tv Bloomberg Real Yield Bloomberg February 9, 2019 2:30pm-3:00pm EST
>> from your city, i am jonathan ferro. bloomberg yield the -- bloomberg real yield starts right now. coming up, pessimism returning, stocks and in the week lower on trade doubts. sentiments hours, the german juncker drives deeper into negative territory. gains in riskof assets. johnathan: we begin with the big issue. looking at this big rally we have had. >> we can't predict how this will shake out. >> we are seeing more uncertainty. >> it is time to sell or take
some caps off table. >> that's what we are debating right now, to we ride strong technicals and momentum, or do we start taking some chips off the table and recognize there is a cap on the upside? >> they sound the alarm that everything is all clear. the fed is not going to allow the expansion to come to an end. >> nothing we can rally further, but this idea that the bonds are going to be low and there are no issues for the rest of the year, it is crazy, especially when the same people saying that say exactly the opposite a month ago. >> having the option in your portfolio to take advantage of these types of dislocations that customized and fear is because of the liquidity in the market. it is very tenuous. can we have a consolidation, should things go back, have things gotten frothy? yes. if you look at the economy, it is strong. credit spreads are tightening. the fed is saying it is on hold. >> this is not a market where you say the wheels are falling off. johnathan: joining me around the table in your, kathy jones,
plus, coming to us from london is diana, for volume manager at jpmorgan. diana, i want to begin with you. it is a big debate on the buy side. now it is time to take chips off the table. what you thought the echo --? taking someana: risk here make sense. we quite like the idea of having a barbell portfolio were you have some risk in the high-yield a push sectors, but with toward quality assets. putting some of that cash in duration like fixed income, where you are looking at treasuries or e.m. markets that are very sensitive to treasury moves. johnathan: kathy, what do you think? reporter: i would agree with diana. off the tableey here. it has been fast and furious. you have to be nimble to play this in and out. we would take some risk off the
table. we do light duration as well in risk-free. johnathan: we're going to the concept of duration and a minute. i want to bring up the charts we see in high yield, credit more probably and leveraged loans as well. kathy, what pockets of credit are you looking at that have gone too far too quickly? kathy: high-yield, leveraged loans, and re-area really. -- every area of the market and credit. particularly, leveraged loans and high-yield. there could be a quick snap back that even though we are pretty positive on the domestic economy for this year, we're still lay in the business cycle. there is still a lot of headwinds. this concept on that risk, we talked about that credit. what about emerging markets because i've heard some banks at the end of the week that people are saying now is the time. dial it back a bit. reporter: an emerging markets, it depends on which part you are looking at. if you're looking at local currency, local currency has rallied to 11% since september.
that is one area that never sold off in december. it shaking idea of during duration. you had relief coming there. i don't think the economic is going to change. when we look at some of the areas such as sovereign credit and some of the corporate space, we have retraced most of the selloff we saw in the fall of last year in that space. taking back some risk, with a view of acknowledging we are in a volatile. -- volatile period, you get opportunities to reengage. johnathan: duration is, multiple times in this conversation. it is a concept that many people are bringing up. now is the time to at some duration. is it? reporter: in the treasury markets or risky assets in general, i think we will be range bound. carrying a trade make sense. in some
bound. numbers are very low. people are going out on the risk spectrum and buying high yields or corporate bonds and that is sort of what the fed wants the market to do in some respects. they want some stability in risky assets. johnathan: kathy? kathy: it's a little bit different. when engaged on qe before, you salt long rates move up. -- you salt long rates move up and reverse when they ended it. this time around, you're getting credities rallying and rallying and we have a lot more faith in the rally and long-term treasuries than we do in granite. i agree with kathy. -- subadra: i agree with kathy. what drives the market here is the fed. it is probably placed in what for the fed. we will probably remain on hold
for the end of the year. more portly, what the market is looking at is the potential for a rate hike in the future. there is not nearly as much room for the fed too high. johnathan: i want to pick you up on this. simultaneous rally we are seeing in risk assets and the resiliency we have seen and haven't assets of the same time, it is coming as concerns. downdrop, the next selloff, the haven assets will provide you with a buffer. it is tough to find diversification. what are your views on that? diana: the correlation between risk and safe haven is the issue is among the risks side and not on the safe haven side. assets, there was some undervaluation that has cropped up. given where we are on the growth cycle, given that we are starting to see some data coming in and we are seeing revisions from policymakers across the board, we had seen her loan say some concerning
