tv Bloomberg Real Yield Bloomberg March 11, 2018 4:30am-5:00am EDT
jonathan: i am jonathan ferro with 30 minutes dedicated to fixed income. this is "bloomberg real yield." ♪ jonathan: coming up, a goldilocks jobs report, monster payrolls growth without the inflation shock. positive news for ian as the trade war says mexico and canada escaping tariffs. and debt iissuers fixed up. but we begin with the jobs report. >> thought it was really good report. >> impressive. >> a near-perfect report. >> it is probably the case that the headline of tremendous jobs
report will be tempered by low wages. >> the overall report, despite the weakness in wages, is probably the best of the expansion because of the volume of increases we saw in jobs coupled with an increase in labor force participation. >> great for the fundamentals. it seems there is still a large amount of demand for labor, but it is not causing a gigantic increase in wages. >> the reason why it is a good number, you are not getting the wage acceleration, the fed will not be in any rush around this number. >> i was we could get more productivity, i think we will with capex picking up. >> it should be good for race, rates are not low right now. a good number at a good time. >> even though the job market is strong, we have not seen really strong wage growth.
i'm looking forward to stronger wage growth in the future, looking forward to all of these things leading to a stronger economy and stronger inflation more in line with our 2% inflation objective, i think we are on a good path. jonathan: on a pretty good path here in new york city, joining me in new york is the chief fixed-income strategist at montgomery scott, and portfolio manager at federated investors. and from london, fixed income portfolio manager at jpmorgan asset management. i want to begin with you. in the mid-aftermarket payrolls report, treasuries on offer, yields up. not what i would expect. >> it wasn't the long end of the yield curve that was subject to inflation, it was the middle. part of that is reaction to payrolls numbers. i think that reflex reaction is still in force.
anything that causes the federal reserve to act more aggressively will compress long rates as inflation expectations come down in the fed asked concretely. jonathan: we get a more aggressive federal reserve? >> we still think we are likely to get four hikes from the fed this year. this doesn't really change that view. we noticed during the week, we had a fed governors comments coming out and we have a lot of sympathy with the points she made. keep in mind, this is a fed member who historically tended to be dovish, but they are pointing to things we have been flagging. financial conditions remain easy, at the point where the u.s. a cycle is picking up and we are seeing growth accelerating. we have this late cycle fiscal stimulus on top of that. while inflation is not a big story, we think it will
gradually pick up and this will allow the fed to move a four times. jonathan: how pivotal is it that the doves are starting to sound more hawkish? >> a think it's consistent with -- i think it's consistent with where the fed has been. while she is viewed as a dove, i get that, i think we have seen janet yellen, she became less dovish by the end of her term, multiple tidings by the dovish core setting the tone for the leadership going forward, which will be gradualism. i think this employment report is up their alley. inflation is building but slowly, average hourly earnings is still ahead of the inflation rate and gradual monetary policy normalization, they can stick to that script. jonathan: and the economy is picking up. what is the fed ultimately going to deliver?
guy: the euro-dollar markets are basically pricing in two and a half to three rate hikes for the year. i think we should move to the market pricing for rate hikes, i doubt we get there. what it comes down is the random nature of it. three things cause inflation to exceed our forecast, core inflation. one is a change in methodology in used car pricing. it doesn't get much more random than that. i am willing to bet that on the flipside, we get some data over the course of the next six months or so that is randomly lower than expectations for small, meaningless reasons and it forestalls the fourth rate hike even if the markets price it in. jonathan: can we talk about the seasonality of some of the inflation as well? the break even curve is inverted. there is a seasonality to all of this when we start pricing in your term inflation pick up, every spring every year.
