tv Bloomberg Real Yield Bloomberg October 7, 2018 10:30am-11:01am EDT
jonathan: from new york city for our viewers worldwide, 30 minutes dedicated to fixed income. this is "bloomberg real yield." jonathan: coming up, a weak 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 you got an 80,000-plus revision. this is actually, the increase in the love for september is, for september is, what, 211, 215,000. that's an awful good number. >> what i see is a continued strong job growth. we saw some 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 that we're using these figures to read the tea leaves around the race and what will happening to them and the rest of the the market and the u.s. and globally, it was always an irrelevant number because it's just one in the stream of really strong data points. >> you take a lot of long end interest rate 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 get the most bang for your buck by having some duration. >> it takes some time, 12, 18 months for the long end to actually react. i don't think we have seen that. 3.40 on the 30-year, no thank you. jonathan: joining the around the table in new york is bob miller, head of u.s. multicenter fixed income at black rock, victoria fernandez from crossmark global investments, and coming to us from atlanta is sean newman, senior portfolio manager at invesco. 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 it. we have had these things in the market, these uncertainties that have been holding us down. i have a friend at raymond james who says think about 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 with the isn that came out. you have some trade issues that
have come to pass with the u.s., whatever it is now, n.c.a., in italy. so i think we're finally seeing that strong growth flow into yields. jonathan: bob miller, do you see the same thing? bob: yeah. i think what is different about this rise in yields relative to the rise earlier this year or earlier in 2017 was the notion that curve hasn't flattened in the last four, five weeks. it has not steepened a lot but it has steepened. and the way we think about that -- i think what's different about it is that the market is pricing in a higher term structure of rates. it is not pricing and acceleration in the pace of that fed tightening or the pace of increment a fed tightening, but a higher implied terminal rate. we have been waiting for that to unfold. we have not liked the front-end, we have liked the backend for -- 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 end. 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 the kind of 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 some of this growth impetus start to roll off and this is good for the emerging markets. jonathan: where does the demand come from? does more demand start to come through the 10 year, around 3.20%, 30-year 3.40%? does blackrock like it now? bob: we are approaching levels we have set for a year were kind of fair. we had a 3.25% target. 2.25% break. 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 start to like the price at the
long end, do you like it more or -- do you like it now or do you need to see more? victoria: i know no one wants to talk about the neutral rate. jonathan: carry on. victoria: all day, we have been talking about how there is not really a neutral rate. but i think you're getting close. you had 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 -- above that, we are right where we should be. i think we also have to look and 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. you know, we talked about wage data, inflation, job growth, gdp
growth. we look at a lot of indicators both in 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: showing increasingly the communication coming from the federal reserve, don't worry about the neutral rate, it's unobservable, we don't think we are anywhere near it. what do you think of the communication coming from the federal 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. so if you look at the spreads reacting over the last three to four weeks, markets are taking the comments from the fed in stride. so we are seeing spreads tighten in the back of the fed's comments. i think the market is fully priced in the current path of fed rates, and the normalization factor has been 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 path of 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. jonathan: yeah. i think the risk in bob: i thine 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 it is still not sufficiently positive, in my opinion. so 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 is likely to 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 not to let the fixed income. but 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: so you haven't seen it flow 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. but 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. so 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 from invesco sticking with me, along with bob miller of blackrock and victoria fernandez from crossmark. 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: i'm jonathan ferro. this is "bloomberg real yield." we want to head to the auction block, where comcast has the second biggest deal of 2018 and the fourth largest u.s. debt sale on record. the company selling $27 billion of unsecured bonds in 12 parts in order to finance the $39 billion acquisition of sky. the longest portion of the offering, a 40-year security yielding 1.75 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 will marijuana company will be due in 2023. and over in europe, a little on nerve showing up in the market.
this week, two-year bond sells reported and russia cancelled a planned auction of 10 billion rubles of short-term debt due to lack of acceptable bids. a lack of issuance squishing risk premium on u.s. junk bonds, the lowest level since july, 2007. high yield sales are about 30% lower this year than for the same period of 2017 -- on pace for the slowest year since 2009. still with me to discuss is bob miller from blackrock, the jury -- victoria fernandez from crossmark global investment, and sean newman from invesco. sean, what are your thoughts on what's happening at credit at the moment? this really interesting dynamic taking place this year, 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.
