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tv   Bloomberg Real Yield  Bloomberg  August 4, 2019 5:00am-6:00am EDT

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scarlet: i am scarlet fu. this is "bloomberg etf iq" where we focus on the access, risks and rewards offered by exchange traded funds. ♪ scarlet: getting crowded. toke is the latest entrant to join the latest marijuana themed etf's. we talk about why it is early days for cannabis investing. a hedge fund manager makes alternative investments accessible by charging zero management fees. greece's stock market goes from under performer to global leader. of course, there is an etf for that.
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whether you embrace or reject etfs, they are here to stay. the flows signal broader market trends. let's check in with eric balchunas. a snapshot of the flows and the theme is risky assets like the stocks. eric: thank you, scarlet. i'm feeling like a broken record. every week, i am saying people are excited about the fed being accommodative. it felt like about two months. another week of the same thing. $15 billion into etf's. we have spy, the cuse. you also have ibv and some vanguard funds. both major player types are buying in. i thought, this seems to have started in the beginning of june when the fed reassured markets. let's capture june and july. the complexion of the flows is changing and this chart shows it is. june and july, etf's took in $85 billion. that is more than the rest of the year combined. that is a lot of money coming in. u.s. equity etf's are taking in three times more than they did at the beginning part of the
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year. more than fixed income. they are now the leaders, which is what we are used to seeing with etf flows in 2017. let's look at june and july versus other june and july's. just to give you an idea of how accelerated the flows are. it is the biggest june and july on record. this is what $2.2 billion a day in flows look like. the etf's generally take $1 billion. when the trading crowd gets excited, it is another $1 billion. with both hands on deck, that is why you are seeing this accelerated level of flows. they should break the record if they keep this up. scarlet: making up for some lost time. let's bring in meb faber. in new york, we have annie matha with bloomberg news. let's start with you. you saw the flows. what part of the rush into stocks and risky assets over the last few months surprises you?
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meb: it does not really surprise me. it is a bull market. u.s. stocks are up 20%. the parking lot at bloomberg is an indication where there are only four people working and everyone else is on vacation. it is not just u.s. stocks. all asset classes are having a romping and stomping year. bonds, even gold perking up. commodities are starting to pick up. it looks a lot like the exact opposite of the end of last year when everything was going down. the good news about the dislocations and moves in the markets, it sets the stage for the next regime. we have really only been in one regime for the past decade, which is u.s. stocks cream everything else. the flows make sense to me because everything has been going up. scarlet: we talked about everything going up. we keep talking about how we are at the late stage of the economic cycle. i keep hearing about it constantly. i wonder if what we are seeing is the last hurrah. every asset class is higher in contrast to last year. give us a rundown of what you
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are seeing. annie: you are seeing a rally in a lot of different asset classes. even some you might not expect to move in tandem upward like u.s. large-cap stock and gold. you are also seeing this in bitcoin. it marks a reversal from last year, when you are seeing a lot of these asset classes, a downward trend in prices in a lot of these asset classes. we have seen that reverse. we have this everything rally. scarlet: this everything rally is one of the reasons we have seen value stocks remain laggards. eric: a lot of people pronouncing the death of value. there was an article last week about the value versus growth ratio being the lowest it has been since the year 2000, when this got a lot of attention. i want to get your take on this. is now a good time to going to -- to go into value given everything is up?
