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tv   Bloomberg Real Yield  Bloomberg  March 2, 2018 12:30pm-1:00pm EST

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from new york city, i am jonathan ferro with 30 minutes dedicated to fixed income. this is "real yield". ♪ jonathan: coming up, president trump reveals tariffs. and chairman howl opening the door for four rate hikes this year, and the week looking resilient. we have chairman powell opening the door to four rate hikes. >> headwinds that become thewinds is a reflection
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current economy has gained steam and if they go four times we think it is going to be for the right reasons because growth is good and inflation is not out of control. >> it is a favorite inflation metric and to say the fed is behind the curve, they are doing the right thing. pce, the fed target is two and it is not that scary. has printed on their brain a phillips curve -- maybe it is slow to rise but it is not a bad type of inflation that suggests an overheating or over levered market were prices are out of control. this is because of better growth. toif we rolled the camera years from now, will have a lot more stimulation, particularly in the united states because of becausebill and also liquidities -- we are going to be in a park were central banks
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are going to have a problem getting it right. jonathan: joining us is henry and coming to us from boston is lori, great to have you with me, and i want to begin with you, henry. what happened to the low rates guide the president nominated? henry: it is a change in narrative and we have to get used to that. bear in mind that markets are leaning that way a little bit and is a acknowledgment -- the storyline and narrative is changing and is going to take a while for the market to adjust to that and move to a higher rate, higher inflation regime. i think ever person more inclined to speak as a money manager and the potential of a
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fourth hike doesn't signal in action, it signals a skew. jonathan: the upside looks like four. lori, is that your rate of things at the moment? did we opened the door for four rate hikes in 2018? there is a balance, stronger growth but a lot of fears on inflation and it is inflation the fed will be watching to see. we don't think that is going to happen. jonathan: the trade at the moment on the 2-year note in the united states? henry: remember when the 2-year mostwas trading -- was the vulnerable part of the curve and people wanted to come in shortened durations. the risk is if you move to liquidity to much that is exactly when you are in the
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crosshairs of those commanding -- demanded liquidities. watch out for the front and. end. i agree, we have seen a dislocation of high-quality spread product which is sitting there for more than two minutes, it has been sitting for a couple of weeks and that will persist. are going to see leverage to increase to suck out this dislocation and it is quite attractive for a bond manager. jonathan: what do you think really explains that more specifically? matt: the softness is foreign assets held overseas by u.s. multinationals who have hundreds of billions of dollars benefited from short your bond strategies. plantsstock in building -- this dislocation that should last more than six months to 18 months but it is real and has provided opportunity. jonathan: where is the by, right
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now? matt: is the time to start buying. move 20 or 30 basis points, it is unlikely to get dislocated because we think it is worthwhile trying to neglect that right now. jonathan: is that short duration a great story? lori: i am not so enthusiastic -- i think what is driving is the fear of the long end. one of the challenges is isceptible to two things, susceptible to higher real rates and even if we don't get inflation coming through people are concerned about future inflation prospects and demanding higher real yields. jonathan: on to get your thoughts on the idea that the front and shifts and capital is elsewhere and something we have talked about on this program for several weeks. are we there yet?
