tv Bloomberg Real Yield Bloomberg February 22, 2019 7:30pm-8:00pm EST
i am jonathan ferro, bloomberg real yield starts right now. ♪ jonathan: coming up, hopes are high as u.s.-china trade talks wrap up in washington. no sign of testing the federal reserve patients anytime soon. and local stocks mount up and credit cranks tighter. we begin with the big issue, is it time to start fading the rally? >> this is a good time to do risk. >> we are running cash balances. >> owning more cash than normal,
more high-quality bonds. high-yield, less levered companies. >> our tendency is to continue to reduce credit risk over the next 18 months. >> into more bonds right now. >> there is cash on the outside and credit. >> halting the portfolio towards high quality treasuries. in group that's been great -- investment grade corporate funds. have -- market has priced and a lot of good news. jonathan: joining me around the .able, our guests let's begin with you. is it time to fade the strength? >> the good question. the turnaround from the fed has been so rapid and sharp and stark, i think it's difficult to
catch our breath in terms of how quickly markets have moved to repress -- to reprice. in the big picture since, nothing really has changed. becauseeing cautious, when the end of the cycle is, i don't know, but i do know that the next big move for me is going to be a soft move. where now into investor psychology and behavior of the federal reserve being very much data independent. they are on hold regardless of the data. investors have rushed to grab yields and invest in the qe environment we've seen. practically i'm not sure. strategically, we deftly want to fade the risk. aref you look at where we in the credit market today relative to where we were at the end of last year, you had an inclination mid last year that perhaps the cycle was getting a little long in the tooth. you seen since then, a
tremendous selloff in the fourth quarter and recompression daily in quality spreads. it's probably a good opportunity to not look just at what you are doing in terms of high-yield, but in this credit volatility section. >> i think to answer this question, we have to answer this question on how long we think the cycle is going to be. growth is slower, that is a negative, but i think the news were getting from the fed is that they may extend the cycle. if they extend the cycle, you got only yield and the credit. don't get short credit. jonathan: what's been interesting for me is the volatility. it has rolled over and presently. if you look at the mood index, volatility has been feeling the treasury market as well. people keep on adding a little more risk. is that the right approach? >> low volatility encourages risk-taking. low volatility is driven by the
fact that the macro environment is stable. growth is slow. there is no inflation in the system. the term structure is relatively indicate -- relatively contained. this means there is not that much to fear. jonathan: do you see any catalyst on the horizon horizon -- on the horizon whatsoever that would energize volatility anything more than then what would happen in the last couple of months? >> the fed has been successful in crushing fall crushing volatility in getting it back into an artificial environment. the markets are completely asymmetric. the rising tide floats all boats. that feels to me completely wrong for this stage of the cycle. for exactly that reason. in, sody has jumped back
i guess it doesn't take much to push it in the other direction. the market yesterday as that was interesting because it basically said, were going to stop the balance sheet earlier, and were really unsure and on hold. really know why. or getting to the stage where everybody has rushed to the other side of the boat. again, in this environment, there isn't the threat of anything meaningful from central banks, and i don't think that's going to last on the tactical horizon. jonathan: i think what's interesting is it has quickly become the consensus view that everybody wants to fade the strength. and it makes me wonder what the pain strategy is. jpmorgan right recently that solid earning, minimal inflation and reflate it markets should be supportive of a continuation of
the benign credit cycle for the 2019 and beyond. the junk bonds, even with spreads are where they are now, what do you think of that? >> if you look holistically a what the fed has effectively done, if anything is going to be a soft lining for credit markets. around this time, when looking at a fed forecasting of 24 interest rate hikes. now they have effectively said it might be zero. in essence, you moved 100 basis points out of the forward outlook and they get you support for credit markets. i think this cycle could go on quite a bit longer. it will continue. economic coverage is usually killed, they don't just i have their own volition. if the fed is going to be more easy and pivot to a different framework to try to boost inflation, which we think is possible this cycle could , continue for a while. and you will get paid for owning
this credit. jonathan: 400 basis points is what we are over on high-yield. ? -- is that too tight? >> those are not terrible returns in the current low return environment. we've a backup in yields and spreads the last couple of years. our message is this is a risen , rate environment, we have to get the credit risk with duration. if you are wrong in we do come off the rails, the duration will help. jonathan: i think it's the shape of the recovery that makes people nervous. when you look at the price of this story, our spreads too tight when you look at high-yield? in terms of the quality of balance sheets, in terms of the , the on the monetary side size of the triple b market,
these spreads are way too tight. essentially we are at the late stage in the cycle and the positives that we see economically and in terms of the balance sheet, and these sovereigns we are looking at, this is horrible. again, this is for me a story about how many pennies you want to continue to pick up. i want to throw china in there as well. i think part of the reason we are able to keep this unstable equilibrium where we are back in the qe type trade is because the market needs chinese stimulus to be successful. i'm not quite show sure that this is the case. if it turns out to be the case the chinese stimulus isn't working, i think that could be a shock. will discuss that a little later in the program we talk about emerging markets. what james is essentially saying is, you have to ask yourself, what is the upside am going to miss out on by de-risking?