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how deep should you go? can you give your take on that? meb: the nice thing about value, it is a pretty blunt tool. you don't need to be doing it out to two decimal points, it should be a fairly simple decision. we wrote an article this year called "the largest valuation spread in 40 years." it is looking at the spread between u.s. stocks, which are trading at a lofty multiple. not a bubble like the date 1990's yet, but expensive. versus the rest of the world. foreign developed reasonably priced, foreign emerging, downright cheap. the cheapest stuff trading in the low teens and single digits, we are talking greece, which you mentioned, russia, a lot of europe. some of these stock markets are trading at a massive valuation spread to the rest of the world. we have been talking about this for years on bloomberg. quietly, a lot of these countries are having monstrous years. russia is up almost 30%. greece's stock market up 40%. you have this scenario where people are no longer talking
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about these countries. starting to see some momentum shifting. they could have some strong, outperformance for the next five to 10 years. scarlet: let's transition to something few people would argue are value stocks. pot companies. give us an update on the pot etf rate. we are five or six in the u.s.? annie: five listed in the u.s. one more in the pipeline with global x trying to come in. the state that we are in right now is really -- there is a lot of excitement over pot etf's. it has been a big year. you have two new launches with yolo and thcx. the sec is asking for statements squaring away some of the legal issues that might be hanging over these funds. that has been a development as well. eric: meb, let me talk to you about this. besides the great ticker toke,
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i think that is not wash motor -- mount rushmore were the already, and the cheap 42 basis points or .420, one thing i noticed, the thematic capture score is a little lower. your media market cap is higher. are you purposely going into some of the bigger names by design? meb: there's also a little bit of cash. here is the thing. we have launched 12 funds. never launched a thematic fund. i would tell people the thematic funds do not offer any value added benefit over time. why are we doing it? we think there are times when thematic funds make sense like the cannabis space today. you can have momentum. or you can have a situation where it is a structural behavioral trade. you want exposure to the entire industry. you want exposure for the next decade, but you still have to be price-sensitive. you cannot say i'm an unabashed bull on cannabis.
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i'm not going to sit here and tell everyone you just have to buy it. the way i approach it is, you need to buy a basket for the next 10 years. we wrote an article about this. a lot of people have picked it up. very similar to prohibition. we studied cannabis stocks in the 1930's -- excuse me, beer stocks in the 1930's post-prohibition. almost double the returns of the stock market. it was lumpy. you cannot just say cannabis is great, you have to buy everything. we need to be thoughtful. you need to be mindful. cannabis stocks have struggled the past three months. a lot of these companies are pre-earnings. some of them are pre-revenue. you see some of the tilts because of that. we do not like to talk specific names. having a basket approach, eventually this industry will mature. it will not just be u.s. and
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canada but global. scarlet: you need a discerning eye. meb faber along with our annie massa. coming up, we speak with julian klymochko. ceo of accelerate financial technologies. he is trying to democratize hedge funds through etf's. one etf that caught our attention, the ishares silver trust fund. its assets touched the highest since 2016. silver prices have been following gold's rally in recent weeks, fueled increasing geopolitical tensions and expectations the fed will cut rates. you can catch that and the other charts we feature on bloomberg on gtv . this is "etf iq." ♪
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scarlet: i'm scarlet fu. this is "etf iq." it is time for the etf lifecycle. we walk you through the three main stages of the fund. step one is the filing. more annuity type etf's are coming your way. registrations for the best u.s.
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equity buffer august and the deep buffer etf. they now have over $1 billion in assets under management. step two is the launch. looking to ride the u.s. rate curve. listing is elixir. ticker stpu. while there are similar products available on u.s. exchanges, this is the first product for europe that allows investors to bet on a 210 yield curve. the final stage is liquidation. remember a report titled "passive investing is worse than marxism." the firm followed up with launching a pair of etf's tracking recommendations. bernstein is quitting after they failed to attract enough assets. let's get passive aggressive and track the tensions between active and passive investing. as passive products gain popularity, hedge funds and pe have become the last frontiers
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to be democratized by etf's. julian klymochko is trying to change that. he joins us from toronto. great to see you. my first question, can you copy hedge funds in an etf wrapper given the liquidity requirements of an etf? you have to be able to redeem shares whenever needed. whereas, a hedge fund is more flexible. julian: certainly. historically hedge funds have focused on liquid securities. what we are bringing to the market we believe is institutional-caliber hedge funds within the etf structure. we have been in the business of running hedge funds for about 10 years with another firm. we really are bringing that model with liquid securities in long short strategy utilizing alternative etf's. scarlet: let's talk about the
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pay structure. you call yourself the people's hedge fund manager. your funds get my attention because you do not charge a management fee. you only charge performance fees. instead of say two and 20, you've got zero and 15, zero and 50, and zero and 20. zero and 50 is high. explain your thinking here. i'd like to correct that. it is 50% above the index total return. our benchmark is the total return. it is only 50% of the alpha of above the equity index. scarlet: i see. i got it now. as a whole, hedge funds have seen the correlation with the s&p 500 increase. it is about 92%. what do you make of the increased correlation? have they lost their way or are they being dictated by investors who are rewarding the ones who look the most like the s&p 500? julian: i think you are right.
