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tv   Bloomberg Real Yield  Bloomberg  August 19, 2017 10:00am-10:30am EDT

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jonathan: i am jonathan ferro with 30 minutes dedicated to fixed income. this is "bloomberg real yield." ♪ coming up, amazon joins the -- $1 trillion worth of bonds this year along ♪e.coming up, joining white house volatility, gary cohn could quit. ecb presidentnd mario draghi meet in wyoming. we begin with a big issue, a day
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of -- and amazon joins in. >> that is the elephant in the room for us, what are they going to be tomorrow. >> it is concerning, but from a credit perspective you have an opaque business model. you don't have a lot of disclosure to the markets and that makes it tough for us. identity make you see across the market, still after we are well into a fed hiking cycle, the borrowing costs are still near the lowest they have ever been. it remains a good time for corporations to borrow money. >> there is an ongoing demand for yield. the fed has gone through a process of slowing downward shoot adjustment. it's happening at a glacial pace. >> all of the companies have taken advantage of huge demand
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so they are issuing long bond at tight spreads. so, the corporate market has extended quite a bit. >> central banks around the trillione brought $60 worth of assets. they have to buy something and go somewhere. joining us, let's talk about the 40 year security that amazon came to market with. the amount of duration is increasing. the index is increasingly tight. help me work through it. >> i think what that is telling you is companies are making the right decision. debt is very cheap and extending the duration as much as possible
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, as much as you should do. the question is why are investors buying it. i think the reason is because they have no other choice. so for any portfolio that needs bondbonds, the government market doesn't give you enough yield and you go into the corporate bond market to get it. it is that simple. you can make it complicated, but it isn't. jonathan: you wonder what kind of deal you're getting when you're forced to buy something over 40 year technology company. a good question. when you are buying long, entering the companies are going to be around or have been around for 30 to years is something you should pay attention to. having said that, i think a lot of these companies -- we could've said the same thing about ibm 40 years ago and they are around, and microsoft, all of those companies. i think it is more about
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creative analysis of the company. let's do credit analysis, 40 year security, 1.45% over treasury. what are your thoughts? about amazon,ink tesla, or any disruptors out there in the market, we find those challenging from a fixed income perspective. they have tremendous promise in terms of future profits, but not a lot of profits today. if you think about tesla, it is a large holding in our convertible portfolios your we like the upside-downside ratios, but we passed on the most recent deal, because we didn't think we were being paid enough for the risks. it really is a credit by credit decision. for some disruptors you're better off on the equity side or convert side. let's talk about you have hit right on it, it is an equity-like a dream.
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it's not going to be captured by the debt. the most you can hope from the debt side of the story is just to get aid. if you look at tesla, that issue has been hammered. it makes me wonder why people were buying in, in the first place. somebody people warned about it. >> again, there is a lot of things to like in the tesla story. i'm certainly not going to talk about the motivations of the other buyers, but we take a very bond, credit heavy approach and you have to look at risk versus reward. for a lot of these issuances, they are not in balance. jonathan: many people have come out cautioning what happened in a credit market, maybe some complacency. the federal reserve likes to talk about valuations, but they usually talk about stocks. should they look at the credit market? >> i think they look at a variety of products, commercial
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real estate, auto loans, credit markets. and a lot of the speakers have alluded to the fact that they are easy right now with the tightening of credit spread. it is something on the top of their mind when it comes to tracking financial stability and this is something that we will be looking for in yellen's speech later this week when she speaks. that will be the centerpiece of her conversation. jonathan: we are going to get into that and a moment. ie wider issuance story, point out yes, the numbers are huge and they are making that'ses, but el toro ultimately what matters is what issuance. when you look at net issuance, are things more favorable toward credit? >> absolutely. the key point is if you are a central ink looking at valuations itself are
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meaningless. you really care about is the rate of credit growth in the economy. if the credit growth is high, that is something that should bother you. having said that, if you look at the rate of net credit growth, if you look at what the rate has been in the economy since the financial crisis, it is higher than used to be, but relative to the pace of reddit growth historically, it is -- credit growth historically is still significantly lower. the corporaten sector, so from vulnerability, that is what we should focus on, but nowhere close to the rates those in 2006, periods. jonathan: the demand side of the picture has been massive. how important is the indexing role in this? given a company you know, if you come to the market and offer
