tv Bloomberg Real Yield Bloomberg August 2, 2019 7:30pm-8:00pm EDT
jonathan: from new york city, i'm jonathan ferro. bloomberg "real yield" starts right now. ♪ jonathan: coming up, no drama in this month's payroll report. the attention firmly elsewhere as the white house whipsaws wall street, announcing more tariffs on chinese imports, providing more fuel for global bond markets, driving the german yield curve below zero. let's begin with the big issue. is the fed prepared to underwrite the trade war? >> it is highly likely the trade issue will dominate a thinking at the fed. >> you have to extrapolate this and think about the fed
delivering a series of cuts. >> this creates enough uncertainty where even the strong payrolls report that we got today is likely going to secure that cut. >> we are going to get a 50 basis points one way or another. r. trump now knows the buttons he has to press to get the outcomes that he wants. >> good policy, that policy, the white house is listening. that is why you are seeing the president be so aggressive right now. >> to the extent trump continues to push on the trade war and that hurts economic growth and creates a downside risks, presumably means central banks will push more in terms of easier monetary policy. >> jay powell has made clear that he is willing to backstop the president in this trade war. >> this is an adverse feedback loop that could get very dangerous. jonathan: joining us to discuss ♪ is oksana aronov, priya misra, and robert tipp. jonathan: i'm jonathan ferro. oksana, that interplay between this is bloomberg "real yield." the federal reserve and trade it is time for the final spread. policy from the white house, coming up over the next week, a talk about it. lot of rate decisions coming out of asia and australia. oksana: the fed went from the you'll hear from st. louis fed frying pan into the fire with that announcement. president jim bullard wednesday. powell never had a particularly another rate decision this time
from the rbi. pmi from china. and we will hear from the good reason for the cut. chicago fed president. thursday, trade balance data he kind of cited increasing from china. friday, ppi numbers from the uncertainty overseas, slowing conditions overseas, perhaps the u.s., and gdp from the u.k. and lower inflation we see, which did not induce the fed to cut in japan. 2017. with me are oksana aronov, priya misra, and robert tipp. they decided to use it as the reason this time. and trade tensions, of course. he tried to walk a fine line by going into next week, what are you looking for? staying middle ground, saying robert: we have had a rally and this is a midcycle adjustment. the markets will take a lot of supply in the refunding. it will be interesting, always a proof statement of how solid the footing the market is on. in a sentence first, verdict later fashion, the president then delivered precisely what we'll be watching to see that. powell cited as the reason. the way we are going out today, then turns it into an easing cycle probably, if the threat materializes, this threat of additional tariffs from a the bund market, looks like at midcycle cut. yield lows. the market is supportive. -- is supported. in this fashion, now powell has i think we will have an august of indigestion. his back against the wall and the fed has essentially chosen to fashion itself after the the market will be dealing with worst student in the class, the ecb and the bank of japan. the pending trade and it will be underscoring the case for lower jonathan: we can talk about that yields in the u.s., compression later in the program. i have had so many people tell
me through the week, if you tell me what happens september 1, i abnormally high relative to the rest of the world, toward global will tell you my outlook. i wonder about is it the same norms, slowly but volatile. for you, if this tweet had come priya: i'll be watching the nonmanufacturing ism, looking out on tuesday and the chair had to hold this conference on for the first sign that the wednesday, how different might manufacturing slowdown is have things been? priya: i think he would have showing up in the services sector. said trade tensions would have also, all of the fed speak, can boiled over instead of they clarify the reaction simmering. that is the only difference. function? i think the fed is actually what is the threshold? grappling with a lot of uncertainty. they don't know how the global growth slowdown is feeding into do they stay here, will they the u.s. ease again? i think we will hear them talk about this midcycle adjustment they are getting mixed signals. being one more cut. jonathan: i think a lot of i am going to say it is a people will be doing a post manufacturing recession powell conference cleanup. globally, feeding into the u.s. let's get to the rapidfire round. how does that affect the service three quick questions and three sector? they have no idea how to get inflation higher. quick answers if we can. first question a bit of spread which is why they are really , theening in high-yield selling this hard as an insurance cut. i think the market reaction tells you there is no belief that these insurance cuts will back end of the week. work. do you buy high-yield on that we have been calling for an widening, or do you continue to extended easing cycle, two sell it? oksana: continue to be patient. more cuts this year, three more there will be better entry points. volatility is still with us. potentially next year. priya: de-risk. this idea that insurance cuts robert: buy.
