tv Bloomberg Real Yield Bloomberg November 16, 2019 5:00am-5:31am EST
jonathan: from new york city, for our audience worldwide, i'm jonathan ferro. bloomberg real yield starts right now. coming up, investors patiently waiting for a phase one trade deal. big returns to the treasury market, yields retreating from three-month highs. u.s. credit delivering the second biggest week of issuance this year. we begin with the big issue. what is feeding investor optimism? >> it is all about trade. >> it is 100% a data issue. >> trade is becoming a secondary issue. >> i think it is dependent on trade issues.
>> data has bottomed out. >> the data has been decelerating the past 18 months. that is coming to an end. >> confidence is rebuilding. >> the data has been bottoming. >> all we are looking for markets to go higher is for the global economy to revive and trade issues to not get worse. >> if trade negotiations fall apart right now, and the tariffs go in, you cannot tell me that the data will not get worse. >> if you get a phase one deal, which is fine, or it falls apart, and we go into phase one tariffs, which is bad. jonathan: joining me around the table is matthew schumaker, kathy jones, and matthew hornbach. i have been fascinated this week. i cannot find any consensus this week as to what is driving the market. what is it? kathy: it seems like this resilience in the u.s. economy,
belief that the global economy is bottoming, maybe we get a trade deal -- a little skeptical on the deal thing -- those seem to be the drivers. jonathan: some people believe it is. where is matthew hornbach on that argument? matthew: in the united states, the jury is still out. you have maybe one month of data that was not horrible, like we have had the last couple of quarters. i don't know if one data point is enough to call all is there. mike: from our perspective, we think trade is driving the markets. jonathan: why isn't it driving the market this week? five weeks of being told we are close to a phase one trade deal, and now according to reports, they cannot even agree on how many agricultural purchases they should follow through on. why are we confident this deal gets done? kathy: it beats me. we have had talks and talks and more talks, and agriculture
seems to be level one for a trade deal and we don't have that. it is too late for the farmers this year anyway. i'm not really sure why there is so much optimism. perhaps we are not being pelted with a lot of negative news. they are talking, and as long as talks going on, there is hope that there will not be an increase in tariffs. jonathan: do you get the feeling that this is just setting the narrative? just feeding on itself for two months, and then we sit around trying to rationalize things with an articulated theory as to the fundamentals underpinning the move, when there aren't any. matthew: the same thing happened in 2018 when we had that spike on the 10 year note. everyone was talking about 4% 10-year yield. the market price was driving the narrative, and that was the wrong thing to be talking about. the same thing is happening
today, at 1.95 on the 10-year, people started talking about 2.25, sell the bond market. that is not the right trade at the moment. it comes back to trade to a certain extent. if there is a trade deal and a rollback of the september tariffs, we are going higher in yield. if not, lower. jonathan: 40 basis points off of the move. let's understand what is behind the treasury yield push higher over the last couple of months. when you break it down, real rates, inflation expectations, what is driving it? matthew: i like to break it down into rate expectations and term premiums. when i look at what happened from the time the tariffs were implemented, you see a reflation in the term component of the 10-year yield but low levels of rate expectation, which makes perfect sense. the federal reserve has cut 50 basis points and now there is optimism being built back in
that we can have a trade deal. kathy: i would agree, the term premium of that has been driving this. it got down to -84 basis points. it didn't take a lot of shift in expectations to have it bounce back to some degree. we actually think there is room for it to go higher. mike: maybe putting it slightly differently. we think about the back end being driven by global markets. trade is factor number one. it is central bank dominated. jonathan: here is the goldman take. the outlook for the u.s. 10-year yield. we believe a major portion of the bond market selloff is behind us. 10 year treasuries will struggle to move above 2.2%. this is largely on account of policy -- this speaks to something you touched on, matt. something else goldman sachs has touched on again and again.
the next move, if we are going to get a move higher in 10-year treasury yields, a lot of the heavy lifting has to come from inflation expectations. not many people think that will come through. with that in mind, the upside is limited on the 10-year yield. what do you say? matthew: i agree with that. in order for the fed to think about raising interest rates, you have to have core pce above 2% for a substantial period of time, likely over a year, and it will take at least that amount of time to get inflation expectations higher, which is another box that the fed needs to check before raising rates. jonathan: what is the conclusion here, range break or head fake? matthew: head fake. jonathan: i know you disagree with that, mike. mike: if you go back to may, when donald trump tweeted about expanding the range of tariffed
goods, we have had three cuts since then. that would take down the top level a bit, something in the 2.10, 2.20 range would be in play for us. kathy: i don't think the path to 2.25 is all that hard to get to if we get some positive news. i would argue that i'm not sure the fed will wait for inflation to stay above 2% for a year before they consider hiking rates. i'm not sure -- it may be more of a case of let bygones be bygones. we have been below it, but once we get sustainably above it, especially if there are signs we are tightening in the labor market, getting other inflationary pressure, i think the expectations may build sooner rather than later. jonathan: matthew hornbach, a fuel out there at the moment, that the reserve is incredibly high. is that where you stand on the issue?