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more, you will get a bigger slice of the index. there will always be someone there who wants to buy it? >> i think you hit on an important point, indexes are momentum strategies. on the equity side you can argue that is ok. you are allocating to more successful companies. on the fixed income side you are advocating to more reckless borrowers. i am not sure that that is necessarily of great strategy. i think a lot of research has shown on an active income portfolio, they have a higher rate of beating indexes. the really important point, strategies that may work on the equity side are dangerous on the fixed income side. jonathan: you are all going to stick with us. coming up, on the program, the auction block. amazon is not the only tech giant to sell tech
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stocks this week -- two cellblocks this week. this is "bloomberg real yield." ♪
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♪ jonathan: i am jonathan ferro. in this is "bloomberg real yield ." i want to head to the auction block. it usually august is a slow month, not so much this year. the amazon deal and british american tobacco are driving the biggest deal in a decade. has pushed sales to all $1 trillion this year. record, so far, it set a , no different. more than double when compared to the same a meadow a year ago. an example of this -- same
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period a year ago. the seven-year bond in canada to fund buybacks in dividends is the biggest offering by a foreign issuer in canadian dollars. it is rumored that gary cohn quit the white house. leadingg to an advisor the effort to overhaul the u.s. tax code will remain in the position as the director of national economic council, but why has goldman sachs president seen as such a critical figure on wall street. joining us is christian money from oppenheimer funds and matt --eud why is it seen as all that is good for wall street? a significant amount of expectation built into the market for tax policy here at the center of initiative is typically the treasury in a typical administration.
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that is not the case since the nation became the -- since mnuchin became the secretary. the center of that is gary cohn. it is real. jonathan: do you think it should be moving this much. the white house has denied it at the potential direction of one policymaker. >> the movement hasn't been just because of the gary cohn story. there has been a lot going on on the geopolitical side as well as on the political side in the u.s. waitingthe market is for meaningful tax reform. he is seen as the leader of this whole initiative in the white house as well as working with the treasury secretary. that is why i think he is so important. .onathan: we have this push on one hand it is risk on if gary stays and it is risk on it
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been goes. what you make of it? given day, any given headline you can point to that direction -- i think when you think about valuations. about weight since -- valuations are high in the equity markets now. i think when you look at treasury rate, we think they are about right. but again, there is normal volatility, especially for august. in terms of what is priced into the market, we are not pricing in significant tax reform this year. i think you are seeing a lot of uncertainty being generated. and i think that uncertainty -- it is easy to have an opinion, but you can have a lot of conviction. jonathan: the other push and pull added into white house volatility is financial conditions. the federal reserve, they have been hiking, but financial conditions have gotten easier
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and easier. is that a problem for them or is it the green light to say keep going? >> it is a good thing for the faeds -- for the feds. it's a problem for the ecb. inflation is a problem for europe, but for the u.s. it is a perfect situation. for thee indications balance sheet and also delivering another hike in december. jonathan: financial conditions are easy and that is a green light to hike, but the inflation data is softer here at the real tug-of-war is the soft inflation data versus the easy conditions. they are concerned about the financial aspect. >> yes. i think what they are to focus on is making sure the growth doesn't get hampered in any significant way because of policy moves.
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instead of enjoying the circumstance, building themselves room by tightening policy or financial conditions are not tightening themselves that been a moaning that -- that bemoaning conditions, that is a good thing. into an extentd is stimulus. his forecast have a change, i find that in treating. if you match up the forecast to where the inflation has ended up, does the for -- forecast have to change? >> nobody believes what they put up anyway. he can change that and bring it back to the market, declare victory. i think it doesn't make sense, because the key issue is the fed and most people at the fed are still sticking to the phillips curve in some form.
