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tv   Bloomberg Real Yield  Bloomberg  March 3, 2018 2:00am-2:30am EST

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♪\ jonathan: from new york city, i am jonathan ferro with 30 minutes dedicated to fixed income. this is "bloomberg real yield." ♪ jonathan: coming up, president trump reveals tariffs. he quickly sparks trade war worries. chairman powell sounds optimistic, opening the door for four rate hikes this year, but despite that, the week looking resilient. we start with the big issue, chairman powell opening the door to four rate hikes. >> the phrase that headwinds have become tailwinds is a reflection that the economy has gained steam and if they go
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four times we think it is going to be for the right reasons which is that growth is good and inflation is not out of control. >> core pc it is a favorite inflation metric and to say the fed is behind the curve, they are doing the right thing. they will probably move four times this year. 1.5% core pce, the fed target is two and it is not that scary. inflation is moving up. >> the fed has imprinted on their brain the phillips curve. growth is good, why aren't wages going up? maybe it is slow to rise but it is not a bad type of inflation where it is suggestive of an overheating or overleveraged market were prices are out of control. this is because of better growth. >> if we rolled the camera to two years from now, will have a lot more stimulation, particularly in the united states we have more stimulation because of the tax bill and also because liquidities -- we are going to be in a park were -- park where
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central banks are going to have a problem getting it right. jonathan: joining us is henry and lorimatt toms, heinel. it is 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, what we had was an acknowledgment of the data coming into the meeting. i think the market was already leaning that way a little bit. it is an acknowledgment, but 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. jonathan: matt toms? matt: i think ever person more inclined to speak as a money manager then an academic and the potential of a fourth hike
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doesn't signal an action, it signals a skew. it could be three or four. jonathan: the upside looks like four. the chart of the week, we bake in three for the year. lori, is that your read of things at the moment? did we open the door for four rate hikes in 2018? lori: our view is there will be three hikes. there is a balance, stronger growth but a lot of fears on inflation and it is inflation the fed will be watching to see. whether they have to move more assertively. we don't think that is going to happen. jonathan: short the front end. the trade at the moment on the 2-year note in the united states? henry: probably. remember six months ago, the 2-year note was trading sub 60 basis points and at the most vulnerable part of the curve and people wanted to come in and say shortened durations. the risk is if you move to liquidity too much that is exactly when you are in the crosshairs of those demanded
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liquidities. watch out for the front end. matt: i agree, we have seen a a lot of selling of corporate bonds on the front end. for the first time in five years, we've 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. it tells you liquidity is no longer free and you'll have to see leverage increase in the system to suck out this dislocation and it is quite attractive for a bond manager. jonathan: what do you think really explains the softness more specifically? matt: the softness is foreign assets held overseas by u.s. multinationals who have hundreds of billions of dollars benefited from short-term bond strategies. it is a dislocation that should not last more than six months to 18 months but it is real and has provided opportunity. jonathan: where is the buy, right now? henry: i think it is time to
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start buying. you can only get so cheap. you move 20 or 30 basis points, it is unlikely to get dislocated because liquidity is not expensive yet. we think it is worthwhile trying to nibble at that right now. jonathan: is that short duration a great story? does it attract you as well? does, but i am not so enthusiastic about it. i think what is driving is the fear of the long end. people don't want to be long-duration right now. one of the challenges of the short end, is susceptible to two things, is susceptible to higher real rates and even if we don't that inflation coming through, if people are concerned about future inflation prospects and demanding higher real yields, that's an area where the curve is vulnerable. jonathan: you touched on this and i want to get your thoughts on the idea that the front and -- that the front end shifts and capital is elsewhere and something we have talked about on this program for several weeks. are we there yet? henry: i don't think so.
