tv Bloomberg Real Yield Bloomberg August 23, 2019 1:00pm-1:30pm EDT
ourrom new york city for viewers worldwide, i'm lisa abramowicz. bloomberg "real yield" starts right now. coming up, move over jackson hole. paris fears dictating markets with escalating trade fears extending the rally in treasuries. chairman powell saying the u.s. economy is in a favorable place but faces risk. zero rate 30. germany regarding the size of its bonds that pay nothing as the option flops.
fed officials at jackson hole grappling with how the trade war is impacting the u.s. economy. >> trade uncertainty is sort of a fact of life now. >> trade policy uncertainty has been weighing on the outlook. already someen business spending the weekend because of that terror situation. what is holding it back is trade policy uncertainty. the center of gravity is u.s. economic policy, not monetary policy but trade uncertainty. >> trade uncertainty will be with us. what i some businesses do is become more cautious. this trade war is triggering other actions around the world, other countries thinking about reevaluating their own trade relationships. this could easily get out of control and easily feedback to the u.s. lisa: there should be a little
ding every time they say uncertainty. matt toms,now is luke hickmore, and here in new york, jim keegan. i want to start with you, jim. one thing i'm struck by, yes, we are seeing a rate cut being priced into markets but it is not giving a boost to risk assets. what do you take from this? jim: you have to look at how risk assets have performed. if you look at 2018, it looks like we had a peek in growth rates, inflation, interest rates, and risk assets. if you look at stocks for instance, globally, stocks peaked in 2018 and the s&p is on very little from where it peaked initially at the end of january 2018. you have basically collected the dividend. at the end of the day, i think that policy has just created
asset inflation, which is why you have this divide on the fed where there are several people who are concerned about financial stability risk. if you look at acid inflation, it leads to asset bubbles. revert, and those laws have not been repealed yet, assetss you where could head. lisa: the concern for asset bubbles has been persistent for a long time, has not stopped the fed from easy money policies. how concerned are you about that, how many times do you expect the fed to cut rates? >> the market pricing around four cuts seems right. we are only expecting 25 basis points in september but the risk of a 50 could be centered around how risk assets move here on out. the move into q4 this year seasonally could be pretty tough
for risk assets. feels quiteight now shaky for equity markets coming into the end of this year, and that could be what pushes the fed into upping the pace of their rate cuts. it does feel hard at the moment to see rates much below 1% in the u.s., but we could get there quicker if equity markets selloff. lisa: matt, do you think the fed will cut four times? i a feedback loop on growth expectations is not there, and that has historically increased asset prices. that is not being questioned by the market, and that is why the yield curve is flat and. we have also had fixed income assets not selloff. so there is not a trade to bounce back in high-yield when you're already off 6%. lisa: st. louis fed president
jim bullard keeping a close eye on the yield curve, telling bloomberg he is not shrugging off the inversion. have a recession prediction model, it will use the yield curve to predict that. our job is to get the yield inverted, soun- those recession models probably do not work anymore. testing interested in somebody stare about this time is different about the yield curve. does jim, how many times the fed have to cut to avoid a yield curve inversion? jim: it depends part of the curve you are talking about. lisa: let's say 2/10. >> 25. more than that, they would have to do 50 or more. lisa: luke? luke: at the moment, that is difficult to say. the market is really pricing in, moving toward recessionary probabilities being very high. what they do now may not change
that yield curve move in the short-term. times if they cut four before the end of the year, we could still be inverted. because the market would panic, what does the fed know that we don't? lisa: luke is suggesting that markets are going to invert the yield curve regardless because people are feeling pessimistic about the economy. do you agree? >> i disagree. the market will not assume that the fed knows anything more than it does a day or two ahead. a proactive fed hubs the market, does not instill fear for more than a short-term amount of time. in our opinion, 3x on cuts allows the 10-year to steepen, if some of the trade uncertainty goes away. it is hard to see below 1.5 on the 10 year when the inflation expectations have a hard time getting below that level. 1.5 is a key level on us for
cash and on 10. lisa: what does the fed know what we don't know? certainly, the fed is wondering what the market knows what we don't know. loretta mester telling bloomberg, she may not agree with the signals in the spot market, but they cannot be ignored. >> no doubt bond investors have a more pessimistic view of the u.s. economy then perhaps the economists and i do. we have to take a signal from that. we cannot just ignore what is happening there. lisa: jim, do you think the bond market is appropriate in segment a signal that is basically telling us there will be recession within the next 12 months? jim: if you look at various financial markets, the three-month 10 year, the new york fed recession probability model is telling you on a normalized basis, 72% probability. five-year treasury, 50% area. if you look at investment grade corporate, 13%.
