tv Bloomberg Real Yield Bloomberg March 15, 2019 7:30pm-8:00pm EDT
from new york city for audience worldwide, i am jonathan ferro. "bloomberg real yield" starts right now. ♪ up, risk assetg mounting higher, despite few signs of economic recovery worldwide. very little in economic data to test the fed's patients ahead of next week's meeting, and an increasingly bullish europe. a so-called contrarian trade. we begin with the big issue, markets mounting with few signs the global economy is bottoming. >> goldilocks. >> goldilocks. >> i would call this a goldilocks moment. >> a low-inflation world.
>> a low-inflation rate. >> low volatility. >> every central bank involved in supporting the economy. >> very dovish. >> the fed really doesn't need to tighten. >> the fed will be very passive and on the sidelines. >> it's time for investors to be more relaxed. >> there are a lot of reasons to be optimistic. jonathan: joining me, colin robertson, jeffrey rosenberg, and from minneapolis, craig bishop. craig.to begin with you, the goldilocks thing, many people have become comfortable with. goldilocks is used a lot. and like to move on to something else. let's talk about a soft landing. the fact that the fed, we believe is done, the tightening cycle is over. and looking ahead, where we are right now is a period where it
is similar to the late 1990's, the yield curve stayed flat for years, the fed held rates steady, and the curve did eventually infer in recession happened, but it was not an imminent event. goldilocks, i would like to say where in an environment were economic growth will remain slow but steady, not taken to a recession imminently, and the fed will stay on the sidelines permanently. jonathan: what do you think, jeff? >> i think it's remarkable how little the economy and the outlook for the economy between october in today has really changed. what has changed is the fed narrative. the fed caused the financial crisis tightening. october, beginning, far away from neutral them in the may cost of the pullback. we are reacting to the fed, whereas the economy has been much steadier relative to the swings in financial conditions and swings and financial sentiment.
i think we have a setback and remember, before october, people were talking about four hikes, six hikes, and were going the other extreme and saying no hikes. is that you at the? beginning, was my answer going to be? is going to be data dependent but also fed dependent. we have: something explored over the last couple of weeks, we understand the federal reserve is data dependent, do you understand how they are dependent on the data? increasingly they talk about inflation, and it is not clear to me what the function actually is. if we get inflation taking higher on the back half of this year, what do they do? >> that is part of it as well. over the course of the swing, far away from neutral, to today where we are having the conversation about the new regime for which monetary policy operates. inflation targeting, make of strategies, 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 can have a pivot, and a little of that change is fueling the bullishness in the market, but dovishness, all of the comment you just collected, because the fed is worried about, the downturn and long-term inflation expectations. even if the data turns stronger, inflation growth, this fed is likely to the firm. reserve: the federal underpins a lot of this, the selloff on the back half of last year into the rebound from the first quarter of this year. you think it is too little, too late from the fed? how far will this go? >> i hope they figure it out and go down and easing cap as soon as possible. jonathan: really? >> really. where i am with craig and jeff, i think the fed caused these issues and they moved too many times in 2018.
think they are done, i think it is minus one with respect to hikes this year. think they will ease later in the year. jonathan: what is the trigger? >> investors and data. the data, inflation will not pick up. investors, as they have now done, will put the fed in the corner by raising expectations for a rate reduction, and the fed will be stock, because they don't control the narrative anymore, the investors control the narrative, and there was no better defined them december. jonathan: craig, your thoughts? >> that's a great conversation have. honestly, if you ask what it's going to take for that, it's not necessarily going to be domestically. i think the fed is focused on globally. the u.s. economy is ticking along, certainly showing signs of stress. late cycle, not end of cycle come in our view, but i think the fed is almost 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: how would you push that view, but you just outlined, through the treasury market this year? we like being long-duration. the rate upside to this market, the yields at this point, are capped. most, 250-280 trading range on the 10 year. -- we have been advocating for clients to abjuration of portfolios rather than stay bundled or humbled -- huddled. we think rates go lower from here so we like duration. jonathan: what do you think? >> i don't see rates going much lower but i agree that the duration for portfolio construction is fundamentally changed because of the fed pivot. because they are more willing to absorb inflation, and they are certainly willing, the collins