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beta has been doing exceptionally well in the u.s. with the s&p 500 up 20%. investors are rewarding that. hedge fund managers want to be longer than they should, which could hurt them in a downturn. q4 of last year, stocks took a hit with the s&p 500 hitting a bear market. i think that if you are running a hedge fund, you should run it with low correlation. low beta with compared to the index. if you are an investor in a fund that is exhibiting high beta, high correlation to the index, perhaps they are not offering you a naturally hedged structure. scarlet: the knock against etf's is that they have struggled in the u.s., even with jp morgan. as a group, they have gathered some $3 billion. what is the bigger obstacle to quicker adoption of investment etf's?
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julian: one thing is education. getting out the fact that stocks and bonds in this day and age do not truly offer a diversified portfolio. you are seeing record equity valuations in the u.s. almost $14 trillion globally in negative yielding bonds. in europe, 2% junk bonds with negative yields. i think investors really need a third asset aside from stocks and bonds. i think alternatives provide that. what we are bringing to the market is the endowment-style asset allocation. if you take yale, which runs $30 billion. 55% in alternatives. 26% in hedge funds, 14% in private equity. only 4% or 5% in domestic equity. they have had strong long-term returns under the endowment model. i think that is only going to be copied more in the future, not just by other endowments and institutions, but increasingly
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advisors and smaller institutional investors. even retail investors. scarlet: i get what you're saying about uncorrelated. one of your funds attempts to copy private equity returns through publicly traded companies. one of our guests last year voiced skepticism on the strategy. he said it is hard to capture the real liquidity premium you get from a 10-year lock up. to do that synthetically is very difficult. that makes sense to me. you mentioned that people like alternative investments because they are not correlated. but if you are mimicking p.e. returns through listing stocks, aren't you correlated with the broader equity market? julian: you have a point. our private equity strategy would exhibit a high correlation to the broad equity index than a traditional hedge fund strategy. our hedge fund strategies exhibit lower beta. they have a and shorts.
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long and shorts. the private equity strategy -- i disagree with the notion that private equity returns are due to this illiquidity premium. they are more so due to four factors. by private equity, we're talking about leveraged bio. if you're looking at what drives returns, these four factors are size, quality, value, and leverage. we put together a multifactor model to mimic that within liquid public securities. scarlet: julian in toronto, thank you so much. coming up, the disclosure of a hack of capital one raises eyebrows about putting financial information up in the cloud. we dig into one of the main cloud computing etf's next. this is "etf iq." ♪
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scarlet: i'm scarlet fu. this is "etf iq." for every etf that offers exposure to a theme, it is not long before others promise the same. jay jacobs knows this well. his global x funds has been out front in identifying emerging trends, whether it is robotics or fin tech. before we talk to him, eric balchunas is going to give us a drill down into the latest fund. eric: the reason this caught my attention is, it's got $508 million. it only came out three months ago. it is the third best selling etf out of 135 launched this year. it is already cloud computing. it is hard for a product to do
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that. it comes down to the holdings. if you look at the holdings, it is going after software companies that are selling their software through the cloud. if you notice, a lot of these companies might not be big, giant tech companies. that is what makes it unique and different from skyy, the first trust etf. let's look at a tale of the tape between skyy and cloud to get an idea of this. the key metric is the median market cap. this one is going to be much lower. $7.2 billion. look at skyy. much bigger companies. this one is much higher. in a way, this is more pure. this one is up 10%. this one is flat. that performance is part of the reason. that shows you how you have to look under the hood. they are both named the same, but they have wild differences. scarlet: very different components. still with me is jay jacobs.
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how did you get up to half a billion dollars in assets so quickly? jay: it was clear to us that investors like the cloud theme, but they felt like they needed more purity to the exposure. it's hard in thematic investing to zero in on those companies that are getting that triple exposure. especially in something like cloud where you have huge players like amazon and microsoft involved. we crafted an etf to downplay the exposure to the major hyper scalers and up-play the smaller mid-cap names. scarlet: that gives you probably more bang for your buck as things are going up. what about the recent cloud hack of capital one? for years, the credit card lender was beating the drum on how the cloud is better and safer. this certainly highlights the risk of being cloud forward. jay: putting data anywhere is a risk. if it is locally on your desktop, there is a risk. if it is in the cloud, there is a risk. we see these themes being very closely related to each other. cloud computing and cybersecurity go hand-in-hand as partner themes.
