tv Bloomberg Real Yield Bloomberg February 2, 2018 7:30pm-8:00pm EST
city for from new york viewers worldwide, i viewers wm jonathan ferro. 30 minutes dedicated to fixed income, this is "bloomberg real yield." ♪ jonathan: coming up, the job report. wages have climbed the most since 2009 and has helped sink treasury and 30 year bonds break 3%. after showing signs of resiliency through the week, credit begins to crack. we begin with the big issue, the solid u.s. jobs report. >> this is a solid report. >> we think it is quite solid. >> we think it is a overall positive backdrop for the
economy that is about to get more tailwind from the tax policy. >> it suggests the job market is going to heal and i would be surprised if the bond market did not take this into account. is 4%.unemployment rate in the last 70 years, we have never seen unemployment rate at 4% when the deficit spending is set to increase from 4% deficit to 5% so this is an economy , running hot right now. >> wages are gradually beginning to pick up and there is evidence we are closing in on full employment and this is the start of a more pronounced acceleration in wages. >> i think ms. volatility in the data the rush to judgment is a , little too soon. it is probably pulled in from the folks in the top end. >> we are very excited to see the 2.9% growth rate number. it is the impetus for our tax plan to create real sustainable wage growth.
it is something that has been missing from the country for a long period of time. jonathan: joining me around the table in new york is lisa, portfolio manager at schroders. head of fixed income at raymond james. coming from boston is eric stein, codirector of global income. guys, it is great to have you with us on the program. kevin, let's begin with you. sense for the treasury to be woken up to the world around us? nothing to me has fundamentally changed in the last couple of weeks. this story existed for months, yet suddenly the treasury woke up. why? sense for the treasury to be woken up to the world around us? nothing to me has fundamentally changed in the last couple of kevin: we spent most of last year focused on inflation. treasuries are going to go on a higher yield if we see inflation. that changed after tax reform and a number of new factors came into the market that would create this new wall of worry. the dollar decline. the dollar decline is an issue. trade disputes. china is the biggest buyer, and now the deficits.
if you are not taxing then you are spending and you are going to build deficit. those things have changed the dynamic of inflation and why yields have jumped up. jonathan: let's get that yield down, how much every repricing have we seen so far? lisa: i think you have seen a big move of inflation break even which tells us some of it is coming -- we now start to see it move higher which tells there is growth in inflation coming through, and potential growth is maybe higher and tax reform is stimulative. central banks are buying a trillion dollars less assets in 2018 than they were in 2017. jonathan: as you look at the situation now, do you view this repressor repricing of treasuria market catching up to what has happened already or a market trying to get ahead of what is to come this year?
eric: i think it is both. up until now, it was a market catching up to a confluence of factors. you talk about synchronized global growth in 2017 and early 2018. monetary policy, whether it is the fed raising rates or the ecb buying bonds at a slower pace than it has in the past. global growth in 2017 and early from a monetary perspective, the tax reform, all signs pointing towards higher yields whether it be monetary, fiscal, growth, or monetary policy or inflation. jonathan: we came into this year of a consensus view that we will get a flatter yield curve and some people said it was becoming a much crowded trade. i'm wondering whether we are taking some of that off or putting caps on? which one is it? lisa: i think one of the surprises this year will be a steepening of the curve, the market came in to a flatter curve.
typically when the fed is raising rates, the curve is flattening. the last six rate cycles, we have seen the curve flattening in five. the curve actually steepened as budget deficits were rising, so we have a similar phenomenon today even with the increases in the front end issuance over the next two months. next year, they are looking at funding another $300 billion of treasury debt that needs to come from somewhere. there is a possibility they will extend -- given how flat the yield curve has gotten. jonathan: is this 1986? kevin: i don't know if it is 1986 but we have seen the curve steepen 68 basis points. the steepest it has been since mid-november of last year. jonathan: when you put it like that. kevin: it is not 200 basis points, but it's not 40 either. there are some parallels to that. i am trying not to fall into the same trap that others have at
the beginning of every year for the last five years when we get good growth and a surge in treasury prices and we get hopeful inflation that drives interest rates higher, only to have it peaked and turned out before the end of the year. jonathan: you like the treasury at 280? kevin: i do like them at 280. we will find out who else likes them next week. lisa: i think treasuries offer better value than a few weeks back. obviously, the bigger distortion is in european sovereign yields. germany is on 10 basis points, in the context of nominal growth in germany of over 4%. three rate hikes priced and for the next three years in europe. that seems modest given the data. jonathan: let's talk about that, not just europe but japan as well. the boj offering a limited amount of bonds for the first time since july. they are not capping yields at 3%. these guys are not capping yields at 50 basis points, and the boj is capping points at
capping points at 0.1%. is this craziness? lisa you couldn't have said it lisa you couldn't have said it : better than that. jonathan: it feels like the japanese are trying to nationalize the bond market. when you think about it that way, past resistance of the yields is indeed higher, but how much higher if the bank of japan is going to keep a lid on every thing that happens there? lisa: that is a fair point but one of the biggest distortions is because of purchases is in credit markets rather than an treasuries. guessing tremendous amounts of overseas buying, 45% of the u.s. corporate market today is overseas versus 25% 10 years ago. we have seen -- the distortions are coming through risk assets more so at this point that through rate markets. kevin i think it is a great : point that she is making. it has been the best trade in the sovereign marketplace for a while now, buying treasuries. will that trade still be good
now that italy is facing inflationary pressures? some of these other european countries are seeing inflationary pressures. does it make it a value back to other sovereign debt? that is something we will watch closely but it has been the best strategy on the board. jonathan: eric, what are your thoughts? eric we talked about the boj : before and the are capping the yield -- one of our favorite trades is shorting the 30 year part of the curve -- they don't control in a free market part of the japanese bond market curve. jonathan: is that not the widow maker? or is it different this time around? eric: i do think it is somewhat different because as you said before, the yield control policy is suppressing yields throughout the curve up to 10 years effectively. the economy in japan is growing. there is real good corporate governance reform stories going on.
