tv Bloomberg Real Yield Bloomberg August 18, 2019 5:30am-6:00am EDT
tom: from new york city for our viewers worldwide, i'm tom ferro.in for one jon "bloomberg real yield" -- it starts right now. coming up, the yield curve inverts, disinverts, and historically more fixed income on fears of global slowdown. bond yields priced to perfection on germany and surging negative yielding debt. finally, credit markets enjoy real volatility. high yield spreads at their widest since january. and we start with a big issue,
fears of recession and uncertainty surrounding trade, sparking a rush into safety. that leads to a u.s. yield curve that inverted wednesday-ish, as i recall, the first time since 2007. >> the recession is avoidable. >> even when you see the yield curve invert. >> that does not necessarily mean we are going over a cliff into recession. >> it tends to be about 18 months earlier than you see recession. >> this is about traditional signals of the yield curve. >> talking about the curve inversion. >> inversion. >> 2/10 inversion. >> the risk of recession goes right up. the cast-iron signal recession is probably not correct. >> markets always short-term have a wall of worry to climb. >> the market is, in an extreme way, seeking safe haven. >> a safe haven. >> looking for safety. >> treasury bonds is where you go. tom: terrific conversation through the week across all of bloomberg media. we want to advance this now and into the weekend with peter
tchir of academy securities. thrilled that peter could join us on the mechanisms we saw this week within fixed income. we are thrilled kathy jones is with us with charles schwab. and really interested in the desperation of savers and those looking to clip a coupon. and from boston, margie patel joins us from wells fargo asset, with decades of experience in high-yield and fixed income space. let's dive right in. while we enjoy this weekend, what did schwab see, kathy, in terms of what people actually did? what did flows look like? kathy: actually, people were pretty calm. i would say our clients have had a lot of cash anyway. certainly, fixed income investors have been sitting heavily in short duration securities, despite urging them to take a little duration. but there was not a lot of panic. i think people were pretty calm. we have seen some of these selloffs before, and they rode it out pretty well. tom: margie patel, you are the queen of opportunities. what have you seen in terms of a
price back up in high-yield? is now the time to reenter high-yield? margie: i think high yield is very, very attractive especially with treasury rates this low, with the one qualification -- the ccc's, the bottom of the barrel, are still to be avoided. but basically, you can get 4.5% to 6%. default risk is 2.5%. those are very attractive compared to where treasuries are. tom: peter, you write these short little paragraphs about the carnage that has been out there. what did you learn this week? what surprised you, maybe? what did not happen this week? peter: what is surprising to me and others is how quick risk happens. argentina was a great example. the bonds fell 30, 40 points. you saw ge yesterday get attacked quickly. as the other guests mentioned, we have seen that occur in the ccc baskets of high yield. i think what we will see is a little bit of spread widening as people take this idiosyncratic risk and realize we have had a lot of great gains.
credit has performed very well this year. let's lighten up a little bit. i am not looking for a big backup in spreads, but that is starting to occur. at the hedge fund level, the volatility has been too insane, so i do not think we are yet done seeing people take off risk, because they cannot stomach the volatility. tom: these are some of the themes we will talk about this half-hour to get you into monday. why don't we start with the former chairman of the federal reserve system. alan greenspan has been a huge supporter of my work on economics and fixed income. and i thought chairman greenspan really was a sharp this week. there is international arbitrage going on in the bond market that is helping drive long-term treasury yields lower. there is no barrier for treasury yields going below zero. zero has no meaning besides being a certain level. margie patel, we saw jpmorgan stop the fixed income market, not with a forecast, but with the idea of thinking through how we get to ever low yields. can you frame the possibility of
high-yield moving from x percent, down under 4%? margie: i think they will follow treasury yields down. the path of treasuries are down. that is pretty much set in stone. i think, with the economy still growing, people will be attracted to that much, much higher yield. it is really the only place in town where you can get very, very high yields. very competitive. tom: i want to deal with this in our third block today. kathy, it's so important -- what chairman greenspan said chills retirees. doesn't it? kathy: it does. it is very difficult, has been difficult for almost a decade, for a retiree to invest without a lot of risk and generate a certain degree of comfortable income. and we have had to navigate that, help them navigate that throughout the last decade, really, of zero interest rate policy.
