tv Bloomberg Real Yield Bloomberg August 11, 2019 5:30am-6:01am EDT
lisa: from new york city for our viewers worldwide, i'm lisa abramowicz. bloomberg "real yield" starts right now. coming up, fears of a global recession reemerging with economic and political concerns rattling market. central bankers struggled to keep up defenses despite a round of surprise rate cuts. investors flee to safety, buyers pulling the most from junk bonds the most since 2018. let's start with the big issue. where did all the bond bears go? >> bond bears are dead. >> the 10 year is headed back down to test all of the old
lows. >> 1.30%. >> you can keep going. >> detail is much, much lower than this. >> you could still get another 25 basis points. >> in the near-term heading toward 1.5%. >> 1% on 10 year treasury rate is not impossible. >> potentially all the way to zero. >> there is no lower bound. >> especially if we end up in a recession scenario. >> the economy is weak, and the leading indicators point to that at this point. >> we and the rest of the world will own long government bonds. lisa: unambiguous, bond bears are dead. joining me around the table in new york, kevin giddis, ed al-hussainy, and scott kimball. ed, do you agree that there is no lower bound? let the basement be the ceiling or whatever it is? >> seriously, the data, in terms
of inflation and growth, point in that direction. there will be a limit in terms of how crowded the position will get. i think we are getting to that stage. the next 25 basis point or so, most are quite long-duration. there will be a limit in terms of how low they can go. the conversation around negative nominal yields in the u.s. is premature. lisa: kevin? >> you would have to give up on the fact that the u.s. economy has not found its way to recession yet. still some strong points in the economy that will keep yield from dropping a whole lot more than they are. if the trade issue is the only issue we are talking about, and that will extend well into next year, then there is no other way to go but down in yields. if cooler heads can prevail, we can look at the fundamentals, there is a point, maybe 20 or 30 basis points from this very bottom out for a while. lisa: there is a question, scott, about how crowded things
are getting. investors are bracing for a drawnout battle. money into treasuries as hedge. bank of america survey saying investor faith in u.s. treasury is the most attractive hedge affirmed. as is the expectation for a much more aggressive fed cut cycle. at what point do we understand this to be just an overcrowded trade, albeit a good one? scott: the challenges we have seen that break in zero lower bound. we always assume rates were closer to zero, treasury values were more full than a day before. we start seeing sovereign curves like we have seen in europe are persistently negative, that may put the bond bears out of business for a couple of days. it really emboldens the global bulls. when we think about where global yields are in context, the treasury still has a good amount of risk off from that because the yields are still positive. lisa: will the federal reserve
come through on market expectations? james bullard addressing trade tensions between the u.s. and china, saying "the nature for a tit-for-tat trade war is there are threats and counter threats occuring all the time. it is not reasonable for monetary policy to respond to all of these threats and counter threats. it raises the prospect there will be disappointment from the federal reserve for markets pricing in four rate cuts. do you think this is a possibility? >> i think they are being sanguine about the risk. they did deliver disappointment in july. there was overwhelming evidence in my mind to start with a 50 basis point cut, to buy that insurance upfront. they didn't go with that move, they went to 25%, messaging about the future of rate cuts. it was very muddled. so there is a possibility they slow walk into a problem. you see the curve reflected
that. we have had a very aggressive flattening of the curve. that is in essence saying the fed is not taking this seriously enough. if they come back and move 50 basis points in september, be aggressive and recognize the risks up front, we will see the curve resteepen. lisa: what happens if they don't do this, kevin? kevin: i kind of wonder if james bullard was addressing the president or the market in general. i think the fed will try to hold onto as much of its independence as they can when they make a move. while i thought earlier in the week there was a possibility you could have a move before the september meeting, i still think that is in september. whether it is 50 basis point or not, it depends over the next three weeks what will happen. i do think an orderly 25, 25, 25 is possible. lisa: if the fed does not come through market expectations on rate cuts, will the result be a tantrum?
>> i think tantrum is a good word for what it might be. we have to look at what happened recently, the fed cut by 25 basis point. conditions have tightened. widening credit spreads, increased volatility. the market being set up for disappointment from the fed would certainly lead to these problems being exacerbated and probably more pronounced selloff of risk assets than we have seen so far. lisa: how many rate hikes do you think there should be heading into the end of next year, given the data we are seeing? >> zero rate hikes. lisa: is that the issue -- we should have no rate cuts whatsoever? >> i will frame it in this way. the market is dramatically underpricing the probability that the funds will fall to zero. we are talking about 125. the real conversation is, is there enough risk on the table at the moment to warrant the fed cutting 200 basis points, taking it to zero?