there is low inflation. given the pressure on global yields and the strength of the japanese economy, i think being short of the 30 year curve is a good place to be. jonathan: you had to be short somewhere there would be? kevin: it would be bunds. one of the greatest monetary failures seems to be japan not raising its rate. it seems to be a 30 year a 40 year issue. i do think we are about to see some higher rates in germany in particular. jonathan: lisa sticking with us alongside kevin and eric. it has been a rough week for risk assets. coming up on this program, we take you to the auction blocks. orderly sale.rst that conversation is next. we continue to cover the saddle. this is "bloomberg real yield." ♪
♪ jonathan: this is "bloomberg real yield." i am jonathan ferro. i want to take you to the auction blocks and the u.s. treasury boosting its borrowing for the first time since 2009 in order to cover the budget deficit. long-term debt sales will increase to $66 billion this quarters. this comes against a budget than thanthat grew to more $665 billion last fiscal year. meanwhile, u.s. investment has sold more than 220 billion in january, a drop of 3% and marks the lowest total in that month and three years. tesla sold nearly $550 million of bonds. he company was able to/th premiums.risk
still with me around the table -- kevin giddis and eric stein. kevin, you've got to say we have this selloff of risk assets at the moment. selloff in treasuries and equities. we're starting to see some cracks, but i wouldn't call it a credit stress, would you? kevin: not quite yet. since the fourth quarter of last year has treasury 10 gone up 80 points, spreads on investment rate has widened 40 basis points. credit stress, would you? demand is still very, very strong. so what i am looking for is those stresses, especially in high yields. we are not seeing that yet. we also aren't seeing corporate defaults, and until we see cracks like that, it is still an attractive trade. jonathan: lisa, if you look at the chart right there, equities as rollover. are you surprised by the fact
that comparatively so, the that comparatively so, the credit estate is resilient? lisa: it is hard to say that equity is really rolling over given the rally we have had over the last few months. with rates growing higher, high-yield has a retail-based orientation. it is less sticky money than the institutional demand we are seeing so i am not surprised to , see four continuous weeks of outflows in the high-yield etf space. from the valuation perspective we are through cycle types and , 35 basis points off of all time highs in the market, especially when everyone is optimistic on the equity market. jonathan: eric, do you expect the cracks we are starting to see in credit materialize into something much bigger? eric: right now, i would say no. everyone is focused on prices. we look at risk factors. spread. don't think about an etf but a
spread of a high-yield bond. spreads have been tight and have widened the last couple of days given the risk of selloff, but some of the decline you have seen on etf's are the duration of high-yield bonds based on u.s. treasuries. still a good chance you earn your coupon and have risk if it is a risk off deflationary environment or a higher rate inflationary environment. right now, it is a higher rate leading to some stress in the market is a bigger risk than a deflationary risk off, so i think there is a good chance you can earn your coupon but not as much value left in the credit markets as we had a year or so ago. jonathan: if you are at the federal reserve, you might be thinking about what happens with credit. if you are at the ecb, you would be more focused on peripheral spreads. what is more remarkable is the likes of it -- spread is still tight, does that make sense? kevin it's never made sense to : me, but you get the protection of the european union or the
ecb. when you look at the economies of these countries, would you rather own a 10 year at 145 or a u.s. treasury at 280 today? it goes up and down the line, it offers great protection, currency protection, market protection. at some point, that will crack. jonathan: lisa, your thoughts? do you want to be short in italy or spain. ? lisa: definitely short. there is an election coming, and before the french election french yields sold materially, i think the market is forgetting about that. i think italy has not participated in the selloff in rates last few weeks. this is it a market that is materially mispriced. jonathan: mispriced by how much? the reason i ask is the timing for the trade. is this something that is going
to have more sustainable upside? to have more sustainable upside? yields higher and yields higher again. lisa i can't make a promise, i : think it is a structural trade. if you look at the dependency ratios in italy and the materially mispriced. jonathan: demographic issues that italy is facing over the next several years, it is not a pretty story. i think it is more structural. in the near-term with the come to terms that the ecb has been buying the net debt in europe, and are stepping away from that market. eric, you talked about how you would be willing to short japan. would you be willing to short italy? eric, you talked about how you would be willingeric: wt positions going back to 2005 and 2006 with greece and italy, more recently we had short italy positions. not as optimistic with italy right now because it seems to be a one-way trade every day where spreads continue to tighten almost every day. i would agree with the previous guest that it doesn't make sense but i think the tough part with the european peripheral bond markets seem to oscillate which