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henry: i don't think so. that marginal change is positive for buyers but let's think about the fed is try to do here. trying toobably is let inflation rise and maybe exceed the 2% number. ways out of the situation when you are indebted, and the idea of inflating ourselves globally is something to think about. at which point if the fed does get behind the curve, we are going to see a sharp repricing on the front end. jonathan: look at the forecast -- 2019 and 2020 and beyond that as well. -- 2.4 is work economists see growth next year and 2.0 the year after that. the trend for is not going to be aggressively higher according to
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economists we surveyed. do you disagree with that? that comes with the idea of a shifting narrative. we have correlations of low rates, low inflation, this inflationary trends, and to dislodge that narrative into a newer one is a process of adjustment and will come in fits and starts. --ectations have gone higher but we need to shift to a new narrative and it is going to take an adjustment. lushhan: and incredibly economists says that his view is that you progress towards the end of the year, the picture best case is going to look like those numbers on that screen than your best case. are you saying matterhorn back his right? aboutwhat we are talking are the new rate hikes in the
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environment, and it brings uncertainty if you fall from that higher level of growth, so we enter a new phase the cost of volatility and interest rates will have a feedback. if you move beyond three and three and a quarter percent on the 10 year, the feedback self correct and the growth number start to move lower and yields cannot escape to quickly. it is hard to put an estimate but you probably will see a demand coming on around the premise. jonathan: lori, does that make sense to you? that basically we are topping out further along the curve and the bind comes from pension funds. this is a buy from them, does that make sense? lori: it does, we have been putting additions here, we could touch three or three and a
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quarter, but the pressure will be to go lower from there especially if we see major inflationary things and we are not seeing that. the wildcard here is what is going on with trade. lori is sticking with us because we're going to be talking about trade. up next on the program is the auction block with investors turning to bonds. 16 of 21 p.m. markets -- that conversation next. this is "real yield". ♪
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jonathan: i am jonathan ferro and this is bloomberg real yield.
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currency bonds have fared better and the trend extends the issuance and borrowers are raising more money than ever before and those bond sales have exceeded $1 trillion. is teva,ny from e.m. selling $3.5 billion in euro -- and over in asia singapore's auction of 30 year bonds cover a ratio of 2.21, which is the highest level since 2012. henry peabody, met tom's, and lori, henry, emerging markets -- a conversation of a trade war holding up really well, why? henry: it is hard to make a blanket statement that we like
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the space of em and there is a narrative around better growth. part of the u.s., were talking in the break this dialogue around the dollar being broadly weaker for the foreseeable future to provide a tailwind to that em position and volatility position,t a dramatic and those who take a long view of a fundamentally changing em stories are rewarded. jonathan: let's show you where things are as i see them right now. the mexican peso in emerging markets against the u.s. dollar, here is the move. a 10th of 1%. if this was 18 months ago and this was the residence best case ont would have a tariff steel and aluminum with more to
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come, what the peso move at a 10th of 1%? matt: we take the over. this is a specific issue of mexico and after, this is a global issue and a stance of trade policy change and i think the saber rattling will keep the market concert, especially canada. it is also more about japan and u.s. manufacturing and you see brought volatility -- nothing that is poked at mexico. jonathan: the details remain to be seen but we may get them next week. em when theseo details came out? matt: the spread get in hard currency is not the similar of what you can get in high-yield corporate's, it is modest, but if you see trade tension or global volatility increased --
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you could have volatility and not compensated for it. the local site accents because the dollar is likely week when you are hurting the trade policy stance. jonathan: does what matt said resonate with you? it does -- at the gentleman said, improving growth prospects and policymaker flexibility. a dollar not likely much of a had went there, and improving credit quality, across the board we are constructive on em that and local currency debt. jonathan: is it interesting that we have a safety it into treasuries? is that a one-off or is there something more to that? henry: i think long-term or medium term i think it is one-off and it seems to us that the push higher inflation -- the fiscal mess we are in, frankly,
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could call into question that traditional relationship with stocks and bonds. if rates selloff and it causes that risk off environment you really need to think about what your portfolio is an and do you have the risk mitigation you think you have? jonathan: what is the risk mitigating asset? cash, probablyy, gold. for acent trade has been better rates for scott but you need to question that relationship and think about liquidity or than anything. acted that way, and it has come back -- it is a funding trade when the world gets uncertain people buy back yen. but the dollar may lose that mental, and if you lose the --
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if you lose that status you see the dollar yield increase. jonathan: when you say liquidity i think treasuries. i need, and that is why i need treasuries, so if it is not treasuries, where am i going? where on earth am i going? are holding cash, a diversified position and waiting for volatility to pick up and you are not in duration. we talked about the 2-year note but that is relatively limited from in total return standpoint. we will be negative than other asset classes. jonathan: lori, are you comfortable holding treasuries? there is no risk mitigating assets, cash is the only thing there because we are in an environment where rates are going to go higher.