work, i am very skeptical that jonathan: treasury rally. this will work. lock in the profit or cling onto it is not really changing our call, but powell had this that coupon? waffling attitude on wednesday. priya: cling on, buy more. robert: hang on. i think that would have changed, had the tweet come out tuesday. oksana: lock in your profits. jonathan: it was a terrible jonathan: september performance wednesday, most people would agree. expectations, 50 basis points, 25, nothing? robert: 25. oksana: 25. easingbelieved monetary priya: 25. jonathan: great to catch up with was going to work, inflation expectations would be higher, longer rates would be higher. you. that is not happening. robert: it is not happening. from new york city, that does it for us. there are different styles we have seen at the fed. we will see you next friday at what we are used to from mario 1:00 p.m. new york time and 6:00 draghi, janet yellen, alan p.m. in london. greenspan, they really get the this was "real yield." committee on a message, or at ♪ least come in with we are easing conditions, that is the thrust of the committee's move today. but's., and's or in that way, you have the best chance of easing financial conditions. if you come in and talk about maybe we will raise rates before we cut rates and you go back and forth, it confuses things.
the reason i say that, his approach is, i'll just be completely transparent. in a way, he reflected what the committee told us in june which is half of them do not want to cut at all. and they are getting dragged, kicking and screaming. what we saw in the fourth quarter of last year is the fed will be hiking rates, and he said absolutely not. this is an unsustainable gap between other yields and u.s. yields. it will be destabilizing. you are going to have to get on board with the global program. oksana: the issue here is that the market refuses to be weaned off of the central bank banking. the past couple days, the fed says we don't need anything other than an insurance cut, and the market hates it. the following day we have a bad ism number and the stock market rallies. bad news is good news because you'll have more central bank intervention, and you mentioned potentially manufacturing recession. what is wrong with a manufacturing recession if it comes about organically, as
opposed to a financially driven recession, which is what central banks are engineering here? jonathan: you touched on something that is critical, how the market is responding to different pieces of information. the ism was softer, stock markets rallied. risk assets performed. but how the markets responded to the tweet was different. that wasn't a bad news is good news is situation. what that told me was, at least from a lot of people's perspectives, we are this close to the tipping point in the global economy. any further pressure and it rolls over. you are seeing that remarkable move in the bond market this week. it really struck me as this could be the moment where people start to price in the policy mistake of december last year all over again because they are not going quick enough. priya: i think people understand monetary policy in general is pushing on a string. forget getting help from the fiscal side. if we get hurt in a sense from tariffs, i think the market is sort of treating this like a
nonlinear response. i think the fact that the next $300 billion is retail products, consumer products, it will hit the u.s. economy much more. we estimate the gdp shock from the tariffs implement it so far plus the 10% is as much as half a percentage point of gdp. we don't have that cushion. we are going to go to 1%, 1.5%. what can the fed do to get that higher? jonathan: we have to think about how the curve response to potential rate cuts in the future. you think they go a couple more? priya: i do, but until the fed comes out to say that this is more than insurance cuts, the market will continue to price 75 basis points. jonathan: let's talk about the yield curve. most assume the fed would come into play, the front end, but tofront end would have rally, and we would have curve steepness. but what we are seeing play out in the united states is that we are seeing play out in switzerland, germany. you just get the whole curve come in, all the way out to 30 on the bund curve.
