tv Bloomberg Real Yield Bloomberg March 24, 2019 10:30am-11:01am EDT
jonathan: i'm jonathan ferro. from new york city, "bloomberg real yield" starts right now. coming up, concerns lingering, the u.s. yield curve inverts for the first time since 2007. more european data, the german 10-year yield dropping below zero. negative yield assets worldwide, $10 trillion. we begin with the big issue, curve inversion for the first time since 2007. >> that is potentially cautious. >> inversions are typically 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 for longer. >> we had a fed coming out a lot more dovish than the markets expected. >> very dovish. >> yields in the u.s. coming up. >> boj, ecb, signaling they will are willing to stay on hold. >> yields in europe have come off. >> it will be hard to be meaningful. >> weakness in economies that have kept foreign bond yields lower. >> 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, a standard investment senior investment manager. drain the drama a little bit. i want to begin with you. luke, looking across the treasury curve, why is it so
important if it is at all in your mind? luke: people are claiming this is a problem about the transmission of monetary policy, that the banks are finding it difficult to lend money in the curve, that supplies to the rest of the economy and you run into recession. i think it is hocus-pocus. jonathan: what do you think? jose: you have to look at the market. 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? so banks -- yeah, it is a problem. >> i think have to pay attention because these things can be self-fulfilling. will the fed be bullied into cutting short-term rates to get the curve dormant, it is definitely a problem for europe where the banks are weaker and they have problems with monetary transmission in those countries.
jonathan: you said it is hocus-pocus. let's explore why. luke? luke: i think there are a number of things at play here. if we look at where interest rates are, we don't run into a recession ever before in the past. if you want to look at three months, 10 years 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. for example, the loans are does -- disintermediating in the market. balance sheets 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. we are at a turning point here. a few things need to have been
-- need to happen. we are near or at the bottom of what we are likely to see. jonathan: more broadly yield is aggressively lower. german ten-year below 0, 10 year in the u.s. has dropped lower. a lot of people would say that this has happened because central banks have pivoted and have become more dovish. i would say it happened despite that. the retreats by the fed and ecb will not be effective. that is the reason why the yields have gone lower. do you agree with that? 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 in two rate cuts. i happen to think that is a mistake. i think 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. why? 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 all kinds of distortions through the inventory channels. and i think we are getting that weakness heading right now. if people are worrying about a recession, we have got it. it is bottoming now and will lift off. the underlying consumer is strong, and we will see lift off. therefore, 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 what we thought we were going to get, below 1%, maybe half a percent. it is accelerating for q2. i don't think inflation will pick up as a secular disinflation, but we could see a modest pickup in inflation. wages are doing well. on the equity side, we are looking at consumer
discretionary stocks because we see a pickup in the economy. jonathan: according to chairman powell -- it is this. >> my colleagues and i have one overarching goal, to sustain the economic expansion with a 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: it would not be the first time we have had a false signal with curve inversion. you assume this is another false signal. can i assume that you think the federal reserve can engineer a soft landing and extent this cycle? luke: i certainly hope so. i think what jay powell has done is letting the market take the work off of 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 things like the mortgage
applications in the next few weeks to see if the rates do stimulate consumer activity. jonathan: let's talk about the bond market, the dilemma the market confronts. depending on your objective, let's say i am looking at two, and bills above fact. looking out to 10 year for a similar yield of a longer maturity. why would anyone want to take all that risk for the same yield? luke: you wouldn't, and what we have, it is a bit of a pickup over the 10 year. it is technical right now, but you can slice and dice this up a little bit more and get a pickup in yields. or go chase yields and credit because that is much, much better trade than chasing around the treasury markets. jose: i think credit is the way to look. 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 e.m.? matt: you need to have a very pessimistic view for looking here. 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. and luke, some people are watching the program and to they are scared by what you are saying, it is a reason to pick up yields and take risk elsewhere. luke: that is right. and you know, whether it is high-yield or credit or even equities, really pulling yourself out of the u.s. treasury curve at the moment seems a good plan. i am finding it really hard to buy into the fed knows more than we do and the whole economy is going to hell in a handbasket in the u.s., which these levels are implying. jonathan: let's talk about that, the idea the federal reserve knows something market doesn't. maybe the market knows is
something the federal reserve does not, because the market is leaning into a rate cut, not a rate hike. luke: it does feel that way. i think this is probably the opposite of the volatility we saw at the end of last year. the fed is not 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 the last 10 years, something to get used to over again. jonathan: no surprise that people disagree with you guys, somebody has already written that the reason you would take the risk is you think rates will tumble from here. can you see any argument that would suggest that yields can go lower from here? luke: i really can't. i think that the employment market is pointing to growth and inflation.
