tv Bloomberg Real Yield Bloomberg October 5, 2018 7:30pm-8:01pm EDT
jonathan: jonathan: from new york, this is "bloomberg real yield." ♪ jonathan: a week payrolls headline offset by solid revisions and a 48-year low unemployment rate. treasury bears having their moment and some. yields breaking out for multiyear high and junk bonds looking rock solid. spread grinding down. we begin with a big issue. the hot u.s. economy. >> this is a report that's consistent with being pretty close to full employment. >> the wage numbers are
continuing to point in the right direction, so to me this is a perfectly good number. >> you have a 130 something and 80,000-plus revision. this is actually, the increase in the love for september is, what, 211, 215,000. that's an awful good number. >> what i see is a continued strong job growth. we saw pretty positive revisions to previous months and we are seeing the unemployment rate come down. continuation of a really strong economic -- strong u.s. economy. >> the economy is running hot. why? because of a trillion-dollar deficit and because, you know, corporate tax cuts, etc., etc. >> ultimately to the extent we're using these figures to read the tea leaves around the race and what will happening to them and the rest of the market u.s. and globally, it was always an irrelevant number because it's just one in the stream of really strong data points. >> take a lot of risk when you get 90% of the yield in the front end and not the duration
why do it? ,>> you take the duration in the next downturn, it may be three, four, five years out, i think rates will be significantly lower than where they are today and you will have the most bang for your buck by having some duration. >> it takes some time, 12, 18 months for the long end to react. i don't think we have seen that. 3.40 on the 30-year, no thank you. jonathan: joining me is bob miller, victoria fernandez. plus, coming to us from atlanta is sean newman. great to catch up with you. victoria, is this the long end of the yield curve aligning with a strong economy in america? victoria: that is absolutely what is driving the market. i have a friend over at raymond it aswho says, think of holding a ball underwater for a long period of time and then when you let it go it spikes higher. i think that's what we're seeing. we have really strong economic numbers.
you have some trade issues that have come to pass with the u.s., whatever it is now, n.c.a., in italy. i think we're finally seeing that strong growth flow into yields. jonathan: bob miller, do you see the same thing? bob: yeah. what is different about this rise in yields relative to the rise earlier this year or earlier in 2017, the curve hasn't flattened in the last four, five weeks. it has not steepened a lot but it has steepened. what's different is the market is pricing a higher term structure of rates. it is not pricing in acceleration and pace of fed tightening or change in the magnitude of incremental tightening but a higher applied -- higher implied terminal rate and we're waiting for that to unfold. as you know, we like the front end. we have not liked the back end for a while. it has been a long while coming, but i am encouraged to finally see some steepening of the curve. jonathan: i asked whether you liked the long and.
sean, is this how you would characterize the move we've seen this week, would you characterize it in the same way as the other panelists? sean: yeah. you have to think of cholesterol levels, right? this is a good cholesterol that the body needs. rates are going up because growth is strong. not because there is a big inflation concern. even further, looking out the next three, six months, we should expect the growth impetus start to roll off and this is good for the emerging markets. jonathan: where does the demand come from? does more tomorrow -- does more demand start to come around the 10 year? that -- does blackrock like it now? bob: we are approaching levels we had said were fair. we had a 3/4 market. 2 1/4 break. my is 3.25 is a reasonable expectation for the long end of the next six months. jonathan: i am trying to understand where the biases
