tv Bloomberg Real Yield Bloomberg August 23, 2019 7:30pm-8:01pm EDT
lisa: from new york city for our viewers worldwide, i'm lisa abramowicz. bloomberg "real yield" starts right now. ♪ lisa: coming up, move over jackson hole. paris fears dictating markets with escalating trade tensions extending the rally in treasuries. chairman powell saying the u.s. economy is in a favorable place but faces risk. reinforcing that for another rate cut in september. and zero rate 30. germany regarding the size of its bonds that pay nothing as the auction flops. let's start with the big issue. 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. >> business investment is not being held back by the cost of capital. >> we have seen already some business spending be weakend because of that tariff situation. >> what is holding it back is trade policy uncertainty. >> the uncertainty around the trade situation. >> the center of gravity is u.s. economic policy, not monetary policy, but trade uncertainty. >> i don't think there is resolution likely anytime soon. >> trade uncertainty will be with us. what i see 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.
joining us now is matt toms, 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 that 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 peak 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 up 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 policyid policy -- fed
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 asset inflation, it leads to asset bubbles. if we mean revert, and those laws have not been repealed yet, it tells you where risk assets could head. lisa: the concern for asset bubbles has been prevalent for a long time, has not stopped the fed from easy money policies. it appears they are going to cut rates. 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. it depends on the pace. 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. the set up right now feels quite
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? matt: there is a risk higher on assets. a feedback loop on growth expectations is not there, and that has historically increased asset prices. that is not being pushed in by the market, and that is why the yield curve has flattened. we have also had fixed income assets not selloff. so there is not much of a trade to bounce back in high-yield when you're already off 6%. lisa: i'm glad you brought up the yield curve. st. louis fed president jim bullard keeping a close eye on
the yield curve, telling bloomberg he is not shrugging off the inversion. >> if you have a recession prediction model, it will use the yield curve to predict that. our job is to get the yield curve to be un-inverted, so those recession models probably do not work anymore. i am not interested in testing somebody's theory about this time is different about the yield curve. lisa: jim, how many times does 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. jim: 25. more than that, they would have to do 50 or more. lisa: luke? luke: at the moment, that is difficult to say. they could cut enough to avoid inversion. 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.
almost if they cut four times 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: that raises an interesting question. luke is suggesting that markets are going to invert the yield curve regardless because people are feeling pessimistic about the economy. do you agree? matt: i disagree. the market will not assume that the fed knows anymore than it does more than a day or two ahead. a proactive fed helps the market, does not instill fear for more than a short-term amount of time. in our opinion, three extra 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. a negative real yield on 10. 1.5 is a key level on us for cash and on 10. don'tit's interesting you
think the markets are saying 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 from the bond market, but they cannot be ignored. >> no doubt bond investors have a more pessimistic view of the u.s. economy than 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 sending 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%.
equities, 8%. historically, the bond market has been much a more accurate reflector of inflection points, so it is reasonable. global growth has clearly slowed and there is elevated global recession risk. china is in a secular slow down. not a cyclical slowdown. they don't have the current account reserves that they did had previouslyy to stimulate. they have a debt problem. germany looks like it is going into recession. it is totally tied to trade in exports. 47% of germany's economy is exports. 9% of germany's gdp is tied to chinese exports. lisa: we will see how that plays out. 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 -- like an intro meeting rate cut, jay powell saying we will do everything it takes to get inflation back to 2% and support growth. a very mario draghi approach to life. 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 offering.
♪ lisa: i'm lisa abramowicz. this is bloomberg "real yield." i want to head to the auction block. let's begin in sweden where the country's oldest lender tapped the market for so-called additional tier 1 bonds for the first time in three years. the bank received orders for more than nine times, yielding just over 5.6% as record low interest rates continue to lure issuers. in the u.s., the treasury sold $7 billion at 30 year tips. the yields the lowest in nearly
seven years. primary dealers took home the smallest portion of the auction on record. the strongest since 2017. where is inflation? some people are girding for it. the world's first 30-year bond without coupons struggle to find buyers, prompting germany's debt agency to admit the sale may have been too large. it signaled that negative yields across europe may finally be taking their toll on demand. rebounding, so maybe not. credit suisse saying there may not be too many alternatives to negative rates. >> clearly, yields are not attractive, 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, jim keegan still with us. what is your take on negative yields and the attractiveness? do you take a signal that reaching peak negative yields from the german bond auction? luke: 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 depo rate. getting into a 70, 80, 90 number for the german 10 year could be quite easy from here. you think, a lot of people are buying these assets for capital appreciation and direct duration in their portfolios. then 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 corporates in a couple of weeks.
it will get taken down very well. lisa: matt, 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. if you can swap back into another currency and still have a positive yield, it makes sense and we do that. ultimately, we think the experiment has a problem with the outcome mechanism. we have not seen growth or inflation revive. we think you'll see a bottom to negative yields, how far they can go, because there is a cost. the banking system, savers, wealth tax, and ultimately in investment. the end will be when people realize there is an offset. there is a benefit that there is an offset to negative yield. lisa: president trump reacted to the german bond auction, tweeting, "germany's 30-year bond fell.
germany competes with the usa. our federal reserve does not allow us what we need to do. they put us at a disadvantage against our competition. strong dollar, no inflation. 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, they have not increased inflation, 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. all of these easy money and negative interest rates does is increase the ability of these companies that should be out of business to stay in business. lisa: which raises an interesting question. 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 in a time of a slowing economy? are you saying at least we can pick up some extra yield and there is a buyer of last resort, the ecb, or are you staying away? luke: the landscape is changing pretty rapidly over here. that whole 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 -- to finance. these are not businesses that can go to the market and get lots of new debt. the place that we think is interesting and credit is the investment grade and bb 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-term 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, to 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 debt to 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 -- diversify and get income. that is 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. -- on a nominal basis. then you adjust them. what is interesting about this cycle is the fact that typically at the end of a business cycle when corporate profits and cash flow are peaking, leverage is at a trough, not a peek. this cycle, leverage is at a peak in investment grade. we know why. the largest buyer of equities has been corporations buying back their 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 all-time record tight, the fourth quarter of 2017. 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 -- that saying any longer we are just going to avoid it is hard to say. lisa: 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 four basis points, leading to that flattening and brief inversion
between two's and tens. the 10-year poised to end the week at the lowest level since august 10, 2016. still ahead, the final spread. 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." ♪
♪ i'm lisa abramowicz. this is bloomberg "real yield." time for the final spread. over the next few days, president donald trump and u.k. 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 out 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 still with us. so much uncertainty. matt, 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 forestalled 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. the 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. actually, prime minister johnson in the mix there as well will not make anything anything -- make anything any 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 cutting the deposit rate even further, that will put downward pressure on global yields. 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. jim: when 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. luke: 10-year yield, yes.
matt: no. lisa: the next question, em debt, buy or sell? matt: i'm a buyer here. luke: i cannot buy it here is too expensive. jim: the dollar is getting stronger and i will put pressure on e.m. lisa: my thanks to jim keegan, luke hickmore, matt toms. from new york, this is bloomberg "real yield." ♪ manus: you're watching the best
of "bloomberg daybreak: middle east." the major stories driving the headlines this week. aramco attack. saudi arabia's energy minister says drones struck facilities in the southeast of the country but failed to disrupt production. yemen's rebel leader claims responsibility. gibraltar rejects the request of old and iranian oil tanker detained on suspicion of smuggling fuel to syria. washington says it's disappointed with griffin. after handling saudi aramco's bump up bond sale earlier this year, his law far in line for an ipo.