tv Bloomberg Real Yield Bloomberg October 22, 2017 5:30am-6:00am EDT
♪ jonathan: from new york city to our bureaus worldwide, with 30 minutes dedicated to fixed income, this is "bloomberg real yield." ♪ jonathan: coming up, in the race for yellen's chair, john taylor and jerome powell are the front runners. trump's tax-cut effort takes a step forward in the senate. drivedriving treasury yields higher. the ecb prepares to unveil its next move. better data is offset by some very ugly politics. we begin with the big issue, the race for the fed chair. >> leadership matters and who is the chair is does make a difference. >> i think there are a lot of good names on the list.
i don't think with that list of names, even with mrs. yellen, who would not be my first choice, i don't think the president can make a bad choice. >> i would say that the political considerations may outweigh the current economic situation. a new administration often just wants its own people on board. >> the interesting part at the moment is this discussion is coming at a time when there is the so-called "mystery" about the low level of inflation. so the interpretation is quite important. >> i think they would view jay powell as someone to be more continuous in the policy we have been experiencing. >> more likely than not, we will have a very accomplished economist as the head of the chair of the federal reserve for the foreseeable future. jonathan: joining me around the table in new york is mike collins, bob michele, head of the global fixed income currencies and commodities group at jpmorgan asset management, plus from london marilyn watson , from blackrock. guys, great to have you with us. let's begin with where the odds
are for the race for fed chair. the number one spot now seemingly is jay powell. but then at the number two spot, if you look at the two front runners, it is reportedly jay powell and john taylor. the spread between those two is, me, mike, isfor really quite wide. mike: in the last few days powell's odds have really soared in the marketplace, because he is probably the one most conducive to a more continuation of existing policies. more of a certainty, less of an unknown. less risk to the markets. taylor is a little bit of a wildcard. jonathan: how are you thinking about this at the moment? bob: i will take jay powell, because he is a moderate. i think he will be good for asset prices. i fear john taylor, kevin warsh. i would really want gary cohn in there. it does not look like he is in the race anymore. jonathan: explain to me why you would really want gary cohn.
why would he be so good? bob: i think it is time to get a markets practitioner into the fed seat and balance the econometric models of the ivory towers with the real world we all have to deal with. jonathan: i don't think i have ever heard anyone talk about gary cohn becoming the fed chair for weeks. bob: i thought i would throw him in when you gave me the airtime. jonathan: marilyn, as you sit around with the guys of blackrock anticipating the decision that could come any day now, how do you approach a decision like this? have you at all? marilyn: you have to look at the probability. we are looking at what the market is pricing in. but as you mentioned, when you look it all the different candidates, a lot is known about several of them. i think potentially, when you look at taylor, for example, and how hawkish he is going to be, i think that is sort of being overplayed. when you look at the list of candidates, some on the more hawkish side, but actually it is one person that will be leading the fed, but they will have one vote. at the end of the day they will be leading a committee.
it is all very much focused on the fundamentals and the committee as a whole at the federal reserve. jonathan: talk to me about that. if it dropped across the bloomberg terminal in the big red headline that john taylor had been nominated as the next fed chair, would you be fading that move off the back of it? marilyn: we expect to see more volatility. i mean, if you look at the bloomberg terminal itself and in -- thes pricing taylor rule is pricing in interest rates, is about 2.5% higher. when you look at taylor himself, he is much more flexible in his approach to the unemployment rate. he is much more flexible in his approach. so i think we would. we would look to trade that volatility and probably fade it. we would expect to see a flattener. mike: i think the monetary policy implications for whoever the fed governor is is not that big of a deal. i think the monetary policy is on a pretty set course, by and large. remember, it is driven by the consensus of the committee. i think the regulatory policy is a bigger deal.
right now i think trump wants someone who is a regulatory dove. taylor would fit that bill better. jonathan: there are a lot of things to think about. it is the push and pull in d.c.. i noticed over the last couple of days, mr. powell, the politico story, drives yields lower, then the tax-cut story drives yields higher. i wonder how that push and pull will play out over the next couple of months. bob: first of all, i don't think monetary policy can be put to the side. i think monetary policy is in a ridiculous place right now. and i think if you look at somebody like john taylor coming in, why the markets are not more frightened that the next paul volcker is coming in? he has got his rule. he is telling you it is 3.75%. you know what? i think he is right. i think the period of distorted monetary policy is something of the past. the fed, ecb, bank of japan need to step up the pace to normalization. what comes out of washington is something different than that.