negative yield at one point on friday. robert, is that what you feel like is happening in the u.s.? not these kind of levels, but yousef: you are watching the the federal reserve will "best of bloomberg daybreak: struggle to engineer the yield middle east." curve and what will happen is the second corner profit plunges to the lowest level since 2009 the whole curve will drop-down. for the middle east largest company. waning demand for chemicals and robert: the market drives the plastics. mike pompeo says he's willing to visit iran. equilibrium rate. going back to 2003, we marked down our forecast in the long iran slams what they call u.s. run, that the 10-year would economic terrorism. average 3%. then as we came down averaging 3%, looking at the feedback from the economy, marked down to 2.5, and, a record $315 million fine for misappropriating funds. 2. then we said the central tendency is probably 1.5, but it will take a year or two to get there. even though that may sound crazy, when you look at other places where the central bank is actually running the mandate as stated -- australia, new zealand, they want the good
growth, they see the room on inflation, they cut rates. their rates are much lower than ours. the market is bringing the fed to that. the slower they go on the front end, the quicker the back end goes down. jonathan: that is the story. do you feel uncomfortable holding duration? everyone has said i have heard nothing this week that makes me uncomfortable holding duration. do you want to lock in your profits on treasuries? no. i don't want to give up that coupon, that is the response i give. i did find somebody who wants to give up that duration position. walk me through your position. oksana: it is simple, with the curve shaped the way it is, what is the incentive for taking on more duration risk? 60 or 30-day libor is still 60, 70 basis points above the five-year. maybe more now. i have not checked in the last hour. what is the incentive for taking on 30-year risk? the fact that it will continue
to rally on some sort of additional accommodation from the fed going from ultralow rates in an environment that does not really call for extra ordinary measures? by the way, i made a comment earlier about the fed fashioning themselves after the worst students in the class. when we talk about the fed being able to support the longer end of the curve, create a steeper curve, revive the economy, or give it more escape velocity, we have not seen that in europe. not only have we not seen it, we see consumer confidence being hit in europe. we see that from a rising savings rate in spite of the negative yield that investors are facing. savings rates are coming back to precrisis levels. yet another reason for why these policies do not work. in the u.s., the fed has the luxury to be data dependent and they choose not to. priya: i will take the counter to that. the reason to extend our duration is that three-month
t-bill, if you invest now, it may be much lower. if you are trying to buy the 10-year, it could be significantly lower. global domestics -- demographics, we are seeing this in europe. it is all moving saving rates higher. that is creating this reach for yield. if we look at the bloomberg ag index, 20% is in negative yielding territory. there is something that forces us to reach for yield. look at how high risk assets are. what is my only hedge against risk assets? duration risk. i would say go maximum duration risk. jonathan: they are all itching to carry on the conversation. we will continue the conversation. coming up, the auction block with big man's -- demands in europe. that is coming up next. this is bloomberg. ♪
♪ jonathan: i'm jonathan ferro. this is bloomberg "real yield." i would like to head to the auction block and begin in europe, where investors offered to buy almost twice the amount of 10 year bonds the german treasury sold at auction. the demand taking the yield on the notes below the ecb key deposit rate for the first time. in the united states, boeing selling $5.5 billion worth of bonds in its largest ever dollar-denominated offering. the largest portion of the offering, a 30 year security yielding nearly 1.5 percentage points more than treasury. the third and final issue, daimler getting more than 6.5 billion euros of bids in its second multi-tranche offering of the year. the automaker raising 3 billion euros in a three-point deal with pricing tightening at least 10 basis points on all the tranches. staying in europe, the battle between the weaker fundamentals and qe continues. skybridge has a warning for
investors. >> fighting the fed or central bank has been a losing battle post crisis. pretty much every short position you have had including lower quality deteriorating fundamental credits has worked against you. briefly in 2011, 2015, q4, fundamentals mattered. since the start of this year, they have not. jonathan: with me at the table is oksana aronov, priya misra, robert tipp. let's talk about that. in credit in europe between fundamentals and qe, how difficult is it to get your hands around that in europe? oksana: they have divorced each other completely. there is no relationship between fundamentals and prices in credit in europe, which is why we have stayed out of it. that is what happens when the european central bank provides an inordinate amount of demand for the credit market. you have high-yield names, junk rated names trading at negative yield. it is really unclear what puts a stop to this.
