tv Bloomberg Real Yield Bloomberg April 27, 2019 11:00pm-11:31pm EDT
jonathan: from new york city, i'm jonathan ferro. bloomberg "real yield" starts right now. ♪ coming up, u.s. gdp delivering a big upside to price, topping all forecasts. a headline flattered by an inventory boost fueling doubts the growth burst will be sustainable, providing another lift for treasuries. we begin with a big issue. the united states looking like the best house on the block. >> strong growth. great economy. it. can't do smith' dismiss
>> great gdp, great low inflation. >> better fundamentals. >> the underlying economy is doing well. >> the u.s. is doing relatively well. >> it looks reasonably stable. >> the u.s. is simply in a better place. >> the economy has continued to grow. >> yes, gdp was higher, but the devil is in the details. >> you have to strip out all of the noise of trade and inventories. if it is inventories and trade, that is not indicative of the underlying economy. >> the underlying demand was weak. business investment, pce cooled. >> the u.s. economy is decelerating. >> definitely a deceleration from where we were last year. >> but, you know, nowhere close to recession. jonathan: joining me around the table is matt hornbeck, greg staples, and from london, ian steely. ian, let's begin with what must be the most hated 3% read of gdp in america in recent memory. why? >> you say it is the most hated, but we have stocks up,
treasuries up. everyone seemed to like it on the markets side. it is one of those, you beat expectations, but the mix of it was not quite great. but it shows what people have been saying, we are in the slow trend-like growth environment, which is actually good for all assets and why all asset markets are up today. jonathan: if i said 3% on a gdp print, would you expect to see two-year treasuries come in at five basis points? >> if you would have also told me that the core pce would be a tenth, i would suggest that treasuries would be fine in that environment. >> the first print was actually higher in yields. when the market dug into it and saw the competition, they realized it was not as hot. jonathan: you see the positive contribution from trade that most people consider, the vision
inventories, which most think you give back as the year progresses, does that mean that the rest of the year will be bad? we are still around 2%. matthew: that is not a bad rate of growth if inflation is at 2%. if your policy rate is neutral, that is not bad. the problem is inflation is 's target by 50s targe basis points. that is the problem. jonathan: is that your point as well, as we round out the week, it is not with gdp, but with a pce and a softer inflation rate in america? iain: yes, i agree with that. if you look at what has happened over the course of the year, you have seen that effective it pivot where it is all about inflation. that is what fomc members will be focusing on. it will be fascinating next week to see what jerome powell has to say about that. it has come down, lower than they would like. growth looks fine, not a problem there. inflation is what is on everyone's mind right now. jonathan: consumer price tolerance looks ok as well. we have heard from several u.s.
companies through the week, pepsico, coca-cola, procter and gamble, all saying they can put up prices, and they got the green light from the consumer. they paid up and revenue growth came along. there are a few signs that things are picking up. iain: i think so. ian: i think so. if you think about the overall market, typically q1 is not great from a gdp standpoint. from seasonals that we all know about. we also have the shut down to contend with, retail sales have picked up recently. there are some green shoots as look forward to q2. so maybe it is not that bad of a print. it is probably better than what most people have hoped for, when you look at where we were in november, december. greg: yesterday's jobless claims notwithstanding, look at how strong the job market is. next week we will get hourly average earnings. wages are going up. we think that will support prices. jonathan: your view is treasury yields are going lower. matthew: we are at 2.25 by the end of the year. we look at the data this morning , the thing that really jumps out at me, putting the gdp
report to the side, is what the university of michigan report was telling us about consumer expectations about long-term inflation. typically, the preliminary report gets revised higher, but but the final report this time didn't. 2.3% as we look on the terminal. this is a low expectation from consumers on inflation. heaven forbid the oil price goes down and breakeven inflation comes off. the fed will be even more worried than today. jonathan: i want to get to a dynamic that has confused a lot of people. treasury yields are coming this week and the dollar strengthened. can you make sense of that? greg: the u.s. is still the high-yielder in the world. now, if you are a levered investor and you need to borrow money to buy something, you are not coming to the u.s. because it cost money to borrow here. but if you are not, if you are a real money investor and are willing to take currency risk are going to come to the united states. that has supported the dollar despite what most people have thought. jonathan: we have seen
increasing signs of that. investors are looking at the united states, coming in unhedged, you end up with a result of a stronger fixed income market, asset prices rich and the dollar gets stronger as well? are we seeing signs of that? iain: we are definitely seeing signs of that, and it is not just europe, it is happening in asia and japan as well. people are saying, actually we are in a world of negative yields. we have a big increase in the amount of negative yielding bonds across europe, japan. let's look to the u.s. 10-year treasuries, 2.5%, not as high as we would like it, but a lot better than domestically. if you hedge that yield away, you don't get anything. so they are looking at buying 2.5% and doing in unhedged. jonathan: are we start to see that, greg? greg: one more piece of the equation. stock volatility, yield volatility, and currency volatility has been low. those willing to take the currency risk feel more comfortable because they feel the surprise on either side is muted. almost 200 basis points of real yield in u.s.