if we get some stimulus, what is the stimulus going to do? it is going to accelerate the recovery that we have already seen. so i can see rates buffeting back and forth between this. i don't know if it has much to do with the fed chair or stimulus, i still think it is a qe aftereffect. jonathan: i think people might have watched what you said and sat there nodding their head. get out of the market, we want it back, but volcker back? really? he had inflation to deal with. not inflation with a two handle, or a one handle. come on. bob: inflation is picking up. i am going to pull up a chart because i get this all the time. people say no, there is no inflation. and you see it. you see year-over-year wage gains coming up. you see the inflation across europe, japan, china. it is all picking up. jonathan: is it picking up, marilyn? marilyn: it is picking up to a certain extent. but still, i think, from very,
very, very low levels. so it is all relative. certainly still at very low levels. jonathan: michael collins, you will take the other side of that trade, i assume? mike: all day long. i think if the fed gets the fund rate anywhere near 3%, it will assure we going to recession and the stock market crashes. think about it. if you have a money market fund at 3% or 4%, everybody would take all their money out and put it into money markets. it is too good to be true. on the inflation side, i'm in the disinflationary camp. i'm looking at anecdotal evidence of companies in the world, very few in the world that have the ability to raise prices on their goods and services to consumers. in fact, that is the opposite. they all cutting prices, fighting with each other for market share. bob: i found the chart i was looking for. what you are looking at is developed market core inflation and china core cpi year-over-year. this goes back to 2012. where is the deflation? where is the downside risks they
are trying to respond to in the central banks? they are behind the curve. it is starting to get away from them. you can look at the recent wage data in the jobs report. you can look at the atlanta wage tracker. it is all headed one way. jonathan: you two joined me on this program since its inception. mike collins said i will take the other side of the trade. mike collins is in the money. bob michele is in trouble. you can be right about inflation but wrong about a market? bob: it is true. before you claim i have been wrong about everything -- jonathan: i certainly have not done that. bob: yields could be higher and should be approaching 3% now. the other thing we have seen is the weight of quantitative easing that has come in and suffocated the market. it is that weight of the cash that has kept yields in a very narrow range. 2.15 to 2.50, for most of this year. there has been a bear market. it has been on the front end of the curve.
that is where the fed will surprise. they will raise rates in december. it will be the third time. it does not make any sense to me that they are still going this low unless you look at qe coming into the markets and supporting that. jonathan: i wish we had a camera and a microphone during the commercial break for the conversation bob and i are about to have t. everyone sticking with us. mike collins, bob michele, and marilyn watson. coming up, the auction block. nathan's first bond offering since 2015 has a jump on debt, chowing down. that's coming up. this is "bloomberg real yield." ♪
just some breaking news and the update regarding fed chair janet yellen. back at the white house, said to be back at the white house according to a person familiar with the matter. this appearance following the day after her interview with the president of the united states. fed chair janet yellen is said to be back at the white house. this is according to a person familiar with the matter. bob michael from jpmorgan, marilyn watson from blackrock over in london, and michael collins from pgim. looking at the situation, we barely discussed fed chair janet yellen staying on as fed chair in the previous segment. why? bob: i think her time has come and gone. i think she did well in the aftermath of the financial crisis, helping to continue bernanke's policies. i think the administration feels they need a breath of fresh air to come in, particularly if they're trying to pull the rest of the republicans along with them, and also trying to bring the rest of congress with them.
jonathan: for me, i thought she signed her resignation letter off the back of the jackson hole speech where she defended the regulatory regime. you put the emphasis on deregulation. is that ultimately what could the resignation letter as well? mike: i think so. she has pushed back pretty hard on trump's emphasis on deregulating the banks. in her defense, that is the right move. one of the best things that has happened in this cycle with the regulatory push back is the fact that banks are in as good as financial shape as they have never been in our career. bob: but not extending credit. that is the one problem. it is true the regulation has done a lot of very good things. has it gone too far? where is the extension of the credit? why all this raised capital and then buy riskless government bonds and in europe at mostly negative yields? jonathan: just to confirm the latest that we do have, janet yellen is said to be back at the white house. this is according to a person familiar with the matter. the appearance following a day after her interview with the president of the united states.