and we are really having to look at the entire portfolio now rather than just the fixed income slug. tom: the fixed income slug, let's look at that. peter tchir said he would not come on unless i did some fancy charts. this is the 10-year yield with service sector inflation. the cleveland fed. and the idea here is you take the yield lower, lower, lower, and then you take the idea of the cleveland fed. peter, we have never been here back 30 plus years. we have got a real yield on the inflation people feel we have never seen. peter: you go back 10 years ago when everyone was talking about the financial recession, and people said we would not be japan. we are starting to look more and more like japan. people will have to adjust how they think about income with that backdrop. things have dramatically changed. we are now at lower yields, lower real yields, than before the financial crisis. tom: how do you say adjust? are we going to adjust our bond framework? we all have this memory of grandfathers clipping coupons, -- a younger guy like you
doesn't remember clipping coupons. bill gross started at pimco in the mailroom, clipping coupons. that is ancient history when you are under 2%. peter: yeah. people are going to have to take more duration risk than they will like. they will have to look for alternative assets. and they will also have to figure out what will benefit from low yields and take more risk. one of our themes is a lot of these companies went through a debt diet. companies are emerging much stronger. companies like at&t will be able to use this low debt to their advantage, and it will actually help out the equity markets. we have to take what we are learning about fixed income and apply that to our portfolio as a whole. tom: margie, i want to go to you and your decades experience. you started out in high-yield when you were 12 years old. when i look at the perspective, there is a social cost to the real yield that we enjoy today. what is the social cost to american society, if the financers decide we can do with a massive negative real yield? margie: well, i don't really look at it as social cost.
it is too bad savers don't have those bonanza yields. but financial markets change. you need to change your investment approach. i think treasuries have become and will become an instrument that really is not suitable for long-term investors, simply because the yields would be so low or negative. either corporate bonds, high yield bonds, or common equity is -- will be where investors will have to go. it is just what happens when financial markets change. and it shows you that duration is really not a risk, and i don't think it will be a risk. tom: this is a really important statement, because we have margie patel up in boston with all of that institutional pension money. what is the new actuarial assumption, that kathy jones, being so young, has to worry about? are we at 4%? margie: i think 4% is realistic and even slightly bit on the generous side. that is the reality with where we are. nothing wrong with that if inflation is zero. tom: kathy jones just fell out of the chair. i can never retire. we are not ready for this world, are we?
kathy: no, and that is one of the things that worries me. that this adjustment that we are going through is more than just low yield or the potential for negative yield. what we have is a whole system that is a little bit unmoored from the experiences we have had over the decade. and adjusting to that is going to be a challenge. tom: how do we get back to being moored? i don't understand the path back. i saw german yields this week -- hsbc came out and took the german ten-year down to -.81, and they got there in four days. kathy: right. i would tend to disagree that you have to ignore treasuries in your portfolio and just go for risk. i think there is a time and a place for risk, but we are actually underweight high-yield right now. tom: i like it, dissension. ferro never does this. true dissension. [laughter] you are underweight high-yield? kathy: yeah. we went underweight high-yield about a month ago because we started to see the risks rising.
we do not see the value being very attractive right now. that being said, spreads may widen and we may change in time, but at this moment in time when volatility is picking up, people are paying for safety. that is what we see. they are paying for duration. they are paying for safety. sometimes you need something safe in the portfolio to offset the risky part of the portfolio, even if it is not paying you a great return. tom: this is wonderful. an historic week in the bond market, like truly we have never seen. peter tchir with us. kathy jones with us and margie patel with us. we are thrilled they could be with us today. i am even more thrilled jonathan ferro is not here. how about high-yield? we will talk to ms. patel about high-yield. arch dissension here. kathy jones saying maybe not, margaret patel saying load the boat. i have no idea what peter tchir is saying about high-yield. stay with us. this is "bloomberg real yield." ♪
tom: from our world headquarters in new york, i'm tom keene, in for jonathan ferro. people asking where jonathan is, he is on sabbatical. that is all there is to it. "bloomberg real yield" after this historic week. peter tchir is with us, kathy jones, and margie patel as we move through the weekend and drive the conversation into a tumultuous august end. we have to go to margie patel on the yield hog demand for credit. right now we are reaching for yield, we have to get there. the big issue -- goldman sachs had a note on this a couple hours ago -- on energy high-yield. is that another problem for high-yield, or was that market cleared a few years ago? margie: well, they did a fantastic job of clearing, primarily by issuing equity common stock to clear their
