tv Bloomberg Real Yield Bloomberg October 12, 2018 7:30pm-8:01pm EDT
"all sites are green." all of which helps you do more than your customers thought possible. comcast business. beyond fast. ♪ jonathan: from new york city for our viewers worldwide, i am jonathan ferro. this is "bloomberg real yield." ♪ jonathan: coming up, risk appetite try to stabilize following a week of outflows. the federal reserve taking a presidential beating. still looking to deliver more rate hikes, leaving most wall street strategists committed to curve flattening going at the 2019. we begin with a big issue. a messy week on wall street. >> we will see more talks about
u.s. treasuries. >> for us, fixed income is the biggest risk in the financial portfolios. >> what to watch is going to be more credit than treasuries. because of we continue to see rates rise, what we may see is people bail out of certain sectors of credit. >> we think that means you ought to be cautious in high-yield, high grade, those are places where you need to be careful. >> there is no new information that came out about the fed. if the market suddenly got it, that is a markets issue. the fed has been clear. >> at some point when it starts biting hard and we see the corrections and you see the corrections in real data, the fed probably have to back off. but that is not today. it is probably the first half of next year. jonathan: joining me around the table is priya misra, matt toms, and coming from london, iain stealey.
matt, i want to get your view on what is happening with risk assets and fixed income. high-yield started to fracture. just a little bit, a lot of -- a little spread widening. what your thoughts? matt: the move above 315 in the treasury markets really cost of that really caused that. the break up the 320+ put some fear in the system that rates could move higher. high-yield started to give it up. that leaked into equities. bonds did not rally immediately was put a further spook into the market because of the risk off was not there, there was no place to run it. we think it was rate lead. jon: we are getting that risk offset and treasuries. finally this week they are doing what we think they are meant to do. do you take comfort from that? priya: i do, and that we had a significant amount of auctions this week. they went off ok. this was a technical selloff and it is always hard when it is technical lead to draw a line in the sand. i think post payrolls was not
comforting. we don't have a great report and rates sold off. rates have managed to rally and i think the front end is very interesting. i think the front end has a lot of value here because the markets are so well priced for the fed, and as financial conditions tighten, the fed becomes a little less excited about raising rates significantly above neutral . that is going to be a topic of conversation later. i want your view of what is happening in credit. there seems to be little room for error. we are still close to post crisis tight. investment grade, you have seen the leverage being put on by a lot of companies in that segment of the fixed income market. are you concerned by what is happening at the moment or do you take any comfort from what you are seeing? iain: when you look at it, you have an environment this year where you have had the spread on the high-yield and it is about -- and it has bounced about around 320 level. we really are just trading in the range.
we are in the middle of a range at the moment. but the all in yield of the high-yield space is the highest we have seen since the beginning of 2016. that could entice some people back in. ultimately, we think that credit fundamentals are strong and we think this could create a buying opportunity. jonathan: is that buying opportunity there for you and have you been doing that? iain: yeah, we think it is. we are starting to get our toes in. definitely, if we get up towards 7%, that would be a line in the sand for us. the reality is spreads got tight, people got excited, and we had some decent repricing. lastnk everyone was amazed week that high-yield managed to absorb all of the rate back up. but some of that had to give. jonathan: a look of the equity markets situation struggling to stabilize, really, really messy in new york. for the credit guys, do you sit here and say i am looking at fixed income and i do not see a credit quality problem? can you say that with conviction? matt: you can.
thus far. you have to remember, equities did extend the run up while credit state still for the last few months. so some of this is a catch-up of the equity markets. from a credit quality perspective, you really still struggle to see meaningful problems that can really manifest over the next year or two. credit quality looks decent. that said, it is better the closer you get to the consumer and further away from e.m. and corporate risk. that is a key distinction. jonathan: priya? priya: do you worry about the bond outflows? because we had a pretty big bond outflow last week. as bullish as i am on treasuries, i am nervous that in these relatively less liquid times, if we continue to see outflows, does that hurt credit? more than say, repricing? matt: that is a good question. it is acutely more important and the more liquid sections. in the broader markets, we think it is the speed of inflows as they yield curves increases but high-yield, yes.