and i think it reflects the lingering policy risks around in the global marketplace. uncertainty around trade and tariff policy has led to more onshore dollars and that's is what has benefited the dimmest -- domestic markets so far this year. jonathan: you wonder how much room for error there actually is? sean: i don't think there's a lot more. one of the trades we've been pushing this year is we believe that you should take advantage of the massive compression we've seen in some of the credit markets domestically to go long on certain parts of the em space more than the sovereign on the corporate side. take advantage of these attractive valuations. jonathan: victoria? victoria: if you look, h.y.g., that is a great example of high-yield. we had $2 billion come out in september from hyg. that is the largest amount in 2 -- 2.5 years.
i think there is some nervousness that's building when it comes to credit but the spreads just aren't moving. and i think that comes to the fact that we have a strong economy. normally you see spreads widen when we have a weak economy, and we are not seeing that. we are looking at strong economic numbers and 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 this year, so it is not a shock that 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 composition of high-yield returns by rating, the highest quality, bb, which is the most rate sensitive, is flat on the year. the ccc 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 of this is organic growth. but some of this is fiscal impulse that will start to fade, likely peaking in the fourth quarter.
and decelerate through next year. jonathan: so what does that mean for how you allocate over the next 12 months, bob? bob: it makes us less willing to allocate in high-yield. i think the asymmetry is clear, it is more negative they are. -- more negative there. 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 but they are not likely to meet the rising expectations for 3% to 3.5% funds rate. there are parts of the ig market in 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 ig has grown to $2.5 trillion.
a 227% increase since 2009. along those lines we see elevated downgrade activity as a stress point when the cycle eventually turns. you 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 if downgrades come out and look at the leverage that these companies are generating. but there is always a place for this in your current portfolio allocation. but 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, high coupons, high liquidity, those are going to bow to well over -- bode you well over the course of the market. 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. but we are also looking for idiosyncratic opportunities in our markets, whether it is looking at turkish debt or select points on the argentine credit curve. jonathan: we will have a chance to talk em in a moment. speaking with me, bob miller from blackrock alongside victoria fernandez from crossmark and sean newman from invesco. coming up, a market check. the yields are up seven basis points on the two-year, and there is your move on 10 and 30.
jonathan: i'm jonathan ferro. this is "bloomberg real yield." it's time now for the final spread. coming up in the next week, we have the first round of the brazilian presidential election, plus the fresh 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 over the last 20 minutes or so. so 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. i know that is some of what -- is somewhat of a cliche statement, but what we have here, we have the candidates, a here, we have the candidates, the elections are this sunday. you and we will have a very and i will contested election. on polls released overnight suggest it will likely end in a second-round runoff. between these two candidates, even though the field has 13 candidates that are actually contesting the election. it will probably will be a race you between two individuals. both have a slight edge at this areboth have a slight edge at this point going into the first round. jonathan: how are you positioned in terms of capital, allocation exposure to that event? 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. you right now, it is pricing in maybe a 5% move here.
you we see actually more as a 15% move in the b.r.l in the event this goes to the second and round and the p.t. candidate i looks like they have better odds. so given this risk tradeoff will aso given this risk tradeoff will prefer to be the sideline here. jonathan: we talked about credit and going up in quality. what about emerging markets? : what are you thinking right now in e.m.? bob: e.m. stays similar to what we have said for a while, there is no more broad e.m. index anymore. there is, but it requires a very clear disaggregation into each of the countries. there are few places. so we have some argentina risk, we've got some brazil risk. it is important to note, brazilian currency has rallied nearly 10% in the last 10 days. so the market is pricing a higher probability of a good outcome or more favorable outcome than it was a month ago. a nonetheless, the challenges will remain. if u.s. rates are going to press
a bit higher, u.s. growth starts will to decelerate a bit next a 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. will you if that stabilizes, will if that stabilizes, u.s. decelerates a bit but maintains a good level, e.m. probably does pretty well. i without that, i think you got some legitimate questions. jonathan: i know you wanted a word on italy as well. 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 a some overall vol in european bond market. will jonathan: final word, victoria? what to look ahead to? victoria: you have to take a
longer-term look at a fixed income market right now. you have quantitative tightening in the next month that we will see from the ecb. there are a lot of things going on but i think you have to take that 12 month outlook. let things calm down a little will bit in e.m. they do have better fx reserves as a whole than they did before. obviously, we have brazil, turkey, a few countries specifically to look at. but look at the general 12-month plan. will 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. jonathan: 10 year bund and u.s. treasury spread, narrower or wider before year-end?
bob: wider. you victoria: narrower. sean: is low. a jonathan: how many hikes left in the cycle? i will not make you call a i number, 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: it was great to catch up with you. bob miller of blackrock, victoria fernandez from cross mark, and shawn newman from invesco, 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. ♪
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