tv Bloomberg Real Yield Bloomberg February 9, 2019 9:30am-10:00am EST
jonathan: from new york city, i'm jonathan ferro. "bloomberg real yield" starts right now. ♪ jonathan: coming up, pessimism returning, stocks ended the week mobile on growth concerns and trade doubts. as sentiment sours, the german yield curve drives deeper into negative territory. january offers a big month of gains in risk assets. we begin with a big issue, is it time to fade the strength? >> we are looking at this big rally we had. we can't predict how this is going to shake out. >> we just keep seeing more uncertainty. >> it is time to sell or take
chips off the table. >> that is what we are debating now, do we ride the technicals, strong momentum, or start taking chips off the table, recognizing there is a cap on the upside? >> they sounded the alarm that it is all clear, the fed is not going to allow the expansion to come to an end. >> i'm not saying that we cannot rally further, but this idea that vol will be low and there will be no issues the rest of the year is crazy, especially when the same people saying that said the exact opposite a month ago. >> having the optionality to take advantage of these type of dislocations, that is fast and furious because of the liquidity in the market, it is very tenuous. >> have things gotten a little frothy? yes. if you look at the underlying economy, it is strong.
saying, we are on hold. this is not a market where you say, the wheels are falling off evidence the cart. jonathan: joining me in new york is kathy jones, subadra rajappa, and coming to us from london is diana amoa, the fixed income portfolio manager at jpmorgan asset management. diana, a big debate on the buy side, whether now is the time to take chips off the table. what a given the strength of the rally we saw in january taking back some risk here makes sense. we like the idea of having a barbell portfolio where you have some risk in the high-yielding sectors but with a tilt toward quality assets. then putting some of that cash in durations like fixed income, whether yofixed income, whether you are looking at treasuries or e.m. markets that are very sensitive to treasury moves. kathy: i would agree with diana. we take money off the table here. this has been a fast and furious rally. jonathan: very quick. kathy: you have to be really nimble to play this in and out. we would take some risk off the table. i agree, we like duration as well in risk-free. jonathan: i want to bring up the v-shaped charts we see in high-yield, credit, leverage loans as well. what pockets of credit are you looking at right now that you think have gone too far too quickly? kathy: high-yield, leverage loans, just about every area of the market in credit. particularly leverage loans and high-yield. it's been such a quick snap back. even though we are pretty positive on a domestic economy for this year, we are still late in the business cycle and there is a lot of headwinds.
jonathan: diana, on this idea of dialing back risk, what about emerging markets? a couple of banks suggesting to people that now is the time to start back a bit. diana: in emerging markets it depends on what part you are looking at. if you look at local currency, actually, it has rallied close to 11% since september. that is one area that never really sold off in december. that is the idea that it is more linked to durations, treasury rallies seeing some relief, central banks being able to cut rates, domestically supports this base. i don't think that dynamic will change. when we look at other areas like sovereign credit, even some of the corporate space, we have retraced most of the selloff we saw in q4 last year. taking back some risk with a view of acknowledging that we are in a volatile period, you will get sporadic dislocations which give us better opportunities to engage. jonathan: duration has come up multiple times in this conversation. a concept that a lot of people are bringing up. now is the time to add duration. is it? subadra: treasury markets, risk on assets in general, we will be relatively range bound. carry trade make sense. if you look at the market action
over the last month, it's been basically the qe playbook. treasuries are relatively range bound, general yields are low. people are going out the mixed spectrum and buying high-yield or corporate bonds. that is sort of what the fed wants the markets do in some respect. they want stability in risky assets. kathy: what is a little bit different, when they engaged in qe before, you saw treasury rates move up. and reverse when they ended it. this time around, you are getting both treasuries rallying and credit rallying. we have a lot more faith in the rally in long-term treasuries than we do in credit. subadra: i agree with kathy. what drives the markets is the fed. very little priced in for the fed, and we are probably going to remain on hold for the remainder of the year.
more importantly, what the market is looking at is the potential for rate hikes in the future. there is not nearly as much room for the fed to hike. jonathan: diana, i want to pick up on this, the simultaneous rally we have seen in risk assets and the resiliency we have seen in haven assets, coming with its own concerns. a lot of people raising the issue, goldman sachs has done so, that in the next selloff, the haven assets will not provide you with that buffer. it's very difficult to find the diversification. what are your views on that? diana: i think the recent correlation of risks and safe haven is more on the risk side, not safe haven. risk assets, there was some undervaluation, but given where we are in the growth cycle, given that we are seeing some slower data coming in, revisions from policymakers across the board. senior loan officers, somewhat
concerning in that it's been a pretty reliable indicator of where the u.s. cycle is, showing tightening credit conditions. it is hard to be playing it from a risk asset with convictions when fundamentals are not great. i still think duration will remain the better play on risk off. ultimately we are in a low rate environment in the rest of the world and anything that offers yield in that safety, as long as it is not because of the fed balance sheet is moving, should be supported. subadra: i agree. i think duration in general is where you want to be toward the end of the cycle. especially given the fact that we think we could go into recession in early 2020. ultimately, you'll see people flocking in to save haven assets. there is plenty of that, no shortage of treasuries. people can always by treasuries. i think bunds are starting to get too rich. jonathan: what is driving that?