jonathan: you bring up loans. everyone has discussed how resilient high-yield is been through 2018. loans have been rocksolid through this week. why, how, and can they continue? matt: really interesting that the flows into the bank loan space continues. while high-yield has been punished. that is not a sign of a credit concern, that is the sign of the rate concern. a lot of spl created and importantly, the clo controls that. we think they are acting quite rationally. we are not as concerned about an unwind in the spl space. jonathan: this is an important point. as you look at fixed income in any market participant, is this still a rate story that dominates fixed income? that defines much of the price action and not credit? iain: i completely agree. when we look at credit, i agree, it looks healthy to us. obviously we are going to come through earnings, but earnings are likely to be reasonable. we see a fairly favorable growth
backdrop to the end of this year and into next year. driven by what happens on the treasury market. it manifested itself around the fixed income space. jonathan: i listen to you and you seem to be bullish on credit, still. on the other side, if you are going to bar balance on fixed income, the other side is going to do its thing. this week it has done its thing. do you feel confident it will continue? priya: yes. the auctions came in and that is a good sign. the fed is going to be interesting because we are at an inflection point. the markets are rising at this neutral rate. for us to continue to feel confident, we have to have the fed not talk about going significantly above neutral. then, real rates will continue to rise. i think the entire selloff, if you dissected, it is real rate. we had a cpi report, and we've
been saying it is a one-off thing. a bunch of one off start making got trend but inflation is not picking that up. but what is going to keep us together with the fed next week -- do they really push on this , do we have to go above neutral? jonathan: your word has been tremendous and one of the things you have done is drawn a line in the sand at 1% real rates. is that where we cap? we have bounced off of the real rates line. priya: what i look for is productivity moving higher, and i think that move structurally grows in the u.s., there is nothing sink or saint about the 1% level. we are somewhat in a sugar high, but if it is all temporary, you are not seeing it pick up and long-term growth, than i would say the real rate 1% level -- i would stick by that. matt: i completely agree. about three and a quarter this
year and three and a half next year looks like decent support. beyond that, it moves too quickly and it self corrects. jon: matt toms and priya misra and iain stealey. sticking with me. coming up, the auction block a -- coming up, the auction block. amid the market volatility, the u.s. and china selling billions in bonds. this is "bloomberg real yield." ♪
there was healthy demand in bid to cover ratio, the highest level since january. china sold $3 billion of bonds. more than four times the issuance size. u.s. investor offshore participation notably lower compared to last year. on the corporate side, uber is said to have gathered enough together for $1.5 billion of junk bonds. all of that despite the volatility in the markets through the week. the flashpoint for a lot of people was the president of the united states once again taking on the fed chair, jay powell. take a listen. pres. trump: i think the fed is far too stringent and they are making a mistake, and it is not right. despite that, we are doing very well, but it is not necessary in my opinion. and i think i know about it better than they do. jonathan: still with me, priya misra, matt toms, and iain stealey.
