tv Bloomberg Real Yield Bloomberg August 17, 2019 10:30am-11:00am EDT
tom: from new york city for our viewers worldwide, i'm tom keene in for one jon ferro. bloomberg "real yield" starts right now. ♪ tom: coming up, the yield curve inverts, disinverts, and historically more fixed income on fears of global slowdown. bond yields priced to perfection on germany and surging negative yielding debt. finally, credit markets enjoy real volatility. high yield spreads at their widest since january.
we start with a big issue, fears of recession and uncertainty surrounding trade, sparking a rush into safety. that leads to a u.s. yield curve that inverted wednesday. as i recall, the first time since 2007. >> the recession is avoidable. >> even when you see the yield curve invert. >> that does not necessarily mean we are going over a cliff into recession. >> it happens to be about 18 months earlier than you see recession. >> and this is about traditional signals of the yield curve. >> talking about the curve in version. >> inversion. >> 2/10 inversion. >> recession goes right up. >> markets always short-term have a wall of worry to climb. >> the market is an extreme way, seeking safe haven. >> a safe haven. >> looking for safety. >> treasury bonds is where you go. tom: terrific conversation through the week across all of bloomberg media. we want to advance this now and into the weekend with peter
tchir of academy security. thrilled that peter could join us on the mechanisms we saw this week within fixed income. we are thrilled kathy jones is with us with charles schwab. really interested in the desperation of savers and those looking to clip a coupon. from boston, margaret patel from wells fargo, with decades of experience in high-yield and fixed income space. let's dive right in. while we enjoy this weekend, what did schwab see in terms of what people actually did, kathy, what did flows look like? kathy: people were pretty calm. our clients had a lot of cash anyway, certainly fixed income investors have been sitting heavily in short duration securities despite urging them to take a little duration. there was not a lot of panic. i think people were pretty calm. we have seen these selloffs before and they rode it out pretty well. tom: margaret patel, you are the queen of opportunities. what have you seen in terms of a
price back up in high-yield, is now the time to reenter high-yield? margaret: high yield is very attractive especially with treasury rates this low, with the one qualification, the ccc's, the bottom of the barrel, are still to be avoided. you can get 4.5% to 6%, which is -- default risks look under 2%, which is attractive compared to where treasuries are. tom: peter, you write these short little paragraphs about the carnage that has been out there. what did you learn this week, what surprised you maybe what did not happen this week? peter: what is surprising to me is how quick risk happens. argentina was a great example. the bonds fell 30, 40 points. ge yesterday got attacked quickly. as the other guests mentioned, we have seen that occur in the ccc basket. i think we will see spread widening as people take this idiosyncratic risk and realize we have had a lot of great gains.
let's lighten up a little bit. not looking for a big backup in spreads, but that is starting to occur. at the hedge fund level, the volatility has been too insane, so we are not done seeing people take off risk because they cannot stomach the volatility. tom: these are some of the themes we will talk about this half-hour to get you into monday. why don't we start with the former chairman of the federal reserve system, alan greenspan has been a huge supporter of my work on economics and fixed income. i thought chairman greenspan was really sharp this week. there is international arbitrage going on in the bond market that is helping drive long-term treasury yields lower. there is no barrier for treasury yields going below zero. zero has no meaning besides being a certain level. margaret patel, we saw jpmorgan stop the fixed income market, not with a forecast, but with the idea of thinking through how we get to ever low yields. can you frame the possibility of
high-yield moving from x percent, down under 4%? margaret: i think they will follow treasury yields down. the path of treasuries are down, that is pretty much set in stone. people will be attracted to that much higher yield. it is really the only place in town where you can get very high-yield. very competitive. tom: i want to deal with this in our third block today. kathy, it so important, what chairman greenspan said, chills retirees. doesn't it? kathy: it does. it is very difficult, has been difficult for almost a decade, for a retiree to invest without a lot of risk and generate a certain degree of comfortable income. we have had to help them navigate that throughout the last decade really of zero interest rate policy. we are really having to look at
the entire portfolio now rather than just the fixed income slug. tom: let's look at that. peter tchir said he would not come on unless i did some fancy charts. this is the 10-year yield with service sector inflation. the cleveland fed, and the idea is you take the yield lower, and then you take the idea of the cleveland fed. peter, we have never been here back 30 plus years, a real yield on the inflation people feel we have never seen. peter: you go back 10 years ago when everyone was talking about the financial recession, and people said we would not be japan. we are starting to look more and more like japan. people will have to adjust how they think about income with that backdrop. things have dramatically changed. we are at lower real yield than before the financial crisis. tom: are we going to adjust our bond framework? we have this memory of grandfathers clipping coupons, younger guys like you don't remember clipping coupons. bill gross started at pimco in
