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tv   Bloomberg Real Yield  Bloomberg  July 13, 2018 1:00pm-1:30pm EDT

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>> from new york city, i am lisa abramowicz. 30 minute dedicated to fixed income. this is bloomberg real yield. coming up, the trade war heats up. the question now becomes is it time to buy bonds? the leverage loan market is getting hotter but for how much longer? china's junk market starting to crack. we start with a big issue, the rising global trade tensions. that tale of risk is getting
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fatter and fatter as we go along. so far, the chinese have shown no interest in backing down. neither does donald trump. >> i don't think we need to be hitting the panic button quite yet but we have moved a lot closer to it, no question. >> until we see a compromise on the chinese side but also the u.s. side there is a real concern it will get worse from here. >> the whole situation with china and the u.s. is very critical, particularly for china. can gete the situation worse. trump will not given. discussions, the biggest issue on the table was trade tensions. given the multiple channels through which protection measures affect economies, it should be clear monetary policy is ill suited to counteract all of their effects. >> if you are worried about this renewal volatility we have seen, then you new to worry about your underlying credit exposures as well. storm,s like a perfect
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trading conditions where increasedis likely, incidence of default and delete what sees are higher. lisa: some dire words of worry. aronov of is oksana jpmorgan asset, joe higgins of tiaa investments, and coming mattatlanta, met tom -- toms. oksana, how much are you paying attention to these detentions and making moves? it is interesting the stock market has not shown much concern about the trade tensions. muche not really seeing panic around the markets in general. what i find fascinating about the reaction, anytime there is an escalation in the storyline related to trade war's is that it becomes a risk off and rally
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and the 10-year goes lower, where in reality that is an inflationary pressure if anything. the 10-year will be higher as a result. lisa: this is the ultimate question at the moment. our trade tensions going to be inflationary or deflationary? joe, what do you make of that? >> the textbook explanation they say that tensions, are inflationary, we have seen that with select asset classes. washing machines up 20% since was put on. ability to impact business and consumer sentiment is high. in an of itself it is inflationary but the after effect would be a business slowdown. a lot of people are looking at the yield curve, seeing the expectations of growth dropping as the likelihood of a trade war picks up. treasuriesnow to buy ? not a terriblere
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investment. 3.15e real difficulty at a to 3.25, above that level. not an environment to be overly afraid but the trade tensions are inflationary long-term. remember the feedback loops are a stronger dollar and more active ad, which suppresses the market. near-term makes the 10-year not a terrible investment, particularly not any 3.10 level. oksana: i'm always here to bring some dissonance. i am going to kind of put this in a different light. went through a multi-year period of extraordinary accommodation from the fed. the message through that was don't fight the fed, if you are trying to stay away from the risk. the fed is not your friend anymore as a fixed income investor. all the investors that were espousing that mantra should now start to believe it on the other
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end, because that is the biggest issue for fixed income markets, treasuries, the reduction of the fed balance sheet. lisa: ok. taking that, let's take a look at a chart that i find fascinating showing the massive divergence between the long and short positions in the treasury market. you can see the divergence between the real money long and the speculative shorts have reached the widest since back leading up to the last financial crisis. joe, who is right here, the lawns or the shorts? believe 2.85 percent on a 10-year is not a bad entry point. the longs are more correct. we heard the fed for the first days, that they are seeing districts slowing capex.
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we really need that to increase productivity and extend the cycle. the fact that certain fed governors are talking about it tells me that the fed will be somewhat reactive, should this go further. at the supply of and demand dynamics of the market. we are on track to produce $2 trillion of fixed income in the u.s., which is 400 billion above the 1.6 average over the last five years. most of that extra issuance is coming from treasuries given the deficit we have. the fed is on track, given the current guidance -- perhaps they reduce theirto demand for the market by 200 billion through the second half of the year, as our largest sovereign buyers are buying less, banks holding less because they are less regulated, etc. the supply demand dynamic is what is going to continue pushing yields higher and much less so how many hikes the fed will do or not do. lisa: you think the speculative shorts are more accurate here? oksana: when we look at the
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longs and shorts, when you look at the fixed income market in general, where is the exposure? trillions upon trillions of dollars that are long fixed income. compare that to speculative shorts, it pales by comparison. having said that, we are not sure the 10-year treasury. we find it much more efficient to be short -400 basis points on the german midpoint. that is a completely artificially created price point by the ecb. a moneytt, you are manager, real investor, you have to put money into fixed income instruments. point, the supply demand dynamic, and the fed rolling up its balance sheet, are you concerned about holding a significant duration exposure? >> we are not. we the supply demand dynamic, and the fed rolling up its balance would prn germany. i would agree with the shorts in the near term. pushr 10 push after this
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down to 2.85 make sense. the fixed income markets are more concerned about down side risks. equity markets can do well to a trade war. fixed income markets need to be concerned about the downside. that is why you see treasuries move lower, corporate bond spreads move higher. near-term is slightly higher in yields but not a prolonged move higher. lisa: when did we see the next recession, matt? today looks like 2020 always are moving up above 25% but you cannot say it's the majority outcome. we think it's beyond that but the odds have doubled of a 2020 pullback given the fiscal stimulus rolloff getting through 19. joe: we think it is likely h1 20 20. matt: late 2019, early 2020. oksana: it is really hard to assume the yield curve is signaling anything given the amount of central-bank meddling.
