tv Bloomberg Real Yield Bloomberg March 31, 2019 10:30am-11:00am EDT
jonathan: "bloomberg real yield" starts right now. ♪ jonathan coming up, concerns -- with junk debt in the united states delivering its best quarterly gain since 2009 even as the market continues to price in doom and gloom elsewhere looking for a rate cut . we begin with the big issue despite all the attention it has been a global bond rally. >> i think everything looks great and bonds. i think it is magnificent.
>> the fed is easing now. >> boj, ecb, signaling they will stay on hold. >> that is good for risk assets. no surprise the beginning of the year they shot out higher. >> the default rate is extremely low right now. >> corporate credit spreads are narrow. >> quality single-a's. i feeling there's going to be a bid for them and comfortable holding those. >> tremendous amount of movement. of raisingree years rates and running down the balance sheet the fed has called a truce on us bond investors. seniorn: joining me is portfolio manager, marilyn watson, and george rosneft at wells fargo investment institute. it has been a global bond market rally.
>> i think we have seen a sea change in terms of central banks becoming more dovish. we've seen a repricing. the fed we think is on hold probably for the rest of the year. the data has been much weaker than expected. to start tohe data come down especially in the u.s. without this with the distal stimulus we had last year. we have seen a huge rally. a lot of concerns around global growth. central banks doing nothing. i think it is explainable. >> i think the direction is correct. a little too extreme. causing is one thing. i think that is a much higher hurdle. we are in a low rate environment . flatter curve or the near-term. we pushed it hard here.
>> i think right now it is 50% expectation two cuts by years end. i think that is a bridge too far for us. long-term rates are coming down but short-term they might have gone a little too far too fast. jonathan: things at the epicenter of this rally when the big discussion points is the treasury curve. i want to decompose some of the things happening. start with the treasury curve. when you boil it down to the very fine point where it has really dropped down it is the , just collapsed over the last month or so. we have had a curve steepen. steeper year over year. the stream front end that has really moved driven by a multitude of factors. lots of issuance. a real driver for sure. i think there has been so much talk and the chatter around the curve inversion. i know there's a lot more to it.
that itar in the sense has happened more in the short part of the curve. from our perspective the yield curve has been a pretty good oncoming of an recession. something we are very concerned with. on the further part of the curve you are not seeing inversion. jonathan: it's unusual that you would have this curve inversion. can you reconcile those things for us? >> i think it is about the speed of the changes we are seeing. i completely agree with the technical aspects in terms of the huge amount of issuance and we have had institutional bid at the back and the curve as well. dohink a lot of it has to with the speed and the change that a lot of people are pricing in from the beginning of the year to now. jonathan: the next thing we got to do is decompose the treasury yield and what has moved in the last month or so. in terms of real yield it has been a massive move over the
last couple of months. what is behind that? >> i think that has a lot to do with the fact the fed has been consistently raising rates. 10 rate hikes or so in a consistent pass. we are not expecting anything. the market is expecting a cut. we think that is too far. nothink they are going to do anything. they want to support the economy , continue to support this expansion. i think the speed of it in terms of the expectations of interest rates. jonathan: is that the point you're trying to make greg? >> i think so. the direction is correct. we know growth is rolling over. we know inflation is rolling over. a really big move in a short time and that does not feel right to me. will continue to price in slower growth and lower inflation but it does not have to happen in three days. jonathan: let's talk about positioning.
further evidence of the bond rally isn't dead yet. the treasury department selling seven year notes. demand surge of the german bond auction as the nation cells 10 year benchmarked at at negative yield. the 2.3 billion euro auction, pricing at an average yield of -0.05%. finally incorporates, can we make a mark? $5 billion deal this week. the largest corporate bond deal since pfizer and merck christ about three weeks ago. to the credit market after the biggest rally for triple be -- triple b rated u.s. corporate since 1995. there might still be more to come. >> bbb leverage is coming down now. ge and kraft heinz sent warning
shots across the bow of all bbb companies and you are seeing that coming back. the era of leveraging up the balance sheet, buying back shares, raising dividends, making acquisitions, all of that mania has died down a bit. jonathan: greg peters, marilyn waters, and george, still very much with us. let's talk about it. the program is about tension. contradictions. we have a market pricing in rate cuts. a market that is sucking up bbb's. if we are going into a recession, do i want to own bbb's in that environment? george: the question is do you want to own high-yield in that environment. we are changing our review. bbb's is idiosyncratic. as bob michael pointed out, some of these firms are shifting debt balance sheets off. you see it with heinz, ge, at&t.