information, given that it is been a reliable indicator of where the u.s. cycle is, showing some tightening credit conditions. it is hard to play it from a risk asset with conviction with fundamentals. i still think duration will remain a better play on risk off. ultimately, we are in a low rate environment and the rest of the world. anything that offers yield in that safety, as long as it is not because the fed balance sheet is moving, should be supported. subadra: i agree with what diana said. duration in general is where you want to be toward the end of the cycle. especially given the fact that we think we are into a recession in early 2020, ultimately, you will see demand, people logging into safe haven assets. there's plenty of that. there are no shortage of treasuries. bonds are trying -- starting to get to risk -- to rich in a fax. -- in effect. johnathan: what is driving that
in your mind? of the ecp not going anywhere anytime soon? subadra: there's a crowding a fact. there are not that many bonds or safe haven assets. quality,of flight to everybody tries to buy bonds and there is not enough to for the markets to take down. haven assets will continue to be safe haven assets. i would agree, just a limited universe of things with positive yields that you can buy. that keeps treasuries there -- johnathan: there seems to be a consensus emerging, that duration risk, the fed is out of the game, pick up some yield curve on the treasuries in the long game. we've seen some moves in the treasury. we remember last year, where it was one payrolls report, and inflationary surprise and the entire story change. are we vulnerable to that again? i do think so but i don't
think that will be something for this quarter. when you look at things that would leading indicators for 2015 when you had the big signsd on growth, you had of green sheets coming through in places like korea, which does lead chinese data by about a couple of quarters. we started to see the pickup. it will be a couple of quarters before we are talking a stronger story. we still need to get brexit out of the way. we need the u.s. funding depression to be out of the way. -- discussion out of the way. all they had winds that the central banks are alluding to are having this quarter. johnathan: a final word on the inflationary tail risk that is still there. what your thoughts? subadra: the fed being on hold is something that will be positive for inflation and inflation expectation. we saw a pop in the inflation expectations right after the meeting last week. in the big scheme of things, it will be hard to see sustained
rise, especially given the global environment. the revision to sought from the european commission on global growth and development inflation, they are bringing down the inflation forecast for 2019. that will weigh on u.s. inflation. johnathan: we will talk about that in just a moment. coming up on the program, a global force for bonds have investors scooping up italian debt. huge demand. that conversation is next. this is bloomberg: real yie. ld. ♪
♪ johnathan: onjohnathan: jonathan ferro, this is bloomberg real yield. i want to add to the auction block where you find in other side of the u.s. junk bonds market is alive and well. clear channel sold more than $2 billion in bonds and the largest triple c rated deal since september. it is going off from its they crept parent company, i heart media. in asia, and auction of 10 year japanese bonds is the highest ratio since 2005. the sale came one day before the central banks regular purchases. italy, surprisingly market with this one. raising 8 billion euros that attracted more than 41 billion. it is the second impressive vote for the country this year. still with me is kathy jones. moa.ra and diana
let's begin and mentally. a mustard demand for euros of debt. what is behind it from where you're sitting echo -- sitting? diana: we came to market with a decent concession. they had about 25-30 basis points cheap to the current 30 year bond, which the market saw as an opportunity to get some , at a relatively attractive level. what we've seen since then is the curve has underperformed. we saw the secondary pricing up closer to where this bond was issued, rather than this bond running back. ultimately, it comes down to what we have been discussing. for italy, it is seen as a duration. european rates are low. in terms of the high-yield space, investment grade, we have had very little issue in december of last year. investors were risking portfolios. withe have come in here,
greater risk than they have wanted to, starting to gear. at a time we are seeing money coming out of leverage loans and a big stock cutbacks at the, .hat is supporting -- convexity that is supporting these bond markets. johnathan: what do you make of the unpredictability of the treasury bringing something to market like that? it is a surprise to some people. they have a 250 billion euro funding target for the year. is that something that is weighing on btp's too? diana: it is weighing. the outlook for a deal at -- italy doesn't look great. it is only a month of time before investors start working about the probability of them being able to achieve their fiscal targets when growth seems so poor there. markets will manage to get away with it. the italian government will beef -- to be fair to them, they played this well. they sought opportunity in the market were sentiment was
positive and they took at the advantage to issue. we will see more of that from then i expect. johnathan: the fundamentals in italy are not turkey. a huge concession for the 30 year issue for 2049. you have the fact that it is 300 basis points over germany. is this something that is attractive to you? kathy: it is more of a trade that a long-term hold. this is been true over the years with italy. you can buy it and make some money. in this environment, when there yield overo year -- the world, people will take advantage of it even as a trade. johnathan: it's against the backdrop of a forecast for the european commission work cut by italy by about 100 basis points. the growth story for the continent is not looking good. subadra: it's not. that is where i struggle to see why there is so much demand for risky sections of the growth rate for instance.