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the externa amount of long-term liability management coming into place, with a population getting older. there is probably demand that will continue to anchor the long end of the curve that 10-year and in is susceptible to the supply demand dynamics and what the fed will do. nothing i'm hearing from the fed is particularly dovish. lisa: when do we see a yield curve inversion? matt: we think we will not see it. we think it will bottom near the end of the year. the ecb will be in play late this year, early 2019. we would put that well into the future and call that a late 2019, early 2020, if it happens at all. hard to sayent, when, given the technicals. oksana spoke about a lot of moving flows, u.s. inflation, wages, what the ecb chooses to do. the recession will follow the inversion possibly by nine to 15
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months. lisa: we will be talking about the yield curve for a lot longer. anyone who is a skeptic, good but. everyone is staying with me, andna aronov, matt toms, joe. there is buzz in the bond market. greece is back.
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lisa: i am lisa abramowicz. this is bloomberg real yield. u.s. treasury department auctioned off nearly $200 billion this week. first we focus on the $33 billion sale of three-your notes , the smallest bid to cover
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ratio since 2009. primary dealers also took the greatest share since 2014. $22 billion were sold in the 10-year sale with 2.89% with a bid to cover ratio at the lowest level since may. primary dealers have the smallest share since january. in greece, investors are warming up to the prospect of a return to debt markets. the nation's biggest corporate borrower attracted more than 1.8 billion euros of investor orders there does still seem to be very much a shirt for yield. there was a story that caught my attention this week looking at at least 69 companies have increased in their debt loads by 50% or more in the past five years. , are wed the question getting to the end of the cycle, will there be a reckoning? joe, what do you think? joe: at the end of the cycle you
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always get distortions, not just in the high-yield market, investing great market. component of that index has roughly doubled. investors in passive vehicles they may want to think, is this safer? we don't think indexes are necessarily safer. active management can move you away from some of these issuer concentrations. lisa: matt, where you see the biggest distortion right now? matt: the corporate space. debt to gdp continues to rise and is beyond precrisis levels. that is different from the consumer-oriented space where the two gdp in the consumer space continues to fall. the consumer has grown the prior debt load. andmuld point to the bbb e corporate where we would see potential dollar funding issues. those are the potential seeds of concern in the future. lisa: oksana, i want to get a
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leveraged loans. a lot of people have been raising this as a hotspot of concern. a near record pace of issuance so far this year after last year. do you think that leveraged loans are going to see much lower recoveries in the next downturn than perhaps even high-yield bonds? oksana: not surprising we are seeing this a tremendous upside for loans because they are one of the few pockets that have delivered positive returns as everything else struggles. there has been deterioration in the quality of the issuance. in our portfolio, we were very bullish on a loans, selective holders but not very active adders. it will continue to benefit from the flows and technicals matter in this market. it's been dominated by etf's, etc.. loans likely have some room to run but fundamentals are becoming a higher concern because as more deals come to market, there is -- this idea of
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loans being senior, seniority in the capital structure is starting to matter less as you have more secondly and issuance and there is often no one behind you in the capital structure. this whole seniority argument sort of start to deteriorate. lisa: joe, what is your perspective? joe: two oksana's point, there is more risk now historically, leverages higher. one thing about the high-yield bond market, of course a collection of individual stories. many of the leverage loan issuers that get covenant like status are high quality. you have to differentiate between what you can tolerate as a covenant light and what you cannot. lisa: you did bring up emerging markets, matt. you seem to suggest that could be an area where we see stress. given the selloff we saw last month, are you starting to experiment, trickle in, staying away from the area?
