tv Bloomberg Real Yield Bloomberg May 18, 2018 1:00pm-1:30pm EDT
jonathan: from new york city for our viewers worldwide, i'm jonathan ferro with 30 minutes dedicated to fixed income. this is "bloomberg real yield." yieldsn: coming up, breaking up to the highest level since 2011. italian bond market adjusting to a populist government determined to spend more. e.m. central-bank credibility very much in question. the central bank governor and president erdogan. treasury yields breaking out to new highs. >> short-term, yields are going higher on a 10 year treasury.
inflation is making a comeback in the u.s.. we will see positive surprises on inflation. it is seems inevitable with oil prices. yields have a doubled in a year-and-a-half. that traden is -- is over and how much capacity is it to move higher if we look at 3.25% on a 30 year? tois the room for yields move higher for inflation expectations that creep into the markets more? absolutely. is it out of control? i don't think so. up three fed goes times, that is 75 basis points, you have to ask yourself if the 10-year is going to go up that much over that time frame. if it doesn't come out will have an inverted yield curve this year or early in 2019. i do think it is crunch time for those. jonathan: joining me in new york
is luke hickmore, senior investment manager at aberdeen. joe higgins, managing investment at tiaa-cref. diana amoa, portfolio manager at jp morgan. luke, welcome to new york. let's begin on treasuries. this is a debate about how far can we sustain. we blew through all of the point and it we hit three 10. --3.10. a bid for the end of the week, it may be a little more about italy. germany isversus still really at high levels, and it will get higher. jonathan: we took out the 2018 high. i took out the 2014 high, and
wonder, when you look at the spread over germany when the bond treasury goes beyond 300 cans points, how much wider it get and can the united states and treasury market recover from the rest of the world? it can certainly get wider. it is important to keep an eye on underlying growth spending. this quarter, we have disappointing growth out of europe compared to where we have been. the ecb had to downgrade language. there are transitory things that might be explained, and maybe whether related. it is not coming through in a meaningful way. to quality orhat what is happening on the periphery with italy, it is possible to see the spread widening further. jonathan: your thoughts? luke: that is a problem that is
raised, sentiment around italy, although i believe that is in fully -- that is fully priced in. u.s. growth is pronounced at the moment. jonathan: joe, we have had these discussions. a lot of people looking for flatness of the curve. it is a one-off week. what are your thoughts about the direction of that? it was narrow, and surely it gets flatter, and this week it changed. why? my view, it is u.s. undergrowth strong and probably getting stronger as we see q2. that is what we are seeing with the long end, more confidence. jonathan: yield on the treasury curve. this week something changed. it got steeper. what are your thoughts? i believe we can get back into this quite easily.
it is about the u.s. growth story. the long end, it will look past us and worry about 20 and growth slowing down. jonathan: what is about the 20 20's? 0's, itigure by the 202 is about trump tax and when we could see the next problems coming up in i agree it is common for 2020. there will be a recession, just slow growth. jonathan: i hear this all the time, especially with equity markets. and also with fixed income more. this obsession between what happens now will be fine and then wait for 2019 or 2020, then you will get a slowdown. do you subscribe to that argument, diana? diana: i think eventually you will have to price in the slowdown. right now we are focused on too many moving parts to the story. the impact of the fiscal
stimulants in the u.s. -- stimulus in the u.s. is starting to come through. it could push into 2019. what happens beyond that with monetary policy tighter, you have a big? mark.on rates areinterest happening in the way it hasn't happened in several years. the federal reserve is projecting fed heights. what is the take from that? luke: i think markets are concerned about higher oil prices and the geopolitical place that we are. that could have significant cyclical and lead into secondary inflation growth. jonathan: is it an old story? fiscal conditions are timing. when you look at the bloomberg
index or goldman sachs index and they are tying up in the u.s. next year, the markets are starting to take pricing out. and 2.0.emain 2.5 the fed is at real risk of going too far, too soon. jonathan: you really think so? joe: jay powell just looks that way. jonathan: what gives you that impression? up thee wants to get hill. he wants to go marching up the hill with rates. toust think he is going continue down that path, and the risk is just too much. that is really interesting. , this is still in accommodative federal reserve, isn't it? thea: it is, but that is
point. that raises the likelihood that you get more hikes. the federal reserve is concerned that we have had unprecedented stimulus when the labor market is tight. we do not want to be caught behind the curve, but we want to see other language. the next two meetings will be important. them to signal one more hike this year. we agree that you get three hikes this year and possibly another three next year. jonathan: joe, you like the 90 basis points? joe: yes, i think so. at shorter ends of the occur -- of the curve. jonathan: staying with me are you all. coming up, the auction block. ricky holding often -- auction -- turkey holding auctions. this is bloomberg. ♪
jonathan: i'm jonathan ferro. this is "bloomberg real yield." investors are being lure away. so fierce is the demand, value is coming in light. weaker lending protections than before. there was an $11 billion sale with a yield of 0.9 34%, the highest since january 2011. 2019 --share since 2017. less than planned from the lira tumbling.
treasury a combined $700 million from the sale of two-year and five-year notes. we heard from the turkey president he spoke with us about monetary policy. >> you will play a role in monetary policy going forward, is that the big change? >> this make make some uncomfortable, but we have to do it. it is those cool the state -- rule the state were accountable to the citizens. jonathan: still with me, joe andins, and luke hickmore, diana imola. amoa.esident -- diana the president wants to control the central bank. >> he was trying to tell us that it was a normal thing and that everybody does that.
