tv Bloomberg Real Yield Bloomberg April 19, 2019 11:30am-12:00pm EDT
jonathan: from new york city, for our viewers worldwide, i'm jonathan ferro. bloomberg "real yield" starts right now. ♪ coming up, getting a mixed read on the u.s. economy. retail sales looking good, services data disappointing. signs of weakness in europe. german manufacturing struggling to bounce back. bund yields year heading back toward zero. struggling to get a read on the global economy. >> china, europe. >> the eurozone. >> close to a recovery.
>> data is encouraging. >> europe has many existential issues. >> structural hurdles. >> structural problems in europe. >> this year worse than people expected. >> so awful over recent months. >> the u.s. economy is doing well. >> the u.s. is not doing poorly. >> the u.s. economy may be stuck here. >> the u.s. was stable last year. there is a pass off to china and improvement occurring in china. a big week for economic data worldwide and to discuss is free from his rough -- priya misera and victoria fernandez. we have had u.s. retail sales, data out of china and eurozone pmi. what is your conclusion this
week? ?ictoria i think we did get a mixed bag as the people on the clip were saying. we are still going to have positive momentum in the second half of this year and is long-term investors that is what we're looking at. of had positive numbers out china. gdp was where they expected, industrial production was good. you are seeing the stimulus finally starting to feed through and beijing is probably not done yet. that is going to be positive and you should have that feedthrough mechanism to go through to other those with the supply chain, vietnam, taiwan. germany needs china to do well. hopefully having this turnaround will help the european numbers. priya: i would agree with victoria. the u.s. economy is growing around trend. 2% gdp. butpe is still a laggard
what this is telling us is that the fed and other global central banks have managed to extend the cycle. the big fear or something the market is grappling with is has the fed extended the cycle? the fact that the data is telling you growth is ok in china growth is picking up, therefore we should back in the reach for carry trades. this divergence between rates as , the factsk assets that rates have broken out to the upside is going to get that risk assets are ok. >> i agree with everything that was said so far. there seems to be some natural law that we have to be toward the end of the cycle, as if it is a baseball game in the third out in the ninth inning of the game is over. that is not the case. we were saying australia has been expanding for 30 years,
china, korea, india. there is no natural limit. the fed is off the table. they're willing to let inflation run hot if need be. they will not take the punch bowl away -- the punch away. europe, countries like germany are much bigger exporters of the u.s. some of the consumer numbers are not consistent with the recession. the idea will going to worldwide depression is overblown. jonathan: a few dynamics we will work our way through. let's start with united states and the idea that we are late cycle. there are so many people who believe we are late cycle. when you ask them why, they will tell you it is because it has been going on for a long time. can you define late cycle by duration alone? victoria: no. it can go on for a much longer time.
with the central banks were they are, the federal reserve on pause, you had india cut rates, you have a situation where things can continue for a longer time. there is no timeline on how long this has to be as long as you have fiscal policy and monetary policy situated in a place where it can continue to boost that, i think you can keep going. priya: i completely agree. , the fear is business cycles do not die of old age, they are murdered are the fed. tenure real rates hit 1.2% late last year. i'm nervous that of the fed continues hiking or let the balance sheet runs off from april rates continue to rise -- if real rates continue to rise, they will not go above neutral and then they stop the bank sheet run-up. that has taken these much lower. they are not trying to murder the economy.
they might be up to achieve what no other fed has been able to do which is not murder the business cycle. jonathan: let's talk about what is happening with treasury yields. the fed has backed away. we still cannot unlock materially higher treasury yields in terms of nominal and in terms of real yield. gershon: the market is saying they do not believe the fed will be able to generate inflation. you would expect, if we were to go into a recession and the fed would start the race, the short end would be rallying more than it is. you have the short anti-rally or the long end -- the short end rally or the long end selloff. i'm just as bullish as the others but it is not like there are not risks out there. in the fourth quarter, everything was terrible, the world was falling apart, no one could do anything right. it is not 100% rosy. we do not have a final trade deal.