there is still a serious amount of risk. ,taly came out of a recession or is in one, i should say. there is still a lot of demand. why? investors are seeking gilts. they have to go out there -- yields. they have to out there and get them. especially if it will be on hold, there will be some risk on margin. you mentioned something important. it is not the growth forecast that is of interest alone. it is not a surprise that the italian government is struggling. it is the politics that emerges because of the cuts to the forecast. we are likely to see another clash between the commissioner of the italians. is that something that not enough people are paying attention to as they clamor for duration on the periphery? diana: for italy's case, it is something that the market will probably need to pay more attention to as we approach the may election.
during the course of the week, we have had some speculation that there was discussion around supplementary budget to help boost growth, being discussed within italy. i don't think the markets will see that as a positive. it would take us back to where we were and porter for last year. -- in quarter for last year. it is more of a trade that a strategic long-term play for now. until we get clarity on how the fiscal economics are likely to evolve. johnathan: tender yields have backed up through the week. the german yields have plunged lower. mentioned earlier in the program, the yield curve is negative out to nine years. the 10 year yield down to 10 basis points in germany. what is your thought on what is happening with the curve and how this is a to evolve through the year? kathy: it will be a tough environment. if you're tried to invest in europe right now. there is a slowdown in china, and the trade conflict and how that has 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 europe. johnathan: are you convinced that we will get an effective response from the ecb anytime soon? subadra: we already did in some respects. they've acknowledged it is down to the downside. what stood out to me in some of the projections from the imf or the ec was the magnitude to which they brought down the growth forecast for germany. it was .6 or .8. it is tracking close to 1% growth. that is a big concern. the trade uncertainties are having a much greater impact on china and germany, but i think those dynamics are what are driving the market. johnathan: the emissions forecast for germany, lower than the u.k., which is dragged in bread -- brexit as well. we don't have to talk about it. you are all happy about it. subarra andi want to give you t
more debates in the u k parliament over brexit. a u.s. inflation report and a potential u.s. government shutdown on the cards as well. a lot to look out for next week. still with us is kathy jones, subadra and diana amoa. i want to wrap things up with something. kathy, i know you want to talk about it. weut a year or so ago, reached this level in 10 year treasuries around to 65. , and some big names camera and said that came out and said the bear trend is over and it is done. we're back to those levels again. what is your takeaway? kathy: a bear market is yield over time. you can't take a moment in time and declare we have started a bear market. potential forhat inflation on the horizon to really push us into a bear market. we think there is more of a range trade than anything else. subadra: i completely agree. it is really hard, especially after seeing 30 years of one-way
imagine acan't sustained selloff in treasuries that is going to lead to a bear market in bonds. johnathan: diana? onna: i get the argument white inflation is been lower, you can't discount the fact that we are seeing a modest pickup in range growth across the economies, whether it is in the u.s., europe, the u.k., and even japan. that is one thing. the other thing is, and the last small business survey in the u.s., a number of businesses were reporting supply chain pressures. some sort of issues around supply-side pressures, which might then, potentially down the road, caused them to raise prices. that is not the core scenario. i wouldn't write off inflation just yet. johnathan: i get the feeling from you, diana, that you think maybe might have gone to the one
side of the boat and there is to there right now? diana: yes. that is exactly how i would put it. morbid pendulum. we us want one way in december and now we have swung too far the other way. markets are very much overpricing the fundamental the impact the policy response has had 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 tried to conflate prices and have done little for the economy, and that is what the issue is right now. johnathan: you know what time it is. end of the show. we need to end it with a rapidfire round. negative german ten-year yield before the month is over, only eight basis points away. yes or no, kathy? kathy: yes. subadra: possible. johnathan: come on, subadra.
johnathan: is it time to fade the 20 19th strength and asset? kathy: yes. subadra: yes. diana: yes. johnathan: i just want to get a feeling for where the ship is. the next move from the fed, a hike or cut? kathy: hike. diana: cuts. -- subadra: cuts. diana: hike. johnathan: that is it for us right here on bloomberg: real yield. for our audience worldwide, this is bloomberg tv. ♪