tv Bloomberg Real Yield Bloomberg March 24, 2019 5:00am-5:30am EDT
jonathan: "bloomberg real yield" starts right now. coming up, concerns lingering, the u.s. yield curve inverts for the first time since 2007. more ugly european data. the german 10-year yield dropping below zero. negative yield assets worldwide, toward $10 trillion. we begin with the big issue, curve inversion for the first time since 2007. >> potentially cautious. >> versions are followed by a
slow down. >> it is wait and see. >> people are trying to see what this means. >> interest rates are going up. >> interest rates will be lower for longer. >> lower than longer. >> we have a fed coming out a lot more dovish than expected. >> very dovish. >> yield coming up. >> boj, ecb, signaling they will stay on hold. >> yields in europe have come off. >> weakness in economies that have kept foreign bond yields lowered. >> the music of slowing growth, a lot of it with yields in the u.s. jonathan: joining me is a fixed income group portfolio manager, hsbc chief investment strategist and from edinburgh, standard investment senior investment manager. let's dream the drama -- let's drain the drama a little bit. i want to begin with you.
looking across the treasury curve, why is it so important if it is at all in your mind? >> people are claiming this is about the transmission of monetary policy, that the banks are finding it difficult to lend money in the curve, back cuts of supply to the rest of the economy and you run into recession. i think it is hocus-pocus. jonathan: what do you think? >> you have to look at the markets. you have seen an expansion of debt, talking about different forms of liquidity. no question the curve is telling you why go long if i don't get paid for the risk? it is a problem. >> we have to pay attention because these things can be self-fulfilling. will the fed be bullied into anding short-term rates allowing banks -- there is more of a problem for europe where the banks are weaker and there
is definitely problems with the monetary transmission. jonathan: you said it is hocus-pocus. let's explore why. luke: if we look at where interest rates are, we don't run into a recession -- if you want to look at three months, 10 year and in version in this space, that causes recessions. there is other things going on. your other guests talk about how people are accessing capital markets. the loans are dis-intermediate in the market. increasing balance sheet strength has happened at a dramatic pace over the last 10 years, leaving the banks in a good place. i don't see that as the next nexus of any crisis. jonathan: do you see it as a false signal? luke: that is what i am trying to say. a few things need to have been
-- we are near or at the bottom of what we are likely to see. jonathan: more broadly yield is impressively lower. german ten-year below 0, 10 year in the u.s. has dropped lower. people say it has happened because central banks have become dovish. i would say it happened despite that. there is a belief the retreats by the fed and ecb won't be affected. because there is an effect it will not be affected, that is one reason why yields have gone lower. matt: starting the end of last year, the market was already pricing a rate cut before we came in here today and now they are pricing two rate cuts. i happen to think that is a mistake. the market is overreacting here. nonetheless that is what the market is saying, fed policy is not -- jonathan: you think the fed has another hike in it. matt: it has to do with the fact
that this is a center of manufacturing cycle, inventory cycle running through starting with the tariffs and caused distortions through the inventory channels. we are getting weakness getting it right now. if people worry about recession, we have got it. it is bottoming now and will lift off. the underlying consumer is strong, and we will see lift off. i don't think inflation is really dead here. jose: looking into q2 -- q1 was affected by the trade wars and the government shutdown, weaker data below 1%, maybe half a percent. it is accelerating for q2. i don't think inflation will pick up but we could see a modest pickup in inflation. wages are doing well. on the equity side we are looking at consumer discretionary stocks.
