tv Bloomberg Real Yield Bloomberg March 23, 2018 7:30pm-8:01pm EDT
jonathan: from new york city, i'm jonathan ferro with 30 minutes dedicated to fixed income. this is "bloomberg real yield." ♪ jonathan: coming up, trade war fears resurface as china announces plans to retaliate against the united states. treasury receiving haven assets, ding high.keeps ri we begin with the big issue for fed chair powell. >> the fed has moved in a decidedly more hawkish way. >> this is the fed saying we are going with the idea that fiscal
stimulus is going to overview -- to overheat the economy a bit and we are ready to raise rates to deal with it. >> you could sort of say that the tilt to the risk is are they getting behind the curve? i think it's way too early for that and that's what you've only got three hikes for 2018. we will see where that evolves by june's meeting. >> they might just get four. a close call. given the other uncertainties and trade policy, mr. powell decided to take a cautious course. >> you are new to the job and you want to get through a meeting and a press conference without putting undue expectations in terms of policy shifts coming in the immediate future. jonathan: joining me around the table is oksana aronov, jpmorgan asset management, colin robertson, head of fixed income for northern trust and him into us from london is jim cielinski, global head of fixed income at
janice henderson investors. what have we learned about understanding the reaction of fed chair powell? ms. aronov: he played it safe. it was the inaugural meeting and it was important to get through with minimal volatility. it was interesting because during the meeting, it was perceived as dovish, but in the announcement subsequently, it was perceived as more hawkish. i was writing some comments before the meeting even happened and i said i'm writing this as we are sitting a day away from fed and it doesn't matter whether it's going to be three or whether they're going to indicate more than three. jonathan: why not? ms. aronov: as long as the fed continues to shrink its balance sheet and as long as it continues on the path of higher rates, as long as markets continue to grapple with additional supply, not only from what the government is doing but also from less regulated banks, which are huge holders of
the technicals for the treasury market and everything off of it are not constructive. jonathan: jim cielinski, does the argument she presents resonate with you? mr. cielinski: i think it does. i think we often get too fussed about the dots. the key message is they upgraded their growth and inflation forecast. and also the terminal rate forecast. they are giving you a clear message as to where they think they are headed. i think you don't get too caught up in this they are going to do two or three additional hikes, i think that's probably a mistake. these are forecast and we are talking three years in the future. the dots, you need to remember, they are not actual forecast. they are how the fed thinks will -- the fed think things will work out based on their models and their expectations. and these are models that have been largely wrong for many
years. in a lot of uncertainty still remains. jonathan: looking at the dots, i don't know what they are worth at this point, but we can bring them up on screen. the big wager going into the federal reserve was wages looking for the spread between december 19 and 2020. we saw a record volume come into -- record volume come into that trade and the fed delivered exactly what that volume was looking for, which was this drift hiring rates for 2019 and 2020. that's what the fed delivered. at the front-end there was this obsession between whether we go three or four. we are drifting towards four. mr. robertson: i would say there are a lot of important messages that chairman powell sent in this meeting and i'm going to come right out and say it. i think the fed is only going to move one more time this year. i really throw the dots out the window. jonathan: what underpins this? mr. robertson: lack of inflation even approaching what the fed would like.
pce continues to stay low and i think powell alluded to the fact that the forecasts are just forecasts. they are no better or worse than anybody else. i did find it intriguing when you look at the dots and you saw one who had a terminal rate of 480, i thought that was pretty impressive. but the bottom line is i think we will see the data to continue to be moderate and disappoint and i think that powell really laid it out that they made one move, one decision at this meeting, and it was to raise rates by five basis points, and everything else just gets made in furtheron meetings. jonathan: for most people, there is no downside risk. not many people calling for one more this year. what do you make of that argument? ms. aronov: let me throw some stats out there. it's really interesting. over the past two years, from march of 2016 to march of 2018, we have seen $300 billion fallen to core non-strategies, more
than ever in the history of this as a class are arguably any other asset class. the return for the benchmark has been barely over 1%. 1.1%. this happened over a time when the fed was at this very kind of early stages of removal of its accommodations. we are in the mid-, starting to enter the later stages of removal of that accommodation. what are those returns going to look like? ultimately, we have to bring this back to what does this mean for portfolios and where will investors get that diversification and they are , struggling to provide it as we have seen in the course of this year with every part of the market down year to date. jonathan: this goes to your message, ultimately 1, 2, 3, 4, what the federal reserve doesn't do doesn't mean anything to your portfolio strategy whatsoever? ms. aronov: we do not build our portfolio strategy based on where we think the dot plots are or how many rate hikes there
will be. that's kind of the whole point, you need to be not so focused, -- not be so base case focused. my base cases, rates are going to end here or here. the idea is to have a diversified portfolio and what that means today is to extract riskss from other besides interest-rate risks, which is dominating markets. and that's where the alternative approach comes in. someone could bring my screen up, when you look across fixed income sectors year to date, you see everything, including extended sectors have posted negative returns. whether you are invested in traditional fixed income risk or traditional, there has been no place to hide, because everything has been traded completely correlated and very tight from the spread standpoint. what has actually performed this year? floating rate instruments, so -- serve markets of the securitized market that are floating rate instruments, certain select shorts, convertibles, if you think about where all the politics in d.c. and the economic backdrop, where does that accumulate, where do
the benefits of that accumulate? as a fixed income investor, you can play that in converts, the floating rate structures given that we are in the rising rate period right now. there are other sources of return. jonathan: the most equity like securities we could find in fixed -- find a fixed income that's where you think they are , ultimately. ms. aronov: certainly, there has been interesting pockets to add as we have seen volatility. this is kind of the issue with traditional fixed income management. when you look across portfolios for decades, they've carried cash balances between 2% and 3%, five years ago, 10 years ago, 15 years ago, and you can't take advantage of volatility with that kind of position. one of the things that we've been very focused on is being a liquidity provider during periods of volatility. that is not how the traditional fixed income investor typically thanks. jonathan: i want to get your -- what on what all,
