tv Bloomberg Real Yield Bloomberg September 8, 2017 12:00pm-12:30pm EDT
jonathan: from new york city, i'm jonathan ferro. this is "bloomberg real yields." ♪ jonathan: coming up, congress clears legislation to extend the u.s. debt limit. president trump would like to scrap it altogether. synchronized growth story does not seem as with the bond market. 2018 looks increasingly uncertain. the ecb is still exploring qe options. the white house is said to be considering six candidates for the fed chair. the big issue, president draghi
urges patience as the economy continues to outperform. >> it is hard to talk down your currency when fundamentals are improving. >> the currency has found a headwind, but we believe we are justified >> by >> the domestic strength of the economy. the reason they are not too concerned by the euro is it exogenous shock. it is a manifestation of the confidence of the eurozone and their policy. >> the eurozone is now growing as much as the united states. i don't know if you change monetary policy if it affects that much. i don't know if the euro is now affecting the changing growth rates now established by the euro. announcing some sort of tapering the decision ahead of the governing council. he did not have a lot of room to move. jonathan: joining me is robert
tipp, chief investment strategist at pgim limited, also eric stein from eaton vance, and trey parker at highland capital management. great to have you on the program. me, is what jumps out to the message that seems to be received by the fx and bonds in europe and the diversions -- d ivergence between the two. why can we have bond yields going lower and the euro ever stronger? robert: if you look back over the last five years, the money was first leaving the eurozone because of prices. after that they moved on to a new mode of stimulus. they broke any link to the idea that this was a central-bank motif, they would never do qe, now they are massively into qe and groundbreaking in terms of a
central bank going negative on interest rates. they are chasing money out. as if that was not enough, they have moved on to political fragmentation, concerns about the netherlands and austria and the great package in the balance, concerns in italy, and the le pen situation. if you fast-forward, you are past the dutch, the austrian, the french outcome was phenomenal as far as europe is concerned. italy is the only outlier there. the money is not coming back. europe is a place where the underlying fundamentals of being a savings block, sort of like japan which had an ironically strong currency is there. they now have a cyclical upswing going on. the politics are coming together. unless you have steady outflows on the portfolio side, as will be a strong currency. jonathan: that all makes sense
except bund yields on -60 basis points, what you want to your notes out of germany when you can have a strong reallocation to europe? >> there is still some fear premium. thereb not buying bunds, are not that many of them. jonathan: if i truly believe the ecb is going to step back, why two-year note yield in germany higher? >> i think mario draghi really has to tight rope monetary policy. he has to slowly normalize and bring down the pace of quantitative easing. look at global yields. they had been falling. now bund yields are going to fall as well. the way we have always looked at currencies at eaton vance is one versus the other. the dollar has been weak this year. this is the inverse of dollar
weakness in addition to the positives we mentioned in your. robert: the other thing on burns is there is no supply. the fixed supply is a small market to begin with. the ecb is fine based on capital key. a quarter of their purchases every month are getting squeezed into the bond market. that market is under pressure. jonathan: trey parker, after hearing from mario draghi of the ecb yesterday, what is the base case for you now on the recalibration of policy later this year if it gets announced? trey: i think mario is still trying to walk a tightrope in terms of waiting and seeing the data. i don't think he is too concerned about euro strength. on a trade weighted basis, it is only up 6% this year, and they can handle that given the growth
outlook in the eurozone. we think the fed and ecb are in wait-and-see modes given policy action later this year, and understanding they want more ammunition as we get later in the credit cycle. jonathan: will this be a move from 60 to 40 over six months, or 60 to 20 over nine months? where are we? trey: i think they will start moderate. this is too big an experiment to be aggressive with reduction in the tapering. just like the fed, they will guide with moderation initially and see how that goes. that potentially they will increase it later in 2018. jonathan: we have talked on this program about obsessing over the sharp nearness to the boat. that is obsessing over what the ecb does next. about a mile away is european politics, does that reassert itself into the bond markets and
financial conditions? eric: i think it does. there has been a tail geopolitical risk in europe. italy is not growing. stronger euro does not help italy. ande's a lot of debt contained spreads because of ecb purchases. the debt trajectory is sustainable now. normalize, it really is not. concernedmarkets over last year, they may be getting overoptimistic this year. robert: it is a little, look at it, but at this point if you compare the u.s. and europe, when they created the euro out of nothing, they really created a tremendous physical process that they immediately -- fiscal process that they immediately violated.