jonathan: according to chairman powell, the term -- it is this. >> my colleagues and i have one overarching goal, to sustain economic expansion with strong job market and stable prices for the benefit of the american people. the u.s. economy is in a good place, and we will use monetary policy tools to help keep it there. jonathan: wouldn't be the first time. you assume this is another false signal. do you think the federal reserve can engineer a soft landing? >> i certainly hope so. what jay powell is doing is letting the market take some of the work off him. talking dovish and hoping to get a response. he is having that in spades. we could easily get to a point where rates go back up again. maybe we should be watching
mortgage applications in the next few weeks to see if the rates of do stimulate consumer activity. jonathan: let's talk about the dilemma the market confronts. depending on your objective, let's say i am looking at two, and a build above fact. looking out to 10 year for a similar yield of a longer maturity. why would anyone want to take that duration risk the same yield? luke: you wouldn't, and what we have, it is a bit of a pickup over the 10 year. you can slice and dice this up a little bit more and get a pickup in yields or go and chase yield and credit because that is much, much better trade than chasing around the treasury markets. jose: i would look at the belly of the curve. then two or three year duration and we are short because of what you mentioned, not getting paid,
what about corporate credit? what about e.m.? matt: you need to have a pessimistic view, and i think basically central banks around the world being easier on hold is giving the green light to take risks. jonathan: i hear that from the three of you. some people are scared about what you are saying, it is a reason to pick up yields and take risk elsewhere. luke: that is right. weathers high-yield or credit or equities really pulling yourself , out of the curve at the moment seems a good plan. i am finding it hard to buy in to the fed knows more than we do and the whole economy is going to hell in a handbasket which these levels are implying. jonathan: let's talk about that, that the federal reserve knows something market doesn't.
the market is leading into a rate cut, not a rate hike. luke: it does feel that way. this is probably opposite the volatility we saw at the end of last year. the fed is still involved with the treasury curve, same in europe. we are left to our own devices and we are more volatile. this is the market behaving with more volatility which we are not used to over 10 years, something to get used to over again. jonathan: no surprise that people watching could disagree and someone has already written the reason you would take the , risk is you think rates will tumble from here. do you see any argument that yields could go lower from here? luke: i really can't. the employment market is pointing to growth and inflation. it might be employment is so
tight it is hard to get extra growth but it doesn't cause recession either. it is maybe the third midcycle pause, but not the end of the cycle. jonathan: what do you think? matt the concern is not the u.s. : economy. there is a lot of strength and tailwinds in the u.s. economy. if you are bearish, you have to look at europe and china. i would be most nervous about, can china get its economy going. that is the pessimistic. have to buy into to take duration risk. jonathan: great to have you with us. coming up, the auction block. brazil's president seeing his first global bond sale 48 hours after the dovish announcement. the conversation is coming up next. this is bloomberg. ♪
♪ jonathan: i am jonathan ferro. i want to go to the auction block where we begin in the united states where demand continues to govern debt. the treasury selling $11 billion in 10 year inflation protected notes. emerging markets doubled down, leading brazil to its first global bond sale under bolsonaro. 4.7% lower than the initial target and five-year credit, glaxosmithkline joining the recent wave of high-grade corporate bond issuers to issue new debts. this price across three trenches, three, five and 10 year notes. still with me around the table
is matt egan, jose rasco and luke hickmore. what we have seen is the german 10-year yield drop below zero for the first time since 2016. off the back of that, the negative yielding assets, approaching $10 trillion. how significant is that? luke: it is incredibly significant. what we have seen in terms of the reaction is people start hunting for alternative assets. we are starting to see that already today although we have weak equity markets. some of the riskier bits of credit like hybrid in europe picking up really well today. you can see these people hunting these yields. i wish i had gone short a little bit higher than where it is at the moment but if i didn't have that position, i would be putting it in very soon.
jonathan: this is a point worth exploring. you can have haven assets perform well and still have risk perform well also. do you think it will continue? matt: absolutely. the fed is easing, the ecb is easing, china, it is adding stimulus. that is good for risk assets. it is no surprise at the beginning of the year they shot out higher, 7%. looking at the risk premium embedded in a market like high-yield, let's say you are getting 350 basis points. given the forward-looking view and low amount of default rates, you are getting paid a fair amount for taking on that risk. with the central bankers saying go ahead and do it, you have them behind you. are you going to make a lot of money? probably not, but you will earn a higher kerry. jonathan: people say the credit
guys are bullish on credit but equities will be ok. i kind of take issue with that. if negative yielding assets are getting back to $10 trillion, if they are up 60% or something from october, and the japanese investors and european have to go in to u.s. corporate credit and say they have to extend themselves to pick up yield, i am wondering whether the credit market will need equity into the next downturn, whether it will provide the same signal because of distortions in sovereigns. luke: maybe, if we get a fed cutting interest rates. that sends a signal that worries about fundamentals in credit. i could buy into that argument, credit starts selling off. i have one of the equity ties -- equity guys coming out this afternoon. they are finding flows for the same reason we are. it is a yield hunt in equities.