it might be employment is so tight it is really hard to get extra growth, but it does not cause a recession either. it is maybe the third midcycle pause, but not the end of the cycle. for us anyway. jonathan: what do you think? matt: the concern is not the u.s. economy. i think there is a lot of strength, a lot of 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 view that you would have to buy into to take a lot of duration risk in this market. jonathan: great to have you with us. coming up on this program, the auction block. brazil's president seeing his first global bond sale 48 hours after the dovish announcement. and that conversation is coming up next. this is "bloomberg real yield." ♪
jonathan: i'm jonathan ferro. this is "bloomberg real yield." 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. yield of 0.758%, the lowest since january of 2018. emerging markets doubled down, leading brazil to its first global bond sale under bolsonaro. the 2029 auction yielding 4.7% lower than the initial target. finally in credit, glaxosmithkline joining the high-grade corporate bond issuers to issue new debts. this price across three
traunches, three, five and 10 year notes -- still with me around the table is matt egan, jose rasco and luke hickmore. guys, what we have seen is the german 10-year yield drop below zero for the first time since 2016. and off the back of that, luke, it leads to the negative assets, the yielding debt is approaching $10 trillion. how significant is that? luke: it is incredibly significant. but what we have seen in terms of the reaction the market has had is people start hunting for alternative assets. and you know, we are starting to see that already today, even though we have weak equity markets. some of the riskier bits of credit like hybrid in europe picking up really well today. you can feel the people out hunting these yields. i wish i had not 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. you know, the fed is easing, the ecb is easing, china, it is adding stimulus. and that is very good for risk assets. it is no surprise at the beginning of the year they shot out higher, high yields off 7% today. 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. and with the central bankers saying go ahead and do it, you have them behind you. and i think it is a decent traded. are you going to make a lot of money from here? 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 assets are getting back to $10 trillion, if they are up 60% since 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 the credit market will provide the same signal because of distortions in sovereigns. what are your thoughts, luke? luke: maybe, if we get a fed cutting interest rates. that sends a signal that worries about fundamentals in credit. if we see that then i could buy into that argument, credit starts selling off. i had one of the 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. but you know, yes, if we see significant deterioration in economics, that is the case. but that is not our base case. jonathan: what i am seeing in the broader bond market is growth concerns morphed into a concern for the federal reserve. the market is positioning increasingly so 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. those two things are tough to reconcile. the federal reserve is cutting rates, that is for a good reason and it is not an environment it performs well in. jose: we have rate cuts, but not until next year. 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 has made dollar denominated
assets appealing across the curve and across asset classes. matt: the credit markets are well supported. when we went through this in 2015, 2016, midcycle slowdown, very similar. but the big difference was credit was very exposed to certain segments, particularly the commodity base which got absolutely crushed. you saw the fallout. it was an increase in faults, downgrades and so on. when we look around and we see other 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: you guys are going to stick with us. let's get you the market share on where treasuries have been. two, 10's, and 30's. some big moves. 245 on the 10 year, down 13 on the 30, comfortably low, 2.8% on a u.s. 30 year. still ahead on the program, the final spread.
jonathan: i am jonathan ferro. this is "bloomberg real yield." time now for the final spread. we begin in china as the development forum kicks off. a new platform for apple as the company plans to launch a video streaming service. central bank officials gathering in frankfurt for the ecb watchers conference. and we will hear from president mario draghi on wednesday. and trade talks as ustr, lighthizer and secretary mnuchin travel. matt, luke and jose are still with us. 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 that the chinese can address it. and some dreadful european data. whenever we get that, the market is sensitive to it. why? luke: it is about a belief here. 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 downside. but even that, today's data was awful. so much of it is short-term stuff in germany, one off, that should roll off? if we get anything at all from china that is good news, i think there is a good sign for europe. but again, it is not going to be exciting growth, 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.
we were talking about the second half of last year being transitory, that it would fade when a new year began and it got worse. why should i believe it will get better? luke: it is entirely fair. it remains difficult to see where that comes from except you have got a lot of space with fiscal boost from germany, if they choose to go down that road. there are a lot of things to get done in europe. that would 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. you know, there is a chance things can happen but i accept what you are saying. matt: i think that number one, he has a much better backdrop than we do. jonathan: he does. matt: number two, you don't forget the trade accord which is something we talked about months ago.
if we 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. you know, we started seeing some of the backlog slowdown, via germany and other places, that is tied into china and the u.s. they are feeling the brunt of that first. but i agree with luke, there is a lot of one-time issues. france had its yellow jacket issues. clearly one of the things, that mood and weakness in the economy and the financial markets can build on pessimism and be self the filling. fulfilling. europe has a lot on its plate. jose: i want to just add, the upside to china is there as well. it is palpable. looking at tax cuts or more spending on infrastructure, 5g, that will boost growth. jonathan: so you are shorting bunds?
jose: where do we go from there? [laughter] jose: you buy u.s. dollar-denominated. jonathan: you sound bullish. i'm wondering. matt: why not go long european banks? it is kind of the same trade. i think that -- look, these are trades that i think six or nine months down the road will be looking good. jonathan: you know, it is the end of the program, rapidfire program. three quick questions, three quick answers. 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: ball steepener or more inversion to come? steeper or more inversion to come? matt: steepener. jose: short-term steepener. luke: steepener. jonathan: u.s. 10 year yield and
the year higher or lower than it is now? matt: higher. jose: higher. a range of 2.5% to 2.8%. luke: i am happy with that one, higher. jonathan: great to catch up with you, luke hickmore, from new york city, that does it for us. we will see you next friday at 1:00 p.m. new york time, that is 5:00 p.m. in london. that was "bloomberg real yield." this is bloomberg tv. ♪ you.
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