matthew: i think that's true, but there is a tremendous level of asymmetry in these bars. when i think about the timing of the next possible rate hike, i'm thinking middle of 2021. i don't think the fed will hike in the second half of next year, not only because there is an election, which generally raises the bar for action, but more important is in the middle of next year, the fed will opine on their inflation targeting framework. how will they hike rates after they tell us that they care about missing on their inflation goal? it doesn't make sense. mike: maybe the bar for action is tough, but think about last year, the fed hiked. two weeks later, powell had a bad new year's party or something, the whole tone changed. was there an actual shift? no. but the markets reacted. you could have a pretty quick turnabout. jonathan: are you implying i had an opinion about a policy decision from the federal reserve? coming up on the program, the auction block, featuring the
jonathan: i'm jonathan ferro. this is bloomberg real yield. i want to head to the auction block and begin in europe, where the primary market is showing few signs of calling. deutsche bank raising 500 million euros, helping weekly sales to past 30 billion. no shortage of supply on this side of the atlantic. the junkyard market set for its busiest week in two months. finally, the big one, abbvie selling $30 billion in bonds to finance its acquisition of allergan.
big demand to buy a piece of the biggest debt sale so far in 2019. the second-biggest week of 2019. >> rates are cheap. why would you raise as much as you can? there are flows into the fund. once you are a large issuer, everyone forgets, you become a big weight in the index. the more you issue, the bigger you get. jonathan: still with me are kathy jones, matt hornbach, mike schumacher. we just took down the fourth biggest bond issue on record like it was nothing. spreads the tightest since spring of 2018. what are your thoughts about that? kathy: now with the fed on hold, no risk of higher rates, everyone is optimistic, the risk appetite is out there, and so much for the debt diet. everyone is wanting at and
loading up their plates and taking more. the issue we are concerned about is this tremendous amount of debt hanging out in the bbb area, and the risks associated with that if the economy slows down, spreads widening. there is a lot there, a fairly risky proposition. jonathan: the investor appetite, it sounds counterintuitive to people not in the market, but when you have an investment grade issuer, the bigger the issue, the bigger the demand because of the indexing. when do we start to see some stresses because of those things, do we ever see that happen? kathy: probably eventually but more toward the end of the cycle and people start getting nervous about what's happening, if there is a risk of downgrades into high-yield. something like that may trigger concern. right now, it feels like everyone just wants a piece of the action. jonathan: what happened to the debt diet? we have talked about it so much through 2019, the dividing line
between investment grade and high-yield, out on the bbb line. most people in the fixed income market said that they would manage the situation. many of the big names have. in the past couple of months, a whole lot more issuance. mike: you could add the government to that list. there is no discipline whatsoever. you are not getting it from the current government, not from the leading candidates on the democratic side. that seems to be a fact of life for the next two years. on the corporate side, i agree with kathy. money is cheap. as long as the falls seem like they are at bay, it is ok. jonathan: a lot of companies thinking, i can buy the growth now. we have seen headlines about kkr looking into the likes of walgreens. that would make walgreens potentially come down to high-yield. the discussion we need to have is the length of the cycle. the decision-making that we are seeing from corporations and what signal that gives you about how long they think this cycle will go on for. matthew: i don't think people are particularly pessimistic.
if you look at indices that look at cfo or ceo optimism, yes, it's come down from the peak of the economy, but the economy has decelerated to a great trend of growth. what is so bad about that? inflation near the fed's target, not exactly 2%, but still relatively elevated compared to other developed markets. why should we be so pessimistic about the outlook for next year? if the fed will be on hold, it may not be that bad. that is what you are seeing in investor sentiment today. kathy: i would agree with that. we seem to be in a good place, as jay powell said. that is translating into ceos and cfos saying this is an opportune time to borrow, rates are low, we can borrow long-term at low rates. why not do it? jonathan: some investors are liking what they are seeing as well.
