tv Bloomberg Real Yield Bloomberg February 4, 2018 11:00am-11:30am EST
offixed rate since the first july. they're not capping yields at 50 basis points. are 0.1%. is this not craziness? >> you cannot say it any better. jonathan: i just wonder with the yields on treasuries, it is indeed higher, fine, but how much higher? >> i think it is a fair point. a big distortion resulting because of bank of japan says, the ecb is actually in credit markets. we have seen tremendous amounts of overseas buying with the corporate market today over's it versus 25% 10 years ago.
distortions are coming through risk assets more now that rate markets. versus 25% 10 years ago. >> it is a great point she is making. it has been the best trade at the sovereign marketplace for a long time now buying treasuries. will the trade still be good now that italy is starting to see inflationary pressures? countries have seen inflationary pressures. they make a value back in the .ther in sovereign debt without a doubt, it will be best -- >> what are your thoughts? >> we just talked about the boj before we are happy with the control policy, they have their 10 year basis point. one of the traits is shorting curve,year part of the basically what they don't, the japanese government on market. jonathan: the little maker trying to make sure this time around? >> i think it is somewhat different. the yield curve, they are yields yields throughout the
missing in this country for a long time. jonathan: joining me around the lisa,in new york is curve of the 10, effectively more freely flowing. in addition, the cop -- the economy in japan is growing. not a lot of inflation, little inflation. given the pressure and the strength of the japanese economy, i think the short-term kevin, head of fixed income, and eric stein. it is a good place to be. and, kevin, head of fixed ethan. great to have you with us on the program. jonathan: would it be booms? >> it white. does it make sense -- for the the greatest monetary world around us, nothing to me failures is the bank of japan's has fundamentally changed in the last couple of weeks. ability to raise inflation this story existed for months. rates. he continues to be a 30 year or 40 year issue. think we are about to see >> we spent most of last year higher rates in germany in focused on inflation as far as bond market was concerned. particular. jonathan: lisa is sticking with treasuries would only go higher us. yield if we see inflation. that changed after tax reform. been a rough week for risk assets. the dollar decline. we will it to the auction block. elon musk taking it. china is the biggest buyer.
that conversation is next. we continue to cover. this is "bloomberg real yield." ♪ so those things have changed the dynamic beyond inflation and why yields have jumped up. >> we brought that yield down to individual components are how much have we seen in the changed the dynamic beyond inflation and why yields have jumped up. >> we brought that yield down to individual components are how much have we seen in the normally -- normal treasury yields so far, inflation expectations?
both but up until this payroll report in the fed, it is to ay, are you catching up confluence of factors? u.s. growth, the growth we saw in 2017 an early 2018, monetary policy with the fed raising rates or shrinking its balance , buying bonds at a slower pace than in the past here from a monetary perspective, all signs are pointing to higher yields since policy growth or inflation. came into the year and there was a big consensus was that we were going to get a flatter yield curve. some people said that would become a much more crowded trade or i wonder whether we are taking some of that off or putting something else on. which is it if you put it that way? >> i think a surprise will be a steepening to the curve. the market came in position for a flat curve, particularly when
raised rates, it is flattening. out of the six rate hike we have seen, the only exception was 1986 after reagan's tax reform plan as it steepened as much as deficits were rising. even with increases on the front end, the front and issuance over the next few months, they are looking at their need to find another billion dollars of treasury debt, it needs to come from somewhere. there is a possibility they will extend to why wouldn't they? >> this is 1986? >> i do not know but we have , as steepurve steepen as it has been since mid-november of last year. >> when you put it like that. >> it is not 40 basis points, either. there are parallels to that but
i'm trying not to fall into that same trap others have at the beginning of every year for the >> when you put it like get good strong growth and we get a surge in treasury prices and we inflation that get real yield." drives interest rates higher only to have it peaked before the end of the year. i like treasuries at 280. has think treasury real yield." i am jonathan ferro. i want to take you to the undervalued than a few weeks auction block. the u.s. treasury boosting its back. borrowing for the first time since 2009 in order to cover the i think it bigger distortion is mounting budget deficit. long-term debt sales will increase to $66 billion this probably in sovereign yield. quarters. real yield." areany, five-year yields i am jonathan ferro. i want to take you to the auction block. the u.s. treasury boosting its borrowing for the first time since 2009 in order to cover the mounting budget deficit. long-term debt sales will still 10 basis points in the increase to $66 billion this quarters. context of nominal growth in germany. this comes against a budget shortfall that grew to more than three ratea limit to the amounts $665 billion last fiscal year. meanwhile, u.s. investment grade issuers have sold more than 220 billion in january, a drop of 3% since 2017, and marks the lowest total in that month in three years. tesla sold nearly $550 million of bonds. the company was able to slash the risk premiums. still with me around the table lisa hornby, 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. i have to say, credit is starting to reprice. we're starting to see some cracks, but i would not call it credit stress, would you? kevin: not quite yet. since the fourth quarter of last year, the treasury 10 year has gone up 80 points, spreads on investment grade corporate's has widened 40 basis points. 