what has happened with the financial crisis and euro crisis is they have really regrouped. at first they wanted to drive the private sector involvement, and that was obviously a disaster. instead they tightened the fiscal restraints and the approval process. they began to make examples out of individual countries when the eurozone was acting in a position of strength. a key example is cyprus where they basically restructured the banking sector and took money out of deposits to right the situation. how does this matter for italy? if italy was asked if europe was in disarray and to have italy on the brink, -- if you're was in disarray into italy on the brink, that would be an issue. put together and italy is in disarray.
i think they will make their way through, although it is not a great-looking situation. jonathan: think about how tight things are trading up. earlier this week blankfein came out and said he worries when corporate bond yields trade below dividend yields, take the euro and compare it to the stoxx 600 yield on high-yield europe, is that a cause for concern? aboutthinking broadly global central banks, why are they tightening? his inflation out of control? no. it is financial stability. whether it is u.s. high-yield or european high-yield, whatever credit market, they are getting compressed, specifically gold. sometimes there is too much of a good thing. that is the number one focus of central banks, financial stability. jonathan: trade something that does not come up much at the ecb
news conference. should it? how frothy should it look? trey: i think they're so mandate is price stability. from a u.s. perspective, asset bubbles and one of the things rates and run provide is an ability to curb those excesses. they have to worry about trading false demand in asset prices, that is something we need to think about as investors even though the ecb may not be talking about it. jonathan: you are sticking with us. robert tipp, eric stein, and trey parker. coming up, the auction block after the u.s. holiday labor day was one of the busiest so far for corporate debt. this is bloomberg. ♪
♪ jonathan: i am jonathan ferro. this is "bloomberg real yields." deadlinee debt ceiling was pushed back to december, we had a nervous market, look at this past tuesday's full week treasury auction. the highest rates since december 2008. billion in bills sold at 1.3%. european u.s. and companies lined up to sell. one of those was apple. they sold $5 billion in four parts. year security with the yield of 1.4 percentage points.
buying, investors still media debt in a big way. billion. $6.3 the largest portion $1.25 billion maturing in 24/7. us robert tipp, eric stein, and trey parker. i want to talk about that treasury bill, why 1.3%? >> i don't have a perfect answer for you, but it is one of the issues with the debt ceiling. responsibleeed more government in washington, but the debt ceiling is a crazy way to deal with it. it is all about taxing and spending. having this higher sale where this bill is higher than that built and we might have a debt ceiling, it is more of a
distraction than what is really happening. 1.3% for one month money? >> it may sound like a lot, but you have to annualized it. obviously, the u.s. is not going to default. if you say, what if they did, what did you get paid for that? 207% inlooking at like % in congress002 compe% in nsation. it does not look that good. jonathan: this lasted about five minutes. treasury yields popped a little bit. the prospect we might not h ave a debt ceiling anymore in the u.s.
if we bring up a chart of real yields, real yields are completely rolling over. everyone from pgim who sat around this table bullish like there was no tomorrow, the curve is going to flatten, we got basically what you anticipated. where next? robert: i hate to say it, but this is not over. all the instances where yields 3%, youhed to 2.5% or had unrealistic expectations about growth. if you go back to the first half of last year, we were 1.30 or 1.90 on treasuries, the economy was ok. before the trump trade, you had a steepening program put in place in japan. japan is very important on b uying treasuries. you had the ecb going to taper.