around the table, when sellers start to become buyers, when you like the price at the long end, do you like it more or do you need to see more? victoria: i know no one wants to talk about the neutral rate. jonathan: carry on. victoria: i think you're getting close. you have the 3.01 level that was a benchmark you want to bypass and you have to look at the range of where you were before that move that much higher to where your limit should be. if our range was about 20 basis points, we move about that, we are right where we should be. i think we also have to look and see the move we saw this week was mainly due to term premium moves, not necessarily to growth expectations, which is what we have been seeing previously. that shifts your outlook on the longer part of the curve. jonathan: i think you agree on that situation. john williams, the new york fed president, this is what he had to say. >> neutral is just one piece of information that we think about when we think about monetary policy. we talk about wage data, inflation, job growth, g.d.p. growth. we look at a lot of indicators
both at the u.s. and abroad to think about policy. neutral is just one of those. it's an important one, one i follow closely. but to me it's just one piece of the puzzle. jonathan: increasingly the communication coming from the federal reserve, don't worry about the neutral rate, it's unobservable, we don't think we are near it. what do you think of the communication coming from the reserve on something that was quite important? sean: it is in line what we're thinking. it's not ahead of what market is pricing in at this point. if you look at the spreads reacting over the last three to four weeks, markets are taking the comments from the fed in stride. we are seeing spreads tighten in the back of the fed's comments. i think the market is fully priced in four fed rates. nominalization factor we've seen in our markets for quite sometime. it's not a new phenomenon. jonathan: bob, do you agree with that? that we have fully priced in the
rates? bob: i think the front end represents -- has a fair amount of risk premium in it relative to the most likely path for the fed. i think the risk in the back end is we could overshoot a bit. we had a flat curve for a long time. the structural bull flattener has been a popular trade for a couple years. as victoria said, we are only now starting to reintroduce term premium and still not sufficiently positive, in my opinion. i can see some overshoot as we unwind some of the longer term, long-held views that real rates and nominal rates can't go higher. they can go higher. we do have a growth and an inflation impulse that's likely to get better before it gets a bit worse. at least the inflation impulse will get better before it gets worse. jonathan: what we see on the screen is 12 months ago on the yield curve compared to where we are now. victoria, what does the picture look like 12 months out? can we do this again? victoria: i don't think we'll do it to the same extent.
but yes, i think you will see the curve shift higher. it takes about 18 months for rate changes to flow through to the economy. so we still got about five rate hikes we have not truly made our way through on the economic numbers. yes, we will see rates continue to move higher. again, closer to the 3.25, 3.30 neutral rate, you are getting close to that right now. jonathan: you don't like it when rates go up. you don't like when the curve flattens or steepens. there will always be a reason for the equity market. for the fixed income market, i'm just wondering, how much more of this can go forward without the economy coming under pressure? what's the data point you'd be looking for to say this is going too far? victoria: you haven't seen it flows through on a wide basis but there are a couple sectors. we've seen it in autos. we've seen it in housing. six straight months of existing sales coming down. autos you have to look at from a different perspective, the sheer fact that we have the hurricane
hit and that will affect it. when harvey hit houston a year ago, half a million cars destroyed and so that, you know, kind of changed the way you look at the auto sector for the last 12 months. look at those. look at credit card delinquencies, those things we'll be watching. jonathan: any sign that this economy can't stomach high rates? sean: i think from a leveled perspective, some of your hosts mentioned earlier, there is probably a little risk we do overshoot from here. in terms of key rates, we're watching the 3.40 or 3.50 on the 10-year are levels we will reassess whether the pressure from higher rates will lead to a tightening come a increased tightening and financial conditions. that is going to make it to all risk assets, not just emerging markets. jonathan: sean newman, bob miller, victoria fernandez. sticking with me. coming up on the program, the auction block. comcast pulling off one of the biggest corporate debt sales ever in the u.s. this is "bloomberg real yield."