we are seeing improvement. fundamentals are improving. we don't see that improvement in high-yield market. jonathan: what do you think? greg: i agree. fourth quarter was a blessing in disguise. it scared companies straight. they saw their future of not being able to issue possible downgrades. i disagree on the high-yield side. i think the high-yield side looks good. jonathan: why is high-yield looking pretty good? greg: they have not leveled -- levered up like in the past. these are companies that have not taken balance sheets to access like previous cycles. all that has been put on the lever loan market. that is where the excesses. -- where the excess is. bbb's got religion. lever loans may or not -- may or may not. marilyn: i think the value we are seeing and the demand in the
ig space, high-yield, you could extend to em as well. this is the environment where you can add spread sector, a diversified portfolio and get a decent level of income. it is important to be selective and cautious on fundamentals. in this environment, it is good to add that risk. jonathan: i want to explore getting religion with you. typically we get religion by before we are about to die. you carry on going to church if you survive? for q4, do you get religion for a couple months? do they lose religion quickly again if price determines the story? george: i don't know. from our perspective with high-yield, it is funny to talk about fundamentals. for them to be reflected within the marketplace we are seeing a , little of that, but not to the
level we think it should be. we think high-yield will do fine this year, not necessarily to the level it is compelling. it is 7% up in the first three months. year-over-year we are expecting 3% to 4%. that is not enough. jonathan: more broadly, people struggle with the idea that you can simultaneously have price cuts and have tight credit spreads at the same time. we saw that in the last cycle. you can start pricing rate cuts and have spreads remain tight for a little while. the debate is for how much longer. george: it is continuing to thread the needle. what the markets are looking at, credit versus rates is that the fed is no longer the enemy. it is a support system. it is allowing the reach for spreads to continue longer than what was perceived three months ago. that is the story. they are not disconnected. it is as simple as the fed and global central banks are no longer on attack. they are here to support you. spread markets are reacting. jonathan: bob michael's point at
j.p. morgan. something i would like to discuss, this idea that the yield curve inversion doesn't matter because there are global distortions moving the treasury curve domestically, i will take that. can you also say, the credit market in the united states is equally distorted? if i cannot take signal from treasury, why should i take comfort from credit? both of those are distorted markets. distorted the credit must be too. walk me through the argument. george: the markets are too large and sophisticated to be distorted by one single flow. the markets are too large and sophisticated to be distorted by one single flow. what is happening is investors globally need yield. they will get it anyway they can. that does not mean it is a distortion across board. spreads are tighter, yields are lower but that does not change
the entire fundamental story. jonathan: do you think credit will leave equity in the next downturn. marilyn: i would agree with that. now greg think right , had it right. short-term, people are grabbing yield. long-term, things get figured out. if the fed doesn't make a mistake, you will see a lead with high-yield. jonathan: do you agree with that? marilyn: i think that is true. when you look at where investors are allocating money, to your point there is a distortion in investors behavior has changed because of central banks. i think we are seeing less crowding than we have. jonathan: i guess what i worry about, there are three groups of investors. a group that thinks we will have economic conditions that materialize that justify rate cuts.
the group that don't think we will get economic conditions and they are adding risk. a third group that goes straight through the middle of the first two. the group that blindly thanks to matter what the conditions are federal reserve cuts rates assets will do ok , regardless of fundamentals. how dangerous is that third group? that way of thinking? george: that third group is somewhat lunacy. the central bank is not there to rescue every single mistake. it is there for support. it is not there to rescue. on the credit side, it is important, leverage across the board, even to my beloved high-yield is high. investment grade, lever loans. the penalty for making a mistake this cycle will be much greater than the past cycles. jonathan: greg peters, great to have you with us. what to get to a market check.
jonathan: this is bloomberg real yield. time for the final spread. next week, trade talks continuing. the chinese vice premier goes to washington after robert lighthizer and steven mnuchin visit beijing. we get rate decisions from australia and india as well in terms of economic data there's plusretail and auto sales a slew of pmi's and finally on
friday it is the main event. the payrolls report here in the united states. still with us, greg peters and george rosneft. looking ahead to payrolls, what are you looking for? george: we are looking for it to go down a bit. we think that will decline. marilyn: i think we are looking for something a little softer than the markets are expecting. in this environment given it is , full employment economy, that is positive. greg: big week across the board. what is more important is what markets react to softer potential data. if you get a situation where the data comes in week -- comes in weak and the bond market doesn't move or sells off, that is a signal. jonathan: how do you think the market will respond to weaker data? we have been willing to give the
policymaker the benefit of the doubt. the ability to stabilize. is that faith being tested? george: i don't know about the faith itself. i'm not sure the bond market rallies continues now. there are quarter end effects that come in and you see things back off a little. opportunity to get long. jonathan: the path of least resistance for yields might be higher? george: just for the short term i think it is. i think longer-term you're going down. marilyn: the market reaction so vigorous to the weak pmi's in japan and europe as well, we could expect to see it back off. it is important to keep focusing on data. if you're looking to see it trough out and pick up, we need elevation. jonathan: this kind of plays into your point, greg. how difficult would it be to add more fuel to the recent bond rally? you agree with the direction.
short-term, how difficult wouldf this 10 year? greg: i think it's going to be hard. it will be difficult. you priced in a lot already. you look at the front to tell you that. how much more at the front can you price in terms of dovishness? i don't see it. i think that makes it a more challenging path for rates to go lower over the near term. jonathan: rapidfire around. three questions, three answers. do you faith the strengthening credit or rate cut? greg: great. -- rate. marilyn: rate. george: the other side, credit. jonathan: u.s. 10 year. have we seen the high for 2019? greg: yes. marilyn: yes. george: yes. jonathan: high-yield.
next nine months equal or beat the performance of the next three? greg: no. marilyn: it could. george: no. jonathan: great to catch up. thank you very much. from new york city, that does it. what a couple of weeks and the global bond market. much more from us next friday. 1:00 p.m. new york time 6:00 , p.m. in london. this was bloomberg real yield. this is bloomberg tv. ♪ . .
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