priya, i will not ask if it is going to make a difference because i assume every single one of you thinks this does not make a difference. i will ask if the president has a point, if the fed might be setting themselves up to go too quickly. priya: as the fed is hiking, it does not want to tighten financial conditions. if they are, it is an unintended consequence. the problem is the speed of the tightening. does it get overdone? that is where when you have the fed saying they are data ypendent, deemphasizing our star. -- saying theyg will be responsive. i would argue the financial conditions keep tightening and the fed is going to slow their trajectory so they are trying not to make a policy mistake. they are not ready for a model that they have to keep hiking. i do not think that he has a point, and i wish he would not talk about the fed. we have a lot of treasuries to sell, we need the dollar to
remain as the reserve currency, and the central bank is the key part of that. matt: i agree. the fed pauses near a 3% level, or a slow to push beyond that. it is very important to realize that we have escaped from 0. this is not been done a lot in the world. to get away from 0, it provides a cushion. the fed is playing a long-term game, much longer than the election cycle, and they need to steer for two to three years ahead. getting way from zero, big success, the president is underestimating the importance. jonathan: a huge amount of people came out -- central bank officials, finance ministers, all supporting jay powell in the face of the criticism. i wonder whether you think the president might have a point, maybe they're going to quickly. given that inflation forces are captive you look at the recent data of the united states. iain: i think is the reality is that everyone has an opinion but what jerome powell will be at, he will say to himself, we
have a mandate, it is economy growth on one side and on the other, inflation. the economy looks great, growth looks good. the cpi printed this week was a little below expectations, but we are hovering around the 2% mark. i think they have got every right to continue going. i also want to remember that they are going in such a slow, gradual pace compared to other hiking cycles. they are taking their time. they are making sure they don't disrupt the economy. i agree with other comments. when they see the data rollover they will be happy to pause. ,jonathan: there was one high profile capitulation on wall street. over at morgan stanley, throwing in the towel. i'm going to catch up with him on but for the most part, a lot monday. of people have stuck with it. we're going to get a flattener, it resumes again, you stay with it through 2019. do you stay with that view? iain: if you take a long-term view, yes. i think ultimately as the fed
raises rates and we get to the neutral level, you will see the curve flattened off, probably down to zero, and then slightly inverts. the reality is in the near-term you could well see the curve , have a little bit of a steepening, impacting the rate move. the pension reforms moves, pension demand. there is a lot of issuance the u.s. has to do and it could lead to a little bit of a curve capitulation and the flattening of the curve, which has served so many people so well. steep to expecting the come from the long end, do you prescribe -- subscribe to that view? priya: i do like a steepener in the short term. i see lower rates in the front end given the tightening and financial conditions. and given the risk of bond outflows. if i want to just tied out somewhere, the front end is finally giving me positive real rates. so why don't i stay in the front end and wait until the equity
market stabilize, does credit stabilize so i can see the curve , steepen. we need the risk complex to stabilize. jonathan: steepening typically scares people, because it could mean something else. the federal reserve is about to make the turn and go into rate cuts because things are not looking too good. can we get a bull steepener that is not a risk off? matt: we do not believe so. i agree in the short-term, the biases toward the steepener. but the issue in the front end of the curve is that it is set to ramp over the next six to 12 months. the back pressure is going to keep the front from rallying. we have been calling for a steepener for about four months. it's nice to see it begin. we think a 50 level is probably as far as it can go into you get the push. jonathan: iain stealey, would you go with that in the short term for the 50 basis point? iain: i think that is a very reasonable level. and level we have been discussing. we've had a similar view, we like a bit of steepening over the last few months and it's
finally coming to fruition. i do think you will get a flattening curve in the longer term. here and now, i think we will see a repeat of the last few days. jonathan: really interesting stuff. iain stealey, matt toms, and priya misra, sticking with me. i want to get a market check , because treasuries last week battered. then this week cap and. money coming back in. they retain those risk mitigating characteristics once more in the face of a big debate as to whether they would. yield down. 332 is your yield in the long end. 10 year yield at 314. still ahead, the final spread and the week ahead featuring minutes with the fed and another round of earnings in the u.s. banks. this is bloomberg "real yield." ♪
it is time now for the final spread. coming up, the data point to look out for, u.s. retail sales and housing data coming out. plus, minutes from the federal reserve coming up on wednesday. we get more bank earnings coming on monday. plus, governor carney speaks in new york city. look out for that, with the brexit talks ongoing in brussels. and we get the official treasury currency report. will china be labeled a currency manipulator? that is one to discuss over the weekend. still with me, priya misra, matt toms, and iain stealey. some final thoughts as we go through the weekend into next week. what are you looking for? near-term move in the cmi is going to be pretty critical. there's been stability around 6.9, are we going to get to the seven? it is a psychological level that is going to trigger risk off. i think the market was happy to see all of the china data overnight. but i think it does not help
trade, because the trade has reached a record. china will be important and i will look at the housing data. primary mortgage rates reached the highest level since 2011 but affordability is not that great. do we start seeing the first signs of this impacting the housing market? jonathan: it's interesting you mentioned china. we are going to get that treasury department report and the reports ahead indicate the treasury could be leading saying no, they are not a currency manipulator. if they were labeled one, what would it mean to you? priya: it is extremely risk off if they were labeled one, you wonder what does it mean for risk assets -- does it mean more tariffs? not, ourif they are view is if you look at the data, do not satisfy any of the criteria. if they are not labeled, korea is next. if they are not labeled, it is still interesting that cnh is unable to rally. china is weakening before the tariff affect. in 2019, how much can the u.s.