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is ate are finding out some point it worked, today it is not working. what they are telling us is they will continue to tighten and the market discounts that assertion. jonathan: did you want to jump in, sir? history is important only if you look and it is very unusual for the fed to be raising rates and financial conditions to accelerate as they are in we think it speaks to the actions of global central banks. the fed first took their foot off of the accelerator, sin they will tap on the brakes. it depends on how much the world bankers push on to keep the conditions easing. it is getting harder to analyze. to the point of hiking rates, typically they hike rates when inflation is a problem, when it is accelerating.
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now you see it rolling over, and i think it is because their models don't work. we have come through a balance sheet recession, whether it is the debt, demographics, or a combination, their models are not working. jonathan: you are going to stick with us. -- let's get you an update on the market. close the week very close around 2.6 on a 10 year. from new york, still ahead, the final spread features janet theen and mario draghi, annual conference in wyoming. this is "bloomberg real yield." ♪
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♪ ferroan: i am jonathan
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"bloomberg real yield. this is "bloomberg real yield "bloomberg real yield." military drills coming up. president trump will be speaking in arizona. the big highlight is a with janet helen and mario draghi. hole eclipse or jackson are you, sir? >> solar eclipse. jonathan: the ecb or what is happening with mario draghi? it was meant to be the main event. the accounts from the ecb's last meeting, but they are concerned about a euro overshoot. it aids the risk a little bit, hasn't diminished for you guys? .> i think it has a little bit
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again, i think the problem is everyone wants to talk about having a strong currency, but nobody once their currency to be that strong. i think the rhetoric will be dialed down a little bit, but again, the ecb is clearly the wildcard in world central banks. jonathan: a lot of people say the ecb holds the key to level rates?-- to global >> in my opinion, yes. they will be careful to not rattle the markets. ofyou see a decent repricing term premiums in germany or europe, i think that will push level yields higher. jonathan: worst part of that is the task in front of the ecb is awful lot different than the task in front of the federal reserve. credit are
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ridiculously tight in europe, because unlike the fed, the ecb buys corporate debt as well. is this challenge bigger for draghi than it was for bernanke at the time? >> i think so. they have to be careful not to undo what they have done. they have to be careful about communication. like i pointed out, the environment is not really per,ucive for them to ta because the euro continues to be strong. i think they have a tough balancing act. jonathan: i know a lot of people are critical of where roads would -- where rates would be, where work out rates should be for germany versus the periphery, we should get to the bottom line there. that is where rates should be for the periphery and you can get to the white line.
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things have changed over the last couple of years, that picture has gotten better. that is ill the problem. >> the eurozone has structural issues. i think the markets have been surprised by the eurozone's ability to grow 2%. if you told me europe was going to grow at 2% a few years ago, i would've laughed. in fact, i did. ist is the thing that draghi dealing with. he doesn't know whether the growth rate is sustainable or not. early is aering too risk he, like the fed, doesn't want to take. jonathan: is it premature to talk about removing accommodation at this point? growth, at if you look at inflation, absolutely. i think that is the dilemma of the world's central banks. growth wise we have gotten to where we need it to.
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importantly from inflation, we haven't. the risk is very much there and central inc. policy has to be -- central bank policy has to be there. jonathan: it is the rapidfire around here at one question to each of you with one word answers if you can. we begin with a conversation about credit. you have to hold to maturity. amazon orturity for tesla and you have to buy and hold. i know you are a rates person, but you have to play. so, by or hold? >> amazon. >> amazon. >> i will go for tesla, it is wider here. jonathan: if i could give you a speech now, would you take yellen's speech or draghi? >> draghi.
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>> draghi. >> draghi. >> he was there next week, yellen or cohn? >> gary cohn. >> gary cohn. >> gary cohn. easy one.that was an it has been great to have you on the program. from new york, we will see you next friday. it is "bloomberg real yield ." ♪
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