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directionally, think about where we were and where we are now, yes, marginal change is positive for buyers, but let's think about what the fed is try to do here. the fed probably is trying to let inflation rise and maybe exceed the 2% number. there are two ways out of the where you are over indebted. one is default and the other one is inflation. the first one is not too good. 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: it's hard to understand when the fed gets behind the curve. we can look at the forecast, 2019 and 2020 and beyond that as well. 2018 at the moment, growth, 2.7%. it is the top right we are interested in. 2.4 is where economists see growth next year and 2.0 the year after that. the trend for growth is not going to be aggressively higher according to economists we surveyed. henry, do you disagree with
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that? henry: yes, and that comes with the idea of a shifting narrative. we have been in an environment where you have the right correlations between equity and rates, low rates, low inflation, disinflationary trends, and to dislodge that narrative into a newer one is a process of adjustment and will come in fits and starts. we are going to see some disappointment of data because expectations have gone higher, but we need to shift to a new narrative and it is going to take an adjustment. jonathan: morgan stanley last week, essentially the view is as 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 that home back is right or mr. peabody? matt: what we are talking about are the negative feedback loops of editing a new environment. you have a higher growth environment, and also brings
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uncertainty about what if you fall from the higher level of growth? so we enter a new phase where the cost of volatility and interest rates will have a feedback loop. if you move beyond three and three and a quarter percent on the 10 year, the feedback self -- feedback loop self corrects and the growth number start to move lower and yields cannot escape to quickly. 325, is that when it starts to push back in for you? henry: 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? i spoke to others earlier today and they think that basically we are topping out further along the curve and the bind comes from pension funds. people of the longer horizon of five years this is a buy from , them, does that make sense? lori: it does, we have been adding two positions on here. we could touch three or three and a quarter, but the pressure will be to go lower from there unless we see some sort of major
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inflationary sting. we are not seeing that in the offing. the wildcard here is what is going on with trade. jonathan: lori heinel sticking with us. we're going to be talking about trade. alongside henry peabody jr. and matt toms. up next on the program is the auction block. that conversation next. this is "bloomberg real yield." ♪
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♪ jonathan: i am jonathan ferro and this is "bloomberg real yield." i want to head to the auction block. emerging markets dollar bonds have struggled in 2018, but the
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local currency bonds have fared better. their trend extends to issuance and borrowers are raising more money than ever before and those bond sales have exceeded $1 trillion. almost triple the amount raised in the same time last year. one company from em set to make a notable offering is teva. it will hold its first offering as i high-end issuer. ias a high-end issuer. over in asia, singapore's auction of 30 year bonds cover a ratio of 2.21, which is the highest level for 30 year debt since 2012. still with me is henry peabody, matt toms and lori heinel. in a conversation of a trade war, holding up really well, why? henry: it is hard to make a like a statement about e.m., but selectively we like the space and there is a narrative around
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better global growth. a narrative around being earlier in their cycle. there is a dialogue about the dollar being broadly weaker for the foreseeable future to provide a tailwind to that e.m. position. with that, the volatility has come in dramatically, and those who are willing to step out and select,ong view on fundamentally changing e.m. stories are rewarded. jonathan: let's get the function up on the bloomberg. i'll 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%. matt, if this was 18 months ago and this was the president's base case going into the white house, we would have a 25% tariff on steel, a big one on aluminum, and potentially more to come, would the peso have moved at a
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10th of 1%? matt: we take the over. this is less of a specific issue of mexico and nafta, this is a global issue and a stance of trade policy change and i think the saber rattling will keep the markets concerned, it is not just about mexico, it's more about canada, who is a bigger metals importer. it's also about japan and u.s. manufacturing. you see broad volatility. nothing that is poked at mexico. jonathan: the end details remain to be seen but we may get them next week. if you shifted anything to e.m. when these details came out? sense on the -- side. the spread get in hard currency in our not to similar to what you can get in high-yield corporates, very modest. but if you see trade tension or global volatility increase, you can have volatility.
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you're not compensated for. the local side makes sense because the dollar is likely weak when you are hurting the trade policy stance. that pushes things away from the dollar. jonathan: does the argument of matt toms makes sense to you? lori: it does. as the gentleman said, improving growth prospects and policymaker flexibility. a dollar not likely much of a headwind there, and also improving credit quality. across the board we are constructive on em that and local currency debt. jonathan: what about the risk from treasuries at the moment? was it interesting that finally we got a safety bid into treasuries? is that a one-off or is there something more to that? henry: i think long-term or medium-term, probably more of a one-off. it seems to us that the push higher in inflation, the fiscal mess we are in, frankly, could call into question that traditional relationship with stocks and bonds.