continue to grow with the world economy slowing? iain?an: iain: i would like to see what is going on in italy over the next week. we have the budget and we have got concerns regarding the levels that are likely to be announced for next year that has been pushed back. i think that would be a very interesting to see how that plays out over the first few days of next week. jonathan: are you confident that we will not cross that 400 basis point line in the sand? iain: from where we are today, we are around 300, 400 is a long way away. let's talk about that when we get there. jonathan: a couple of days. iain: [laughter] i think it takes something big to get us up to that sort of level. when we look at italy and we look at the rest of the periphery, they are starting to be levels that are attractive. jonathan: matt? matt: cmi is important and china
is important. but we think the narrowing has some benefits. less uncertainty. this war could become a bit more dangerous. we also think a dissecting the earnings for signs of inflation is critically important. it will be a real focus in the next two weeks. any signs of more inflationary push, look out. jonathan: you pick up on that. i've had this discussion multiple times through the week. corporate identifying price pressure and the official data is not. why are there two different stories coming out of corporate america and the official economic data? matt: there is a potential the earnings could be squeezed a little bit. you need productivity to go up to offset the price pressure. so far, so good. but there is a risk if it gets passed through. jonathan: what do you make of that? priya: until you have significant ways -- significant wage inflation, you not that have the price pressure. amazon is a big component, you can have a robot next time
talking about rates. jonathan: i hope not. issue, we can the have robots doing things. overall, does that keep wage inflation low and does that mean that cpi stays. jonathan: do we punish productivity in america? priya: long-term, yes. i don't know if that happens in the next few years. we need the big data. all of that has to flow into the way we process and produce things. i think that could be a pretty long cycle. jonathan: some people bullish getting robot anchors sometime soon. it is time for rapidfire questions. i'm going to give you one question, one short answer. will jay powell serve a second term? we are looking way out. i want to get a feel for now. will jay powell serve a second term? matt: and a third. priya: yes. iain: yes. jonathan: there we go. would you buy the spread widening in u.s. high-yield, yes or no? matt: yes. priya: no.
iain: definitely. jonathan: treasury flattener or steepener going into year-end? matt: steepener. priya: steepener. iain: steepener. jonathan: really interesting that is becoming the consensus view. great to catch up with you, matt toms, priya misra, and iain stealey. from new york city, that does it for us. what a weekend it has been. we will see you next friday at 1:00 p.m. in new york time. for our audience worldwide, this was bloomberg "real yield." this is bloomberg tv. ♪
manus: you watching the best of "bloomberg daybreak: middle east ." the major headlines from the region this week. mohammed bin salman tells bloomberg the aramco ipo is still on and will happen by 2021. he is sticking to his belief it is worth $2 trillion. gulf arab allies pledged $10 million in aid to bahrain. is it enough to avert a currency devaluation? and trade tensions may be on the rise, but ceo of one of the global port and logistic operators tells bloomberg he sees no impact yet. ♪