turkey, if you are thinking about countries and risk, we have seen argentina with 40% rates.t rate record -- turkey is not far off. they need to be keeping external investors happy. don't think erdogan controlling the bank does that. jonathan: does erdogan control the bank? this is nothing -- this rhetoric from turkey this is nothing new. we have had this rhetoric from turkey before. monetarycredible policy -- lack of credible monetary policy, you have inflation that they cannot get a grip on. the macro picture remains weak. whether the central bank will
come on, we will wait and see what the next meeting brings. broadly, chief a trifectavisor has of poising for emerging markets picks it is up, dollar stronger, rates climbing could how much of a challenge is that? joe: you have to differentiate between crude importers and crude exporters. it is country specific. there are a lot of winners and losers yard it is a trifecta -- losers. it is a trifecta. it could be the top with technical directions and dollar short reversed. is theng to look for individual story. argentina had a great policy response, different from turkey. it is country specific. jonathan: you said a great policy adjustment too bad
policy. still have the confidence around those two issues? more crucially for investors, you have exposure to currency bonds is whether the fx volatility can stabilize. do have the confidence it can stabilize? i think now technicals are cleaner. there was a huge amount of positioning. there is less of a credit position. that had become concerning for us. additionally, we have seen repricing in weaker stories. valuations look more attractive. i agree that you need to pick your winners if you want to reengage. there are some markets that will continue to perform well. look for cases that export commodities. commodity prices should remain supportive, have credible institutions and policymakers. external balances are not as vulnerable.
merging point, within -- emerging debt, corporate should dwell in these environments. if you look at where we are in terms of leverage, leverage has been falling in corporate's. weaker currency should help earnings with exporters. as you know, whenever there is a fire, there is someone to pour gasoline over it. this week, that was a warning that emerging markets are in worse shape than they were. it was said that the u.s. policy becoming tighten or -- titans, the dollar strengthens. now it is even more from borrowing from china trade this is not from gloom and doom, but there are external and internal vulnerabilities. get to the essence of that, diana, comparing now to 2008.
what are your thoughts? diana: my thoughts are threefold. one, em economies are overheating. this time around, emerging markets still have a negative out what gap, around 2.5%. second point is -- although rates are slightly lower, when em look at inflation for back then, they had average inflation close to 8%. right now the average inflation for em is around 3%. stronger starting point. progression as they mature. i think looking at the number, it is slightly alarmist. i think emerging markets can whether this. the responses are credible. you have brazil not cutting when the markets expected it. india quick to respond.
this time is different for em. jonathan: great to have you with us. higgins,more and joe let's get a check on where the bond markets have been. treasury market, up a yield on a basis point on a two year yield, 2.55% on at u.s. two-year, but up 10 on the back end and on a 30 year as well. we have steepness to finish the week. still ahead, the final spread. f1 and comments from central bank including jay powell. this is "bloomberg real yield." ♪
weekend. of england and the fed jay powell and other central bankers will be at a conference. we will be watching closely to see if an italian prime minister is named now that the government program has been a agreed-upon. still with me is luke hickmore, joe higgins, and diana amoa. bcp's totally battered through the week and we wondered when the risk would bite. here it is. luke: you can easily say it is going to be tough to get things through. there is going to be so much rhetoric from them at the beginning when they get things done and how they will be successful and they will get brussels to support them, it is 164, i want to see 170 or 180.
that longsis is not ago and we could get something a bit like that. it feels to me it should be 200 to compensate, not 160. jonathan: do think it might be conditioned to a regime at some point during is risk domination a factor or is it about increase supply? it depends on how far brussels comes toward italy. if they don't come to help the , then no, no problem at all. if they come too far and get to italy, spain will look ok and ask why are we going to everything we are going through when italy is getting it from brussels? you will have more risk in europe. jonathan: that is your answer, why would the europeans do it? why would they let that happen? why they let spain follow this and get out of control? joe: the response will be
measured. we are not convinced much will happen or a lot will happen as opposed to what is being talked about. jonathan: would you buy bcp's where they are now? joe: we think they are fairly priced. jonathan: interesting. diana, your thoughts? when the outcome is uncertain, i don't buy winter fairly priced. early. it is still too we do not know exactly what it is it will get in the end and who the prime minister and of the finance minister will be here we will wait and see how it plays out. jonathan: lou, interesting situation in europe. luke,e super core, -- interesting situation in europe it would now have -- we now have core, super court, and now -- super core, and you have countries on their own.
the leadership has changed. n will be the speaker. how the response will be what to watch in a couple of weeks. if they want to push on fiscal and that fits him, we may see brussels. market is ag of the way to look at your portfolio. italy at the moment, i agree with diana, by when it is cheap. jonathan: you don't like btp's now, do you like bunds even less? luke: yes. in germany, you are seeing wage rises coming through and you are seeing the need to get fiscal expansion out there to the rest of europe so then it will be disastrous. jonathan: the front end is just by a -40shed down
basis points per lend we start adjusting for a change there? luke: will make it to the 10-year at plus 40. that is what i feel would be fair volume -- fair value. in october, when draghi is known to buying germany, maybe that is when you start seeing 90 or 100. jonathan: i'm going to ask you some final questions. i will run through questions for you. will the market come down so that fed or will the fed will but to the market? what will happen? will i think the market come back to the fed because it will only do two. joe: i think the fed comes to the market. diana: i think the fed comes to the market. jonathan: btb bond spread, why narrower by year-end? luke: wider.
joe: flat. luke: flat. jonathan: who runs the central bank of turkey? luke: irna one. -- erdogan. joe: erdogan. jonathan: great to catch up with you diana amoa, joe higgins, and luke hickmore . from new york, we will see you next friday. this is "bloomberg real yield." you are watching bloomberg tv. ♪
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