jonathan: so that comfort with low volatility, is that misplaced? greg: i think it is correctly placed. what i worry about is too many gamma bets on either side, and then you get that explosion of volatility, like we saw in march 2018. they seem to pop up, those four orplosions every five months. i worry about the tinder for that fire building again. matthew: we agree. at the end of the day, you need an event to spark price action in the marketplace. there are things on people's radars. but typically the things that make volatility go up are not on most people's radars. we think it is coming but it is hard to see. jonathan: final word on the subject, iain? iain: we are in a good environment at the moment, benign central banks, trend like growth, low inflation. you just need something to spark us at the moment to get that volatility up. it is hard to see where it will come from. so at the moment, people are
happy to play the carried trade and run this low vol environment. jonathan: doesn't seem to be coming from the economic data. the economic data abroad through the week, some doubts emerging about whether the global economy stabilizes, particularly in china, with companies exposed to the chinese story. do you think the buy america stories being reinforced by the fact that data is still ok, and there are some doubts happening about what is happening, more specifically what is happening in the asia-pacific region? matthew: absolutely. clearly you can see some improvement happening domestically in china, but when you look at the neighbors, you don't quite see it yet. you are not seeing it in japan, and certainly not in europe. jonathan: you don't see it in south korea to. we have the trade data, gdp in negative territory. china recovering without a little sign of positive spillover to neighboring countries. greg: seems like so much of the
growth coming from china is export driven. they are not importing what they otherwise would, so that growth is not going into neighboring economies. jonathan: do you think we are paying enough attention to this? that the recovery in china is different? the character of the spillover would be different, too. greg: i don't think the market is paying attention to it, and they should. jonathan: do you think that? matthew: i agree with greg. everyone is hopeful that what is going on in china will begin to spill out. typically even our economists are looking for some spillover to help europe along. but i think if they are wrong on that, it's a major issue for the marketplace and a major issue for the fed. jonathan: final question, how disappointed will we be with the second half hopes? iain: when you look historically, you normally have a lag, 6-9 months in china, and then reverberating around the world. i agree it's been more domestically focused, the stimulus over the past few months, but when we were talking about it before, we expected more weakness followed by the pickup in q2 and the second half. so maybe we are getting a little
too excited because data is coming through in china, has not fed through to the rest of the world. let's keep an eye on that. i do feel it is such a big component of local growth, it is unlikely to sustain itself internally and not filter out. jonathan: it is a key story for the rest of the year. that is for sure. coming up on this program, the auction block. netflix dominating the show in the u.s. junk-bond market. that conversation is coming up next. this is bloomberg "real yield." ♪
the week. , five,asury offering two and seven-year notes. pretty solid demand. the $32 billion seven-year auction was awarded with 2.46% with primary dealers receiving the highest shares since october. in corporates, netflix continuing to attract demand luring another $6 million in , pricing. the 10.5-year dollar securities will yield 5.375% while the euro notes were sold at 3.875%. and finally, automotive seat manufacturer avian priced 7% senior secured bonds together with a new $800 million term loan. it will refinance its existing bank credit facility, another sign capital markets remain supportive for high-yield issuers. matthew hornbeck, greg staples, and iain stealey are still with me. i want to begin with you. the high-yield market, do you still get the feeling that this is wide open for issuance?