♪ jonathan: this is "bloomberg real yield." we want to head to the auction block. comcast has the second biggest deal of 2018 and the fourth largest u.s. debt sale on record. the company selling $27 billion in unsecured bonds in 12 parts in order to finance the $39 billion ack which vision of sky. -- billion acquisition of sky. the longest portion, a 40-year security yielding 1.5 percentage points above treasuries. till rate announcing to raise $450 million through a private placement of convertible bonds. the notes for the world's largest publicly traded marijuana company will be due in 2023.
in europe, a little nerve showing up in the market. this week, two-year bond sells reported and russia cancelled short-term debt due to lack of acceptable bids. a lack of issuance squishing issuance on u.s. junk bonds, the lowest level since july, 2007. high yield sales are about 30% lower than the same period of 2015. on pace for the slowest year since 2009. still with me to discuss is bob miller, victoria fernandez, and sean newman. sean, what are your thoughts on what's happening at credit at the moment? this really interesting dynamic taking place where investment is really soft and high yield is really solid. what do you make of it? sean: there has been a big trend toward domestic markets overall, whether you are looking at equities or u.s. credit. you can look at u.s. credit indices, especially on the high yield side. my colleagues are telling us
it's at the tightest levels seen for several years. it reflects the lingering policies in the global marketplace. uncertainty around trade and tariff policy has led to more un -- onshore dollars and that's affected the domestic markets. jonathan: postcrisis -- you wonder how much room for error there actually is? sean: i don't think there's a lot more. one of the traits -- trades we've been pushing this year is we believe you should take advantage of the massive compression we've seen in some of the credit markets to go long thanon the em space more the sovereign on the corporate side. take advantage of these valuations. victoria: if you look, h.y.g., we had $2 billion come out in september, the largest amount in 2 1/2 years. i think there is some nervousness that's building when it comes to credit but the spreads just aren't moving.
i think it comes to the fact that we have a strong economy. normally you see spreads widen when you have a weak economy and we're not seeing that. we are looking at strong economic numbers. that's why spreads are staying tight. bob: i think the growth piece is critical to the difference of ig and high yield. ig is by definition more rate sensitive. we have had a decent move in rates. it's not a shock your higher grade, more duration sensitive bond market, corporate market has suffered relative to high yield, which has a much greater growth sensitivity. if you look at the decomposition of high-yield returns by rating, the highest quality, double b, which is the most rate sensitive, is flat on the year. the triple c has been all the performance. that strikes me as fair given the growth impulse that's going through the economy right now. i do think it's critical to keep in mind some of this -- no doubt some is organic growth. some is fiscal impulse that will start to fade, likely peaking in the fourth quarter.
and decelerate through next year. jonathan: how do you allocate over the next 12 months, bob? bob: less willing to allocate in high yield. i think the asymmetry is clear, it is more negative they are. you are likely to earn your coupon if everything goes well. more downside price risk. in ig, some of the sectors that have traded poorly look a little more interesting as long -- given our view the fed will keep going a bit that not likely to meet the rising expectations for 3% to 3.5% funds rate. there are parts of the ig market on the shorter end of the curve that look reasonable. jonathan: victoria, it's interesting in ig, it's a big discussion being a lot of risk. just look at the triple b's. morgan stanley got attention. follow the money and look where the issuance is. triple be ig has grown to $2.5 trillion. a 27% increase since 2009. along those lines we see elevate
stressrade activity as a when the cycle eventually turns. pointyou have to worry about the worst type of credit within investment grade, perhaps more so than what is happening in junk right now. victoria: you have to be concerned about downgrades and the leverage that these companies are generating. a few months ago when we were speaking we have been , reiterating, you can have the fixed income component but you have to be careful where you're positioning yourself. you do the same thing with corporate. shorter duration corporate, coupons, high liquidity, those will bode you well. jonathan: are you doing the same thing? bob: we have the same bias. until we get to levels that represent better valuation for, you know, medium term adjusts returns. jonathan: what about you, sean, the liquidity factor has not been discussed so far. how much of a critical element is that right now? sean: it's a critical element, jon. it's one of the factors that we spend time analyzing.
we look at liquid from two perspectives. one, your the colleagues on the show mentioned issuance. issuance has been down 35% on the corporate side as well as on the sovereign side this year. and, fund flows, which are tracking about negative $2.5 billion give or take yesterday's number and this in turn feeds to liquidity environment in our market. so we do have a strategy, we want to stay in quality in places like the middle east where they should be benefiting from higher oil prices. also looking for idiosyncratic opportunities in our markets whether it's looking at turkish debt or select points on the argentine credit curve. we will have a chance to talk em in a moment. bob miller alongside victoria fernandez and sean newman. coming up, a market check.