europe is still spiked, it is not his best people think, but it is not rosy over there. we need central banks to keep doing what we're doing. jonathan: let's talk about the gravitational pull of the rest of the world. we still a positive real yield in the united states and i wonder if that is an incentive to go lower for a lot of people. in germany, you do not have positive real yields. you have negative real yields. is that where we get the sound for the u.s. treasury yields, from everywhere else? priya: even though we are not looking for the economy to slow down, we are looking for over to did present -- we're looking for over 2% gdp. in europe is stuck around zero, how had to in the spread go? if the front end is going to be anchored around 2.40, i think the long end for the tenure -- for the 10 year will struggle to
go above 2.75. jonathan: you can be constructive on the economy. it does not mean you are as bearish on treasuries, does it? victoria: there are uncertainties. they are out there. we are not looking through rose-colored glasses. there are things keeping rates lower. besides the fed saying they are on pause, you do have the global issues pulling things down. look at the spread between bunds and u.s. treasury. -- that hasmon come in. whether headlines from north ,orea, that could be a pullback we still have the china trade ,ssue, brexit is still there there are a lot of issues still keeping these yields lower. we have to be careful.
we have seen huge inflows into investment grade and munis over the last couple weeks. people like to go in when yields are low. you have to position yourself properly so if we see yields go higher, you are prepared. jonathan: let's talk about one of those risks. china improves as the year goes older. they keep pushing stimulus. the nature of stimulus has changed. i wonder because the nature of the stimulus has shifted, if the degree of the spillover has changed? take the eurozone pmi. some people take comfort that in germany it will take a while to get there. what if it does not get there at all because the stimulus china has put into the economy will not be enough to get the degree of spillover we are used to? gershon: you touched on everything we've talked about. what does it all mean in terms of portfolios? what should a fixed income investment -- investor do?
we tend to lump fixed income into one bucket. it is more important to balance the credit risk you take, whether u.s. high yields, european high yields, and your rate risk. if you just balance those risks getting 80%end up of the high-yield market and much less volatility. priya: i would agree with that. when the curve is flat, when spreads are tight, when volatility is low, we have to do far more fundamental credit work. if you are in a risk asset portfolio, having some duration is a nice hedge. i take some of those easy carry trades where you can just go along. maybe paper folio makes more sense. portfolio-- maybe a makes more sense. jonathan: final word. victoria: we take a conservative approach.
.hether tax-free or taxable we are looking for higher quality issues. when you look at spreads, higher quality issues have come in more than a high yields. they are still 30 or 40 basis points higher than the bubbles we saw last year. i would be weary of high yields as we get into -- i would stick to more investment grade, high-quality short intermediate-term bonds. that is what we looking for in our portfolios. jonathan: my guest sticking with us. coming up, the option lock. -- the auction block. is bloomberg "real yield." ♪
jonathan: i want to head to the auction block where we begin in the united states. the spotlight in the u.s. high grade market. walmart issuing $4 billion of debt. it's third-best sale this year. proceeds going to general corporate purposes including maturing debt. asia, selling japan's biggest ever corporate bond. 4.5 billion dollars of notes maturing in april of 2025. the offering was fully subscribed on the first day is the offering attracted strong demand. germany selling 25 year bunds this week.
were sold at aos yield of 25% with investors offering to buy more than 10 times. let's start with europe. you have an interesting call on the periphery i want to explore. it is the idea that after years of behaving like credit, the periphery can start behaving like a sovereign again. walk us through it. thea: the biggest reason periphery traded like credit was the denomination risk. the idea the eurozone can break up. i think mario draghi and the ecb have put in e&p -- and end to that. the other thing is on the ecb. the easy told us they are not hiking until the end of the year. they have done the tltro program. what they are trying to do is extend the cycle as much as they can in europe. european growth is weak. there are big structural issues
with europe. if there is a reach for yield in europe, where do you go? you want to go into the periphery. i think the periphery spreads will continue to tighten. gershon: we tend to do with the extremes. there are idiosyncratic examples. italy, a lot of populism. the debt crisis. all of these economies are susceptible to the region in general. this will be a systematic component that loads -- that goes along with how the european economy goes. will be idiosyncratic components with how the individual countries work out there issues. victoria: you and i have spoken before when it comes to europe, how we feel there are a lot of things going on particular to the individual country. it is all about china or about global growth slowing down. you have -- it is not all about china or about global growth slowing down. you have protests in france.
