tv Bloomberg Real Yield Bloomberg August 31, 2018 1:00pm-1:30pm EDT
>> from new york city for viewers worldwide, i'm lisa abramowicz in for jonathan ferro. with 30 minutes dedicated to fixed income. this is "bloomberg real yield." ♪ lisa: coming up, the selloff in emerging markets is roiling deaden but sisters. how far will it go? the buttoning treasury yield is raising alarm bells. is the u.s. economy vulnerable? italian bond investors run for cover ahead of what is potentially another month of political -- political turmoil. we start with the big issue. paying in emerging markets.
>> emerging markets has been hit quite hard. >> globally quiddity is actually on the retreat. that will definitely lead traces in emerging markets. >> some of them are in good shape, some of them are not. tarred by theeing same brush. investors who are careful about looking for the nuggets are going to find some really good opportunities. >> you do see some selective value there. what has hurt the emerging markets has been the strong dollar and the fed tightening and higher u.s. interest rates that has caused capital move out of emerging markets into the u.s. but the point is that a lot of thethe dollar strength, most of, who knows when the dollar will take? a lot of that has happened. >> we will see points in time where investors start splitting their interest between the good, bad, and ugly. with regard to emerging markets. >> don't forget emerging markets. emerging markets benefit from
two things are they benefit from accelerating global growth and they benefit from commodities because many of them are commodity producers. when emerging-market shares are this cheap, i think it is silly not to look for value in emerging markets. that is what we are doing. lisa: joining me around the table in new york is priya misra head of global rate at tc securities, and michael collins, plus coming to us from london is sameer samana --iain stealey. iain, the want to start with you since you are closer to these nations that are in turmoil right now. you see opportunities here in emerging markets or are you seeing contagion will escalate? really need toou split the emerging markets apart. we obviously have seen big contagion in the argentine is, turkeys of this world. that has reverberated around the whole of the emerging economies. when you look at them, some of them are in good health whether
it is mexico with the improvement on nafta, central european economies that are eurozone., for the i think actually, there are pockets of value to be had. it is a case of not going down and doing the research and trying to avoid the pitfalls out there. lisa: mike, avoiding the pitfalls paid let's talk about one called argentina where the yield has been blowing out. relative to the u.s. treasury yield. are you buying argentina right now? michael: we are overweight argentina. their bonds look really cheap. they are -- of their hard currency debt is trading over 800 basis points in spread. not that long ago, they were the poster child for oriented emerging markets. they were doing all the right things, they had a reformist government. they had some problems. seems like the bond market and currency market vigilante, not to mention the imf, are forcing fiscal discipline on them. i think ultimately, it works out
in argentina. lisa: is this the fed's fault? priya: i think there is a fed component. ecb, boj, they are retreating. you have this liquidity that is coming out of the system. when you have them giving you more than 2%, you should reprice yours premium elsewhere. even the rate market reaction to e.m. has changed. earlier on, a was being viewed as idiosyncratic. the markets are saying, maybe the fed can't hike that much. is saying thist is more than argentina or turkey, this is systemic. this has the potential of slowing the fed hiking cycle. lisa: this is contagion, problematic. i want to get your thoughts. you said you see opportunities and need to dig in there. and do fundamental research. what are you doing with your portfolio? are you buying mexican bonds and bonds of other places?
if so, corporate debt, severance, what are you doing? iain: we are looking for the areas we liked her we like areas like mexico. we have been adding areas like that in the portfolio we have yields up a high of the year. obviously it has rallied a lot since nafta talks. it seems to have stabilized. attractive yield of their. if you look at time gary and yield curve, it is very steep. those yields should be anchored somewhat to what the ecb is doing. coming ecb ised going to take its time. they are not raising rates anytime soon. thismeans there will be zero interest rate policy across europe. that will attract investors who are looking for yield. i am michael, one thing struck by is the yield investors are able to get from emerging markets relative to u.s. high-yield corporate bonds. it is quite substantial. it perhaps has to do with the high valuations in the u.s. where do you see the value between those? michael: i know we will get into corporate credit later in the
show in general. but, we have been reducing exposure to corporate credit globally. european high-yield, investment grade, credit globally, especially industrials, none banks. emerging markets, because of the relative yield and spread attractiveness of emerging markets, granted, they are on -- they are underperforming, but they look more attractive on a. relative value. relative value. brazil to some extent has little government external debt. and mexico, with the nafta thing. it could be a bright spot. there is value that has been created in emerging markets. on the hard currency side, but also on local currency side. these rates are high and the currency have gotten killed. lisa: have you been reducing your allocations and increasing to emerging markets? michael: we have been cutting credit risk in general. we have been reducing the
corporate side. we have not been cutting the emerging markets. than on a relative basis. we have not started adding aggressively. that time maybe will happen soon. lisa: what are you adding instead of corporate credit across the board? michael: some of it is high-quality sovereign debt. treasuries. is one of ourduct favorite traits. aaa, cielo's, esoteric stuff. those look really cheap to us. those are new risk-free assets. lisa: mike is adding treasuries. wondering, from where you said, do you see yields on the longer and continuing to decline relative to short ends? will we get a yield curve inversion sooner than later? priya: inversion, we are a little bit away from. i think the curve will continue to flatten. the biggest risk about -- around the flatten, the fed will continue to hike rates.
