tv Bloomberg Real Yield Bloomberg October 29, 2017 12:00pm-12:30pm EDT
♪ jonathan: from new york city, i am jonathan ferro with 30 minutes dedicated to fixed income. this is "bloomberg real yield." ♪ jonathan: coming up, the president is said to lean toward jay powell to be the next chairman of the federal reserve. the u.s. economy delivers its best back-to-back quarterly growth since 2014. and draghi's stimulus plan helps insulate europe from political chaos in spain. we begin with the big issue. it could be the moment of truth for the bond bull market. >> it has been the graveyard of investment strategists for the last two or three years. >> i certainly think they have a
right to be a bit cautious or unnerved at this point. it certainly seems the bias for rates is upward. >> the bond market has been in a 30-year bull trend. that has bailed out a lot of bond investors. yields keep going down and returns are good. >> hate to argue with him, but i think he is maybe too pessimistic about where bonds are. we will be in a 2.4% to 2.7% sort of range. >> we are in an environment where you will definitely see those bond yields head back towards to 2.6% or 2.7% level. but i am very pessimistic about the probability we can get higher than that. >> it is just a question of pace and path. how fast is that going to happen? we don't think it is going to happen extremely fast. the path is higher. i do not think it will be overly destructive in that sense. jonathan: joining the around the table is kathleen gaffney, joern wasmund, and jack flaherty. great to have you with us around the table. let's talk about the backup in
treasury yields. the tweet from the legendary double lines jeff gundlach, the moment of truth has arrived for the secular bond market bull market. the need for start rallying effectively immediately. it is the 2.4% line in the sand that bill gross has talked about, as well as janus henderson. we can bring up the chart as well. how important is that 2.4% right now? kathleen: i think it is pretty important. i think it is a key level. i think if you look around the world, we are seeing global yields start to move up. the quakes are being felt in all the different markets. jonathan: is this the moment of truth, jack? jack: i think he has got the direction right, but i'm not sure it is really going to be the end of the world in terms of the amount of movement we will have. i agree with kathleen. the rest of the world is showing some pretty good growth and rates should be going higher. it is just inflation is not high enough to say it will go out of control.
jonathan: if i came down from mars and someone said 3% gdp and treasury yields on a 10-year around 2.45%, 2.40%, i think i would be shocked, wouldn't you? joern: i would have short duration buys in general, but i think rates will only rise gradually, maybe to a level of 2.7%. markets are still distorted by monetary policy, and we still have very accommodative monetary policy around the world. the fed will continue to invest, despite their withdrawal. jonathan: ray dalio was on bloomberg radio earlier this week with tom keene. he talked about a risk in treasuries. the risk in bond market with the fiscal plan moving forward as well. does 2.40% make sense to you on a 10-year? kathleen: absolutely not. we are going higher and what we are seeing is a lot of foreign demand. that is what helped keep yields low.
but when you look at some of the actions around the world, if rates start moving higher, that money can come home. i am specifically thinking about japan. jonathan: i'm thinking about 3% gdp and 2.45% on a 10-year and a huge consensus in this market, we will get a flatter yield curve. we can bring up the chart for our viewers. it is positioned for a flatter yield curve. you can see some speculative positions on this chart and you can see how much that spread between the short and long end two's and 10's have narrowed over the last year. that is a big consensus trade. a flatter curve. is that something you go with or go against? kathleen: directionally in the long-term, i think we are moving towards a flatter curve. it is the steepness or slope right now that is demonstrating that the central banks are being less accommodative, or not tightening yet. they can be very stealth in their tapering this time.
that, i think, is really the key. it is very quietly happening in the markets. but when money starts to flow back to home, that is when things can really change. jonathan: what interested me is that i broke those gdp numbers on bloomberg a little bit earlier, and then the treasuries market started to move. then we had a headline that the president was leaning towards jay powell to be the future fed chair. we reversed the move around u.s. gdp. i'm trying to get my head around that. can you make sense of that? jack: i guess people were putting some probability on professor taylor being the one named, who would have been a little bit less than the status quo, or following the yellen path. so i think that really explains this reversal. i agree with you. the numbers today were pretty strong. they were something that should have been for higher yields. jonathan: let's bring up the dot plot and look at it on the bloomberg. this is what i see in front of
me. regardless of who comes into the federal reserve, whether they are more dovish versus john taylor, they are more hawkish versus the market. you see that through 2018, 2019, and going towards 2020. surely, jay powell is in the mix right here, the continuity candidate and therefore, he will be more hawkish than the market expects anyway, yes or no? joern: no. jonathan: why? joern: i think the market has priced in the probability between powell, yellen, and taylor. and because taylor has been much more hawkish, the market has already run ahead a little bit. in this respect, the fact that powell is now getting closer to being appointed means for me we see some continuous continuation and in this respect, i think the plots would be continued to be right in the middle or even a little below.