oksana is talking about. the risk mitigation characteristics of various a fixed income, a bit of a novelty this week and treasury actually received some safe haven flows. it hasn't been that way over the last couple of months. was that a one-off? mr. cielinski: i don't think that story is gone, but i think the valuations do make it tough for bonds to offer a lot of hedging ability. the starting point of low yield gives you limited opportunity to get that appreciation when other things are going down. add to that the concerns right around the balance of payments and deficits and the unwind of quantitative easing, i think there's enough headwind and tailwinds to consider for bonds that are not just universally positive. i think the safe haven flow element is still there. the amount you might see bonds rally on safe haven flows i suspect is probably a lot less than what we are used to. ms. aronov: it's a very important question and one i get frequently. how to investors think about a safe haven in an environment like this? the answer is, it really depends
on how you think about an environment characterized by constructiveus, a backdrop, central bank accommodation removal, all those things, pro-business washington, d.c. if you think that is an environment in which traditional fixed income will outperform cash, that's your answer. we don't necessarily think that's going to be the case. jonathan: i want to give you the final word. i want to come back quickly to you. one more hike, express that in the market for me. what's the most mispriced thing based on that call? mr. robertson: the most mispriced thing to me would be 10 year treasuries. jonathan: where do you want them to be? mr. robertson: they can trade lower than where they are right now. would it be the most mispriced asset? jonathan: i'm trying to understand that. the fed only goes one more time, are you expecting yields to spike higher because they have
been more, did it growth, or are you expecting yields to come low? mr. robertson: i expect yields to stay here or come lower. part of for the fed will be challenged -- again, the dot plot, i'm good throws away because if we look at central tendency and fed funds and we added eight hikes, we are at three and 5/8 by 2020. that doesn't make any sense to me with a 10 year treasury at 283. there's a disconnect, but more importantly, what i would say is i think what's going to happen under chairman powell is he is not going to force the yield curve inversion, and i don't think the long end of the curve is going to cooperate as people like to think there are three more hikes this year and three more hikes next year. if that cooperation by investors doesn't take place, the fed will then be stuck with my view that the data won't support hikes and if investors aren't supporting the hikes and the data is not supporting the hikes, the fed is not going to hike. jonathan: we will end up with a flat yield curve. colin robertson, oksana aronov and jim cielinski.
♪ i'm jonathan ferro, this is bloomberg real yield. i want to head to the auction block, where underwriters are betting against each other more aggressively for work. at least when it comes to money bond options. the volume of the sales plan for the next 30 days has dropped, with yesterday's issuance down 21%.
the second largest dollar denominated offering, raising enough money to refinance more than half the debt it has been maturing in the next two years and finally, uber was the headliner with $1.5 billion in sales lead financing, the company was negative earnings road through headline risk to borrow more than planned it better terms, reflecting how hot the leverage loan market is still running. still with me is oksana aronov from jpmorgan asset management, colin robertson from northern trust asset management, and jim cielinski from janus henderson investors. one of the big stories over the the drift has been higher, real aggressive rip higher in libor. what are your thoughts? ms. aronov: libor moved up to about 2.3% and we have seen a floating rate product perform well on the back of that. floating-rate loans have run a few sectors here today that posted positive returns. credit expansion security is
another pocket, and securitized market has also got floating-rate, probably a bit lesser-known because it's a new market but the idea the basically the transfer risk directly to investor from fannie and freddie's balance sheet, and it's not entirely surprising that libor is moving up. there are some murmurs of their -- murmurs out there about risks perhaps in the financial sector, perhaps related to european banks. not likely. this is sort of a natural occurrence with the rising rate environment in the u.s. and central banks globally following suit. in this kind of environment, it's going to be very difficult for traditional interest rate driven product, even spread product that is trading so tight to perform well. jonathan: the bottom line for most people, the consensus view, is that this is a symptom of credit stress elsewhere. the murmurs about something someone in europe, but ultimately it's not a sign of credit stress, but there could
be consequences and i'm just wondering what your thoughts are on what the consequences might be. mr. cielinski: it does increase funding cost. you see many countries worried about outflows and it does have an impact on policy. i do agree. it's not corroborated by any other signs of stress that i see. you always want to worry about getting too complacent, but i would agree. i think it's more due to technical factors. jonathan: the question that keeps coming up is at what point does this aggressive shift from short-term borrowing costs start to compete with capital elsewhere? are we there yet? mr. robertson: i think we are there. jonathan: where will it impact the fixed income universe? mr. robertson: in the short end. i think part of the increase in libor ois and the libor rate , number one has been mentioned. it is consistent with rates moving higher. that's no surprise to me. i also concur that i do not believe that it is an indicator
of any type of stress in the market whatsoever. i think there is an opportunity there. also i think what's important and that we haven't pointed out yet is the repatriation of cash from overseas. i think that has a significant effect on where this level is going. jonathan: where are the opportunities? mr. cielinski: in the fixed income market overall? jonathan: based on your thoughts. you said there would be opportunities. mr. cielinski: if you think about my forecast, and a lot of areas of fixed income have seen deteriorating performance. obviously, with my view, high yield would be attractive. high-yield bonds would be attractive. that would be both domestically and globally. there would be opportunity in certainly the treasury curve, but even with diversification sense, we are not getting paid zero for cash anymore. people can diversify their in a really low rate environment and actually get some yield only.