the mailroom clipping coupons. that is ancient history when you are under 2%. peter: people are going to have to take more duration risk than they will like. they will have to look for alternative assets, and they will also have to figure out what will benefit from low yield and take risk. one of our themes is, a lot of these companies went through a debt diet. companies are emerging much stronger. companies like at&t will be able to use this low debt to their advantage and help out the equity markets. we have to take what we are learning about income and apply that to our portfolio as a whole. to: margaret, i want to go you with your decades of experience. you started out in high-yield when you were 12 years old. when i look at the perspective, there is a social cost to the real yield that we enjoy today. what is the social cost to american society, if the financers decide we can do with a massive negative real yield? margaret: i don't look at it as social cost, too bad savers don't have those bonanza yields.
financial markets change. you need to change your investment approach. i think treasuries have and will become an instrument that is not suitable for long-term investors, simply because the yields would be so low or negative. either corporate bonds, high yield bonds, or common equity is where investors will have to go. it is just what happens when financial markets change. it shows you that duration is really not a risk and i don't think it will be a risk. tom: this is an important statement. margaret patel in boston with all of that institutional pension money. what is the new actuarial assumption, that kathy jones has to to worry about because she is so young, are we at 4%? margaret: 4% is realistic and maybe even on the generous side. that is the reality with where we are. nothing wrong with that if inflation is zero. tom: kathy jones just fell out of the chair. i can never retire. we are not ready for this world, are we?
margaret: that is one of the things that worries me, this adjustment that we are going through is more than just low yield or the potential for negative yield. what we have is a whole system that is a little bit unmoored from the experiences we have had over the decades. adjusting to that will be a challenge. tom: how do we get back to being moored? i don't understand the path back. german yields this week, hsbc came out and took the german ten-year down to -.81, and they got there in four days. kathy: i would tend to disagree that you have to ignore treasuries in your portfolio and just go for risk. there is a time and place for risk but we are underweight high-yield right now. tom: i like it, dissension. ferro never does this, true dissension. you are underweight high-yield? kathy: we went underweight high-yield about a month ago because we started to see the risks rising.
we do not see the value being attractive. that being said, spreads widened, and we may change in time, but at this moment in time when volatility is picking up, people are paying for safety. they are paying for duration. sometimes you need something safe in the portfolio to offset the risky part of the portfolio, even if it is not paying you a great return. tom: this is wonderful, an historic week in the bond market, truly, like we have never seen. peter tchir with us, margaret patel, kathy jones. we are thrilled they could be with us today. i am even more thrilled jonathan ferro is not here. that is a good and beautiful thing. how about high-yield? we will talk to ms. patel about high-yield. arch dissension here. kathy jones saying maybe not, margaret patel saying load the boat. i have no idea what peter tchir is saying about high-yield. stay with us. this is bloomberg "real yield." ♪
♪ tom: from our world headquarters in new york, i'm tom keene. in for jonathan ferro. people asking where jonathan is, he is on sabbatical. that's all there is to it. bloomberg "real yield" after this historic week. peter tchir is with us, kathy jones, and margie patel. as we move through the weekend and drive the conversation into a tumultuous august end. we have to go to margaret patel on the yield hauled demand for credit. right now we are reaching for yield, we have to get there. the big issue -- goldman sachs had a note on this a couple hours ago, on energy high-yield. is that another problem for high-yield, or was that market cleared a few years ago? margaret: they did a fantastic job of clearing primarily by issuing equity common stock to
clear their balance sheet. yes, i think a sensitive sector like that to downward prices, which is what the case is for energy, the sector has a way above average risk for those credits. tom: you have been historic saying dividend growth is a possibility as a yield alternative. are we closer to where dividend growth is the new yield? margaret: i think so. because if you look a better quality high-yield, so-called short duration high-yield, you are looking at yields at 3.5, 4%. that is bumping into dividend yields of pretty good quality companies, where you have the ability to raise the dividend. we have had the dramatic switch over, and it's a process that will continue. tom: margie, one more question. the issuance frenzy, what is every cfo doing on this friday, this weekend? what is every cfo doing past labor day? will there be an issuance frenzy?
