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tv   Bloomberg Real Yield  Bloomberg  March 1, 2019 7:30pm-8:00pm EST

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jonathan: from new york city for our audience worldwide, i'm jonathan ferro. "bloomberg real yield" starts now. ♪ jonathan: coming up, very little in the u.s. economic data to test fed chair jay powell's patience. investors looking at underwhelming data in china and focusing on the silver lining. debthe lowest rate of leading the charge. we begin with a big issue, space in the global economic turnaround. >> the consensus is the u.s. is about to slow and slow and it doesn't. >> we are at a bottoming phase. >> a lot of it is in the
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rearview mirror. >> we gone through a process in the equity market of pricing in material weakness. >> reversal and sentiment of the dark days of december. >> and might be why the market itself can't kind of ignore the economic data. >> the market is confirming we are getting good macro data. >> we are maybe not as late cycle is a lot of people thought in october. >> china will stabilize. >> you are seeing shreds of this and the data we discussed. isa drip of positive data conquering -- countering the story that it is not getting significantly worse. jonathan: joining me around the table are my guests. greg, i want to begin with you. a glass half full week, even though the data has not been great. greg: hope springs eternal. you saw it on the conference
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ceos were talking about it, a difficult operating environment, but optimistic about the future. i think that is what investors are seeing and feeling as well. but i do not think it is about the data right now. i think it is about the comfort around the fed not moving, ecb backing away, and all central bank driven. the question we have to ask ourselves, at what point will the slowing macro data rear its head? jonathan: through the week china , has been rough, european data not great. bottom of the chart, you see the roll over in the surprise index in the global economic data, and then this happens. 10 year government bonds in germany are week. u.s. treasury yields starts to take up. what is happening, and what does that tell you about the market and investor prices at the moment? the yields are starting to kick higher. >> i think markets try to be as forward-looking as possible and
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responding to not only the stimulus from china, but the fact that the fed seems to be on hold for the foreseeable future. the early signs from the stimulus from china may be starting to come through. we are seeing the credit data, one of the key things fixed income investors were watching and that ticked higher in january. there are things we need to be conscious of and one data point does not make a trend. but these are early signs investors are looking for to get comfortable. the other key thing to remember is where we have come for in q4, where markets were in panic mode. sentiment at the time was deeply pessimistic at the price action this year has really been about getting investors closer to neutral. jonathan: i'm going to pick up on those points. there are little elements, consistent through the chinese
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data, the official manufacturing the nonmanufacturing pmi, new order element kicking higher. is at a glass half-full silver lining or is at the market trying to get ahead for the rest of the year? mary: it is too early to tell. i think it is too early to tell. we do not have a significant amount of data points out. i do tend to agree that right now, it is the market coming out of that panic at the year-end jonathan: has the data changed or just the way we respond to data that has changed? i am trying to explore this. is that what has changed, the investor buys changed with more support from the central banks? >> it is absolutely the rate of change that matters. throughout 2018, not just in q4, investors were battling against weaker data,le of
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and china is slowing throughout the year and we had capitulation in early 2018. even those these are early positive sentiment, markets will respond in a major way. jonathan: greg? greg: i think so too, but valuations have also changed. there was a much cheaper proposition than today. you look at s&p ratios and you have seen it rise in multiples of four pe points. that changes the dynamic when the economy is slowing and earnings are slowing. it makes a much more difficult path going forward. jonathan: what a lot of people have done is looked at v-shaped recovery, credit, high-yield. s&p 500 is one. what is interesting is that in foreign exchange and treasuries, the range has been tight. do you see any reason to break out of the range bound trading we have seen in the 10 year treasury in much of this year? mary: i think it happens -- it
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depends on on what happens with data coming out, but for risk assets, yeah, we have seen a v-shaped. there are also other factors that continue to hold it lower from outside the u.s. jonathan: jub, what do you think about that? jub: i think that we have traded in such a tight range is why they have traded so well. post the fed, we have had a collapse in volatility across most financial assets, and that is one of the primary factors driving people and to carry trades, into credit and emerging markets and giving them offered -- giving them confidence, where it is low and we need to go search for coupons. that is by design, with treasury volatility that was moving higher in this is a signal we 2018. are on hold for the perceivable future and not worried about inflation and that pushes people into risk assets. jonathan: that has been the story for the first quarter of
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this year. does it bleed through to the rest of 2019? jub: growth data is on a declining trend. it is difficult to where we would see sharp inflationary impulse. that is the primary factor that would cause central banks to flip back toward a more hawkish stance. at the moment, while the reflationary impulse is low, is a case for theve fed to turn hawkish. i do think that we see this opportunity and risk assets as being a window that will not be open forever. we do seem to have some blue skies. jonathan: i asked you if you liked jay powell, and you said you did because he makes mistakes. and there are opportunities from those mistakes. he has corrected his path radically in the last couple of months. do you see him carving out a new path? greg: yeah. it is a constant struggle as he
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communicates, and as he changes quite often, and he's trying to regulate the markets. i think what is different today versus several months ago is that it seems increasingly so that he wants to support the markets. he is almost exclusively saying that, but the testimony this week was uneventful. which is what you want. who knows. maybe he is learning along the way but i think he will be a , source of volatility this year. jonathan: what are your thoughts? mary: i agree, and i think where valuations have come back to, there is less opportunity. in high-yield, spreads have tightened, and we don't see a major catalyst for spread tightening from here. if anything, we see the reverse. jonathan: as you say, spreads are really tight. a lot of people are trying to understand what brings the fed back in. our markets a key element as well?