think the fed could hike faster than what is priced in. i can move the front and higher. that is the reason for the continued flattening. story.on is a different i think for inversion coming you need the fed to go above neutral. if the fed is taking the fund rate above 3%, they need an inverted curve. lisa: we have a steady range that the treasury has traded in over the past quarter. the next move, up higher or lawyer -- or lower? priya: i think higher, just given we are near the low end of the range. we have been looking for the 3% all year as being a ceiling on the tenure. higher, butle bit not much. everyone is sticking with me. priya misra, michael collins, and sameer samana -- and iain stealey. coming up, the auction block. u.s. high-yield issuance dries up in august. this is "bloomberg real yield." ♪
lisa: i'm lisa abramowicz in for jonathan ferro. this is "bloomberg real yield." i went to head to the auction block where the u.s. treasury auctioned off more than $280 billion this week. we focus on the seven-year sale. the bid to cover was 2.6 five, marking the highest demand since january. the primary dealer take was a run the years average. looking closer at the short end, the two-year sale of $36 billion had a yield of 2.65%. a bid to cover of 2.89%. over and corporate scum a was much, much quieter. u.s. stock bonds had no prices are launches to speak of. issuance is the lowest year to date, total sense 2010.
-- since 2010. still with me is priya misra, michael collins, and iain stealey. i want to turn to europe. the eyes are all on italy. income is into our in europe, let's start with you are we are bondsng on the fact that have climbed to the highest and about twice 14. and the gap between booms and italian yields. --e climbed to the site this to the highest since 2013 p or gwen is going on? what is the fear with italy? iain: i think there's a couple of things going on. you have this general risk off -- thatt that is going is starting with emerging markets and it is feeding its way into asset classes. that is the first thing. second, there is a liquidity premium for a telling government bonds. you can't trade the size we were looking at earlier in the year. the most important of all, people are looking into september and looking at what the announcement will be around
the fiscal side and how much additional spending the italians want to get out there. what is interesting is we are back to levels but you mentioned, the highest we have seen for a while. in april,ere we were may time when we got these concerns regarding italy. i think it feels like we are in a much better place from the mood we are hearing out of the italians. at the time, we were discussing a 7%, 8% deficit. about are talks euro breakup. i think we could see the italian government see -- do well over the next few months if we see good news on the fiscal side. lisa: what is your sense? priya: i would agree. priya:the market was so complacent about italy. of the recent comments we have had, they have said, we don't really want to take the gdp higher. the markets putting pressure on italy here. they will have to come up with a budget that does not entirely breach all the eu rules. given what is priced in, i would say maybe positive news a run
italy is expected. it is uncertain. on italy,he spread looking at the chart, almost 300 over. it looks pretty cheap. there spread curve is relatively flat. it is flattening today. offfront end is selling more. similar to argentina. inverted type spread curbs. short italy. it seems attractive on a relative basis. the bond market -- lisa: to be clear, short-term debt of italy, not trying to short italian death. got it. michael: i don't think they will go bankrupt in the next four years as a country. they have been around a long time. timestamp. i nothing they will go bankrupt. you are adding on the short end. michael: yes. lisa: you have been actively maneuvering? michael: we like the front end. lisa: have you been adding? completely agree with michael on this. if you look at the front end, the breakeven is there. it is compelling. yields above where
you can get most other short data fixed income instruments across europe and particularly compared to where cash is. lisa: you did mention liquidity. i do have to wonder at what point is liquidity in european markets efficient to max out these wagers? in oneybody moves direction or an italian bank runs into trouble, how vulnerable are you? iain: i think liquidity has been challenging. it has been challenged because we are in the summer holidays. and also because coming to the end of the ecb's bond buying program. what is a good sign for italy is we had one of the strongest five-year options on record. if you -- a huge interest in the market. if you want to get allegations to these markets, you need to go to the new issue market where you can get the size on after. lisa: i would love to get your sense.
heading into the next year end, where is the action going to be? it sounds like there is a consensus around the table that we will get lower italian bond yields. what about -- will those yields rise? to 60,i think we can get 65 basis points. that will help u.s. treasuries go up. i think above that does mean -- leave the ecb to talk about hikes. i think we have an ecb leadership change coming up. i don't think the ecb is seeing inflation. that is why i think bonds are cap. as much as i would like to tell points, ithe basis think it is 20, 30 basis points in bonds in treasuries, i think it could be interesting. the boj -- lisa: real yield! is actuallyoj trying to inject a little bit of volatility in the market. can it gap it at 20 basis points are can they not?