what is the answer? we have to recognize, and i agree with what was said earlier, we are transitioning and we fully transition to a lower potential return environment. taking your foot off the gas pedal too much, is at the expense of getting out of what the next -- what could be the next credit cycle, is proving to be costly. this is a soft landing for the credit market. jonathan: coming up, the auction block. big demand for inflation protection. that conversation just around the corner. we are talking emerging markets. that is next. this is "bloomberg real yield." ♪
♪ jonathan: i'm jonathan ferro, this is "bloomberg real yield." i want to start with the auction block, and we start with the u.s. treasury market, where inflation protection is at levels we haven't seen before. a record 82% of the auction for 30 year good -- year. another sign of exceptionally high demand for new issuance. $4.5 billion, offering as many as [indiscernible] china, overr in half $1 billion into your bonds pricing higher than initially expected. they are selling debt at the fastest pace in three years. quite remarkable given the backdrop. our guests are still with us.
off, pick up where we left the situation in china, and why we are still seeing demand for chinese debt issue. >> it is remarkable. it's very early in the process. chinese hard currency has roughly $1 trillion in financing to do in 2019. stage, relatively early i guess it's not hugely surprising we are seeing corporations globally taking advantage, and it china that is the case. i don't want to make any judgments about how successful that will be through the year, drip, thel be a drip macro environment will pay up -- play a part. i have concerns through the year, because the sheer size could be the difference. jonathan: what you said earlier
i think is important. the market has moved ahead of the economy. the market and the belief that the data will come and validate the price action, the chinese stimulus will work. you have doubts about that. >> i think one of the things that is happen recently is we huge spike,ta and a 5% in gdp in terms of new yuan loans. a massive number. there is some serious stimulus going on. but in context, there's always a bump this time of year. it's the new year, and much of what we see in fx markets around the term, and if you compare these specs in the data with something like chinese pmi, what you see is the bigger drop in the pmi around generate, the bigger the spike in the psx. --aw this as a sign of low
of a lack of confidence. they're making sure they have enough cash for the chinese new year because the economy does not look strong. historically, extrapolating this for the rest of the year has been a mistake. i think it will be a weaker economy. i want to see more data before i confirm that view, that i would not want to jump to the conclusion i think a lot of markets have, that this is the first in a step of a real increase in lending and economic activity. >> i have to agree. our position in fixed income on china, is there a two separate things going on. one, high degree of confidence you will see some affirmation of stability in the chinese a coming through stimulus, and the market surprising that in. there will be told used effectively in china. debt ins we see em particular, we are seeing high
degree of interesting appeared em equity is a leading indicator. you're seeing some resurgence and buying em equity that can sometimes be confused with confidence on the policy side. >> i think when we talk about china, we need to be clear. china is a very big market with capital controls, a very large financial market. they can control their own destiny in financial markets. what we know they have been doing all last year is stimulating. adding stimulus to the economy. bond yields dropped, credit spreads have been tightening. they have continued to tighten. sure in china's interest rates are below u.s. interest rates. this tells me the policymakers in china are very aggressively trying to support the economy. and spreading that stimulus in the economy. it will eventually leak offshore. the ties to the financial markets are a little hindered by capital controls, and it's not
as direct in the old days when you had exports and imports, economic activity being the transmission mechanism. but it will leak offshore. chinese buyers are buying the bond. jonathan: i want to discuss with you, there is a belief that the diminishing margin of return, the traditional dollar debt is so large now that china is pushing stimulus into the economy and is not working. they can doing this a while now -- they have been doing this a while now. why won't this work? >> the chinese economy has been rebalancing toward concepcion. we have to get away from that. past, china was largely driven by investment. you saw stimulus. consumption is different. you put stimulus into the economy, it will support consumption, and we think that is happening.