view, to cut interest rates, you have an asymmetry that favors duration positioning and restores the negative correlation, the expectation that if something bad happens, one of the triggers that either of these gentlemen were think number, rates are going to go lower. that means you want to have duration in your portfolio. jonathan: what we've seen over the last few months and the whole of the first quarter, is the counter form works pretty well. had we know that the next move lower in credit or equities come at treasuries will give you that risk mitigated characteristic they typically offer when yields of and grinding lower through the year so far? >> because most likely that shock is a negative confidence shock and negative growth shock. if you have a negative confidence and negative growth shock, the expectation is the fed will have the ability come because it is not inflationary, it's not an inflationary shock,
the fed will have the ability to unleash the full arsenal of its unconventional policy. the bondtation in market of that arsenal being released, whether it is forward guidance, quantitative easing, negative interest rates, although the fed doesn't use those come goes into the bond market expectations and flattens the long end of the curve. jonathan: let's talk about what has been happening. what we have seen increasingly tens andlast months is 30 starting to break out a little bit. >> i think it has to do is supply dynamics. i'm worried about three months, 10 years. also be five-year treasury traits on top of the effective fed funds rate right now. to me that is a troubling point. i think they have identified they made a mistake, and at this point they are just pausing. if i made a mistake, i corrected. i don't just sit there and do nothing. sitting here right now, things are going to leave rates where
they are, that is doing nothing. jonathan: listening to the three of you, the first three months of 2019 for treasuries has been quite boring. it has been very narrow in terms of trading range, and treasury yields look like they would break out a few weeks ago, 275, 276, then break lower. the path of least resistance is lower yield from here, sub to 60 260?ub t >> i don't see a path at the shock event. what we are forecasting in terms of growth inflation and no outside shock event trade, european autos, tariffs being implemented, all of those as we worry about, i think the market has priced in the movement to zero cuts. the market has priced in a movement to average inflation target in a dovish fed.
to get to a lower rate, and it is fine to have that view, but you are saying there is something else happening that will drive us toward pricing in cuts. jonathan: final word? >> think that's where you come back onto the global front. interest rates moving towards zero in germany, for example. in growth there, continuing to weaken. things that's where you look at the catalyst. jonathan: we will do europe in the next segment. >> i think the 10 year treasuries headed to 230. before year-end. hopefully before gets there, the fed identifies they need to reduce rates, as i don't want to see yield curve inversions across the curve. we know that portends bad news. jonathan: really interesting calls coming from you guys. colin robertson, jeffrey rosenberg, and craig bishop. coming up, the auction block. italian bonds and btp's continuing to rally with yields threatening to break through.
♪ i'm jonathan ferro, this is "bloomberg real yield." i want to head to the auction block right here in u.s. with the treasury auction, the treasury department selling $24 billion of 10 year notes for yield is 2.615%, the lowest since the january 2018 auction. deal forg on a debt johnson controls. the package for about $7 billion of dollar denominated high-yield bonds and loans had already ofounced almost $30 billion
orders. finally, we had to the eurozone, where the enthusiasm for italian buy, investors offering to 1.36 times the amount of securities sold. that brings us to our next story. do and gloom still stalking the eurozone. you wouldn't tell that looking at the price action. the call in europe is not on valuation, valuation is always cheap. it's about the potential for european growth. i see some positive signs coming from fiscal easing in germany. jonathan: i want to bring in colin robertson, jeffrey rosenberg, and craig bishop, still with us. it sounds like a contrary in some -- some people sounding doom and gloom, but when you look at a price action, it is interesting that pretty much everything has performed quite well, including european high-yield and italian government bonds. is it that much of a contrary
and call to say europe is going to be doing well this year? >> i think we passed the contra rian call. convergencebank story was that the fed would leave the central banks to move rates higher in that did not happen. now i think the convergence story is back on, but the other way. the fed is going to lead other banks to is your policy. it goes back to something that jeff said earlier, the central caused the has interest, or given the market the view that there are support for risk assets out there, whether it is equities are high-yield credit. not just in the u.s. jonathan: your thoughts? >> exactly the right point. it is the central bank pivot, the reach for yield. we are talking about fixed income. you were talking about equities and job performance. it is unique, right? are making yields
new lows, pretty much a bearish signal if we take it textbook, and they are doing fine. it's about everybody back in the pool, because the fed cleared of path away from the fears normalization and the disruption that had in 2018, the tightening of conditions, the movement cash, return to cash, i call it the competition for capital. now that story has changed 180 degrees, where you are lowering rates. other central bank so lowering rates. that is lifting the boat. -- you would had only really know europe is in a bad place if you looked at a couple of things. the bond market -- bund market and the euro. performing was deadly and politics was a mess. >> i think of going have a little bit different view on
