tv Bloomberg Real Yield Bloomberg July 20, 2018 1:00pm-1:30pm EDT
morgann: live from jp asset management this is , "bloomberg real yield." coming up, stepping on the fed's independence. the president pushing back. chairman powell testifying that rate hikes will continue. -- meeting presidential resistance. the u.s. struggling to find stability. we began with a stepping on fed independence. >> ultimately it puts into question what the fed and fomc is and the ability to maneuver.
the reserve is not going to react from tweets from the president. >> is a strong institution, and they have staying power. >> it is time to move rates back to normal. they will continue on that path. >> if people feel the fed is going to kowtow to the president and allow the economy to grow too fast and inflation to go up, interest rates will rise. and vigilantes will kick in and rates will rise which is what the president does not want. tothey be the fed will say show its independence, it will preemptively raise rates. it away, the president is shooting himself in the foot. jonathan: joining me now from jp morgan asset is lisa coleman, the head of global investment grade corporate credit. joining also is bob michele. pushes act reserve
against higher interest rates. does it change anything? bob: it doesn't. the fact that you have tweets yesterday to how independent the fed is. certainly, the president gets to appoint who they want as the fed chair, so they pick someone reasonable and moderate like jay powell. i think it was a good appointment. he is on his own now. he has laid out a credible path 14. jonathan: it's safe to say that ,rom the president's tweets what is happening with the treasury curve? all of a sudden we get steepest during the week. couple things a going on. there is a belief the fed will stick to the rate path that we will see increases every other meeting for now. there has been news
out of japan that the bank of japan may tinker with its may letyield, so they the longed and go and be supported by market forces. lisa, if it wasn't under a close watchful eye of the market, it will be more so now with powell. does his job get more difficult because of the president? think the fed will continue on with its independence. chairman powell has a path, and that won't change as a result of the comments from the present. jonathan: we have gone back and forth. you think yield could have a handle on tenure can walk me through where we get from 10 year yield and treasury over the next 12 months. points is only 100 basis from here and is against the backdrop of the fed having
raised rates for two and a half years, indicating they will go for another year. that is a lot of upward pressure. does it look reasonable to buy treasury with the 3% in tenure? -- 10-year. ? i don't think so. it is not fully into the system. you have treasury supply that will fit the market over the next 12 months. i think a good stopping point for the fed is june of next year, two and three quarters to 3%. it will look like a good place to stop, that the economy will do great. jonathan: you mentioned that the issuance is at the front end. the consensus of everyone coming from the program is at the curve will flatten. butonly looking to 4%, looking for steeper curve? steeperking for a
curve. there has been a lot of front and issuance. the fed has made it clear that they are going to maintain waiting out maturity on portfolio outstanding debt. if the issue on the front end, the back and comes in the second half. curves have flatten before and have inverted and it has not led to recession, and they quickly reis deepened. 94 -- 1994 to 1998 comes to mind. crisis andst the snl we had bond outstanding. heat andt continued to the economy heated up into the dot-com bubble. jonathan: in bob's world, sooner or later i want 4% very why what i want to buy credit, lisa? lisa: because you have a good underlying economy going on. it depends on where in the credit market you are going to buy. b ratedook at triple
credits, you might not want to spend risk budget there because this is an area where we have seen a lot of m & a issues. maybe what you want to look at is double be rated credit. creditread -- double be -- with the good economy, fundamentals are good and valuations are attractive. jonathan: don't they have incentive to run a trouble be e bance sheet -- triple, balance sheet? lisa: where on the way to a record amount of acquisitions. companies have no incentive to run at single-a. that's why i like triple b. the fundamentals look good and you are getting paid spread per
unit of leverage more to take the companies than the triple b rated companies where ceos are pouring on more debt. that is some of the disconnect in the market. you're talking about the 10-year flattening and inverting. it is a mindset that people are
used to 10-year of secular stagnation, investors and bond buyers. you hear or america -- corporate america is prepared for a growing america and not stagnant. they are going to take advantage of the growth and the stimulus. jonathan: the difference this time around is the two americas leavening of. -- up. with when you have them leavening at the same time, it is difficult.