if they start rising, we have a bigger global route. we're not looking for that. that is a risk factor. lisa: where is the big excitement going to be? iain: i think it could well be in the emerging markets. i think that is where we could see some volatility but also see distant -- see decent returns. onould say on the german, the court government rates, i think we could see yields push higher over the course of the back end of this year. when i look at germany, i agree. your cap at what the ecb is doing on the cash rate is not going anywhere. lisa: where will you be? michael: one trade we like is the relative yield between u.s. and germany. easier to pick relative yields than absolute yields. i think those yields will compress overtime. lisa: everyone is sticking with me. priya misra, michael collins, and in london, iain stealey from jpmorgan asset management. let's get a market check on where bonds have been this week. not doing too much. yields tipping higher on the
lisa: i'm lisa abramowicz in for jonathan ferro. this is "bloomberg real yield." time for the final spread, coming up, over the next week, u.s. markets will be closed on monday due to labor day. in the week, we will hear from the boe's mark carney. get the u.s. jobs report and potentially another round of tariffs. still with me is priya misra, michael collins, and iain stealey.
i want to end with what your highest conviction contrarian bets are heading into the year. i will combine two things. i will say lower rates and higher bonds. interest rates volatility is at all-time lows. i think most people expecting to shift we do expect a fed to hike in september and december. if you buy the combination of an auction, and should make the trade work, as well as lower rates, i think the risk around em, risk around tariffs, all of that, can potentially make rates drop as well as more pickup. it is a combination. lisa: when you say rates, talking 30 year, 10 year treasury yields? priya: i would say tenure. lisa: mike? michael: i will go with the theme of two ideas. one is lower rates. i believe we have been in that tight range, 280, 3%. if you have a breakout in one
direction, feels like the higher probability is on the downside. we have markets which talked about today, could be a star performer. lisa: including turkey and argentina? michael: possibly. lisa: income, what is your highest conviction contrary and that? iain: everyone else has had to. i will take to as well. i will agree on the emerging markets high. i am looking at these returns down 5% on the hard currency, down 10% on local bonds. i would not be surprised if we are close to flat on the end of the year. the other thing, i think we're looking at is the underperformance of european high yields relative to u.s. high yields over the course of this year. high-yield year can market, those spreads look pretty attractive to us, given the positive corporate fundamentals going on in europe and the fact that you will continue to see the zero interest rate policy which will force people to look at these corporations to grapher yield. lisa: mike, you're nodding, do
you agree? michael: we have looked at the different that ash that differential. that does jump out. where on the margin. -- we are on the margin. lisa: i would love to get a sense of whether the u.s. credit markets in general are overheating or getting a little bit stretched. to one leveled above junk. this is an automaker with newly 90 billion dollars of debt. a big issue where. mike, how significant would it be if it got downgraded? what does it say about the state of where we are at? michael: i was in the heart -- in the high-yield market 15 years ago. i lived in the general motors and ford done great into juncker we spent months and years looking at that and analyzing it. turns out, did not have an impact on the rest of the high-yield market. if ford ends up being the tip of the iceberg and you have fallene downgrades, angels of investment-grade
companies with big capital structures into the high-yield market, that ray prices spreads further. say about thes it state of the u.s. economy at a time when equities are doing well and economic data seems to be on the tear? rates --think my lower on the credit point, it if i ,hink about corporate profits they are at record highs. the corporate sector look strong. is notl have that which come through. the entire spending plan for february will hit us in 2019. we still have that. it will help the corporate sector. you could have some idiosyncratic corporate issues. overall, the u.s. economy is on fire. lisa: do you think right now investors are underpricing the european economy? and the strength of it? iain: i think that is a possibility. if you look at some of the numbers may have had out specifically in germany and france, they have been strong.
weakness in the preferable data, spain and italy. spain is coming off a very high base. we have the noise we spoke about already around italy. i would not be surprised if you see a bit of strength come through from the whole of europe over the second half of this year. the is maybe one of catalysts that pushes bond yields back up toward 50 basis point. lisa: time for rapid fire. this time, next year, would you rather own italy, where greece 10 year bonds? priya: italy. michael: greece. iain: i will take greece. u.s. 10 year yields be closer to 2.5% or 3% by year-end? iain: above 3%. michael: closer to 3%. priya: 3%. lisa: one will do you -- with the u.s. yield curve in verve -- invert, six months or 12 or more months? priya: six months.
michael: 12 or more. iain: 12 or more. lisa: really quick. you care about the yield curve. or is this time birth different? priya: i care. michael: yes. i think the fed is whistling past the graveyard. i think the curve continues to settle off. i think this time is different. lisa: my thanks to priya misra, michael collins, and iain stealey. from new york, that does it for us. we will see you next friday at 1:00 p.m. new york time, it's a quick p.m. london time. this is "bloomberg real yield." ♪ ♪
speaking to reporters in washington, canadian foreign affairs minister said while the canadian and u.s. teams are working hard "we are not there yet." optimistic, saying canadians are good at finding win-win compromises. decided the trial of a man accused of driving into a crowd of counterprotesters at a rally last summer will stay in charlottesville, virginia for now. he is charged with first-degree murder and his attorney had asked for a change of venue. citing publicity about the case and what she called community prejudice. he faces up to life in prison on the state level charges. he also faces federal hate crime charges. the world health organization says -- officials say some control measures appear to be working but they are still unable to track exactly where the deadly virus is spreading. there have been more than 80 confirmed cases in the latest outbreak, including 47 deaths.