margaret: there has been some pickup but a lot of the issuance has flowed into the loan market where companies have gotten lower yields and much more lenient terms. a lot of issues that would've gone to the high-yield market, especially lower quality, where the risk is, have been in the loan market. the high-yield market is very high quality in my opinion. tom: what do you see, peter, in terms of the execution of the fixed income market. is it a normal market with supplies coming on, supply being taken? peter: we will see supply in the investment grade space, even as spreads wide. they want this all in yield. -- all in lower yield. investors still have asian demand coming in, so there will be issuance. on a separate note, there is a complete lack of liquidity. the treasury market usually trades in ticks, 30 seconds. how we got to that, i don't know. tom: i remember that. continue. peter: now it is trading in basis points. you look up and you look down
and any news headline is driving the bond yields down two or three basis points, that is a sign of a lot of liquidity. -- of a lack of liquidity. people caught offsides in their positioning. people will reduce, be cautious. companies will take advantage of this, and that will put pressure on. if anything i would look for yields to head higher. that would be a big surprise. tom: jon emailing in from some island in the mediterranean and asks, should he buy equity debt? there is a letter of credit and other bond construction as well. peter: i have not followed that credit in particular. i think on all of these, you have to do your due diligence, understand what you are getting. some of these companies in the tech space, some of their bonds have not done as well. they may have a phenomenal equity story, which can rely on the prospects of growth, sometimes that does not translate into a great that story. tom: kathy jones saying, don't
ask me about the weed company. my compliance is watching. kathy: it is an interesting story. tom: i like that, very safe. what is so important here is the tumult we are in, whether it is uber, lyft. it has never been like this. what does the retail investor to do, looking for nominal coupon that possibly would be a positive real yield? it is not there, is it? kathy: no, and one thing i have not been doing enough is taking duration risk. tom: can we translate that? i'm not going to buy a two-year cd, i want a five-year cd. kathy: exactly. one of the reasons you do that is diversification from stocks. a t-bill will give you diversification from stocks, but a five-year treasury would give you magnitudes more benefit in a diversified portfolio. when we get these bounces in yield, we still think people should focus on adding some longer-term bonds or medium-term bonds to play it safe.
tom: margie, where is the best duration in high-yield right now? i think immunity bonds, i have to go out already five years -- i have to go out 35 years to find something. where in your world is the best duration? margaret: the high-yield market is really a market with bonds issued in five to 10 year maturities. i would say go for the long duration in high-yield, the more maturity you have, the higher the yield. in high-yield, you are taking credit risk, not duration risk. so i would go for the long duration, 10 year bond with a duration of five or six years. tom: what is the coupon on that? i am afraid to ask. margaret: depending on where it is, 4.5 to 6%, something like that. tom: we remember the days of felix smith, where that was 9%. peter, all of this is great and fun to do, but the real issue is the risk of price. you get yield move and price comes down. what is the risk of getting hit over the head by a bond pullback? peter: i think it is reasonably high. that is why we have been cautious on it. credit and fixed income tends to
trade like this, a deep and sharp decline. we have seen some of that in individual names. there is that risk it translates. particularly in high-yield, i would want to get my money to an active manager. susceptibility to the etf names. i am less concerned about that in investment grade. on the treasury side, two weeks ago, people were talking about 2.5%, 3% 10 year, now people are wondering when we go negative. i think we're getting close to underestimating potential growth in europe, underestimating some ecb, maybe lagarde is pushing for fiscal stimulus, maybe we get a trade deal with china. i don't think anyone is pricing in the potential for growth, and we could have a very strong shock to the treasury market. -- to 2% in aom hurry. tom: margie, within all of this is the idea that i have to make money and not lose money.