the economic backdrop over the belief that the ecb is not going anywhere anytime soon? subadra: it is that, and there are not that many bunds and save haven assets. any flight to quality, everyone tries to buy bunds. there is only so much for the market to take down. kathy: safe haven assets will continue to be safe haven assets when things happen. but i would agree, just a limited universe of things with positive yields that you can buy. jonathan: there seems to be a consensus emerging through the week. add some duration risk. the fed is out of the game. growth will not be good. cut treasuries on the long end. we see the moves in bunds and treasuries. diana, we remember last year where there was one payroll report, and inflationary surprise, and the whole story was repriced. are we vulnerable to that playing out again? diana: i do think so but ultimately i don't think that will be something for this
quarter. when we look at things that were sort of leading indicators for 2015, when you had that big rebound on growth, you have signs of green shoots coming in places like korea, which tends to lead chinese data by a couple quarters. we started to see that pickup, but it will be a couple quarters before we are talking a strong growth story. ultimately, we need to get brexit out of the way, the u.s. funding discussion to be out of the way. all the headwinds that central banks are alluding to are happening this quarter. jonathan: final word on the inflationary tail risk, what are your thoughts? subadra: the fed being on hold is something that will be positive for inflation and inflation expectations. we saw a pop in inflation expectations right after the fomc meeting last week. in the scheme of things, it will be hard to see sustained rise in inflation as well as inflation
expectations, especially given the global environment. if you look at the revisions you saw from the european commission on growth and inflation, they are bringing down their inflation forecasts for 2019. i think that is what will weigh on u.s. inflation. jonathan: we will talk about that in a moment. subadra rajappa, kathy jones, and diana amoa, staying with us. coming up, the auction block. a global first for bonds has investors scooping up italian debt. that conversation is next. this is "bloomberg real yield." ♪
♪ jonathan: i'm jonathan ferro. this is "bloomberg real yield." i want to head to the auction block, where you find another sign that the u.s. junk-bond market is alive and well. clear channel sold $2 billion of bonds in the largest triple c rated deal since september. it is spinning off of its parent company, i heart media. in asia, an auction of 10-year japanese bonds, the highest since 2005, one day before the central banks regular purchases. traders typically buying debt at auction to resell for a profit. finally, italy surprising the market with this one, raising 8 billion euros in a sale that attracted more than 41 billion. it is the second impressive order book for the country this year. still with me is kathy jones, subadra rajappa, and diana amoa. diana, let's begin with italy.
the monster demand for eurozone debt. what is behind it? diana: that particular issue was interesting because they came to market with a pretty decent concession. they added about 25, 30 basis points to the 30-year bond, which the market saw as an opportunity to get some duration at relatively attractive levels. what we have seen since then actually is the curve has underperformed and we saw the secondary pricing up to where this bond was issue, rather than the bond rallying back. ultimately it comes down to the dynamics we have been discussing. for italy, it is seen as a duration. european rates are very low. the prospect of ecb hiking is off the cards. in terms of the high-yield space investment grade, we had little issuance in december last year. investors were de-risking portfolios. people have come in here lighter
risk than they wanted to, starting the year, at the same time where we see money coming out of leveraged loans. there is a big complexity. that is supporting some of these more duration type fixed income markets. jonathan: you mentioned the performance in the secondary market from that 30-year issue in italy. what do you make of the unpredictability of the treasury? bringing something to market like that, a bit of a surprise to a lot of people. 250 billion dollar euro funding target for the year. is that something you think is weighing on btp's? diana: i think it is somewhat weighing. especially with the outlook not great for italy. it is only a matter of time before investors start talking about the probability of them being able to achieve their fiscal targets when growth looks so poor there. markets were caught off, although they still managed to get away with it. the italian government, to be fair, they played this well. they saw an opportunity in the market where sentiment was positive. i expect we will see more of
that from them. jonathan: you have the fundamentals and then the price and the story. diana has walked us through the fundamentals in italy. but the price of the story, a huge concession for a 30-year issue. then you also have the fact that it is 300 basis points over germany. is that something that's attractive to you? kathy: it is more a trade than a long-term hold but this has been true over the years with italy. you can buy it when the spreads are wide versus bunds and make money. in this environment when there is almost no yield anywhere around the world, people will take advantage of that, even if it is a trade. jonathan: against a backdrop where the growth forecast this week from the european commission were cut drastically for italy by 100 basis points. the growth story for the continent is not looking good. subadra: it is not. that is where i struggle to see why there is so much demand for risky -- peripheries, for instance. there is still a serious amount
of risk. italy came out of some sort of recession -- is in one, i should say. still there is a lot of demand. why? investors are seeking yield. especially if the ecb will be on hold, it will make sense to put some risk on margin. jonathan: diana, you mentioned something important. it is not the growth forecast that is of interest to people alone. it is the politics that are emerging because of the cuts to the forecast. we are likely to see another clash between the commission and italians. is that something that people are not paying enough attention to as they clamor for duration on the periphery? diana: for italy's case particularly, it is something the markets probably need to pay more attention to, as we approach the may elections.
