of opportunity opened but we don't think it is a wholesale opportunity to jump in at the moment. >> blackrock seems to have a similar feel saying this is a buying opportunity but perhaps selectively. the managing director saying " after the recent selloff global high yield spreads are relatively more dislocated, offering a tactical opportunity to earn a pickup in spread." kevin, do you agree? is this when you see people come in and parse out what they like? >> on the surface this is what we have been waiting for. widening that was significant enough for investors to come back into the marketplace. $2y struggled to sell
billion in debt in high-yield. was $36 billion of ig debt sold with great demand. the market is still stable. we do not have a credit issue but high-yield may be out of favor. it may be the opportunity to buy what we have been waiting for. lisa: is there a severe dissonance with the idea that treasury yields will go a lower selloffgo lower and any being the opportunity you are waiting for to come in and pick off the things that you like? these are riskier credit that are highly leveraged to the economy. to these market realities seem in congress to you? -- incongruous to you? >> there are factors with growth that affects sectors like high-yield and a conversation about inflation and inflation expectations which are much more common on the treasury side. the fact that treasury yields
have come down is more a refraction of interest rates in terms of policy rates and inflation expectations, less of a growth story. in terms of where we are in the cycle i would say downside risks have increased substantially, they are much more prominent in sectors like high-yield. from a fundamental perspective it makes sense to be more defensive there. the investment-grade sector, we had deleveraging and corporate that have clean access to market , not financing constrained and are looking attractive. ig has outperformed high-yield more recently. if you're looking for pockets to pick up spread high-yield is not one of them yet. investment-grade is to continue outperforming high-yield? >> yes. >> we agree with that. lisa: investment grade versus high, what about emerging markets? there has been a tension
building out where you have the federal reserve in a rate cutting cycle and you have the ecb about to start their own easing process as well. raising a question that is good for emerging markets. it is always different. the problem is the dollar itself. em would be attractive in a weaker dollar .cenario everything else is rolling to the bottom faster than they are. the dollar isf hindering a good investment in gm even with the fed rate cuts possible. do you see a opportunity now that you are seeing central banks are dead set on have an -- having inflation growth? >> one challenge the dollar will
always face is that it is a reserve currency of choice, even more so with the global growth situation. we don't think the fed is acting quick enough to pummel the dollar. when we think about portfolio positioning we think about redundant risk. right now there is no question that the markets are picking up a lot of double risk. we don't think you are getting conversation for that. seeing investors going into more emerging markets and specifically local currency emerging markets even know the dollar has strengthened. ,'m looking at the spread lowest since july 2017. do you think there are other opportunities here? >> if you look at hard currency versus local currency debt, local currency duration prevents at thet value in edm
moment. starting real rates are high coming into this year. whatecond is because of the fed is doing, big change in the fed's orientation between september of last year and now has opened the way for emerging markets and central banks to cut rates. any major emerging-market central bank they have all cut rates aggressively. >> that presents an opportunity. i want to tie this together with something that i've been thinking about a lot. at what point is the fed unable to stimulate risk assets? the do we reach a time with federal reserve is willing to cut rates as low as people can see spreadsyou widening because people take that as an indication of a slowing global economy and possible recession? scott, are we there? scott: i don't think we are there. the fed demonstrated they are willing to go to zero and add stimulus on top of it. -- it is stilled
a sizable gap away from being out of -- pricing themselves out of the market and being able to push risk asset. a lot of that is frontloaded. lisa: what do you think? >> we are not quite there yet. .isa: still ahead we have a lot we will get a market check on where bonds have been this week. yields looking lower, significantly lower. 30 year yields near an all-time low. 10 year yields us to the lowest in 26 -- since 2016. people expect the federal reserve to cut rates. and thehe final spread week ahead including a slew of economic data including u.s. inflation results. this is bloomberg real yield. ♪
this is bloomberg real yield. time for the final spread. over the next week pbi numbers out of japan, germany and spain plus figures from the u.s.. germany announcing second-quarter gdp on tuesday plus we get the u.k. and china reporting industrial production and retail sale numbers. two rate decisions on tuesday including one for mexico. starts asu.s. housing university of michigan sentiment results. ask they key question, does data matter anymore? is any of this going to matter for market participants? numbers thatsome matter and the rest of them you can throw to the backside. cpi should matter next week. any of the manufacturing indices that are trading close to 50, whether they will hang on above 50, fall below 50 and give
recession indicators, those matter. not many others do. lisa: ed, which numbers matter? >> market data matters more than fundamental data. the decision point as the fed is largely split in terms of watch and short-term data versus relying on the secular trends. the decision will be market data in the sense that if it tightens officially we will build a stronger case for a basis cut in september. >> which data matters? >> anything around inflation and wage growth is front and center. lisa: time now for rapid fire. will the next rate cut lead to a bull steepener? starting with you, add. : i think we are walking in that direction. not sure when. >> i think the fed has missed that exit. lisa: high-yield bonds, buy or sell? kevin?
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