equities and fixed income. i think they might be more teetering. that is outside of the u.s.. with respect to fixed income, think of the key to the puzzle is not only the dovishness of the central banks, which is universal, and the fed is going back this way, but the supply-demand dynamic. with the bondt that just came outcome of the demand for the amount they had, including the italian debt, greater than a one ratio, with respect to that issuance. the fact that universally, the demand for fixed income does not go away, i think is a big part of the puzzle. jonathan: maybe the ultimate contrary call from being short german bunds. are you willing to do that? >> at this point, no. i don't think we've seen the low in german bund yields yet. >> think a lot of the bad news is in the price. if you're building a portfolio and holding bonds, what you hold
german bunds in a portfolio if you are a european investor? it's a safe asset. it's powered offset is becoming more limited. you are looking to other assets like treasuries, like the dollar, it's a better place for that ballast in your portfolio. degree,: to some increasingly when having the trade discussion with people on this program and elsewhere, they say may be the ultimate proxy is european risk assets. i'm wondering if we get some kind of resolution to the trade store, could you get a backup in enough?, without be >> not only the resolution of the trade piece, but there's the overhang question of the trump pivot to u.s.-european trade relations. if you alleviate that concern, which is a real risk to the european economy, that could help as well. >> final world, i think tenure below zero.o back jonathan: colin robertson,
jeffrey rosenberg, and craig ship sticking with us. want to get a check on the markets. withgh the week, beginning two year yield, down a couple of basis points, 10 year coming two. still ahead, the final spread. an sm oc rate decision and another appearance from chairman jay powell. that is next. this is "bloomberg real yield." ♪
we had a rate decision coming up on thursday, and the chinese president will be catching up with the italians at the end of the week. we also have an opec meeting. lots going on through the weekend and next week. colinome final thoughts, robertson, jeffrey rosenberg, and craig bishop. what are you looking for next week? >> what we're looking for is the fed to chase the dots. the bold move would be to go to zero, no rate hikes at all. that could be supported by the strong dovish pivot across the board, even from more hawkish members. but given their bent to stay gradualist, they will go to one, but certainly they will ratchet lower the hikes. not moreant if important clarification on their plan for the balance sheet. they have signaled they will stay larger than initially projected, and when do they and the shrinking process? sooner rather than later is our bed, but i think that will be just as important as any rate decision.
>> i think craig has hit the highlights. it's in the market price that the dots will move to zero or one, is where markets are. is anythingng issue that comes out the moves the markets is going to be more information on the balance sheet , markets don't expect details on five, composition, maturity. if we get that, it will be surprising. the other thing, is how he handles the questions around the pivot. this is a big pivot and you could take criticism on it. and the movement toward inflation. jonathan: is going to be interesting to watch them downgrade the growth forecast. how big do you think will be? >> i think it will be dramatic, certainly below two. i think the issue with powell, you want to hear what he has to say? that's been more problematic been not in the past. the fact that he will talk that much more i think is an issue. what craig and jeff mentioned, i think the come down to one. and
that will validate that they are behind the curve on where they should be. fromll see where that goes here, but i was powell would speak less. jonathan: two you agree with that? chairmanmonths ago, tell came into this job and everyone was excited about it, the straight talking animal reserve chairman, what wall street wanted, and then all of a sudden it wasn't. deafthink it has been tone at the very least. a mistakey expect from a new fed chair when they come in, in from communicating he said a couple of mistakes. i think with the dovish pivot in the comments he made after the first of the year, it signals he is listening. i think the tone deafness should go to the wayside. jonathan: do you find this public debate about how they achieve their inflation targets helpful at all? >> i think it is.
i think the market is paying attention to inflation even though it is not an issue. i think the discussion from the fed with regards to inflation is just one more spec of transparency that i think is helpful to markets. >> i think it's much more fundamental the -- fundamental than that. they're trying to affect inflation expectations. you don't do that by having an academic debate, it's by telling people this is how we're going to behave. you build expectations and it is critical to their achievement of the goal. jonathan: were going to wrap up the program with the rapidfire round. three questions, three short answers. forfederal reserve dot plot 2019, next week, how many hikes will it show? 2, 1, 9? >> one, and a mistake. >> one. >> zero. jonathan: german bund, higher or lower by year-end? >> lower. >> lower.
>> lower. jonathan: european or u.s. high-yield credit from here through your end, where is your performance? which one? >> u.s. >> u.s. >> u.s. high-yield will follow equities higher. jonathan: fantastic to catch up with all three of you, colin robertson, jeffrey rosenberg, craig bishop. that is it for us. we will see you next friday. this was "bloomberg really a." yield."mberg real ♪
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