high yield, 10%. historically, the bond market has been much more accurate reflector of inflection points, so it is reasonable. in global growth has clearly slowed and there is a limited global recession risk. china is in a secular slow down. they don't have the current account reserves that didn't have previously to stimulate. they have a debt problem. germany looks like it is going into recession. it is totally tied to trade in exports. -- 47% ofrneys germany's economy is exports. gdp is tied to chinese exports. lisa: of course, we have the trade wars heating up, which is interesting to watch the price action. markets somewhat calmed after what jerome powell had to say, but less so after president trump tweeted out, writing my
only question is who is our bigger enemy? jay powell or chairman xi? i have to wonder, luke, what would president trump have liked to see out of this meeting? how much does this risk the fed's independence at this juncture? luke: you wonder whether he would like an intermediate rate , jay powell saying we will do everything it takes to get inflation back to 2% and support growth. but that is not going to happen. trump will continue to lay on the pressure. it has been a fascinating move away from a completely independent central bank, to ones that are getting increasing political pressure. still independent but that political pressure has to weigh on them in the long term. lisa: everyone will stick with me and we will talk more about this coming up. the auction block. the world's first 30-year bond
lisa: i'm lisa abramowicz. this is bloomberg "real yield." i want to head to the auction block. thes begin in sweden where country's oldest lender tap the market for so-called additional tier 1 bonds for the first time in three years. the bank received orders more than nine times, yielding just over 5.6% as record low interest rates continue to lure issuers. in the u.s., $7 billion at 30
year tips. the lowest in nearly seven years. theary dealers took home smallest portion of the auction on record. where is inflation? the world's first 30-year bond without coupons struggle to find buyers, prompting a germany debt agency to admit the sale may have been too large. signaling that negative yields across europe may finally be taking their toll on demand. increasing uncertainties. credit suisse saying there may not be too many alternatives to negative rates. >> clearly, yields are not attract it, they are very low, but they are reflecting a reality. institutional investors of today are worried about the economic outlook or perhaps risks that are more broadly around. they do not have much more alternatives than piling into already unattractive government
bonds. lisa: matt toms, luke hickmore, and matt toms is with us. when is your take on negative yields and the attractiveness? do you take a signal that reaching peak negative yields from the german bondreaching pes from the german bond auction? >> i don't think we are, bearing in mind september ecb, we are looking for a 20 basis point cut. that will take us to a 60 negative dpo rate. getting into a 70, 80, 90 number could be quite easy from here. of people areot buying these assets for capital appreciation and direct appreciation in there for leo's. if you are u.k. investor buying assets, you get a positive pickup from the foreign exchanges. still plenty of demand around. we will get a wave of new
issuance from corporate's in a couple of weeks. it will get taken down very well. t, what is your perspective when we look at the incredible amount of negative yielding debt out there? are you finding it attractive, going into those areas with negative yield? do you view this as a bubble? how do you reconcile this with the history books? matt: if you need to own it, you need to own it. swap back into another currency and still have a positive yield, we do that. ultimately, we think the experiment has a problem with the outcome mechanism. we have not seen growth or inflation revised. we think you'll see a bottom to negative yields, how far they can go, because there is a cost. the banking system, savers, ultimately investment. the end will be when people realize there is an offset. president trump reacted to the german bond auction, tweeting, "germany's 30-year
bond fell. our federal reserve does not allow us what we need to do. they put us at a disadvantage against our competition. they move like quicksand. fight or go home." do you expect to see negative yields in the u.s. within the next few years as the u.s. faces a slowing economy and perhaps downturn? jim: at this point, i don't, and i sincerely hope not. you can look to japan and europe and they have not worked. we talked about they have not increased growth, in nation, they have not increased credit. they have increased savings rates. they have created more zombie companies. that is deflationary. we have an excess capacity issue globally. andof these easy money negative interest rates does is increase the ability of these companies that should be out of business to stay in business. lisa: if there are all of these
zombie companies getting fuel to be kept alive by the negative rates, what is your perspective on buying corporate debt in the eurozone and a time of a slowing economy? at least we can pick up some extra yield and there is a buyer of last resort, the ecb, or are you staying away? the landscape is changing pretty rapidly over here. that whole a zombie argument has been around a while and i'm not sure it applies anymore. the kind of company struggling to get financed at the moment, b, ccc, are struggling to find assets. these are not businesses that can go to the market and get lots of new debt. the place that we think is interesting is the investment grade and double be area. if nothing else, the ecb will be buying 20 billion of that possibly as early as january next year every month. if you have that kind of big buyer in the market, there is lots to go for still in european credit. sterling credit works as well.