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eric: i want to turn to one of your popular etf's. there is another one from inspire. these bible etf's are punching above their weight. they have almost $1 billion. they have ramped up in assets. can you talk about -- there are wild differences -- the difference between cas and bivl? jay: we are tracking an s&p 500 cas. with it starts with one of the most famous indexes in the world. it is screening out companies that donate to the conference of catholic bishops. on the index committee, they have bishops and consultants who are in tune with what the catholic religion is trying to convey through their investments. it is very broad. it is not screening out tons of names. it is trying to give the s&p 500 flavor. scarlet: we mentioned earlier about the pot etf race. you coming in sixth to the pot party etf. what are you learning about
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watching everyone else's efforts? jay: i cannot talk too specifically about an etf in filing. as we saw with cloud and bots, it comes down to the exposure and giving good exposure and supporting it with research with sales and marketing to tell the story in an effective way. scarlet: jay jacobs, thank you so much. i feel like global x funds is an embodiment of there is an etf for that. let's check out one of the best performing etf's of the year overall. ♪ scarlet: the global x greece etf is known by its ticker. it invests in one of the largest liquid companies. it is one of the best-performing etf's this year, outpacing the broader u.s. market and broader markets. it took off in late may.
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as a first and only u.s. listed etf to directly target greece, the fund offers access to a broad basket of more than 30 market cap weighted greek names mainly in the banking, telecom, elenicansportation sectors. telecommunications and euro bank. it held up well in the 2015 financial crisis with investors using it as a liquidity hub. when greece closed the stock market for five weeks. today, the fund has amassed $400 million in assets. it has an expense ratio of 59 basis points and gets a green light in the bloomberg intelligence traffic light system. global x ahead of the curve with their thematic etf's. i wonder what they are going to use for their pot etf. eric: i did a poll. that was instantly voted as the best all time. scarlet: ufo is good. what was the other one?
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not the space one, it became rokt. eric: tickers matter. scarlet: that does it for bloomberg "etf iq." catch us each wednesday at 1:00 p.m., new york time. 6:00 p.m. in london. this is bloomberg. ♪ hey! i'm bill slowsky jr.,
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jonathan: from new york city, for our audience worldwide, 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 the thinking at the fed. you have to extrapolate this and
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think about the fed delivering a series of cuts. >> this creates enough uncertainty to 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 the other. >> mr. trump now knows the s tot the outcomes that he wants. >> good policy, bad 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 these downside risk, presumably means that central banks will push more in terms of easier monetary policy. >> jay powell has made clear that he is willing to step into the breach and 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. oksana, that interplay between the federal reserve and trade policy from the white house, just talk to us about it. oksana: the fed went from the frying pan into the fire with their announcement. powell never really had a
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particularly good reason for the cut, right, he kind of cited increasing uncertainty overseas, slowing conditions overseas, perhaps the lower inflation we are seeing, which by the way, did not induce the cut in 2017 when we saw lower inflation. but they decided to use it as reason this time. and trade tensions, of course. he tried to walk a fine line by staying middle ground, saying this is a midcycle adjustment. and then in a sentence-first, verdict-later fashion, the president then delivered precisely what powell cited as the reason for the cut, and turns it into an easing cycle probably, if the threat materializes, this threat of additional tariffs from a midcycle cut. so in this fashion, trump has got powell's back against the wall, and the fed has essentially chosen to fashion itself after the worst student in the class, the ecb and the bank of japan. jonathan: we can talk about that later in the program. i have had so many people tell me through the week, if you tell me what happens september 1, i will tell you what happens with
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my outlook. that has been the last 24 hours for me. i wonder about is it the same for you, if this tweet had come out on tuesday and the chair had to hold this conference on wednesday, how different might have things been? priya: i think he would have said trade tensions, which would have boiled over instead of simmering, i think they would have said it is still boiling over. have world over. that is the only difference. i think the fed is actually grappling with a lot of uncertainty. they don't know how the global growth slowdown is feeding into the u.s. they are getting mixed signals. they don't know how the manufacturing -- and i'm going to go out and say that the manufacturing recession globally is actually feeding into the u.s. how does that affect the service sector? they have no idea how to get inflation higher, which is why they are really selling this hard as an insurance cut. i think the market reaction tells you that the market has no belief that these insurance cuts will work. we have been calling for an extended easing cycle, calling for two more cuts this year, three more potentially next year. this idea that insurance cuts work, i am very skeptical that it will work.