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, all-time lows, and until we see cracks like that, it is still an attractive trade. jonathan: lisa, if you look at hyg, you see some cracks starting to appear, but the chart right there, equities role over. are you surprised by the fact starting to appear, but the chart right there, equities role over. are you surprised by the fact 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 in investment grade credit, 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 about 35 basis points off of all time tights in the yield 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. i think everyone is focused on etf prices. space. the way we think about it, 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
your coupon and have risk if it is a risk off deflationary environment, or risk if it is a higher rate inflationary environment. right now, it is a higher rate repricing leading to some stress in the credit market. i would put it as 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 this is it a market that is materially mispriced. jonathan: mispriced by how much? the reason i ask this question also, is what is the time arising for this trade? is this something that is going to have more sustainable upside? yields higher and yields higher again. lisa: i cannot make a promise. i think it is a structural yields higher and yields higher trade. if you look at the dependency ratios in italy and the demographic issues that italy is
facing over the next several years, it is not a pretty story. facing over the next several i think it is more structural. but in the near term, we have to come to terms with the fact that the ecb has been buying the net debt in europe, and are stepping away from that market. jonathan: eric, you talked about how you would be willing to short japan, but only at the long end. would you be willing to short italy? eric: in our eaton vance global macro strategy, we have had short positions going back to 2005 and 2006 with greece and italy, more recently we had short italy positions. not as optimistic, i am shorting 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, it does not make a lot of sense, but i think the tough part with the european peripheral bond markets seem to oscillate which makes more inherent sense for us.
this is "bloomberg real yield." i want to head to the final spread. coming up over the next week, we get a rate decision from the bank of england with boe governor mark carney delivering that. european parliament, his annual report. we get another round of earnings including tesla, and once again, there is the potential for another u.s. government shutdown, which most investors have become desensitized to at this point. with me now is lisa, kevin and eric. lisa, we were 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 thinking 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 that takes over from ecb president mario draghi will have some big shoes to fill. when you start thinking about the ecb post-draghi? lisa: i told you i am short btp's. jonathan: 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, etc. it is a totally different set of members as well. it is a different cast of characters, so we are looking forward and we are trying to make expectations based on what they are telling us. it is a whole different fed this year 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? 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 that would be done to the eurozone economy 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. certainly, wiseman has a different view on the world as draghi. 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, then it would matter a lot. i like to go back and play the hindsight game. if he had been there, would he have done the draghi speech 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, wasn't he, 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 rapid fire round, where i ask you a quick question, and a quick reply if you can. lisa, kevin and eric. we begin with the selloff in treasuries as we approach 3% on a 10 year. value of the euro and italian government bond yields, but it is a crisis situation that do you fade the reflation 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. jonathan: we talked about the bank of japan and how aggressive the boj has been, coming into the market and offering to buy a limited amount of bonds to cap 10 year yields at 0.1%. if i offered you the following decision -- buy or hold 10 year jgb's or 10 year treasuries -- lisa?
10-year, not 30 year. jonathan: because you are short the 30 year. we have got that. the final one, 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 to the year end? kevin: jgb's. eric: jgb's. 10-year, not 30 year. jonathan: because you are short the 30 year. we have got that. the final one, 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 to the year end? italian sovereign debt or u.s. high-yield. it is credit risk in europe or the united states. lisa: neither one of them, treasuries. kevin: i will stick with high yields. eric: stick with high yields as well.