balance sheet. and yes, i think a sensitive sector like that to downward prices, which is what the case is for energy, the sector has a , i'd say, way above average risk for those credits. tom: margie, you have been historic, always saying dividend growth is a possibility as a yield alternative. are we closer to where dividend growth is the new yield? margie: i think so. because if you look at better quality high-yield, so-called short duration high-yield, you are really looking at yields at 3.5%, 4%. and that is bumping into dividend yields of many pretty good quality companies, where you have the ability to even raise the dividend. so i think we have had the dramatic switch over, and it's a process that will continue. tom: margie, one more question before we go to our guests here in new york. the issuance frenzy. what is every cfo doing on this friday, this weekend? what is every cfo doing past labor day? is there going to be an issuance
frenzy? margie: there has been some pick-up, but a lot of the issuance has flowed into the loan market, where companies have gotten lower yield, much more lenient terms. and so a lot of issues that would've gone to the high-yield market, especially the lower quality, where the risk is, have been in the loan market. so the high-yield market is very high quality, in my opinion. tom: what do you see here, peter, in terms of the execution of the fixed income market? is it a normal market now, with supplies coming on, supplies being taken? peter: there are two separate things going on. we will see supply in the investment grade space, a lot of of people taking advantage even as spreads wide. , they want this all in yield. investors still have asian demand coming in, so there will be issuance. on a separate note, there is a complete lack of liquidity. tom: what do you mean by that? peter: if you look at the treasury market, it usually trades in ticks, 30 seconds. how we got to that, i don't know. tom: i remember that. continue. peter: now it is trading in basis points. you look up and look down, and
any news headline is driving the bond yields down two or three basis points, and i think that is a real sign of a lack of liquidity. people caught offsides in their positioning. people will reduce, be cautious. i think companies will take advantage of this, and that will put pressure on. if anything, i will look for yields to head higher. that is the big surprise. tom: jon emails in from some island in the mediterranean. jon asks, should he buy equity debt? there is a letter of credit and other bond construction as well. peter share -- peter tchir. peter: i have not followed that credit in particular. i think on all of these, you have to do your due diligence, understand what you are getting. some of these companies that have been more in the tech space, some of their bonds have not done as well. because they may have a phenomenal equity story, which can rely on the prospects of growth, sometimes that does not necessarily translate into a great story on the other hand -- into a great debt story on the other hand. tom: kathy jones saying, don't
ask me about the weed company. my compliance is watching. kathy: it is an interesting story. tom: i like that, very safe. but kathy, what is so important here is the tumult we are in, whether it is uber, lyft, the weed company. it has never been like this. so what does the retail investor to do, looking for nominal coupon that just possibly would be a positive real yield? it is not there, is it? kathy: no, and one of the things i have not been doing enough is taking duration risk. i think if we get a bounce in yield -- tom: can we translate that? i'm not going to buy a two-year cd, i want a five-year cd. right? kathy: exactly. one of the reasons you do that is just for diversification from stocks. so a t-bill will give you diversification from stocks, but a five-year treasury would give you magnitudes more benefit in a diversified portfolio. so when we do get these bounces in yield, we still think people should focus on adding some longer term bonds or
intermediate term bonds to play it safe. tom: margie, where is the best duration in high-yield right now? i think in muni bonds, and i have to go out 35 years to find something. where, in your world, is the best duration? margie: the high-yield market is really a market with bonds issued in 5 to 10 year maturities. i would say go for the long duration in high-yield. the more maturity you have, the higher the yield. and in high-yield, you are taking credit risk, not duration risk. and so i would go for the long duration, the 10 year bonds with a duration of five or six years. tom: what is the coupon on that? i am afraid to ask. margie: well, depending on where it is, 4.5% to 6%, something like that. tom: margie, you and i remember the days of felix smith, where that was a 9% coupon as well. peter, all of this is great and fun to do, but the real issue is the risk of price. you get yield move and price comes down. what is the risk of getting hit over the head by a bond pullback? peter: i think it is reasonably high. that is why we have been cautious on it.