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it is not really changing our call, but there is this waffling attitude on wednesday. i think that would have changed, had the tweet come out tuesday. jonathan: it was a terrible performance wednesday, most people would agree. the morgan stanley argument, i think, is easy to get your hands around. if you believe that monetary easing was going to work, inflation expectations would be higher, long rates would be higher. that is not happening. robert: it is not happening. there are different styles we have seen at the fed. i think what we are used to from a mario draghi, alan greenspan or janet yellen, is they get the committee on a message, or come in at least with -- we are easing conditions, that is the thrust of the committee's move today. no if's, and's or but's. 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. there are different ways of doing it. the reason i say that, his approach is, i'll just be completely transparent.
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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 mean it, 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 u.s. yields and other yields. be to beis going to destabilizing. you are going to have to get on board with the global program. oksana: the issue here is that the market absolutely refuses to be weaned off of the central bank banking. look at just the past couple of days, the fed comes out and 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, which, by the way, you mentioned the potential manufacturing recession, what is wrong with a manufacturing
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recession if it comes about organically, as opposed to a financial asset, or a financially-driven recession, which is what central banks are engineering here? jonathan: you touched on something that is critical, how this 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 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. and any further pressure and it rolls over. you are seeing that remarkable move in the bond market the last couple of days of this week, really struck me as this could be the moment where people start to price in the policy mistakes of december last year all over again, because they aren't 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 actually get hurt in a sense from tariffs, i think the market is sort of treating this like a nonlinear response.
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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 entire gdp shock of the tariffs implemented 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: so, we have to think about how the curve responds to the 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 then. most assume the fed would come into play, front end would have to rally yields, and we would have curve steepness. what we are seeing play out in the united states is that we are seeing play out in switzerland, germany. as rates go lower, it just see the whole curve come in. all the way out to 30 on the bund curve. negative yield at one point on
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friday. robert, is that what you feel like is happening in the u.s.? not these kind of levels, but just that the federal reserve will struggle to engineer the yield curve and what will happen is the whole curve will drop down all the way up to 30? robert: the market drives the equilibrium rate. right? and the economy adjusts to that. going back to 2003, we marked down our forecast in the long run, that the 10-year would average 3%. and then as we came down, averaging 3% and looking at the feedback from the economy, we marked it down to 2.5%, then 2%, then we said, you know, the central tendency is probably 1.5, but it will take a year or two to get there. that may sound crazy, when you look at other places where the central bank is actually running the mandate as stated, so -- australia, new zealand, they want the good growth, they see
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the room on inflation, they cut rates. their rates are much lower than ours. so the market is bringing the fed to that, and 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 to me, 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 get. i found someone, though, that does want to give up the 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? the 60-day libor 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 further on some additional accommodation from
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the fed, going from ultralow rates in an environment that doesn't really call for extraordinary 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 that in europe, we see consumer confidence being hit in europe. we see that from a rising savings rates, despite 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. and in the unit -- and in the u.s., the fed has the luxury to be data-dependent and you choose not to. priya: i will take the counter to that.
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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 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, 25% of that is in negative yielding territory. there is something that forces this reach for yield out there. look at how high risk assets are. they should be a lot lower, because what is my only hedge against risk assets? duration risk. so i would say go maximum long duration risk. jonathan: they are all itching to carry on the conversation. we will continue the conversation. coming up, the auction block with big demands in europe. that conversation up next. this is bloomberg "real yield." ♪
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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 4-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.
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>> fighting the fed or central banks has always been a losing battle post-crisis. so 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. but since the start of this year, they haven't. jonathan: with me at the table is oksana aronov, priya misra, robert tipp. let's talk about that. the battle in europe in credit 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 essentially stayed out of it. but 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. but in the meantime, how do you analyze something that is a junk rated name and is showing a
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negative yield? what is the opportunities? jonathan: we've got to talk about the investment-grade names. this is really difficult. let's have one example in the auto sector. you saw the daimler issue. big demand for that daimler issue. there is a company that has had profit warning after profit warning through 2019. if you take it as a sector not to pick on daimler, but euro denominated auto issuers right now up until this week, those spreads were tightening. they were not widening. when the fundamentalists suggest they should be wider, they were tighter. 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. so 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 bloc
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and they are forcing everybody there to pay to store their money. i don't think that will be a stimulus. that is bond positive. but the economy is not so bad that the credit fundamentals are deteriorating. and the spreads on high yield, investment-grade are comparable to dollar-denominated. so i think as a result, you will see this search for yield ongoing in the governments, continue to feed out into the corporate bonds, and lead to probably solid returns. oksana: the default situation with credit in europe has always been very different than in the u.s., because 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, number one. secondly, in the current environment, the idea of of rising default in europe is preposterous. you have the ecb supporting zombified businesses essentially. they don't have any catalyst for going through a default cycle.