if you are in the environment, you will go for those kind of assets. it is fine. if we see significant deterioration in economics, that is not our base case. jonathan: what i am seeing in the broader bond market is concerns morphed into a concern for the federal reserve. the market is pricing for a rate cut. it is hard to find a time when the market positions for a rate cut, you get the rate cut and risk assets perform in that environment. they are tough to reconcile. it is not an environment it -- environment credit performs well in. jose: we have one next year. this year we have the fed doing nothing. don't be surprised if something comes back on the table but don't be -- on the other side is the dollar bull rally which we have a stronger dollar than a year ago. that made dollar denominated
assets appealing. matt: the credit markets are well supported. when we went through this in 2015, 2016, midcycle slowdown, credit was very exposed to certain segments, particularly the commodity base which got crushed. you saw the fallout. we look around and see, are there any areas like that, we don't see them. could corporate earnings fall off? yes. is that going to trash the markets, i don't think so. jonathan: let's get you the market share on where treasuries have been. two, 10's, and 30's. 245 on the 10 year, down 13 on the 30, comfortably low, 2.8% on a u.s. 30 year.
♪ jonathan: i am jonathan ferro. this is "bloomberg real yield." coming up, we begin in china as the development forum kicks off. apple plans to launch a video streaming service. central bank officials and academics gather in fragrant -- in frankfurt for the ecb watchers conference. we will hear from president draghi on thursday. and trade talks as ustr, lighthizer and secretary mnuchin travel to beijing. luke hick more, let's begin with you, the worries in europe and what president draghi and do
about it. we have a market and group of investors willing to look through signs of weakness in china because there is a belief the chinese can address it. the back end of this week has ended with dreadful european data. the market is sensitive to it. why? luke: we have been looking for a turnaround in the european data that will be later than what we are seeing now. i had hoped we would turn the corner in terms of economic data surprising to the upside. how much of this is short-term stuff in germany, one off, that should roll off? anything from china is good news. it is a good sign for europe, just turning the corner. it will not be exciting, but any growth in germany, the market will take well. jonathan: i could have said what you said 12 months ago and put
it on repeat and repeated it again. we were talking about the second half of last year being transitory, and it got worse. why should i believe it will get better in the second half of this year? luke: it is entirely fair. it remains difficult to see where that comes from except you have got a lot of space with fiscal beef from germany if they choose to go down that road. there are a lot of things to get done in europe. that will improve things. if we could get brexit over, that might calm things down around europe and improve the whole atmosphere and sentiment about forward-looking business opportunities. there is a chance things can happen but i accept what you are saying. matt: he has a better backdrop than we do. number two, you don't forget the trade accord which is something we talked about months ago. if we don't have anything, it is a net positive. that should help europe where exporters are a bigger part of
the market. matt: europe is beholden to the global trade. we started seeing some of the backlog slowdown, germany and other places for that is tied into china and the u.s. they are feeling the brunt of that first. i agree with luke, there is a lot of one-time issues area -- one-time issues. france had its yellowjacket issue. clearly one of the things, that mood and weakness in the economy, the financial markets can build on pessimism and be self the filling. europe has got a lot. jose: the upside to china is there as well. it is probable. looking at tax cuts or more spending on infrastructure, 5g, that will boost growth.
jonathan: are you shorting bunds? jose: where do we go from there? you buy u.s. dollar-denominated. jonathan: you sounded bullish. matt: why not go along european banks -- go long european banks? these are trades that six or nine months down the road will be looking good. jonathan: you know, it is the end of the program, rapidfire . the next move from the fed, rate cut or rate hike? matt: a hike. jose: we think a cut, but next year. luke: hike. jonathan: more inversion to come? steeper or more inversion to come? matt: steeper. jose: short-term steeper. luke: steeper. jonathan: u.s. 10 year yield and
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