even in the u.s. market, as a haven asset which still has some yield around it, you will find investors forced into that space, too. that may be wrong from an economic long perspective, but in an investable timescale, i would still be in credit. lisa: in the past couple of weeks there has been a paradigm shift from low rates pushing people into riskier assets, yield, too low rates indicate a slow down, pushing people away from the riskier assets, and you have seen a diversion between the lowest and highest rated debt, and how people are trying to hide out in stuff that is more credit worthy. are you seeing opportunities in the lower rated credit, or are you also going into higher rated gird for what could be a downturn? matt: the opportunity has been to be crowded into the higher-quality spreads.
that is a nice way to deliver supply and get income. absolutely the trade, we think that continues, and it expands into other sectors in the bond market that benefit from low rates like housing bonds, commercial real estate. that is a trade that we think continues. lisa: do you agree, jim? jim: you have to be selective because we are getting to the point where there is elevated recession risk. at the end of the day, risk premiums are tight, whether you look at them on a novel basis. what is interesting about this cycle is the fact that typically at the end of a business cycle and cashorate profits flow are peaking, leverage is at a trough, not a peek. this cycle, leverage is that a peak. we know why. the largest buyer of equities has been corporation by dr. own shares, $5 trillion worth, and a lot of that has been debt
financed. if you look at spreads on a leverage adjusted basis, they are pretty close to the fourth quarter of 17. lisa: luke, final thought on you. jim expects that we are getting closer to recession. would you agree? luke: absolutely. all the signs are there. you would now be really hard-pressed to ignore them and look for growth forever. the thing is it could be six months or a year away, but it is coming, and it will come in germany first, it will then come to the u.s., and then maybe mild in the u.s., but staying any longer, we are just going to avoid that -- is hard to say. you are all sticking with us. let's get a check on where bonds have been this week. we are seeing yields lower in the longer dated bonds. two-year yields rising for basis
points, leading to that lightning, brief inversion between two zen tens. the 10-year poised to end the week at the lowest level since august 10, 116. still ahead, the leaders of the group of seven gathering for a retreat as the global economy slows and trade wars escalate. that is coming up next. this is bloomberg "real yield."
lisa: i'm lisa abramowicz. this is bloomberg "real yield." time for the final spread. trump and u.k.d prime minister boris johnson among the leaders set to meet in france for the g7 summit on saturday. tuesday, u.s. consumer confidence data, followed by fed speeches. friday, look up for u.s. personal spending and consumer sentiment data.
plus, a policy decision from the bank of korea. matt toms, luke hickmore, and jim keegan's still with us. are you expecting anything definitive from the g7 meeting that could potentially give a floor to bond yields? matt: unfortunately not. the g7 gives us a chance to fear what if the trade war expands from china toward europe. it was stalled earlier this year to clear the decks with china. there is more downside risk, should there be negative tweets or headlines out of g7. we fear there is more of a downside case as opposed to stability. lisa: luke, agree? luke: that has to be the central case. g7 has struggled to come up with a communique that reflects a more settled joint opinion from the last couple of meetings, and this one does not feel any different. prime minister johnson in the mix there as well will not make anything anything easier. lisa: jim, do you think the
pressure is for yields to go lower here, for government bond yields? jim: absolutely. especially long-term rates, it is a relative gain. as we talked about where the ecb will be the deposit rate even further, that will put downward pressure on yield. the u.s. is the best house in a low yielding neighborhood. lisa: it is time for rapid fire. we have a lot going on. my first question to you all is when do we get a recession in the united states? matt: 21. luke: december 20. the fed goes from a midcycle adjustment to a full easing cycle. that is we know we are in recession. lisa: second question, will we see negative yields in the u.s.? jim: short-term, policy rates? no. yield, yes.r
matt: no. lisa: the next question, em debt, buy or sell? matt: i'm a buyer here. it here isnot buy too expensive. jim: the dollar is getting stronger and i will put pressure on e.m. jim keegan,nks to luke hickmore, matt toms. focus very much on bonds. from new york, this is bloomberg "real yield." ♪
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there is human ingenuity. ♪ ♪ every day, comcast business is helping businesses go beyond the expected, to do the extraordinary. take your business beyond. mark: i'm mark crumpton with bloomberg first word news. as we have been reporting, there are major developments today in the trade war between united dates and china. president trump has ordered all
american companies with operations in china to begin looking for alternatives. his tweets are in response to news from beijing that it will impose additional tariffs on $75 billion of american goods. is also ordering fedex, amazon, ups, and the postal service to begin searching for the powerful opioid fentanyl in all packages from china. a moscow court has ruled that an american man suspected of spying be kept in prison for two more months. the court ruled today that paul weiland the cap behind bars until mid-october. kept ineportedly cramped conditions at a moscow detention facility, built on will him and the court called and amulets. paramedics said he did not require a helpful station. the u.s. embassy last month said his condition has worsened. weiland read a statement to reporters. no