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what we see in the u.s. in high-yield this month has been a nearly 1% pickup in defaults. we are now, at the end of july, 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. so certainly, there is a tremendous amount of complacency out there. with respect to risk, at a time when 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 out there, but what worries me is, are we going to go from a reach for yield to a default getting repriced in the u.s.? in the u.s., we had significant fiscal impulse last year.
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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 getting repriced so far in the u.s. do you start to see the differentiation between high-yield and high-grade between the better companies? we all have to do far more credit work. we talk about liquidity being significant 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, down, up, 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
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central banks hiking aggressively against an asset bubble. and we don't really have that, i would argue. so i think you will see this highly liquid environment fueled by the bank of japan, ecb, the fed begrudgingly cutting, and a 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 that it is going to be hard to stay insulated from everything, because it is already priced for perfection. when we talk about credit, we can't just isolate ourselves in the fundamentals argument, even if we think fundamentals are still on balance, 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, and ride this out longer, because that argument is based on the idea that i will be able to get out before.
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the reality is, you won't. because liquidity is simply not there, because the five largest corporate bond etf's in total carry more assets than the street is inventorying in all of their corporate positions, and 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. and the bulk of that coming in the last couple of days. 1.87 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." ♪
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jonathan: i'm jonathan ferro. this is bloomberg "real yield."
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it is time for the final spread. coming up over the next week, a lot of rate decisions coming out of asia and australia. you'll hear from st. louis fed president jim bullard wednesday. another rate decision this time from the rbi. plus pmi from china. and we will hear from the chicago fed president charles evans on thursday. trade balance data from china. and on friday, ppi numbers from the u.s., and gdp from the u.k. and japan. with me are oksana aronov, priya misra, and robert tipp. robert, going into next week, what are you looking for? robert: we have had a rally and the markets will take a lot of supply in the refunding. that is going to be interesting. it is always kind of a proof statement of how solid the footing the market is on. we'll be watching to see that. the way we are going out today, the bund market, looks like at yield lows. it looks like the market is very well supported. i would guess that will have an august of indigestion. the market will be dealing with the pending trade and it will be
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underscoring the case for lower yields in the u.s., and compression of u.s. yields, which will be abnormally high relative to the rest of the world, toward global norms, you know, very slowly but volatile. priya: i'll be watching the nonmanufacturing ism, looking for the first sign that the manufacturing slowdown is actually showing up in the services sector. also, all of the fed speak, can they clarify the reaction function? what is the threshold? do they stay here, will they ease again? i think we will hear them talk about this midcycle adjustment being one more cut. jonathan: i think a lot of people will be doing a post powell conference cleanup. let's get to the rapidfire round. you know how this works. three quick questions and three quick answers if we can. first question, a bit of spread widening in high-yield at the back end of the week. do you buy high-yield on that widening, or do you continue to de-risk, continue to sell it? oksana fish i think i continue
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to be patient. there will be better entry points. volatility is still with us. priya: de-risk. robert: buy. jonathan: treasury rally. lock in the profit or cling onto that coupon? priya: cling on, buy more. robert: hang on. oksana: lock in your profits. jonathan: september expectations, 50 basis points, 25, nothing? robert: 25. oksana: 25. priya: 25. jonathan: guys, great to catch up with you, oksana aronov, priya misra, and robert tipp. from new york city, that does it for us. we will see you next friday at 1:00 p.m. new york time and 6:00 p.m. in london. this was "real yield." this is bloomberg tv. ♪
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♪ emma: coming up on "bloomberg best," the stories that shaped the week in business around the world. central banks around the world. >> the dial has turned about as far to the left or right as it will get. >> tightening is a ways off. >> once chair powell stepped to the microphone he sent a less clear message. >> the u.s. and china come to the table but trade talks , fizzle. >> for decades, china has taken advantage of trade. president trump has said we will fix this.


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