iain: i think so. and we saw that in europe this week with very little supply over the course of the year. eight or so deals came about after the easter break. and investors have been snapping them up. there has been this dearth of supply, cash on the sidelines. people came into the year slightly defensive. i think supply can come. the good news from the european standpoint, a lot of it was for refinancing, so we are not seeing a pickup in leverage. jonathan: what are your thoughts, greg? greg: absolutely a demand for high-yield coming from retail, institutional investors. we are 150 basis points tighter in high-yield than the beginning of the year. and i don't see it stopping anytime soon. jonathan: i want to talk to about the value you are getting in that high-yield. the team at bloomberg intelligence spent some time breaking down the spread return of leverage. and on a historical measure in terms of the average, not great. is it? iain: within the high-yield market, you could maybe argue
for the investment grade space. high-yield leverage does not look too bad. it has been coming down since 2016. ultimately, from a valuation standpoint, that is the big question mark. as was just mentioned, down 150 basis points on the year, back at levels from last september. maybe a little wider. and the question is where do we go from here? but we are in this environment where we have trend like growth, accommodative central banks, the cycle feels like it's been extended. people are going to come back. they want that yield again. the hunt for yield is back. jonathan: we also have to work out what is driving that less spread of returns, whether it is spreads coming in aggressively or leverage picking up. what do you see as the dominant factor? iain: on the investment grade side, we see leverage coming down. obviously peaked a couple quarters back, but the last two quarters have looked good. we will see what happens this earnings cycle. and when we look across the european and u.s. high-yield
markets, we do not see leverage that concerns us. and the current environment is perfect in our minds for credit on this decent nominal growth standpoint. jonathan: greg, let's talk about high-yield versus investment grade. if you had to make the choice right now, do you think about the regional composition of those two indexes? the more international investment grade and domestic in the u.s., is that a factor in the thinking for you? greg: i don't think so. we are getting comfortable with diversification on the investment grade space. high-yield, you want a little bit more comfort. the u.s. tends to be where the high-yield market has more diversification. you go overseas and you're much more limited into natural resource companies and not much beyond that. jonathan: what about floating rate versus fixed rate, high yield versus leveraged loans? matt, looking at the prospect for rate hikes, it is not there for many people. then they take away from that, then why would i want to be in leverage loans, floating rate? is there any prospect for a rate hike at any point in the next year as far as morgan stanley and the team are concerned? matthew: not within the next year. our chief u.s. economist is
looking for rate hikes in the back half of 2020. but those forecasts have been changing, right? so a lot can happen between now and the next 12 months. it is hard to see at this point a rate hike being delivered, but , look, if the s&p keeps going up, credit spreads keep tightening, if financial conditions continue to ease, the fed will have their third mandate in question, which is financial stability. jonathan: iain, i have heard increasingly as the week has maybe not enough money has gone in to leverage loans, that maybe we are ripe for a bit of a rotation from the great performance in high yield toward the underperformance of loans. what do you think of that? iain: i'm not sure. we have seen a lot of money come out of loans. i think it's about the floating rate component. people piled into loans last year as rates were going up. and as they have in as they have stopped and stabilized, now the worry is the market is pricing in cuts. they are not as attractive. it feels like high-yield bonds make more sense. you have that yield and also the
possibility of capital gain if those yields come down. jonathan: your thoughts, greg? greg: we have seen the leverage loan index yielding higher than the high-yield index. that is a rarity. i think it is because were seeing outflows from leverage loans and people are not anticipating any tightening anytime soon. we disagree. we think the next move will be a tightening at the end of the year or early next year. but for the moment, that is the dynamic in the loan space. jonathan: if you disagree on the rate story, are you rotating out of high-yield into loans, that is something you are looking at doing? greg: we are starting to do that. the other dynamic is how much selling from retail is going into the clo business. the business is still hot and they have a good appetite for loans. jonathan: great to have you with us. let's get a market check. what a week for treasuries. yields shaking up as follows. yields coming in 10 basis points on the two-year, 2.28% on a week where we had a pretty decent gdp print. the nuances are the important part of all this. yields coming low on the 10-year