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a tongue-in-cheek ask, is the s&p 500 a factor in this as well? jub: i think we have seen over recent years whenever the fed feels like markets are getting too frothy, they will try to talk down asset valuations slightly. if high yield spreads were approaching the 300 level, which is where we got to in 2017, they will want to take a little air out of that rally. where they sit, around long-term averages, we are far away from the fed feeling that they need to deflate asset bubbles. jonathan: guys, you are going to stick with me. coming up on the program, the auction block. bonds off to the best start of the year since 2001. that conversation coming up next. this is "bloomberg real yield." ♪
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♪ jonathan: i'm jonathan ferro. this is "bloomberg real yield." it is time to head to the auction block. we begin in russia. a banner month for bonds sales. the finance ministry selling $2.5 billion worth of debt, and -- in february, three times more than the recent average. back in the united states, the seven-year auction to the largest amount since august. the largest share since 2014. racking up the months in corporate for junk-bond supply february, picking up with $21 billion priced in, the busiest month since march of last year. still with us to discuss is mary
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bowers, greg peters, jub hurner . high yield debt issuance up. is that a thing for the rest of the year or just for q1? mary: you have to follow the fund flows. they have been strong for high-yield this year while leverage loans have continued to have outflows. that has come down in the last couple weeks. the demand that was there for leverage loans was sucking the supply out of high-yield is now bringing the supply back to high-yield. amountct to see a larger of secured issuance coming back to the high-yield market. jonathan: what do you think greg? jub: it is about clo's coming -- greg: it is about clo's coming back. it seems like the desire for floating rate assets is not what it once was. with the fed on hold, talking about a hike in the marketplace, you are not seeing the same demand for floating rate product and there is not the same demand
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for loans. jonathan: jub, this makes a lot since with of dashes make a lot of sense with the federal reserve backing off. when we see what was done on the back of it. jub: that is absolutely right. leverage issuers typically follow where the flow is. lester, investors were worried about rates going hiker -- going higher with the fed hiking. this year, that is not there and the flow comes back to the fixed coupon product. that technical has been such a key driver in credit markets over the last couple of years, and we are seeing it play out in the investment grade space, issuance is down 25% this year versus last year. we speak about liquidity a lot in this topic, it can be very one way. right now, it is toward the tighter side of spreads. but supply dynamics will be key to watch in the coming months. jonathan: i want to get your appetite for high-yield versus loans. rotatef people tend to
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from one to the other. morgan stanley was doing that. there was a caution and they said we shift back into loans relative to high-yield while we remain concerned about fundamental challenges specific to the loan market. high-yield is still the higher beta market. let's start with the premise of that. is it still the higher beta? -- beta market? mary: it still does have more retail investors than the loan market which is more supported by clo's. looking at fundamentals, the higher market is as good a shape as loans. there has been deterioration across both markets. you have to be careful at this point in the cycle on credit selection no matter what market you are picking. jonathan: i spoke to my colleague, mark collins, and he is behind this. are you? greg: yes. i would agree with that, but i don't think it is about the beta, it is about valuation.
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valuation on loans were hit hard. the issue we have had around loans is that if you were right on your credit call, it was called away, and if you were wrong you owned it down to zero. , now trading at a discount, it is attractive. in loans versus bonds. it is valuation driven and not so much beta driven. the durations are different. jonathan: can you compare the credit quality of bb in loans to bb in credit? is that an apples to apples comparison? greg: there are nuances. it gets complicated but you can do it. it is a zero sum game. for loan and bond capital structures, for all of the complaints around loans it , forces you down the capital structure on the bond side. these are all considerations. i think doing that relative value is something we should be doing. jonathan: is there a liquidity consideration?
