tv Bloomberg Real Yield Bloomberg March 15, 2019 1:00pm-1:30pm EDT
a very low inflation rate. >> low volatility. >> dovish ecb. next dovish >> dovish. the fed will be passive on the sidelines. >> it's time for investors to be relaxed. i want to begin with you and start with this goldilocks theme that many people have become comfortable with. is it an argument that resonates with you? >> goldilocks is used a lot. i would like to move on to something else. let's talk about a soft landing. the fact that the fed is done. the tightening cycle is over and looking ahead, where we are
right now is a. where we are similar to the late 1990's where the yield curve stay flat for years. i would prefer to say we are in an environment where economic growth will stay slow but steady. the fed will stay on the sidelines permanently. >> i think it is remarkable how little the economy and the outlook for the economy between october and today has changed. what has changed is the fed's narrative. the fed caused the crisis tightening. we are far away from neutral. they caused the pullback. we are reacting to the fed whereas the economy has been much steadier relative to the swings in financial conditions
and the sentiment. we have to take a step back and remember, pre-october we were talking about hikes. now we are going to the other extreme and talking about no hikes. is going to be data dependent but also fed dependent on the data. there is a risk that we are overshooting. we understand the fed is data dependent. do you understand how they are dependent on the data? it's not clear to me what the reaction function is. >> that is part of it. over the course of the swing from far away from neutral to today where we are having this conversation where we are having the new philosophy regime for which monetary policy operates, we're talking about makeup strategies and a fed that is
much more willing to absorb higher inflation yet the inflation data is going in the opposite direction. that is part of what is fueling that. you could have a pivot and a little bit of that change is fueling the bullishness in the market. it is a fed that is worried about the downturn in long-term inflation expectations. data turns stronger, the spread will be likely to defer. you think it's too little too late from the fed. how far will this go? >> i hope they figure it out and they go down a path of easing as soon as possible. iam with craig and jeff, think the fed cause of these issues. i think they moved to times too many in 2018.
i not only think they are done, i think it is minus one with respect to hikes this year. at trigger for that will be investors and data. the inflation will pick up. the investors will put the fed in a corner by raising expectations for a rate reduction and the fed will be stuck because they don't control the narrative anymore. the investors control it and that was no better defined than in december. >> craig, what are your thoughts? >> it is a great conversation to have. if you ask what it's going to take for that, it is going to be not necessarily domestically, i think the fed is focused on what is going on globally. the u.s. economy is ticking along. it is showing signs of stress. it is late cycle not end of
cycle. i think the fed is more focused on what is going on globally. if there is a thing that could tip them to ease this year, it could be something not outside of the u.s. on the global front. jonathan: craig at how would you push that view? we like being long-duration. our view is the rate upside is cap. at most we are in a 252 to 80 trading range on the 10 year. we have be willing -- been advocating for clients to add a duration to portfolios rather than stay bundled up in the short end of the yield curve. we think rates go lower from here so we like duration. if i see rates going lower but i agree with craig and that the duration conversation for portfolio construction is on the mentally changed because of the fed's because they are more
willing to observe inflation and to cut interest rates, you have an asymmetry to the interest-rate outlook that favors duration positioning and it restores the negative correlation -- the expectation that if something bad happens, one of the triggers that either of these gentlemen were thinking about, then rates will go lower. that means you want to have duration in your portfolio. jonathan: what we have seen is that the long and can perform well even when risk assets perform as well. how do we know for sure that the next move -- that the treasuries will give you that risk mitigating characteristic that they typically offer when yields have been lower so far? shock is aely, that negative confidence shock and a negative growth shock. if you have a negative confidence and negative growth, the expectation is the fed will have the ability because it is not inflationary.
the fed will have the ability to itsash the full arsenal of unconventional policy and the expectation in the bond market of that arsenal being released whether it is for -- quantitative easing. it goes into the bond market expectations and you flatten the long end of the curve. jonathan: what we have seen increasingly is the spread between tens and 30's start to break out. what is underpinning that? >> that has to do with supply dynamics. i am more worried about the fact that the five-year treasury trades right on top of the funds rate right now. to me, that is troubling. with respect to the fed, where i would extend it further is i think they have identified that they made a mistake. at this point, they are just pausing. if i make a mistake, i corrected.
i don't just do nothing. listening to the three of you, the first three months of 2019, the treasury has been boring. it has been narrow in terms of the trading range. saying the path of least yieldsnce is for lower even a sub to 60? >> that is our view, yes. i don't see there is a path absent a shock event. if we are just extrapolating from what we have here, and at what we are forecasting in terms of growth inflation and no outside shock event trade being implemented, those things we worry about, then the market has priced in the movement to zero cuts. the market has priced in a movement to average inflation
targeting and a dovish fed. to get to a lower rate, it is fine to have that view but you are saying there is something else happening that is going to drive us toward pricing in cuts. >> i think that is where you come back to the global front. interest rates moving toward zero in germany. i think that is were you look to that catalyst. jonathan: we are going to do europe in the next segment. jonathan: >> i don't want to see yield curve inversions all across the curve because we know that that portends that news. >> stick with us. up, the outside demand for italian bonds. that conversation is coming up.