more inherent sense for us. without duration volatility, it grinds tighter every day, so a lot of fundamental problems with italy and there could be some volatility around the election. trade to bea tough short there given the never ending spread tightening. jonathan: eric touches on trade to be something important. after the crisis, are we going to see trade like credit or a rates market? one or the other? lisa: i think once the ecb market begins clear, it will trade like a credit market, less like -- i should say more like . rates market based on fundamentals and less like a credit asset. jonathan: lisa sticking with me, alongside kevin and eric stein. next on the program, who will walk you through the spread. here is a check at the markets. yields higher through the week, and what a move you have seen in
♪ jonathan: i am jonathan ferro. this is "bloomberg real yield." i want to head to the final spread. we get a rate decision from the bank of england with mark carney delivering that. also, mario draghi delivering his report to the european parliament, his annual report. we get another round of earnings including tesla and there is the potential for another u.s. government shutdown, which most of us have become desensitized to at this point.
with me now is lisa, kevin and eric. lisa, we have been talking about central bank decisions before the break and what this means for peripheral europe and the ecb. one thing that people have not started to think about in a big wayone thing that people have nt started to think about in a big way yet and rightly so because it is a 2019 story is who runs the ecb next? i'm surprised by how governor kuroda is to the bank of japan. the next person who takes over from ecb president mario draghi will have some big shoes to fill. when you start thinking about the ecb post-draghi? so you're hoping it is a german who takes the top spot? lisa: i think that may be the case. it is a selloff environment for european bond yields that have been anchored by the ecb program, by low rates. totally different set of members as well. it is a different cast of
characters and we are trying to make expectations based on what they are telling us. it is a whole different set and it could be a whole different ecb next year. jonathan: kevin, let's think about it. you are at the bloomberg terminal one morning and the headline says he is the next president. do you react to that, should you respond to that?respond to that? kevin: not immediately but i think there may be a shift in focus. much like it has been a pro-usa or pro-america focus since donald trump was elected, that maybe there is a pro-german focus within the ecb or within the european union. that could be to the detriment of some other countries. jonathan: could you imagine the damage done if you have an aggressive repricing of sovereign yields and credit? because mario draghi was gone, and let's say you have more of a conservative central banker in the hot seat. why would they want to do that anyway?
eric you bring up a good point : -- given where europe is in the business cycle, it might matter a little bit but not that much if we have another european sovereign debt crisis, and then it would matter a lot. i like to go back and play the hindsight game. if he had been there, what have he have done what happened in 2012? in a benign state of the world, it matters a little bit of the value of the euro and italian government bond yields, but it is a crisis situation that matters a lot from a policy perspective. jonathan: he was busy hiking rates when maybe he should have been cutting them. guys, great to have you with me. we will wrap things up and go to the final spread. to the rapidfire round will ask you a quick question and a quick reply. eric.kevin and the selloff in treasuries as we u approach
3% on a 10 year. do you fear inflation trade or accept that 3% is coming on the u.s. 10 year? lisa: buy at 3%. kevin: definitely buy at 3%. eric: i accept that it is coming. atathan: 10 year yields 0.1%. if i offered you the following decision -- buy or hold 10 year ecb's or 10 year treasuries -- lisa? lisa: treasuries. kevin: jgb's. eric: jgb's. 10-year, not 30 year. jonathan: don't worry. the final 1 -- we know that lisa is short italian debt. this is the decision she has to make. italian sovereign debt or u.s. high-yield through the year end? italian sovereign debt or u.s. high-yield.
it is credit risk in europe or the u.s. lisa: neither one of them, treasuries. kevin i will stick with high : yields. eric stick with high yields as : well. jonathan: guys, thank you very much for revealing some of the work you have been putting on in the last couple of months. lisa, eric and kevin. that does it from new york as the selloff continues in equity and treasury. we'll see you next friday at 12:30 p.m. new york time. 5:30 p.m. in london. this was "bloomberg real yield." this is bloomberg tv. ♪ ♪
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