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if rates sell off and it causes that risk off environment, you really need to think about what your portfolio is in and and do you have the risk mitigation you think you have? jonathan: what is the risk mitigating asset? henry: liquidity, cash, probably gold. right now -- and yes, we are seeing today, the recent trade has been for better rates for risk off but you need to question that relationship and think about liquidity more than anything. jonathan: matt toms? matt: yen has acted that way, and the correlation we wonder, will it reverse? it has come back. that is still a funding trade. when the world gets uncertain, people buy back yen. we have seen that in a fax. but the dollar might lose that mantle. if you lose the reserve currency of the world and have policy driven toward your own country, you might lose that status. if you lose that, you could see
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dollar volatility increase and yield increase. jonathan: let's put these two things together. when you say liquidity, i think treasuries. and it really think anything else counts. liquidity i need, and that is why i want treasuries, so if it is not treasuries, where am i going for liquidity? if it's not dollar denominated assets, where on earth am i going? henry: you are holding cash, a diversified cash position and waiting for volatility to pick up and you are not in duration. we talked about the 2-year note being overpriced with downside, but that is relatively limited from a total return standpoint. total returns will be negative but less negative than other asset classes. jonathan: lori, does this fly -- does this argument apply to you as well or are you comfortable holding treasuries as risk mitigating assets? lori: 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. the question is how quickly they go higher. we are in an environment where
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there are lots of risks out there that may not be priced into the market. there isn't any safe place to hide. from a u.s. perspective it is fine to go into treasuries and think of them as a safe haven. but if you are sitting in china or japan or sitting somewhere else in the world and you have currency risks, suddenly, u.s. treasury's don't look like a safe haven. jonathan: lori, thank you, you will stay with us alongside henry peabody and matt toms. let's check where markets have been throughout the week. this is what it looks like in the united states. treasury yields, believe it or not, unchanged throughout the whole week. a slight bit coming into 30 year. if are down three basis points. -- we are down three basis points. still ahead on this program, the final spread of the week ahead featuring rate decisions from the ecb and the boj and coming up this weekend, the italian election. this is "bloomberg real yield." ♪
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♪ i'm jonathan ferro. this is "bloomberg real yield," and is time for the final spread. coming up in the next week, we have a pair of rate decisions coming from the european central bank and the bank of japan. we have the beginning of the national people's congress annual meeting in china, the u.s. jobs report, and the italian election. still with me, henry peabody, matt toms, and lori heinel. lori, why are we so calm about the italian election? lori: i think we have just become numb to things that go -- that happen in the continent. realistically there are not a lot of great choices there, and we think it will be status quote prevails, but not without a lot of drama. jonathan: henry? henry: we are at a point in time where europe is starting to call us around the idea of a multistate situation, which gives us a sanguine view of it,
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and lori's point, probably the same, it seems like extremists are not going to take too much of a chunk in that election. jonathan: matt? matt: i think part of it is crowded out by noise from the u.s. political framework. some fireworks, and compared to italian politics, we win. i think the markets have grown numb to these things figure in itself out. if you look at teresa's mate -- theresa may's speech today, it says nothing about brexit, so it is unlikely to see major change, but the ecb dialogue later this year is likely important. jonathan: i am struck by how sensible markets are behaving around italy, concluding that the situation politically speaking is 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. i want to bring up a chart that is interesting that generated a whole lot of conversation.
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the idea that credit yields in italy trade below sovereign yields sounds counterintuitive to so many people. why is this happening? henry: your guess is as good as mine. to me, i think this is something that should probably be exploited and it seems the ecb has taken a chunk out of the italy debt stack and is essentially financing the sovereign. but that is a relationship that shouldn't hold on long. matt: if you look at the broader corporate emerging market set, you typically have a tighter spread, because you have a array of companies that have foreign revenues as well. so i agree that the ecb should be enough to keep the sovereign yield lower, but the market is like diversification in foreign revenue. jonathan: are you saying it is stronger than the state? >> yes. jonathan: lori would you take that? lori: it is about willingness and ability to pay, and it is easier to get your hands around
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a corporate view on that then it is sometimes on a sovereign view. i agree that the relationship should normalize. when you at willingness and ability, right now corporate is looking willing and able. jonathan: what is more in trouble in terms of the misprice and distortion in fixed income in europe. is it in credit or the sovereign space? henry: i think probably in credit, and the sovereign space has room on the upside but credit right now, take european high-yield trading, it doesn't make sense. i think the downside in credit is probably greater at this point. jonathan: matt toms, would you go with that, too? matt: i agree, and further volatility, you have a lot of complacent money in europe that could be spooked out. so we like things of a crossover to widen towards cbx trading. jonathan: we're going to go through some quick fire questions, the rapidfire round where we wrap up the program and some key things this week into next week as well.
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i want to begin with bunds or btp's? henry: can you pass on that? jonathan: you have to pick one. we will go with bunds. matt: bunds. lori: bunds. jonathan: u.s. high-yield or e.m. high-yield? given the yield, thereabouts the same across the board at the moment. pick one until the year end. henry: em. matt: us. lori: em. jonathan: final question. one of the most uncovered stories of the week. the bank of japan, governor kuroda talking about possibility of exiting qe. it raises the question, the ecb versus the boj. the european central bank against the bank of japan, who hikes first? is it the ecb with mario draghi
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or the boj with governor kuroda? henry: ecb. but is close. matt: ecb. i'm not sure japan ever moves. lori: ecb, absolutely. jonathan: thank you for being here with me. it's been great to have your thoughts. , and peabody, matt toms lori heinel. that does it from new york. we will see you next friday. this was "real yield". this is bloomberg tv. ♪
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