r.j.: it goes back to 2010, the green shoots phenomenon. one of the things you have to consider on the front end of the tips curve is you have built in basically passed --past increase in oil prices that have not quite priced out into the index ratio of the tips. that tends to cause, especially past increase in oil prices that has not been reflected in the short in tip adjustment, it causes an inversion. we are flat on the tips curve. jonathan: diana, it raises the point, if we get excited about reflation every spring it, does this story fade as the year progresses? why is this year different than years gone by? what is inflation continue to pick up from your? diana: there are few things that are different. the first one is, let's go back
to looking at the labor market. when you look at the reports, you look at the eci, the momentum on the data is strong, the funds are as strong as they have been. when you look at nfib, you see strong signs that the u.s. labor market is starting to get quite tight. 2% of the participants are saying labor shortages are the biggest constraint to their business right now. when you look at the jobs data, it paints a very similar picture. ultimately, we have not seen this wholesale tightening the labor market in the u.s. we're seeing right now. secondly is the fiscal stimulus. you get this at a point where the u.s. is in the late cycle. one has to assume that when you combine these things, the risks are to the upside when looking at u.s. inflation. jonathan: what are the risks for treasuries? we caught up with bill gross. >> i think we will see fed funds
somewhere around 2% or 2.25% as opposed to 2.5% or 3%, which is what the market expected a tenure at 2.87 is probably perfectly positioned, not well-positioned for 2.5 percent. jonathan: how does that resonate with you? r.j.: we are more on the bearish side. the fed is an upward trajectory, the inflation risks are fueled by weaker dollar and rising commodity prices. i think we are heading higher than what he suggested. would not be shocked if we break free on 10, it would be hard to do. but we think as the year unfolds, we will in up in the low three range. we are not more extreme more bearish than that. jonathan: to get outside of the argument as to whether we raked the magic 3% on u.s. tenure, is it safe to say the consensus at
the moment is we might be nearly top end of the range on a 10 year yield? guy: absolutely. the short-term trading range we're looking at, drifting on the top end of the range, we have not bounced off of it. i am willing to bet we do bounce off of the top end of the range, the 3.05 area, right around the time we see a four dot medium. jonathan: you are sticking with me, guy, rj and diana. coming up, the auction block, cvs completes the third-largest corporate bond sale on record. that conversation, next. this is "bloomberg real yield." ♪
♪ jonathan: from new york, i am jonathan ferro in this is "bloomberg real yield." on the auction block, jcpenney has given more funds to the ever-changing retail industry. they have sold bonds that would allow it to buy back debt. they have more than $600 million outstanding debt. the big headline of the week is cvs as it completes the third-largest corporate on sale and history. still with me is guy, rj and diana. it is great to have you with us.
rj, i want to begin with you and get to the issuance from cvs. that issuance rallied when it came to market. is this a phenomenon we have to talk about where the bigger the offering, it makes it more the index? r.j.: it suggests you may overweight or underweight and cvs have a large composition of the index. they are becoming less of a retail company and more of a health care company. i think that vision is attracting investors and i think it was a healthy test for the market, spreads have been volatile. it's good to see the deal get done, be well received, it got bumped and then it traded up in the secondary. jonathan: diana, despite all the drama that a lot of people have been obsessing over over the last week about who is in the white house and who is out and what happens with international
trade, capital markets have been rock, open for business, if you want to bring debt market, having they? diana: yes they have. i think the cvs deal is a good example. for issuers and investors, it sends the right signal. in the u.s. ig space, we have noticed issuance is a lagging last year. it was quite refreshing to see a big new issue come through the market and trade well after. but this issue is also apparent in emerging markets good when you look at the em sovereign space, we have a lot of new issues coming in from sub-saharan africa. jonathan: do you see the issuance of story continue to pick up, it was a big story at last year particularly in investment grade. a lot of people are wondering after the tax bill comes through, if it slows down debt issuance. guy: it is clearly going to slow, is at the large tech companies with tens of billions,
hundreds of billions stopped over asset managers in london and belgium they are already in u.s. dollar bonds. they will be absent for the next 12 or 24 months for the most part. also, when you see some of the other sectors that are more foreign focus on the buyback arena, i suspect it will be lower, not a massive moves and demand is still there. what will concern me is when we get that maybe $2 billion, not a massive deal, that prices basically on the screws with no concessions versus outstanding debt and trades weaker in the secondary market. that will be the signal that this relatively open capital market situation is closing down. jonathan: the moment you don't see much weakness holding credit despite the fact that we are seeing a pickup in treasury yields and directions from diana, four hikes from the fed, people are not pivoting away