bob: some of the angst coming out of the tweets are coming at a time when borrowing is going to go up. why would you want borrowing rate to go up? the other way to look at it is the opportunity is now very you are at relatively low levels of interest rates. there is plentiful liquidity. you have structural reform
to taxes. you make up deregulation. let's borrow and jumpstart the economy. jonathan: what does it say that we are having these conversations when the federal reserve is still considering to be accommodative? the rate is pop -- fairly positive and we are still having talks about risk in market and what are we talking about in 12 months? bob: i think we will say this is a good place for the fed to pause. there is some digestion, and we will see what corporate america
does with supply and repetitive benefit of tax reform. we will have to look at what the bank of japan has done and has the ecb raised rates? are we plowing through that like 1998? if so, the market will make it that the fed has to go higher. lisa: i totally agree with bob. coming back to the comments about the president saying the fed should not hike rates, corporate america is not feeling the pinch of higher rates. it is a way disconnected. the levels they are able to access remain attractive. jonathan: that has come full circle. do you think the president has a point? pro-growths the most administration anyone can remember since the reagan administration.
he wants liquidity and low-cost trending. he will argue for that. it does tell you that he is focused on growth, growth, growth. jonathan: do you agree with him? bob: no, i don't. the fed is leaning into it for real. they have been trying to get to normal. we will see gdp print with a handle on it and we have inflation, core at 2%. cpi is 2.9. that is about the two point percent -- 2% margin. jonathan: thank you to bob and lisa. morganup, we stay at jp asset management and joining us will be diana amoa to talk emerging markets. that is coming up next. this is "bloomberg real yield."
jonathan: i'm jonathan ferro. this is "bloomberg real yield." live from j.p. morgan asset management. chinese assets ended on good footing. central banks moved to weaken daily currency fixing, the most since 2016. joining me to discuss china and emerging markets is a diana amoa, senior portfolio manager at j.p. morgan and still with me michael -- -- bob bob michele. with what is happening with the currency policy, things have
changed. what the chinese are doing is the right response. what we have seen is they stepped back from the currency. they are willing to let the trade determine where the is. -- they areg to willing to see where the market is pricing it. that is a good response. for the pboc it is the right thing. they will allow some banks to invest again and ease regulations. liquidityo redo track -- they are trying to redirect liquidity. the chinese are having the right response. jonathan: there are many ways to look at the giants -- chinese currency. when you look at it, what story do you see? lisa: i think the dollar and the
currency is trading roughly where we think fair value is. depreciating in the trade basket, looking at euro and asian currencies. that makes sense. the trade right now is going more toward asia. we expect more weakness coming into the basket. the u.s. is a tough call. we just were discussing what the u.s. policy response is and the president pushing back. from 27 into 2018, do you worry about a slowdown in china? 2018 -- intodid 2018, do worry about a slowdown in china? bob: i think we are going to see
a real acceleration. when you look at what is going on in china and with the policymakers are doing, this is the frustration you are seeing in the administration in the u.s. they look at the tariffs and talk about levying and they see chinese policymakers making accommodation for that, relaxing policy. if you are the administration you're looking at a central bank tightening rather than trying to accommodate the reverse tariffs. jonathan: for many it is a global story. it is dispersed. are you looking at more on the regional basis because of the trade story? lisa: we think the impact for tariff will be heavy on asia. we are steering clear of the region until we get more clarity on where the trade tensions are going. we like latin america. value has been created.
we have colombia and mexico having elections. brazil is getting closer to the point, but markets have premium. jonathan: local dollar? lisa: very select. jonathan: china has had its problems. policy mistakes and central banks struggling to regain credibility. brazil as well. where you at at the moment? bob: when i think about being a crossover investor in emerging markets, diana is right. i need a big bottle to get in and invest. there are attractive things about latin america. currencies look oversold. the dollar is not going to go up forever. some models tell us it will flatten out. when you look at real yield, the u.s. is struggling to restore yields to bond markets.