not because a recession is imminent, but because we need that much insurance to make sure inflation expectations are stabilized and the economy continues on an even keel. lisa: meanwhile, the question is how low can you go? i say rate hikes because i was so used to saying that for so many years, that seems like the only possibility but here we are in a cutting cycle. pimco writing in a blog post, it "is no longer absurd to think the nominal yield on u.s. treasury securities could go negative. whenever the world economy goes into hibernation, u.s. treasuries may be no exception to the negative yield phenomenon." do you agree that treasury yields will go negative in the not-too-distant future? >> that is not our view. when we look at the things driving the negative real phenomenon globally, there is a lack of durability that exist in -- that we do not think exists in the u.s.
every time we have said negative yields cannot persist, they have. we have to accept that break in zero lower bound. we will not be free of that if we enter a deep recession. our question is not will we see another recession? we know the answer is yes. cycles happen. the question is, what type of recession? given the resilience we have seen in the consumers, freedom in the investment capital in productive parts of the economy, we will keep away from that hopefully. lisa: ed, negative yields in the u.s.? ed: i think it is a matter of time frame. real yields have come down dramatically, sending a strong signal over the past 10 years. real yields across the developed world have come down systematically. they are close to zero right now on 10 year tips. can nominal yields follow them? yes, if inflation and inflation expectations ratchet down.
if the fed fails to stabilize inflation expectations, the prospect of negative nominal yield becomes a real possibility. lisa: kevin, negative nominal real yield, or talking negative yields in the u.s.? kevin: i don't think you could say negative. keep in mind, this is still predicated on the potential of a trade deal. i cannot seem to get it out of my head, whether this -- we know right now the trade war is inflationary, so it is a pretty clear trend on where we would go if it continued. i am also not sure -- the rest of it is political. is that a timing issue to see the u.s. and china have a trade deal? in absence of a trade deal, we will drift lower in all likelihood, and that will cause the fed to lower rates. somewhere out there is a deal that gets done that changes 40% of this.
i hold out in the back of my pocket and i don't see negative yields anytime soon. in fact, we have the chance to go up. lisa: somewhere out there, i tell my children, there is a trade deal. i am wondering where you see the lower bound for 10 treasury yields in the current circumstance as we see them with no trade deal? 1.72% right now. scott: we have been living in a range of 2%, 2.25%. we think we are at that. ed: maybe 1.5% over the next year. a lot depends on the fed. kevin: i started at 2.25%. i am at 1.5% now. lisa: coming up, the auction block. blue monday for high yields. u.s. junk spreads widening the most since 2011. that conversation is coming up next. this is bloomberg "real yield." ♪
lisa: i'm lisa abramowicz. this is bloomberg "real yield." i want to head to the auction block. let's begin in the united states where the treasury sold $27 billion of the 10-year yield at 1.67%. demand fell relative to the last auction with the weakest bid to cover ratio since may. in corporates, occidental raising $13 billion. biggest demand for a debt deal since aramco. orders for the deal climbs above $75 billion, allowing underwriters to lower the yield of the underwriting from the initial guidance. recent volatility from intensifying trade concerns claiming a victim in the high-yield market. serious minerals announced it was pulling out with plans to return when conditions improve
later in the quarter. if they improve, staying with high-yield where u.s. credit spreads widened throughout the week, with money delivering the biggest blowout since 2011. >> if your outlook is as mine is at the moment, that things stabilize and back half of the year looks better, economic standpoint, that widening is the opportunity that a lot of people were waiting for since the rally began early part of the year. lisa: kevin giddis, ed al-hussainy, scott kimball all with me. scott, are you seeing the recent selloff we have seen in the high-yield bond market as a buying opportunity? scott: on the margins there are opportunities that present themselves. the challenge is it has been dispersed and not everything sold off equally. we try to normalize valuations in our fund. investment grade versus high-yield. we convert everything to spread. what is happening in high-yield, we have seen 50 basis points come out of high-yield since
spreads were at their tight. you look at areas where spreads have widened the most. looking at a few bonds, yielding 4.5%, about to buy at six or 7%. that window opened but not a wholesale opportunity to jump in. lisa; blackrock saying this is a buying opportunity but perhaps selectively. the managing director writing, "after the recent selloff, global high-yield spreads are now relatively more dislocated, offering a tactical opportunity to earn a pickup in spread," echoing what you said. kevin, do you agree? you are seeing people come in and parse out what they like. kevin: on the surface, this is what we've been waiting for, a spread widening that was significant enough for investors to come back into the marketplace. they struggle to sell $2 billion worth of debt this week in high-yield. on the flipside, some $36 billion of ig debt was sold to
multiple covers and bids to great demand. the market is still stable. we don't have a credit issue right now, yet high-yield maybe out-of-favor. it may be that opportunity to buy that we been waiting for. lisa: is there a severe dissonance here with the idea that treasury yields will go lower, and yet, any selloff, 40 bps, the opportunity that people are waiting for to take up things that you like. these are riskier credits that are highly leveraged to the economy. do these market realities seem incongruous to you? ed: it is uncomfortable in the sense we are having a conversation around the fundamentals and growth, which affects high-yield. and then a conversation around inflation and inflation expectations, which are much more prominent on the treasury side. the fact that yields have come down is reflective of the fact of policy rates coming down and