during the course of the week, we had speculation that there supplementary budget to help boost growth being discussed in italy. i don't think the markets would see that as positive, and that would take us back to where we were last year in q3, q4. for us in terms of italy, we agree it is more of a trade that a strategic long-term play for now, until we get some clarity on how the fiscal dynamics are likely to evolve. jonathan: the german yields have plunged ever lower. we mentioned earlier in the program, the yield curve is negative out to nine years. the 10 year yield, south of 10 basis points in germany. what are your thoughts on what is happening with the bund curve and how this will resolve in 2019? kathy: it will be a tough environment if you are trying to invest in core europe. one thing we have not mentioned is the slowdown in china and the trade conflict and how that's had a negative impact on europe, particularly germany, because of their strong trade ties to asia.
as long as that plays out and we don't get any relief in that environment, it will be really tough to be an investor in core europe. jonathan: are you convinced, subadra, that we will get an effective response from the ecb? subadra: we already did, and some respects. they acknowledge risks are to the downside. to me, what is to doubt in his recent projections from the imf and ec was the magnitude to which they brought down the growth forecast for germany. .6 to .8. it is tracking close to 1% growth. that is a huge concern. i'm not sure -- clearly, the trade uncertainties are having a much more impact on china, germany, but those dynamics is what is driving the markets. jonathan: the commission forecast lower than that, the u.k., which is drowning in brexit. luckily we don't have to talk about it. i know you are all happy about that. kathy jones, subadra rajappa, diana amoa, thank you.
i want to get a market check on where treasuries have been through the week. two, tens, 30's. yields coming lower by four basis points on the front end. five on the 10 and a 30-year. still ahead, the final spread. the week ahead, featuring a fresh reading on u.s. inflation and another round of u.s. china trade talks. that is next. this is "bloomberg real yield." ♪
ministers meeting. more debate in the u.k. parliament over brexit. a u.s. inflation report and the potential u.s. government shutdown on the cards. still with me are kathy jones, subadra rajappa, and diane amoa. i want to wrap things up with something, kathy, i know you want to talk about. a year or so ago we reached this level in 10-year treasuries and some big names came out and said at the beginning of the bear market, the 30 year downtrend is done. we are back to those levels again. what is your take away? kathy: to me, a bear market is price over time or yield over time and you cannot pick a moment in time and declare we started a bear market. we just don't see the potential for inflation on the horizon to push us into a bear market. we think it's more of a range trade than anything else. subadra: i agree with kathy. it is really hard, especially after seeing 30 years of one-way
yields, i just cannot imagine a sustained selloff in yields, treasuries that will lead to a bear market in bonds. jonathan: diana, what do you think? diana: while i get the argument on why inflation has been lowered, etc., you cannot discount the fact that we are seeing a modest pickup in wage growth across most economies, whether in the u.s., europe, certainly in the u.k., and even japan. the other thing is in the last small business survey in the u.s., a number of businesses were reporting supply chain pressures. it might potentially down the road cause them to raise prices. that is not the core scenario, but i would not write off inflation just yet. jonathan: diana, i get the feeling that you think maybe people might have gone to one
side of the boat and there are too many people there now? diana: yes, that is exactly the way i would put it, maybe a pendulum. we swung one way in december and now have swung too far the other way. i think markets are very much overpricing perhaps the fundamental improvement, or the impact that the policy response will have on the actual economic growth. the truth is somewhere in the middle. the fact that we have had policymakers starting to be more accommodative, tilting toward a more dovish stance, is positive for risk assets. but you know that in the past, policy responses have intended to inflate asset prices and have done little for the underlying economy. that's what the issue is right now. jonathan: that is a really good point. end of the show, we have to wrap it up with a rapid fire round. negative german 10-year yield before the month is over? only eight basis points away. yes or no? kathy: yes. subadra: possible. jonathan: oh, come on. diana: yes.
jonathan: is it time to feed the 2019 strength in risk assets? yes or no? kathy: yes. subadra: yes. diana: would have been time a couple days ago, but even now. jonathan: i just want to get a feeling for the balance is shifting. the next move from the fed, a hike or a cut? kathy: hike. subadra: cut. diana: hike. jonathan: fantastic to catch up with the three of you over the last 30 minutes. that does it for us on "bloomberg real yield." for our audience worldwide, this is bloomberg tv. ♪
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