you asked where the credit is. let's get it up on the screen for our viewers. credit spreads are as tight as they have been for quite a while across the whole quality spectrum. it could not get much tighter. that is where the credit is, right? bob: well, it can get a lot tighter. i think most investors look at high-yield at 5.5%. it does not strike them as high-yield. they think high-yield should be 7% to 8%. it is not the 5.5% yield or the 3.5% credit spread. it is the risk-free rate, which is about 2%, and the real yields, which are negative. i have pulled up a chart where i look at real yields on the 10-year treasury. you can see the distortion that has been created by quantitative easing and the growth of central bank balance sheets. so credit spreads of 350 over, frankly, at 1% defaults, what companies are doing with their balance sheets, i think they should be 250 over. jonathan: mike, weigh in.
mike: credit spreads are getting to the point where they are not only fully valued but potentially overvalued. i'm looking at spreads across a lot of different corporate sectors, and they are basically at historical tights now. in the last couple of weeks and days we have seen a snap tighter in spreads with the optimism on tax reform. and we are pushing back against that could w. we are fading the credit rally a little bit here for jonathan: , . jonathan: marilyn, is this is a sign of complacency or is the risk on mentality here to stay? marilyn: we see the risk on mentality here for the time being. when you look at global growth, it is still on a very robust stance. when you look at global monetary policy and global central banks, they are at an infection point where they will reduce monetary policy. when you look to the overall environment where investors are , putting their money and trying to get yields, the markets and credit are two sectors, we feel there is more to go, and we do feel they have some value. but we are becoming increasingly
cautious on the names we invest in. we think it will be incredibly important going forward to look really pay attention to the risk, leverage, and where you are investing your credit. jonathan: where are you selling? mike: we are selling double b rated credits in some cases. that is spreads in the low to mid 100's. we are selling some inside 100 basis points, because there is such a demand for extra yield from investors around the world that they are not that price-sensitive. we are selling those and rotating into triple-a asset-backed securities, like commercial mortgage-backed securities, collateralized loan obligations that spread of 100 or higher in some cases. those are easiest and all the value trading markets. jonathan: i need to take a fee. i can make a market. [laughter] jonathan: you're going to sell them, and bob, are you going to buy them? bob: absolutely. i'm not selling credit in here. i don't believe we are anywhere near the tights. if you go back to 2006, 1996, credit spreads got to something like 250 over. that is where we are heading. we have 100 basis points to go.
yeah, we are selling stuff. we are selling the markets that are distorted. it is the central banks that have bought the government bonds and compressed real yield. get rid of that stuff. but right now, everyone is looking for credit. marilyn is right. corporate balance sheets, earnings, the quality of earnings, they all look pretty good. jonathan: wait a second. distorted markets exist across the whole fixed-income environment. bob: this is true. jonathan: if you want to sell the distorted credit, that is it all, isn't it? bob: no. there are a lot of things you can do. one is eve you can into the loan -- one is you can go into the loan market strees. you can take out the fixed rate component. the other is you can buy spread credits. all of us can sell the treasury market against it to hedge interest rate sensitivity and just capture the credit spread. but you are right. if the fed continues to normalize and the other central banks jump in, you will see a return of real yield to the market.
that will ripple through every asset class and every discount rate people are using in those asset classes. jonathan: bob michael, michael collins from pugin, and marilyn watson sticking with me. i want to get you an update on where the bond market is this week. 2, 10, and 30 choppy over the last 24 hours. yields higher throughout the week by seven basis points, front end by nine. the long end on the 30 year getting back up to 2.90. still ahead, the final spread. the week ahead features that decision for mario draghi and the ecb. this is "bloomberg real yield." ♪
♪ jonathan: i am jonathan ferro. this is "bloomberg real yield." it is time for the final spread. coming up over the next week, japan holds an election with prime minister shinzo abe favor ed to win reelection. lawmakers from the main pro-independence parties will meet in the catalan parliament. plus, you have u.s. gdp and the ecb decision.