jonathan: why take duration risk and why take credit risk? oksana, you came on a couple of months ago and said i want triple c's? and guess what has outperformed -- triple c's. ms. aronov: we were talking about the fact that generally went from being extremely bullish on high-yield and lower rated credit to being very bearish on that because of the spread compression that we saw , and i said look, the only pockets that perhaps remain because of security selection has been that lower rated bucket , the triple c bucket. you have to be extremely selective and i want to emphasize that generally we have taken a huge step back from credit exposure because it is so tight. when high-yield goes inside of roughly 450 basis point spread to treasuries, it starts to be highly positively correlated to treasuries and starts to act more like a treasury in terms of insensitivity to interest rate risk. high-yield after this most recent quote unquote blowout, is still hovering around 400.
emerging-market debt is around 300. the lowest on record for emd was 200 in 2007, so we are still hovering close to some of the most tight levels in all of these credit sectors and we think there will be better opportunities to get on. jonathan: do you still like triple c's? ms. aronov: we like floating-rate loans more. very selectively. we like select shorts in the em space, given how tight spreads are, and cash is not tracked. -- is not trash. cash currently is 2.3%. you can hold two-year treasuries and make not much more there for the duration risk. cash gives you that optionality in portfolio that cannot be substituted, given the deteriorating picture of inventory being carried. there are no shock absorption mechanisms that you used to see 10 years ago. jonathan: oksana aronov, with
colin robertson and jim cielinski from janus henderson group. in the markets, where bonds have been this week, tense, 20's and thursdays -- and 30's. two basis points lower on the week at 283 and we and slower by basis point on a 30 year bond yield. still ahead, the final spread, the week ahead featuring a fresh reading on u.s. inflation. this is "bloomberg real yield." ♪
♪ jonathan: i'm jonathan ferro, this is "bloomberg real yield." time now for the final spread. coming up over the next week, it will be a shortened trading schedule due to good friday ahead of the easter holiday. we get a series of u.s. economic data points, including personal spending, housing, and a look at inflation through core pce.
still with me is oksana aronov from jpmorgan, colin robertson from northern trust and jim cielinski from just henderson -- janus henderson group. as people look at the show is a re-airs, there will be a lot of noise coming from washington, d.c., whether it's about white house palace intrigue or trade wars. set me up for your framework for thinking about what is happening in the nation's capital in the united states and how you draw a line between noise and news. mr. robertson: i do think if you look forward to next week, it's less about the data and quieter on the central bank front. it's going to be about the news and in particular, trade is the key element to watch. i think what we have is fear of retaliation and we will get some from china. i think they are playing their cards and looking longer-term and i think we may begin to get a sense of whether trump is trying to get china to behave better pertaining to north
korea, and those negotiations that are coming up, whether he is willing to pull back a little bit if he gets some positive messages from china. i think that is the thing to watch. i think any heightened expectations now of a trade war -- it's not a war yet, it's just kind of a scuffle. if that worsens i think that's , probably the key element to watch next week. jonathan: a skirmish rather than a war seems to be the consensus. i want to get some quick answers from you from greek questions. the leveraged loan the got -- the uber leveraged loan they got issued this week, do you want to take the credit risk from tesla or eight friend kind of product with a leverage loan from uber? ms. aronov: i have to go for the fact that we like leveraged loans. jonathan: colin. mr. cielinski: tesla. jonathan: jim. mr. robertson: i would go with the loan. jonathan: libor.
signaling the beginning of the end, yes or no? ms. aronov: no. mr. cielinski: no. mr. robertson: no. jonathan: are we sticking with three hikes for 2018 or four? ms. aronov: four. mr. cielinski: one. mr. robertson: three. jonathan: it's been great to have you. oksana aronov, colin robertson, and jim cielinski, that's it for us. "bloomberg real yield," this is bloomberg tv. ♪ ♪