all of these things have to take a backseat before we see things get better. we did see services pmi get better in germany. france was solid. there are bits and pieces that can see we started have a turnaround or will be a long time coming. --athan: you think there is we are trying to infer a signal from price when there could just be a monster yield across the continent? gershon: there is always that chance. you show the walmart deal. the demand for that is probably more than we scared everyone to thinking bbb's will get downgraded. it is not only a reach for yield , high yield em debt people need a lot of income. even in the lower yield, we are scaring people and crowding them out of stuff that is priced as if it has problems already. jonathan: being fearful of credit risks has some pain through 2019.
walk me through what is going on next. we have had big price moves. we have had 8% or non-percent on high-yield. we have had a big move. what now? gershon: the reason we can get to 10% return is because we started at much higher yields . now we are in a kerry environment -- now we are in a carry environment. we're not going to go in to recession. we are also not trading at the levels we were in the fourth quarter. that is why it is so important to not only load up on the riskiest bonds. balance it out with some of the higher quality stuff. that will work together in the portfolio. jonathan: you are making the same point? priya: i would agree. i would say at the front end -- if you have a risk portfolio, the front end does not help you. it is not a good hedge. ,f you have a risk portfolio only 10 make sense. particularly at the 2.60 level.
that is a decent level. 2.35, i 10 year was at was saying that was pricing in the recession. at that point i found it odd that credit spreads were still tight. if we go back to 2.35, i think here owning some 10 make sense. jonathan: victoria? victoria: the one thing we need to speak about is the demand. whether your -- whether for municipal bonds, corporate bonds , the demand is there and the supply has shrunk. we are 30% less issuance than in 2018. -- theyl put pressure keep coming in tighter. jonathan: take a break. my guests will be sticking with us. in the markets, a check on
jonathan: i'm jonathan ferro. this is bloomberg real yield. coming up next week, larry kudlow speaking at the national press club in d.c. and plenty of central bank -- including canada, turkey, indonesia, and the bank of japan. the week wrapping up with u.s. gdp on friday. my guests still with us. i want to begin with this line
we got from blackrock's larry fink earlier this week. he was referring to equities and he said there are huge money sitting on the sidelines. clients are underinvested, not over invested. we see more upside, especially in equities. does that apply to credit as well? does that apply to fixed income? it took a lot of inflows on the fixed income inside at blackrock through the quarter. priya: the lowest risk asset have got most of those inflows. the fed told us they are done with hiking. months,ast couple of there is a fear they were going from goldilocks to a recession. if you're nervous about that and the fed is not hiking, you put your money in the front ian d. money market -- in the front end. --t is not investing in
gershon: as much as i hate to agree with larry fink, he is right. that does show people are not investing enough in risk assets. i do not think that is anything new. how many studies have to be done to show the s&p returns 11%. the average investor gets 3% or 4% of it. everyone was so nervous in the fourth quarter last year. now are up on the s&p year to date. jonathan: let's explore this a little further. the belief people will re-risk and begin to participate as the year progresses. any faith in that idea? victoria: we believe that is true. as you have uncertainties get removed from the marketplace, that will give investors the opportunity to come back in. you will see on the equity side, especially with earnings doing as well as they are doing, beating expectations. that gives an opportunity on the
fixed income side. it allows investors to look at their portfolio allocation, see their where they need diversification -- see where they need diversification. we saw flows out of fixed income and we will see flows common. jonathan: what will drive inflation, price or better data? gershon: people chase returns. you see it in study after study. people chase returns. priya: i would add, it is a more dovish reaction function, the data starts improving, inflation does not pick up a lot and the fed does not talk about more , people realize there will not be any hikes than the cycle can extend. jonathan: let's get to the rapidfire around. three quick questions. i asked this once before. have we seen the low for the year on the german ten-year yield? yes or no?
priya: yes. gershon: no. victoria: no. jonathan: big rally on the periphery in europe? do you buy it or faded? priya: buy it. gershon: fate it. victoria: fate it. jonathan: the bank of america says the rally of ccc is inevitable. visit of chase it. do you fade it or chase it. priya: chase it. gershon: cautiously chase it. victoria: i will fade it. too risky for us. jonathan: thanks. that doesn't for us from new york. -- that does it for us from new york. we will see you next friday at 1:00 new york time. this was "real yield." this is bloomberg tv. ♪
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