high-yield, is there a stability there, or is there instability in your market? margaret: i think high-yield looks very stable. one, because the quality of the high-yield market has never been better. typically, half of the issuance for the last half a dozen years has been to refinance on the debt. people are not doing crazy borrowing, huge dividends, crazy acquisitions. they really are companies that have lengthened out their balance sheet in reasonable businesses, excepting energy, retail, things like that. i think the credit default risk is very low in high-yield at the present time. tom: this is interesting, we have to go to kathy jones on this, pushing against of what we're hearing from peter and s. patel. let's come back and talk about the retail market. let's do a market check. this week was bonds, bonds, bonds. ferro told me that i could only do bonds, bonds, bonds on this show. i still don't understand these numbers. a 30-year bond, it is my grandfather's bond.
♪ tom: we welcome all of you worldwide. i am tom keene in for jonathan ferro. bloomberg "real yield," not final thoughts but because of the extraordinary nature of the week, kathy jones, margie patel, peter tchir with us. we are diving into the ramifications of this for the little guy. i don't know whether the little guy is $2000 or $100,000 or even $1 million. what does the little guy do, pushed around by these institutional realities? kathy: at the end of the day, it has not changed that much. it is all about being diversified, understanding your time horizon, and making sure you have some safe assets.
we have been emphasizing more on the safe assets lately because we are getting more defensive in equities and fixed income. but it hasn't really changed. you still need that diversification. tom: this is important, i'm going into the real yield here. ferro stays inside two years, but i'm going off of the actuarial assumption. the actuarial assumption you talked about before, you shocked me with the idea of 4% or lower. how do we get there if we are the little guy and we have to retire? margaret: frankly, people need to keep working -- that is the reality -- or take volatility risk, which is stocks. tom: peter is my retirement planner. i am never going to retire. down we go, this famous logs chart. can you bring that chart up again? that was gorgeous. they do that on "surveillance." the h15 chart from the time of voelker. it is a new world.
peter: it is a new world. we have to manage around that. one of the new phenomenons is etf's. i think etf's fit your portfolio in fixed income. they let people manage around more than they used to. but it is all about time horizon. if you are trading for a couple of months, weeks, etf's work well. i don't know if right now is the time for high-yield. you want to put that in with an asset manager. it is idiosyncratic risk. asset managers can do a better job moving around that. etf's sometimes create their own noise and volatility. that will be the key, what you want and where you want to put it. tom: is it an inflation-adjusted yield or disinflation-adjusted yield? peter: probably disinflation. we are all living with the fact that the fed sees no inflation, and so many of us are told, if we see inflation in our lives, we are crazy. tom: kathy, how do you explain this week to the greater public, as you do at schwab?
kathy: it will be a challenge. the thing we have to emphasize with people is this world could last a while. we could see these disinflationary trends last a while. it is a higher risk world and it was a couple of years ago, simply because we are now priced for that. anything that changes, whether it is fiscal stimulus somewhere or trade deal, that will cause a lot more volatility. tom: kathy jones, thank you. margie patel, thank you for joining us from boston. peter tchir with academy. it's been an historic week. we will do this again next week. this is bloomberg "real yield." ♪ - my family and i did a fundraiser walk
♪ emily: i'm emily chang and this is the "best of bloomberg technology." coming up, a flurry of tech unicorns charged the public markets. we will take a look at the inner workings of adam newman's company and is complex and controversial is this -- controversial business relationships. plus, content kings. cbs and viacom finally inked a merger deal. we speak to buy