colin robertson saying, i expect 2020 to look like 2019, 2018, which saw far more high demand than the bonds issued. a lot of opportunity in ccc right now, you just have to find the right ones. if you could only see kathy jones smiling when i read that. kathy: we are certainly staying away from ccc's because of the risk reward. i know spreads have widened against the rest of the universe but you are still not getting enough yield to compensate for the risk. frankly, every fund manager you talk to says there is some risk there but i have the good bonds, and it's not a problem. at this stage, we don't think the risk reward is that attractive. jonathan: everyone is always thinking they have the good bonds. kathy: and they might, but when the whole market comes down, it doesn't help. mike: you say i just want the good leads, whatever you may get, but it seems dicey to us as
well. my colleagues in credit would say stay clear. matthew: the same issue in the government bond market. you have to find the good bonds. this year, it's treasuries. those bonds don't look particularly good to us. as we go into 2020, treasuries do. jonathan: i had somebody tell me that investment grade was the new haven asset. what do you say to that? kathy: there are limits. the idea of no boundaries, limits -- these are corporations, not sovereign governments. things happen in corporate life. the idea that that is a safe haven asset is mistaken. jonathan: kathy jones, matt hornbeck, mike schumacher staying with me. the week ahead featuring a speech from christine lagarde is coming up next. this is bloomberg real yield. ♪
tuesday, u.s. housing starts. wednesday, fomc minutes, and another democratic debate. thursday, inflation and pmi data. friday, perhaps the main event, christine lagarde making a policy speech. u.s. and eurozone preliminary pmi for the month of november. still with me are mike schumacher, matt hornbach, and kathy jones. let's talk about europe. there is a belief on this side of the atlantic that christine lagarde can do something mario draghi cannot, and get governments in europe, specifically germany, to spend. kathy, the good news this week is germany avoiding a recession.
the bad news, the government seems to be satisfied with 0.1% gdp growth, and no signs of that will lead to fiscal loosening. kathy: no sign that they are inclined to worry about their current account surplus. from the public statements at least it doesn't look like they are inclined to make much change in the budget. things would have to get worse before they would take action on the fiscal side. mike: why would they change? i have not heard any signal and in germany that is likely to change its tack. talking about hitting the nail target. i think we can dispense with the idea. jonathan: when i speak to people in europe, they are very skeptical about germany following through on stimulus. when i speak to people in the united states, there is a belief that we are going to get some stimulus from the german government. where is that coming from? mike: you look at the numbers and you say it is at least possible. you have a surplus. you can say, i can make this work. theoretically, yes, but the political will is not there. jonathan: how about the bond market? do you like it in europe? mike: we like staying short in the u.s. we are not in the comfort zone of saying long-duration. you think about backing up 40 basis points on a trade deal, then maybe we will talk about getting long. jonathan: 2.20 is a level you are looking for. kathy? kathy: we are looking for 2.25. we are not all short right now. every time yields bump up, we have been trying to add duration. it does not pay out to be short duration. the good duration. we have the good duration,
that's right. matthew: 1.95 on the 10-year, we were pricing in. that was what we saw in 1996 when we had a big bond market selloff. the bond markets sold off 50 basis points not just in the united states but around the world. jonathan: that 40-basis point move, you say that is it. we are out of oxygen? the move is done? matthew: i will plant the flag, i think that's it. i don't think it's a base case possibility unless you believe we get a phase one deal that includes a september rollback. that to me seems like a less like a scenario than not. jonathan: tariff rollback, if agreed, that could be the game changer. that could be a driver of sentiment in treasuries? matthew: if we have a rollback in the september tariffs, we could break 2%.
kathy: i think you just need incremental good news on the economy and trade not to be a negative. again, going back to the term premium. there is room for it to bounce up another 25 basis points and push yields back to about 2.25 without a huge change from where we are. mike: don't need to roll back, i agree. yields can go up higher without that, just some sort of signed agreement to buy more soybeans or something like that, perhaps soft measures on the u.s. side. jonathan: what is it about the role that that is important, the signal or the actual substance? matthew: the tariffs have been on for two months. we have not even see the data impact from the worst of those tariffs. it is hard to see the bond market selling off and we have not even seen the data. i don't see how it's possible, especially when the fed says the bar for hiking is so high. jonathan: when will we see the
weakness in the data start to clean out? when do you expect to see the worst of it? matthew: our economists are looking at the first quarter, but that is under the presumption that we actually have a deal. we have to get there first. to the point that you made earlier, we are still trying to figure out the ag purchases after weeks and weeks of positive spin. i don't really see it coming in the near term. jonathan: kathy, what do you make of that, we have not seen the worst of it? kathy: i think we discounted the worst of it. even if we get a slowdown in economic growth, we are looking at something around 2%, a little bit south next year. that is good enough to get used to get yields to edge higher. jonathan: it is the rapid fire round, three quick answers. in high-yield, buy ccc's or stay away? kathy: stay away. matthew: stay away. mike: stay away. jonathan: can we reclaim the
highs on the u.s. 10 year in 2020? the highs were about 2.80 in january. can we reclaim those highs in 2020, yes or no? mike: yes. kathy: no. matthew: no. jonathan: chairman powell, total snooze. maybe that is good news for many of you. the fed pause, does it last six months or more, or less? more or less? yes --: jonathan: longer or fewer than six months? matthew: longer. kathy: more. fewer. jonathan: matt hornbach is going to get this game one day. from new york city, we will see you same time, same place.
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