still with us around the table, michael collins, bob michele and marilyn watson over in london. guys, fed chair janet yellen said to be back at the white house, returning just a day after her interview with the president of united states. that's according to a person familiar with the matter. some choppy market action off the back of that. this fed race is very difficult to interpret. as an investor and market practitioner, how do you view the headline risk around all of this? mike: it looked to me like somebody assumed she was there for a follow-up interview. that she is the front runner. i don't think that is the case. i think she is told she will not be the fed chair and will be allowed a chance to step down. i lookn: bob michael, if at that situation, 24 hours later, this will get replayed. we could all sound really, really stupid. why shouldn't he give her the job? bob: i think mike pointed out
there is the whole regulatory issue. you want somebody in there that will be a bit more balanced. i think just get a breath of fresh air in and get rid of these unconventional tools. they're destroying the markets. let's go back to a market-based economy. jonathan: we would love to go back to a market-based economy. the ecb is meeting next week. they are set to unveil potentially, michael, what they are going to do with the qe program. now do they cut it and extend it for a period of time, or do they extend it for a longer period? which one is it going to be? mike: they telegraphed what they will do a little bit last week. their staff came out with a report that looks like they will cut the purchases from $60 billion month to something less, presumably $30 billion a month, and extend that. it is supposed to expire at the end of this calendar year. extend that through september of next year, another nine months. jonathan: looking at that chart at the moment, i want to put it back. this is just remarkable from deutsche bank. seven times net issuance.
that is the ecb's activity in this market. when they pare back, how significant is that going to be? bob: it is going to be pretty significant, but they will still be buying 3.5 times the net issuance. so they still are going to be in there, distorting the markets. i think it is not the next nine months where they will cut the purchases in half, it is the nine months after that. you really have to get about a year from now to figure out how the markets are going to revalue. jonathan: marilyn watson, the situation revalue. with treasuries when the federal reserve steps back is that yields went lower. why can't the same thing that happened with bunds? marilyn: bunds are already very, very low. rates are still negative. i think as both michael and bob pointed out, there will be a sustained period where the ecb is still buying. it is also our core view that they will be buying about $30 billion from january and september of next year. looking forward from then, that
is when the forward guidance really comes into play. the market will look at if interest rates might rise from a negative rate. when you look at the eurozone economy as a whole, it is doing really well, continuing to grow, particularly when you look at germany, spain. economic fundamentals are very, very positive. even when you look at the labor market, it is coming back from weak levels and continuing to tighten. it is difficult to see a situation in two or three years time when we would still have a negative rate. jonathan: mike collins, looking at the periphery firmament come -- looking at the periphery for a moment, you told me last time you were buying greece. are you buying any other peripherals at the moment? mike: yes. we are long on a handful of peripheral countries. if you look at the credit spreads, they are still pretty wide. the eurozone in general is seeing a real rebound in economic activity. they have been the star performer globally. it feels like there is a coalescence happening politically in europe as well. so we are pretty comfortable with some of the peripheral credits. jonathan: what is the trade in europe for you?
bob: the trade in europe for us is still corporate credit. particularly euro high-yield. that looks great to us. we look at something like 10% of the universe is going to become a rising star. so it will lead to investment grade, you can get yield that 2.5%. i would take that all day long over peripheral europe. jonathan: guys, you're going to stay with us. the next segment is the rapidfire round. i asked the questions and you keep your answers as short as possible. the first 1 -- taylor, powell, or yellen? mike collins? mike: powell. marilyn: powell. bob: powell. jonathan: credit -- wait for the correction, or it's not getting any cheaper? mike: i think you sell and wait for the opportunity to buy at wider spreads. bob: buy all day long. marilyn: stay in it for now. jonathan: bund yields, higher or lower year end? mike: i will say lower.
bob: higher. marilyn: higher. jonathan: that does it for us. thank you very much for joining me. mike collins, bob michele, and marilyn watson. that does it for us. from new york, we will see you next friday at the same time. 12:00 new york time, 5:00 p.m. in london. i imagine by then, we might know who the next fed chair is. this is "bloomberg real yield." ♪ who knew that phones would start doing everything?
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♪ mark: coming up on "bloomberg best," the stories that shaped the week in business around the world. an economic growth matter emerges from china's party congress. >> even though he is speaking about reforms, it will continue to be on china's terms. mark: political chaos reigns in spain is introduced to contain a -- as in madrid moves to contain a crisis. >> it is doing exactly what madrid told him not to do. mark: brexit talks continue to sputter while nafta negotiation simply stalled. >> we don't know exactly where they are going with this. mark: automation has arrived on wall street. a special bloomberg report looks explores the impact. >> some of the highest-paid jobs are in