♪ jonathan: i'm jonathan ferro. this is bloomberg "real yield." it is time now for the final spread. coming up over the next week, a busy one. we will get more tech earnings, wrapping up with google on monday. apple results on tuesday. trade representative bob lighthizer and steven mnuchin traveling to beijing to resume talks on wednesday. a fed decision and news conference with chairman powell coming up. and rates are likely to remain on hold for the bank of england on thursday. a busy week for u.s. data concluding with jobs numbers on friday. still with us at the roundtable
is matthew hornbeck, greg staples, and iain stealey. let's look ahead to next week. what are you looking for from chairman powell? iain: what will be interesting is his take and reading on inflation. because i think that is the shift we have seen over the past few months. it is all about inflation. that is the fed's mandate now. they know the growth side is ok. and really to me, what is the lower bound, what will be low enough to knock them into cutting rates at this stage? jonathan: matt? matthew: the idea of an insurance rate cut is definitely something people are going to be interested in hearing about. depending on what he says in his prepared remarks, hopefully some enterprising reporters will ask him about the concept of an insurance rate cut. jonathan: there might be some here at bloomberg it might asked that question. a wink wink to michael mckee. can you walk me through this concept of an insurance rate
cut? matthew: when you go back and look at the first rate cuts in each of the previous several cycles, the word insurance came up when you read the fomc transcript. this is not a new concept. the thing we have to remember about an insurance rate cut, you buy insurance before the house burns down. that is the whole idea here. before inflation gets to an unsustainably low level from the fed's perspective, they need to put some additional accommodation in place. greg: interesting to talk about but very unlikely. look at this morning's gdp print. i don't think the fed needs to step in and do anything right now. inflation is going to be fine. iain: i don't think they need to do anything. i just feel that is the direction of travel. the market is pricing cuts in as we look out into next year. the likelihood is we will see inflation weakening over the next couple months. maybe it picks up later in the year. so i think that is going to be where everyone's attention will be on. what we have been talking about more recently is this concept of average inflation over the cycle. at the time we are dipping down, we have been below 2% over the
last five years, and quite significantly, so that is what people will drill into. jonathan: i would love to get an idea from you guys of how you think risk assets would respond to a federal reserve rate cut. how do you think risk assets would respond to that, if the federal reserve started talking about an insurance rate cut? wouldn't that worry people rather than build more confidence? iain: i think the markets would fly. you have seen that today with people looking at inflation print, you know, stocks doing well. the global economy, the u.s. economy, 3% gdp growth, looks good. employment looks good. the consumer looks good. i don't think they need to do a cut. you just put fuel on the fire. matthew: i completely agree. if it is an insurance rate cut, that means it is being put in place without any real fear. currently in the marketplace. that should send risk assets higher. the one thing i want to bring up, we are expecting a rate cut next week. it is more of a technical issue with respect to the interest the fed pays banks on excess reserves. jonathan: so you're looking
for five basis points. walk me through the thinking. matthew: we are seeing the effect of federal funds rate move higher. currently at 2.44%, below the target range. we think this sets up the fed nicely to make another technical adjustment. this would be the first technical adjustment that they would make, however, in the absence of a rate hike. there is going to be some communication the fed has to do, but that is something chairman powell can address in his prepared remarks, no problem. jonathan: i look forward to seeing him try to navigate that news conference. it is the final round. you know what it is. it is time for the rapidfire round. this gdp print, as good as it gets for 2019 yes or no? matthew: yes. greg: no. iain: yes. jonathan: it has been really tough through the year for high-yield relative to performance to leverage loans. is it time to start rotating
towards a floating rate, yes or no? matthew: no. greg: yes. iain: no. jonathan: the intraday low for the 10 year yield, getting closer again, so i will ask again. 2.34 on an intraday basis. is that the low for the year in 2019? i know what you are going to say, matt. matthew: absolutely not. jonathan: it is in the forecast. greg: yes. iain: i think you can go lower. jonathan: great to catch up with you. interesting stuff. that does it for us from new york. see you next friday at 1:00 new york time, 6:00 p.m. in london. this was bloomberg "real yield"" this is bloomberg tv. ♪
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