they are abundant across latin america. if we get stabilization, we expect money to recycle into the external and local markets. jonathan: the question for j.p. the very nature of this conversation talking regionally, not local securities. how important is it to be in that space? lisa: the security selection or regional selection that you get you willlatin money, have safety tightening and liquidity will have to be a factor. what we have seen is managers have struggled merging some of the flows in and out of the second or, where positioning allows you to manage liquidity. , gohis point in the cycle to an active manager. jonathan: is that a pitch from
j.p. morgan? diana amoa and bob michele, you are sticking with me. looking at treasury through the week. closing out last week with a yield curve, but it was flat at about 25 basis point. today we steepen. slightly to the end of the week. next up, the final spread, the week ahead. this is "bloomberg real yield." ♪
-- we have a gt -- g20 weekend meaning of finance ministers. i am joined by bob michele. do you believe the federal reserve will raise former times and then close? bob: absolutely. that brings the fund rate to two and three quarters to 3% depending where inflation is. that is a real yield of about one half to 1%. that is still generous by historic fed terms, but not overly accommodative. they will have raised rates for 3.5 years. why not step back and see what other banks are doing and also see how the economy is doing? that takes me to the second conviction -- jonathan: that takes me to the second conviction. bob: we are bearish. use switches to
quantitative tightening and yields will drift higher across the curve. we want to hide in the front end of the curve. short securitized for example. jonathan: do you see that more pronounced in europe or in the united states? bob: i think more in the u.s., frankly. people will have to adjust to what the curve looks like in a growing america and you will see the fed -- america. you'll see the new fed get its feet under itself. jonathan: that takes us to the spread between europe and the united states. u.s. high-yield and european high-yield, will they narrow and spread over the coming years and from which direction and why? bob: both look great. u.s. high-yield has traded in a range of 330 to 380 since february. we are in the middle of that range. as lisa pointed out, there is a tailwind coming to corporate
earnings and that will be reflected in better credit quality and u.s. high-yield tends to go to 300 over. there is at least 50 to 60 basis points. have european high-yield at a 4% handle. europe looks good. you have an accommodative central bank, you have them buying investment corporate grade. that will spill over to the european high-yield market. we expect 3%. jonathan: should we get to the elephant in the building? bob: absolutely. jonathan: talk about companies this week in european high-yield . what is the thinking? bob: it is a reflection of looking at european central banks and trying to understand why they continue to print money and invest in corporate debt. they don't need to do that, and you want to be careful not to entrench bad practices in corporate behavior across europe.
it is a valid warning, and i think the ecb will be sensitive to that. our expectation is at next week's meeting you will hear the planity on what for normalization looks like. at the last meeting talked about not raising rates until the end of next summer and seen a rally very -- rally. jonathan: is that a soft call? bob: it is three and a half percent to 4%. i take your point. i like the 4% call. corporate america is growing again, we are not in stagnation. despiteis scrambling the administration to get something that looks normal. credit is readily available, and you are seeing companies in the early stages of accessing at. wait until we see what it looks like. typically, i rise to
work on friday and get a list of thoughts from my guest. i got a list of thoughts from my guest and the fifth call was nothing to do with markets. it said support liverpool and nothing count. bob: we are ready. we have the brazilian keeper. jonathan: you have more conviction about that than the treasury market. bob michele, j.p. morgan, thank you very much. bob: thank you. jonathan: will back before the year out -- year is out. from new york, that does it for nextd we will see you week. from new york, this was "bloomberg real yield." ♪
with the u.k. the issue must be settled and he added there must be an insurance policy to address the issues of ireland and northern ireland, something he discussed. yesterday that bordernot asking for a between us and ireland and the rest of the u.k. becausechecks on good if the u.k. wants to be in the , we cannot afford to lose time on this issue. mark: he says he feels the back backstop imposed is technically workable and can be improved. the white house says it is not considering supporting a call i've vladimir putin for a
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