finally, we had to the eurozone. our next story. him and gloom is still stocking the eurozone. >> the call on europe is not about valuation. fors about the potential european growth. i see positive signs coming from fiscal easing in germany. jonathan: i want to bring in our guests still with us. so many people sound doom and gloom me on what is happening on the continent. when you look the price action, it is interesting that pretty much everything has performed quite well.
of a contrarian call to say europe is going to do well this year? past thek we are contrarian call because of what the central banks have done. i think it goes back to something that just said earlier. or banks pivot has caused given the market the view that there is a support for risk assets out there. whether it be equities or high-yield credit. jeff, what are your thoughts? >> the central bank pivot, the reach for yield. fixed talking about income.
you were talking about equity. it is unique. german yields are making new lows. much a bearish signal if we take it textbook. the equities are doing fine. it is really about everybody because the fed cleared of the path away from the fears of normalization and the disruption that it had in 2018. the tightening of the conditions and return to cash. the competition for capital theme. that story is completely changed at 180 degrees where you are lowering rates so there is confidence to go back into risky assets and that is what is lifting the boat. you would only really know that europe was in a bad place if you look at a couple of things to. outside of that, looking at european assets, you wouldn't be able to tell that the economy was performing badly and economy
-- politics were a mess. >> i have a different view on equities. equities might be more teetering outside the u.s.. with respect to fixed income. i think a key is not only the dovishness of the central banks. it is the supply demand dynamic. you pointed it out. with this bond that just came out and the demand for the amount that they had including the italian that greater than one ratio with respect to the issuance. thefact that universally, demand for fixed income does not go away. that is a big part of this puzzle. craig, i would love your view on this. think -- i don't think we have seen the low in german yields yet. >> i think that a lot of the bad
news is in the price. if you are building a portfolio and you are holding bonds, why the you hold german bonds in a portfolio? it is power to offset is becoming more limited. you are looking to other assets like treasuries and the dollar. that is a better place for the ballast in your portfolio. will say toople meet may be the ultimate proxy is european risk. wondering if you get some kind of resolution to the trade tory, would it be enough drive it? >> i think the trade piece not only the resolution of the trade piece that this overhanging question about the trump pivot to u.s. european trade relations? if you alleviate that concern which is a real tail risk to the european economy that might help as well. >> 10 year bonds are going to go back below zero.
we are here in new york. i want to get you a market check. yields shaping up as follows. the two-year down a couple of basis points. a 30 year of 3% on government bond in the united states. still ahead, the final spread. another appearance from jay powell. this is bloomberg real yield. ♪ jonathan: this is bloomberg real
conference with us. the chinese president will be catching up with the italians of the end of the week. lots going on through the weekend and next week. next up the fed meeting week, what are you looking for? >> we are looking for the fed to change the dots. a bold move would be to go to zero. no rate hikes at all. that could be supported by the strong dovish pivot. to stayey are bent gradualist, maybe they go to one.. the important is clarification on their plan for the balance sheet. end the shrinking process? sooner rather than later is our bit.
>> i think he hit the highlights. it is in the market price that the dots are going to move to zero or one. anythingising issue is that comes out that moves the markets is going to be more information on the balance sheet area. if we get any of that, that will be surprising. howother important thing is does he handle the questions in the q&a around the pivot. you can take a lot of criticism on it. then, the movement toward inflation. it will be interesting to what degree they downgraded their growth forecast. >> certainly below two. the issue with jay powell is i want to hear what he has to say, that has been more problematic versus not in the past.
i think they are going to come down to one.. we will see where it goes from here. i wish he would speak less versus more. jonathan: do you agree with that on the pell communication? everyone was excited about him when he first came in. what are your thoughts on jay powell's communication? >> i think he has been tone deaf at the very least. you usually accept a mistake from a fed chair from communicating. i think he has had a few mistakes now. in theis dovish pivot comments he has made after the first of the year, it signals that he is listening. that tone deafness that we have seen should go to the wayside. jonathan: do you find this public debate helpful? >> i think it is.
market is paying attention to inflation even though it is not an issue. that discussion from the fed with regard to inflation is one more spec of transparency. it is helpful to markets. >> it is much more fundamental than that. they are trying to affect inflation expectations. the way in which you do that is not by having this debate in an academic corner. it is by telling people this is how we are going to behave. you build those expectations and it is critical to their achievement on that goal. >> three questions, three short answers. how many hikes will it show? >> one. >> zero. >> zero. german ten-year yield, higher or lower by year end?
>> lower. >> lower. >> lower. >> jonathan: european or u.s. high-yield credit from here through year-end? where is the performance? >> u.s. high-yield. >> u.s.. >> u.s. high-yield. good to catch up with all three of you. from new york city, that does it for us. we will see you next friday. this was a bloomberg real yield. ♪
emergency he declared at the southern border. in effort toon was .ircumvent congress the president will speak from 3:30val office at washington time. authorities in new zealand say the gunman behind one of the mosque shootings that left 49 people dead today tried to make a few things clear in a manifesto he left behind. he is a 28-year-old australian white nationalists who hates immigrants. he was angry about attacks in by muslims.trated he wanted revenge and to create fear. he also live streamed to the world his assault on worshipers at a mosque in christchurch. >> as soon as we know any different, we will let you know what is going on. there is a lot of speculation right now and all we can