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the question is how quickly they go higher and we are in an environment where there are that may there not -- not be priced in their. it is u.s. perspective fine to go into treasuries and think of them as a safe haven. but if you are sitting in china here else inany w the world, currency is not a safe haven. jonathan: lori, thank you, alongside henry, and matt. let's check where markets have been throughout the week. this is what it looks like in states.ed treasury yields, believe it or not, i'm changed throughout the whole week. still ahead on this program, the final spread of the week ahead the boj decisions from
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and coming up this weekend, the italian election. this is really old. -- ♪
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jonathan: this is bloomberg "real yield" and is time for the spread. we have rate decisions coming from the european central bank and bank of japan and wept the beginning national people's congress meeting in china, the u.s. jobs report, and the italian election. still with me, henry peabody, einel. and lori f why are we, about the italian election? realistically there are not a lot of great choices there, so it will be status quo them up without a lot of drama. henry: we are at a point in time where europe is in a multistate
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situation which gives us a sanguine view of it, and lori's view, probably the same, it seems like extremists are not going to take too much of a check in that election. matt: i think it is noise from the u.s. political framework. some fireworks, and compared to italian elections, we went, and they have gone numb to figuring this outcome and easy the reason may's speech says nothing to brexit, so it is unlikely to see major change, but the ecb dialogue is important. concluding that the situation politically speaking as so messed up we can't get anything done, so it doesn't matter who gets and because won't able to get anything done, therefore none of this ultimately matters, but for me there is massive distortion in the market. chart thatick out a
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is interesting that generated a whole lot of conversation. the idea that credit yields in italy trade softer than yields sounds counterintuitive to so many people. why is this happening? henry: your guess is as good as mine. to me this is something that should probably be exploited and it seems the ecb has taken a check out of italy and is essentially financing the sovereign. that is a relationship that shouldn't hold on long. matt: if you look at the broader emerging spread, you have a diversified array of companies that have for revenue as well, so i agreed that the ecb should be enough to keep the sovereign yield lower, but the market is like diversification in foreign revenue. jonathan: lori would you take that? it is about willingness
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and willing to pay and it is easier if your hands are around a corporate view on that then the sovereign view, and i agreed that the relationship should normalize. when you at willingness and ability, right now corporate is looking willing and able. what is in trouble in terms of the miss price and distortion in europe, is in credit the sovereign space? credit, think it is an and the sovereign space has room on the upside but credit right now, take european high-yield trading, it doesn't make sense. the downside in credit is probably greater at this point. jonathan: matt you agree? furtheragree, and volatility will happen, and that could be spoke out, so we like things of a crossover to widen towards cbx trading. rapidfiresome
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questions or we wrap up the program and some key things this week into next week as well. bonds to begin with through year and. end. henry: can you pass on that? will go with boons. matt: boons. lori: boons. jonathan: u.s. high-yield or e.m. high-yield? they are the same across the board, pick one until the year end. henry: em. matt: us. lori: em. does the ecb versus the boj -- the european central bank against the bank of japan,
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who hikes first? the ecb or the boj? henry: ecb. matt: ecb. lori: ecb, absolutely. jonathan: thank you for your thoughts of what has been an eventful week. that does it. we'll see you next week, this was "real yield". this is bloomberg tv. ♪
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shery: it is 1:00 in washington and 2 a.m. in hong kong, and from bloomberg headquarters i am shery ahn. david: and i am david westin. shery: here are the top stories
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we are watching, markets aching a comeback -- markets making a comeback and will are from wilbur ross on why the administration is making this decision. and the nra says it has a positive meeting with the president at the white house. what are the chances of gun control happening and what could be the impact on the manufacturers? and italy's five-star movement is poised for a strong showing as italians had to the polls this week and will look at how italy could impact europe's economy. ♪ markets,t's check on as they rebound from opening lower. here is abigail doolittle. abigail:


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