in the meantime, how do you analyze something that is a junk rated name and is showing a negative yield? what is the opportunities? jonathan: have to talk about the investment-grade names. let's have one example in the auto sector. you saw the daimler issue. big demand for that daimler issue. a company that has had profit warning after profit warning. if you take it as a sector not to pick on daimler, but euro denominated auto issuers right now, up to this week, those spreads were tightening. they were not widening. fundamentals suggest they should be wider. can you make sense of that? robert: in aggregate, when you look at credit quality dynamics, even in high-yield in europe, in investment-grade, you are not seeing a wave of downgrades. the economic outlook is threading the needle. it is bearish enough that the ecb is providing this liquidity, probably too much, and with a negative yield, probably dampening the outlook. the euro bloc is a savings block
and they are forcing everyone to pay to store their money. i don't think that will be a stimulus. that is bond positive. the economy is not so bad that the credit fundamentals are deteriorating. spreads on high yield, investment-grade are comparable to dollar-denominated. as a result, you'll see this search for yield ongoing in the governments, continue to feed out into the corporate bonds, lead to probably solid returns. oksana: the default situation with credit in europe has always been different from the u.s. the path through restructuring is much better defined with the u.s. credit than it is in europe. in europe, a default is basically a death sentence. it is a much more difficult process. secondly, in the current environment, the idea of a rising defaults in europe, it is preposterous. z have the ecb supporting
ombified businesses essentially. they don't have any catalyst for going through a default cycle. what we see in the u.s. in high-yield this month has been a nearly 1% pickup in defaults. as of the end of june -- july, we are looking at 2.5% of defaults. not that far from 3.5% annualized average that we have seen over the last couple decades. in spite of that, you see $15 billion of inflows into high-yield bonds in the u.s. you continue to see inflows in europe as well. there is certainly a tremendous amount of complacency. with respect to risk, bb's are at 2.40. high-yield overall is in the mid-threes. what are you going to make on these positions in the absence of central bank support? priya: from a macro standpoint, and i am a government analyst, i'm supposed to worry about everything, but what worries me is are we going to go from a
reach for yield to being repriced in the u.s.? in the u.s., we had significant fiscal impulse last year. as that fades away and global growth starts to impact the u.s., does default risk start getting repriced in? i don't see any sense of that eating repriced in the u.s. do you start to see the differentiation between high-yield and high-grade between the better companies? do we all have to do far more credit work? we have talked about liquidity risks in the past, but i think that default risk has been underappreciated in the u.s. because of strong economic growth. robert: i think you'll see volatility remain high. since the beginning of 2018, we have had a slowly deteriorating economic backdrop with tremendous volatility. the stock market is up and down. spreads out and in. i think you'll continue to see that because of your proximity to the zero lower bound. if things get bad, there is nothing you can do about it, and leverage is pretty high. having said that, what usually brings about the secular end of the spread cycle is a solid
downturn, usually brought by the central banks hiking aggressively agreally have that. i think you'll see this highly liquid environment fueled by the bank of japan, ecb, the fed begrudgingly cutting, volatile but solid performance. jonathan: oksana, what do you think of the idea that credit can remain insulated from pretty much everything until monetary policy gets too tight? oksana: credit is already so tight it will be hard to stay insulated from everything. it is already priced for perfection. when we talk about credit, we cannot isolate ourselves in the fundamentals argument, even if we think on balance they are constructive. the volatility has been created by a completely changed liquidity landscape in these markets. that is my biggest issue with the enjoy the ride argument. that argument is based on the
idea that i will be able to get out before. the reality is, you won't. liquidity is not there. the five largest corporate bond etf's in total carry more assets than the street inventory and all other corporate positions. that should be a concern to all credit investors. jonathan: oksana aronov alongside priya misra, robert tipp. let me give you a market check. where treasuries have been through the week. what a week. 20 basis points lower on the week on the 10 year. the bulk of that coming in the last couple days. 187 is your yield to close out the week. still ahead, the final spread, the week ahead featuring a lot of asian central banks with rate decisions coming up. this is bloomberg "real yield." ♪