from high-yielding assets to the safer treasury market with a higher treasury yields. r.j.: we've seen outperformance, generally speaking, when you look at investment grade securities of any type of fixed income, you need returns on the year. if yields are rising and the fed is normalizing because corporate profits are going, the economy -- corporate profits are going -- growing, the economy is expanding, and make sense to get better relative returns. as interest rates rise, the magnitude of absolute returns may modest but the relative returns to credit risk still seem attractive. we select the space. jonathan: do you go further along the curve to pick up yield or further down in credit quality? we caught up with someone from blackrock earlier about what would happen to credit as the fed rate continues to climb. >> i think it does take capital
away from other parts of the curve. you can carry extremely well on the front end of the yield curve, you don't have to take five-year credit risks, you can carry particular on the front in, you can refinance at -- front end, you can refinance at negative rates at times. jonathan: diana, a big conversation of the last few weeks over the the you get competition from high treasury yields of the front in, high -- front end, high rate fed funds in the future as well. do you have to reverse the thinking as rates creep higher? diana: we look at it from a global point of view as international investors. you have to take a step back and think at this point in the cycle, who are the marginal buyers? u.s. investors will be very active in the space, but actually, from a global
perspective, the marginal central bank is coming from the ecb, the boj, the rest of the world at this particular point in time. when you're thinking as an offshore investor, looking at the u.s. government and the unclear few of the dollar, two -- do you get a weaker dollar and what does it mean for currency exposure? when you look at u.s. rates on a hedge basis for foreign investors, is not that clear that it is probably the way investors need to think about markets. we do think the front and is -- the front end is very appealing now, you get rates of one to three quarters in money market type products. it will give investors concern. but i tend to agree with what has been said already, ultimately growth is still very attractive and should support risk assets and seat spread
tightening in select spaces. jonathan: diana, staying with us alongside guy and rj. in the markets is far this week, what a week, treasuries look like this. yields up to basis points on a -- yields up two basis points on a 2-year note. we creep higher on the 10 year. still ahead, the final spread and the week ahead featuring a fresh reading on u.s. inflation. we will bring you that in a moment. you are watching "bloomberg real yield." ♪ ♪
inaugurated as chancellor for a fourth term. mario draghi speaking and we get the latest read on u.s. inflation. the cti number. must watch, apparently. still with me, guy, diana and rj. still with us. in a week where there is obsession over what would and wouldn't happen with international trade, seemingly em is ok. why do emerging markets proved to be so resilient to the rhetoric around a trade war with the united states and everyone else? diana: there are a couple of things at play here. one, the trade that has been announced so far, the impact on emerging markets is fairly marginal, so the tarrifs are not that large. in the commodities space, china is the largest consumer commodities.
in emerging markets, what happens to china is a bigger driver on the outlook than just the u.s. the last thing is, we don't know if there is any retaliation. we are not at the point it is a war. it is more of the u.s. has made an announcement and we are waiting to see whether there is any fallout from the rest of the space. ultimately, historically when the u.s. has increased revenues from trade tariffs, it sees a weaker dollar. we might see some of that in emerging-market currencies as well. jonathan: the relationship between u.s. dollar and emerging markets, you would think em would get hit, all it has meant is the dollar has gotten weaker and the em will be ok. front and center at the moment, it seems to be dollar and dollar weakness. r.j.: the twin deficit story, a
phrase we started using in the 1980's, it seems to be back. cutting taxes, increasing spending. at this point in the cycle, it is unfriendly for the dollar. despite the rate dynamic, it is dominating. jonathan: not just the fundamentals about emerging markets, the strong composition of the index is weighted more toward tech now. financials are looking better. but dollar weakness seems to be the cushion for em. guy: the dollar is the one factor model in the financial universe. dollar weakness means potential for the fed to act more aggressively, it means potential existence of an em outperformance. jonathan: time for the rapidfire round. we want to look at the last week and sum up this week. begin with a couple of questions. the first one, is reflation
euphoria seasonal or different this time? guy: no, a feature of slower population growth. r.j.: i disagree, i think reflation is happening but it will reflate to a lower level than history and not having hyperinflation problems. diana: it is here this time. jonathan: are you confident we have seen the low of the 10 year yield in 2018? guy: no. r.j.: i disagree, i think we probably have seen the low and we are headed higher from here and will break the 3% level. diana: i agree with the high as well. the thing from here we might get consolidation. jonathan: the trade war talk dominated the news last week and markets. would you have u.s. credit or emerging-market credit into year-end?
>> we are starting just like this? no foreplay? leisureng, did you wear suits? >> people seemed to blame goldman for more of the sense of wall street then anybody else. did they say, this could be life threatening? did you think maybe you should step down, smell the flowers a little bit more? >> would you fix your, please? >> people would not recognize me if my tie was fixed but