jonathan: what do you think of that argument? >> i think it's an interesting argument. i think what they are attempting to do is to some degree healthy, but they can't get to where they were with him productive investment. the kind of fiscal stimulus we are seeing may have come a bit late. all of the information we are getting from onshore is that there has been a massive negative shock to confidence. private enterprises and employees, the consumers of china, are feeling very concerned. is 25%, and you arefiscal stimulus, people nervous about whether they will keep their jobs and the growth prospects of the economy. for me, that means probably high propensity's essays -- high propensity to save. that is a drag on the economy. where got this situation
yes, it is stimulus going in, but it seems like it is pushing on both sides, consumption and business, and maybe giving people money or debt when they don't want to do practical things with it. jonathan: in the market, the belief that the ppi trend at the moment in china, the deceleration is going to continue, prices are going to come down for carlos of what happens with the trade deal, the second largest economy in the world will continue with inflation. the resilience in treasury is not going anytime soon, is that your take? >> pretty much. inn if there is growth stimulus or stabilization, it will be different. it will not be the type in the investment-- type of , commodity intensive as in the past. it will probably have less of an impact on the global economy. they are in account deficit country now and they will continue to push debt.
we talked about a nervousness in china, and it will spread to other countries. to agreewe would have with that. our position on china in particular has been that the transition from investing heavily on the producer side into a consumption-based market, there isur data, and much more volatility in the data, and that's something the market has a factor in, taking in these points. jonathan: it's a big debate. guys, you're going to be sticking with me. i want to give you a market check on treasuries through the week. to's, tens, 30's. the 10 year yield lower. 264 on the tenure. down a few more on the two-year. still ahead on the program, the final spread and the week ahead featuring a spotlight on chairman jay powell.
♪ i'm jonathan ferro, this is "bloomberg real yield." over the next week, president donald trump and north korea leader kim jong-un meeting in vietnam. and, dallas fed president, chairman powell delivering his report on monetary policy. from the new hear york fed. still with me, my guests. what are you looking for from the fed speak? >> if we go back to the fourth quarter, we knew risk assets had to have a response to higher interest rate regime. at the chairman powell probably might have shanked that one a little bit. now the ball is back on the tee. he has to a knowledge were in an
inflation, with 1.5% a lot of complacency on the bottom -- the bond aside, not a lot of confidence in the direction policy. needs to be more down the middle and more concrete. it is can be more transparent, aware of what markets are telling you. jonathan: for those who aren't aware, when you hit the golf ball, and it doesn't go where you wanted to. not pretty. i want to talk to about policy at the end of last year. cap we cleaned up the communication mess or gone too far? have we corrected too much from the federal reserve? >> here in european headquarters there looking out for me very well. pie.e a slice of humble last time i came on the show, i was very hawkish with respect to
the fed, and i got a slump in the facing q4. i don't think they cleaned up the communication mess at all. i think it's even worse. i cannot rationalize economically the dramatic change in policy guidance. for me, this is hugely concerning for the medium term relationship between the economy, federal reserve, and financial markets. you're just rewarding bad behavior. the markets have excessive stimulus that have not been economically active. it's not finding its way to the real economy. the fed came right into the rescue enough not going to encourage the behavior -- good behavior in the future. i continue to see a lot of there is a sense of dovishness. to stick you going with me for the rapidfire round.
a quick few questions and quick answers. raise cash or stay long on high-yield? >> stay long. >> stay long. >> raise cash. jonathan: treasury yield, tenure, higher or lower? >> higher. >> higher. >> lower. jonathan: the fed speech through next week, are we on hold for the rest of the year, yes or no? >> yes. >> yes. >> yes. jonathan: great to catch up with you. that's it for us, this was "bloomberg real yield." ♪