credit and fixed income generally tends to trade like this. a long, slow climb higher followed by a steep decline. we have seen some of that in individual names. there is that risk it translates. particularly in high-yield, i would want to get my money to an active manager. there is susceptibility to the etf names. i am less concerned about that in investment grade. on the treasury side, even there -- two weeks ago, people were 2.5%, 3% 10 year. now people are wondering when we go negative. i do not know if you will get to that. the contrarian inside me is screaming. but i think we're getting close to underestimating potential growth in europe, underestimating some ecb, maybe lagarde is pushing for fiscal stimulus, maybe we get a trade deal with china. i don't think anyone is pricing in the potential for growth, and we could have a very strong shock to the treasury market. where we could go from 1.55% to 2% in a hurry. tom: margie, within all of this is the idea that i have to make money and not lose money. well, high-yield, is there a stability there, or is there
an instability in your market? margie: well, i think high-yield looks very stable. one, because the quality of the high-yield market has never been better. typically, about half of all the issuance for the last half a dozen years has been to refinance on the debt. people are not doing crazy borrowing, huge dividends, crazy acquisitions. so they really are companies that have lengthened out their balance sheet in reasonable businesses, excepting energy, retail, a few things like that. so i think the credit default risk is very low in high-yield at the present time. tom: this is interesting. we have to go to kathy jones on this, who i think is pushing a little bit against of what we are hearing from mr. tchir and ms. patel as well. let's come back and talk about the retail market. let's do a market check. this week was bonds, bonds, bonds. ferro told me that i could only do bonds, bonds, bonds on this show. i still don't understand these numbers. a 30-year bond -- it is my grandfather's bond.
tom: we welcome all of you worldwide. i am tom keene, in for jonathan ferro. "bloomberg real yield," not final thoughts, but because of the extraordinary nature of the week, with peter tchir, margie patel, and kathy jones of schwab with us as well. we are diving into the ramifications of this for the little guy. kathy, i got to go to you. i do not know where the little guy is with this, $2000 or $100,000 or even $1 million. what does the little guy do, pushed around by these institutional realities? kathy: at the end of the day, it has not changed that much. it is all about being diversified, understanding your time horizon, and making sure that you have some safe assets.
so we have been emphasizing more on the safe assets lately, because we are getting more defensive, both in equities and in fixed income. but it hasn't really changed. you still need that diversification. tom: ok, this is really important. i'm going into the real yield here. ferro stays inside two years. i am going to go on the real yield based off of the actuarial assumption. margie, the actuarial assumption you talked about for, you shocked me with the idea of 4% or lower. how do we get there if we are the little guy and we need to retire? margie: frankly, people need to keep working -- that is the reality -- or take more volatility risk, which is stocks. tom: peter tchir is my retirement planner. i am never going to retire. down we go the famous logs chart. can you bring that chart up again? that was gorgeous. they do that on "surveillance." they bring the chart up. my word. the h15 chart from the time of voelker.
it is a new world, after all. peter: it is a new world. again, we just have to manage around that. one of the new phenomenons is etf's. i think etf's fit your portfolio, particularly in fixed income. they let people manage around more than they used to. but it is all about time horizon. if you are trading for a couple of months, weeks, etf's work really well. i think if you want to make a commitment -- i don't know if right now is the time for high-yield. maybe that is a few weeks or months away. you want to put that in with an asset manager. it is idiosyncratic risk. asset managers can do a better job moving around that. etf's sometimes create their own little bit of noise and volatility. that will be the key, what you want and how you want to put it. tom: is it an inflation-adjusted yield or is it a disinflation-adjusted yield? peter: probably a disinflation-adjusted yield. though we are all living with the fact that the fed sees no us seeon, and most of inflation and are told we are crazy. tom: kathy, how do you explain this week to the greater public, as you do at schwab?
kathy: yeah, that is going to be a challenge. but i think the thing we have to emphasize with people is this world could last a while. we could see these disinflationary trends last a while. it is at higher risk world than it was a couple of years ago, simply because we are now priced for that. and so anything that changes, whether it is fiscal stimulus somewhere or a trade deal, that is going to cause a lot more volatility. tom: kathy jones, thank you. margie patel, thank you for joining us from boston. peter tchir with academy. it's been a historic week. we will do this again next week. this is "bloomberg real yield." ♪ ♪
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♪ kailey: coming up on "bloomberg best," the stories that shaped the weekend business around the world. global markets find themselves buffeted by a whirlwind of worry. >> i felt that she'll go up my spine. shots inolitical argentina and hong kong. >> today could be carnage. in the argentine markets >> growth concerns across asia and europe. >> output has weekend. the export sector has suffered in the second quarter. >> to disruptive disputes over trade and tariffs. >> they still have some enormous issues they have to sort out. >> china said we