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greg: they are both terrible. loans are worse than bonds, and clearly tied to flows. much more so than bonds. i think you ultimately have to start with fundamentals and get the call right and then liquidity is secondary. jonathan: what did you think about that trade, jub? jub: we are quite defensive on u.s. credit, particularly leverage parts of the u.s. credit market. ownhis point, we don't loans in our portfolios. we think it is more advanced and other markets. the fact that cash is an investable asset in the u.s., and it is in europe that makes , us lean towards european high-yield rather than the leverage part of the u.s. -- the u.s. market. greg: we see more value in the
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u.s. as well. mary: not as much. they have typically traded inside the u.s. at even. it is lower duration and higher market. with seen deterioration in the credit metrics across european high yields. it has a larger component of autos, which has been suffering. the data in europe continues to be weak. at the margin, we would prefer for credit to be where the growth is. jonathan: coming up, a market check on where treasuries have in. up on a two-year by nine basis points, a 30 year by 10. the 30 year on yield. coming up, a decision from the ecb. focus shifting to mario draghi. this is "bloomberg real yield." ♪
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♪ i'm jonathan ferro. this is "bloomberg real yield." time for the final spread. in the next week, china's national people's congress in beijing. a slew of central bank decisions on interest rates, with the spotlight on the ecb. we will hear from mario draghi. we will hear from governor carney, too. capping it off, the main event, the u.s. jobs report. still with me are mary bowers, greg peters, and jub hurner. let's begin with the ecb. what are you expecting from frankfurt next week? jub: the key thing for us to watch will be any revisions to the staff productions on growth and inflation. they look a little bit high in
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terms of expectations for 2019, given the recent growth weakness we have seen. they have projections of 1.7% for 2019 versus a consensus of roughly 1.3%. the market will be watching how far the mark -- the number is revised down to see how the ecb is thinking. there is expectation about an announcement or further news on the banking sector. it is a big meeting. ultimately, the ecb are unlikely -- are likely to maintain a more dovish bias. there is uncertainty in the external environment. our take on the european domestic economy is we see some strength, particularly in the consumer sector, with unemployment at almost precrisis lows and wages moving higher. the slowdown has been that on external factors that largely points back to china. decide will have to whether they think this will be
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longer-lasting. jonathan: it has been going on for a while. mary: it has been going on a while. in terms of how the ecb will week, theyxt probably will continue to be patient like the fed. what tools they have additionally, i am not sure. i tend to agree that it did concern what the revisions are for growth. jonathan: the ecb has tried to be patient for the last several minutes -- several meetings in that has not paid off. where the fed, the growth is decent in the united states, it is terrible in europe. greg: this is true and they do not have a lot of tools left other than the bank program. what they do have is china stimulus. that has a much bigger impact on europe van -- europe and the u.s.. -- europe than the u.s..
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that is a wildcard. we learned last year that the trade war and the slowdown in china had a larger impact on europe than it did the u.s. jonathan: you think mario draghi's decision is going to sit and wait? greg: the point is that there is some positive external optionality they can hope for. hope is not a strategy, as you know. aroundo think it is all revising the forecast lower to give them more room elsewhere to do more policy. jonathan: jub, on the policy option they do have, the bank funding tool, to the optics of too?helped us market, do they help europe? jub: it would if it wasn't for the fact that there is optimism baked into some further news. to greg's point, i agree, i think the upside for europe extends from china.
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if we look back to 2017, at that point, the eurozone was growing at 2.5% gdp. that was helped by the at fort -- export sector as china was inflating. then we had deleveraging from china suffering. you need to look east for outside eurozone growth going forward. the ecb will be patient in terms of exercising policy tools until they get more clarity. jonathan: let's get to the final round. the rapidfire around. we start with europe. quick answers if you can two quick questions. does the ecb pull the trigger on counters next week? greg: yes. jub: yes. mary: yes. jonathan: have you seen the lows on 10 year yields? greg: no. mary: no. jub: yes. jonathan: supertight range for 10 year treasuries through 2019. really tight. are we going to break out, and
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if we do, only breaking out yields higher or with yields lower? higher or lower? greg: lower. mary: higher. jub: higher. jonathan: really interesting stuff and great to have you with me. mary bowers, greg peters, and jub hurner. from new york city, that does it for us. we will see you next friday, 1:00 p.m. new york time, six clock p.m. in london. for our audience worldwide, this was "bloomberg real yield." this is bloomberg tv. ♪ want more from your entertainment experience?
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