and theboj revamping trump trade that was supposed to, and people on the extreme were good at panicking in the short term. what was the bad news? you could have inflation on import tariffs, tax breaks to bring you growth, infrastructure spending, everything you can imagine, and things were up 2.50, 2.60, those yields were too high. how much of that has come true? the hurdle is very high. they don't have that much to work with. the underlying economics are the economics. japan, the yields are incredibly solid, negative, low. europe low. jonathan: let's get to the economics. your take on treasury yields around 2%, with gdp growth
around 2.5%? tough to reconcile the two. you have inflation 1.7%, below the fed started. you have gdp around 2.5%. something is wrong. we have a different view from robert. we think there is an under expectation of growth and a lot aspects,chnical looking for relative yields elsewhere in the world is perverting the market. part of that is the geopolitical issues whether it is harvey, irma, or korea. easy equity markets near all-time highs, and so we think technicals is a key factor. jonathan: let's get into it more.
pgim has been dead right. forward, have we had capitulation yet from the treasury bears at the beginning of the year? is there more to come? we think 2% is as far as its going to go. eric: i would agree with that. global yields being low causes every thinges, and else keeps that. i think we are getting close to it. what if we do this and the other washington? trump just cut this deal with democrats, what if we do get corporate tax reform? right now it is not priced in at all. jonathan: as we grind higher, when does pgim start buying again? robert: the market looks great. this is not a one-week or one
month for six months, the structure of the decline in rates are there. all the metrics people are using to look at this overtime, they are not changing fast enough to see what is really going on. there is not a bubble. the demand for money is not there between the demographics and whatnot. long way to go. jonathan: you are sticking with us. pgim, eric stein of eaton vance, and trey parker of highland capital. twos, tense, and 30's making new lows. we are down 11 basis points on the 10-year. vogue again.her in a bank of england rate decision. we will discuss in just a moment. this is "bloomberg real yield." ♪
jonathan: i am jonathan ferro. this is "bloomberg real yield." time now for the final spread. goldman sachs revealed a plan to turn around performance of its core bond trading unit. apple with a much awaited launch of the new iphone. a state of the union address, not sure how many people are waiting for that. the bank of england rate decision on thursday. and we get retail data and inflation from the u.s. on the same day. with us, robert tipp of pgim, eric stein of eaton vance, and trey parker of highland capital. considering the events of the last couple weeks, is it going to be a couple of months for this to come through? >> i think there is definitely going to be a few months of pause in economic activity, a
lot of it depending on the extent of irma hitting florida. harvey you are a soft and some of the employment data earlier this week. there will be a two to three activity in economic that should catch up. >> obviously, you will have a drawdown and that the stimulus. gets factored into gdp data. is that going to be a few tenths of gdp that gets spread out over a decent period. jonathan: how much of the demand is going to be absorbed by the us economy? cars went out in harvey, and who knows what happens with irma, so we will see that in the auto production. there is obviously more demand in the auto sector. jonathan: on these numbers start
coming through, they will have a reflationary element to them. is that something the market will jump on waiting for those numbers to come through? >> we will have to see. trading numbers is incredibly difficult. i don't know if there's a strategy necessarily of over reading or other reading, but we will see how it comes out. jonathan: you will wrap things up by looking ahead to the week ahead. a quick series of three questions, one word answers if possible. the base case for the ecb from here, 40 billion and a six-month extension, or 20 billion and a nine-month extension. what are we getting closest to? months, andr 30 46 within 12 months they will be out. eric: 46 months. 6 months.
jonathan: if you had to belong to the year end, 10-year bunds or btps? btps.: eric: bunds. trey: bunds. jonathan: do you want to hold apple equities or apple credit? robert: equity looks good. i think strategically markets are good shape. eric: equity. trey: equity because i think rates are going up and the duration risk of the credit market -- jonathan: we have to leave it there. from new york city, you have been watching "bloomberg real yield." ♪
welcome to "bloomberg markets." julie: from bloomberg world headquarters in new york, here are the top stories on the bloomberg and around the world that we are following. hurricane irma remains on a collision course with south florida. it is threatening to become the most expensive storm in u.s. history. we are days away from apple's big timber 12 event, where the company is likely to reveal -- september 12 event, where the company is likely to reveal big , thees to its device iphone. and a cyber attack leaves as many as 143 million people at risk. we will look at the next depth fax on the heels of their data breach. if you look