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it is a time where you can find winners and losers. overexposed to the dollar and the like even the right place to avoid but there are countries doing the right things, raising rates to defend their currencies. mexico, indonesia. those can play out differently than the turkey's of the world who has an array of trouble from a political and financial crisis standpoint, and argentina. it is time to look in the e.m. markets for opportunities. not yet time to just blindly by. says i feel like everyone that. there could be opportunities but don't go near turkey or argentina. oksana: very different from what we were hearing at the end of last year and this year where most of the issues were saying e.m. is a great opportunity. now is stronger dollar, rising rates in the developed world. if you look at the amount of defaults that have been -- that we have had in sovereign em over
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the past 20 years, 25% occurred in 2017. five of them happened last year. certainly there is some deterioration in fundamentals. my final point is it is very hard to imagine e.m. strength in a world where developed world's rates are going up and the dollar is strengthening and there are various inflationary pressures. finally, technicals have not started to get the market. when people start to pull out their money through etf's, that is what can create a significant selloff. that will be the time to buy. oksana: but not yet. lisa: time to buy? >> there are select opportunities and a lot of flows have left the market. lisa: everyone is sticking with me. oksana aronov, joe higgins, and matt toms. let's get a market check on where bonds have been this week. bit,-year yield clowning a
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certainly after that three-your auction that was disappointing. 10-year yields creeping up one basis point. 30-year basis points for the flat considering what oksana was highlighting, the runoff of the fed balance sheet. at chinaahead, looking gdp. this is bloomberg real yield. ♪
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lisa: i am lisa abramowicz. this is bloomberg real yield. over the next week, fresh readings on china's gdp and president trump and russian president vladimir putin will meet. fed chair jay powell testifies before congress. and we have a bunch of earnings including goldman sachs.
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still with me is oksana aronov, joe higgins, and matt toms. i want to start out with china's gdp. we have seen a bit of deterioration in chinese corporate bonds, particularly denominated in dollars. joe, are you concerned at all about some of the weakness we have seen, are you starting to see the time to buy? joe: certainly weakness in china has implications for e.m., risk sentiment globally. we remain generally somewhat concerned about the weakness in the renminbi. what happens with further dollar strength? it is something to incorporate in your asia play. lisa: how much are you paying attention to chinese gdp and the efficacy of the controlled slow down in that country? matt: the controlled slow down is key, trying to slow it down. the good news is the markets are assuming u.s. strength will offset that. it is happening in an
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environment where the market sees a safety net. that said, we don't think it's time to look at chinese workers specifically. foreign funders in u.s. dollars space is something to be avoided in the coming years. lisa: i was struck by the growing number of u.s. investors purchasing chinese corporate debt, chinese bonds in general, even though european and asian investors have been withdrawn. who do you think is right? lisa: that is the chase for yield. china certainly is another reason why it is really hard to be extraordinarily bullish on e.m. given all the issues that they have. china has the largest number of bad loans across a lot of these corporations that have been kept up by the government. more so than in 2008. china has a significant bad loan problem. credit issue. the government is trying to figure out how to work through this. the tariff rhetoric is not
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helpful there. it is not unreasonable to expect china to slow down in the next 18 months and that we will have significant ramifications in em another reason why this is not yet the time to get into em. you, are youout buying chinese bonds right now? matt: generally know. we think the severity will not be terribly strong. the chinese government is trying to slow things down, so they want some of this pain to come through the system. if it goes too far, we think there will be fiscal measures that china would deploy. that would be the sign for a bounce. wait for things to get worse before china will protect the downside. that is when you buy. thing i'm struck by is south korea may end up feeling the brunt of some of the slowdown in china and any of the trade skirmishes. what about the other asian nations? oksana: what is interesting about the market today in
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general, not specific to e.m., but we saw this a few years ago. 11 sector of the market struggles, investors flee en masse, and that is when you have this broad-based selloff. 2015, there were significant fundamental issues in energy but that was not the entire market. there were no issues in gaming, telecom, health, but investors .umped the entire market dislocated 1000 basis points. certainly, stress in china can have the same effect on e.m. lisa: time for the rapid fi re round where we try to get one word answers. e.m., local currency debt, buy or sell? oksana: definitely not by. e.m. fx down 6%, by selectively. matt: sell. lisa: 2020, the fed is hiking or lowering? oksana: hiking. joe: down.
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matt: lowering. lisa: 10-year treasuries? oksana: sell. >> sell. >> sell. thanks to oksana aronov, joe higgins, matt toms. from new york, that does it for us. see you next friday. this is bloomberg real yield. ♪ 2, down. back up.
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