♪ jonathan: i'm jonathan ferro. this is "bloomberg real yield." time for the final spread. coming up in the next week, we have the first round of the brazilian presidential election and the first round of u.s. inflation data. bank earnings and the fed's john williams will be speaking. still with me is bob miller, victoria fernandez and sean newman. fast-forward to the brazilian election. here is the chance to talk em.
i know you have been itching to do it. tell me what we should be looking for. sean: jon, it's a classic election. we have never seen an election like this in brazil. what we have here, we can charted the supporters of the different candidates. elections are this sunday. we'll have a contested election. polls released overnight it will -- overnight suggest it will likely end in a second-round runoff. even though the field has 13 candidates that are contesting the election. probably will be a race between two individuals. jonathan: how are you positioned in terms of capital, allocation exposure to that? sean: we are somewhat flat right now, jon. we think the market is somewhat overpricing the possibility of a good result. i think looking at b.r.l.
right now, maybe a 5% move here. we see actually more as a 15% move in the b.r.l in the event this goes to the second round and the p.t. candidate looks like they have better odds. given this risk tradeoff will be on the sideline here. jonathan: we talked about credit and quality. what about emerging markets? what are you thinking right now in e.m.? bob: e.m. stays similar to what we said for a while. there is no broad e.m. index anymore. there is, but it requires a very clear disaggregation into each of the countries. there are few places. we have some argentina risk, brazil risk. it is important to note, brazilian currency has rallied 10% in the last 10 days. the market is pricing a higher probability of a good outcome or more favorable outcome than it was a month ago. nonetheless, the challenges
remain. if u.s. rates are going to press a bit higher, u.s. growth starts to decelerate a bit next year. the key question for the em basket is the degree to which the chinese deceleration has been a bit of a surprise this year, which has impacted european growth expectations, stabilizes. is that stabilizes, u.s. decelerates a bit but maintains a good level, e.m. probably does pretty well. without that, i think you got some legitimate questions. jonathan: any word on italy? bob: the italian budget processes, the new government has taken a fairly confrontational approach with the european commission annual budget process. our expectation is that it will get a bit noisier before it calms down. jonathan: yeah. bob: the market has moved a lot, but i would expect further volatility in italy over the next couple of weeks, creating some overall vol in european
bond market. jonathan: final word, victoria? the torilla: -- victoria: you have to take a longer-term look. you will see quantitative numbers. there is a lot of things going on but i think you have to take that 12-month outlook. let things calm down a little bit in e.m. they do have better fx reserves than they had before. we have brazil, turkey, a few countries specifically to look at. but look at the general 12-month plan. just like what we were seeing a moment ago, where to invest in order to reduce your risk. jonathan: that's a good place to wrap this up. to the rapidfire round. three questions. you know the drill. three quick answers. the 10-year, 3.23. as i ask this question, do we see 3.50 before we see 3% again? 3.50 before we see 3% again, yes or no, bob miller? bob: yes. victoria: no. sean: 3.50. -- bund: 10 year bond,
and u.s. treasury spread, narrower or water before year-end? bob: wider. victoria: narrower. sean: is low. jonathan: how many hikes left in the cycle? i will say fewer or more than four? fewer or more than four, bob? bob: fewer. victoria: i am going to go more. sean: fewer. jonathan: at least you have a market. [laughter] jonathan: bob miller, victoria fernandez, sean newman, thank you for joining us. that is it for us from new york. we will see you next friday at 1:00 p.m. new york time, 6:00 p.m. in london. this was "bloomberg real yield"" this is bloomberg tv. ♪