inflation expectations, less of a growth story. in terms of where we are in the cycle, i would say downside risks have increased substantially. they are much more prominent in sectors like high yield. so from a fundamental perspective, it makes sense to be more defensive there. on the other hand, investment grade, we have had deleveraging, corporates that have clean access to the markets not financing constraint. ig has outperformed high-yield yield more recently. if you are looking for pockets to pick up spread, high yield is not one of them yet. lisa: investment grade set to continue outperforming high-yield in your view. ed: i think so. scott: we would agree with that. lisa: what about emerging markets? there has been a tension building on where you have the
federal reserve in a rate cutting cycle apparently and you also have the ecb about to start their own easing process as well. it raises the question -- usually that is good for emerging markets. is this time different? kevin: it is always different. the problem is, the dollar itself. as much as em would be attractive in a weaker dollar scenario, if it tied in with the fed's rate cutting, we still cannot get away from the fact that it is the world's best currency and everyone else is running to the bottom faster. that strength to the dollar is hindering good investment in e.m., even with the rate cuts possible over the next three months. lisa: do you see an opportunity given banks are dead set on having inflation and growth? scott: one of the challenges the dollar will always face from
getting pummeled is it is the reserve currency of choice, even more so now with the global growth situation. furthermore, we don't think the fed is acting quickly enough to pummel the dollar in the secondary factor. when we think about portfolio positioning, we think about redundancy risk. there is no question the markets are picking up a lot of risk. you start adding emerging-market debt into a bond portfolio, you start pulling in more of that global factor that we don't think you are getting compensation for. lisa: you are seeing investors go into emerging markets, local currency emerging markets, even though the dollar has strengthened. looking at spreads on emerging-markets. do you think there are opportunities here? ed: hard currency versus local currency debt, local currency duration probably represents the most value in e.m. at the moment. the starting real rates there
were quite high coming into this year. so you are well compensated. and because of what the fed is doing, the big change in their orientation between december of last year and now, has open the -- opened the window for emerging-market central banks to cut rates. we see everybody lined up. name any emerging-market central bank, they have all cut rates pretty aggressively in the past three months. i think that presents an opportunity. lisa: i want to tie this together with a question i've been thinking about recently. at what point is the fed unable to stimulate risk assets? at what point do we reach a time where the federal reserve is willing to cut rates as low as people can possibly imagine, but you see spreads widening because people take that as an indication of a slowing global economy and possible recession, scott, are we there? scott: i don't think we are. they demonstrated their willing -- they are willing to go to zero lower bound and add stimulus on top of it. we think this fed -- still a
pretty sizable gap from pricing themselves out of the market and being able to push risk assets. although we will acknowledge that a lot of that is frontloaded. ed: we are not quite there yet. definitely more policy room. lisa: still ahead, we still have a lot. we will get a market check on where bonds have been this week. yields are significantly lower. 30 year yields near an all-time low. 10 year yields close to the lowest since 2016. two year yields taken lower as people expect the federal reserve to cut rates. still ahead, the final spread, a slew of economic data, including u.s. inflation results. this is bloomberg "real yield." ♪
lisa: i'm lisa abramowicz. this is bloomberg "real yield." time for the final spread. coming up over the next week, ppi numbers from japan, germany, and spain. cpi numbers from the u.s. wednesday, germany announcing second-quarter gdp. plus, we get u.k. cpi. china reporting industrial production and retail sales numbers. two rate decisions on thursday including mexico. friday, u.s. housing starts and university of michigan sentiment results. still with us are kevin giddis, ed al-hussainy, and scott kimball. does any of this data we will be getting actually matter for market participants? >> i believe there are some numbers that matter and the rest of them you can throw to the backside. cpi should matter next week. any of the manufacturing indices that are trading close to 50, whether they will hang above, fall below, give a recession indicator, those matter. not many others do.
lisa: ed, which numbers matter? ed: market data matters more than fundamental data at this point. the fomc is largely split and watching short-term data as opposed to relying on secular trends. the decision flip there will be market conditions. if conditions tighten sufficiently, we will build a stronger case for a 50 basis point cut in september. scott: i think anything around the inflation wage growth is front and center. lisa: time for the rapid fire. will the next rate cut lead to a bull steepener? i'm going to start with you, ed. ed: we are walking in that direction. i'm not sure if september or the second half of the year. scott: i think the fed has missed that exit. kevin: no. lisa: high-yield bonds, buy or sell? kevin: i can't say sidelines?
buy. ed: sell. scott: marginally buy. lisa: will u.s. 10 year go negative at the next recession? kevin: no. ed: yes. scott: no. lisa: interesting. thank you all so much for being with us today. from new york, that does it today. "real yield" will be back at the same time next week. this is bloomberg. ♪
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