jonathan: kathleen, my point, i guess, is they will continue delivering rate hikes. if you look at the median year, the year-end for them next year, it is 2.12%. that is the policy rate. that is only 30, 40 basis points below where the 10-year is. either we get this flat yield curve or something is not going to happen that we expect to happen. kathleen: we will definitely move towards flattening. i think what the market is saying is, we really believe in lower for longer. we prefer powell over taylor. that is the market being entrenched and complacent that things will stay the same. jonathan: you think they will be disappointed? kathleen: i think they are going to be very disappointed. i think the carry trade, the reach for yield that has thrown markets out of whack, will be challenged. jonathan: what is the best way of capturing the story kathleen is talking about in the market, jack? jack: the way we have been playing things is a core short
duration in developed markets. given the fact that in general, we have strength in the economiess and is continuing and seeing bigger growth elsewhere, the more positive risk stance to be taking is the one we have been playing and believe it can continue as well. how do we do that in the fixed income market? you stay long in emerging markets. there is some emerging marketplaces you can be. we like mexico, for instance. long mexico and short core europe. that is one way to play it. jonathan: you want to be short duration and long yen? cufflink, do you agree with -- kathleen, do you agree with that? kathleen: i like long. i would not go short duration. that is a huge give up. currency is the key in the market. jonathan: kathleen gaffney, sticking with us along with joern wasmund and jack flaherty. coming up on this program, stranger things happening in the auction block this week. some really interesting supply coming to the market, including netflix. we will get to that in a moment. from new york, this is "bloomberg real yield."
jonathan: i am jonathan ferro. this is "bloomberg real yield." i want to head to the auction block. netflix is burning through cash as it invests billions in programming. to invest those billions, they needed to raise the money in the debt market. they sold $1.6 billion in bonds, the largest dollar denominated sale ever to help produce that content. junk rated notes yielded 4.875%. over in sovereigns, a few notable offerings in asia. the appetite for yields showed up in mongolia of all places. the country sold $800 million in 2023 bonds that received $5.5 billion in orders.
meanwhile, in china, the country sold its first sovereign dollar bond since 2004. the demand for the notes climbed to 11 times the offering, and priced under initial guidance. in the u.s., a $28 billion sale in seven-year notes. pitcher of bid to cover ratio of 2.39%, the lowest since august of 2016. it had a yield of 2.28%. in europe, the big story for markets this week was president mario draghi. the ecb chief warns that the bank would remain cautious as it put its stimulus measure on the road to an exit. starting in january, the ecb will cut monthly purchases of public and private debt at 30 billion euros or half the current pace, and continue that pace through september of next year. with me around the table, kathleen gaffney and joern wasmund and jack flaherty. jack, looking at the situation in europe, the power of reinvestment, the stock effect, and the flow of 30 billion a month. how powerful is that program going to be and continue to be?
jack: they are running out of bonds to buy. that is really where we are getting to. it remains very powerful. his talk was definitely on the dovish side. he definitely left out the draghi put. that is one way i would like to describe it. jonathan: kathleen, one thing i always think about is when the federal reserve is at and where the ecb will be at. we can capture the story in the bund's treasury two-year spread. how much oxygen is left up here, around 236, 237 basis points. what is left? kathleen: not much. i do think you will see that spread converge. but it is going to happen slowly. draghi is being careful when you look at the spanish, catalan elections. it is very telling there is a lot of unrest. so they don't want everyone heading for the exit doors all at one time. so the slope, the steepness, less accommodation, really important. jonathan: if i go on central banks' current guidance, ecb
told me they will buy 30 billion through to september and it won't be a sudden stop. they are implying they will taper through the end of next year. they can approach 2019 with a -40 basis point deposit rate. in 2019 the federal reserve will retake their guidance. they are approaching 2.5% on the policy rate. so you are going to have 2.5% in the u.s. potentially, a -40% basis point depot rate in europe. that can happen? joern: they can happen for some time. the expectation is the monetary policy divergence will fade, it will just take longer than people previously expected. it will probably also keep rates here in the u.s. a little bit contained. jonathan: kathleen says the spread will converge. it will narrow again. do you believe that? jack: i think it will narrow but not that quickly. for me, the market is getting a
little more correct than the dots. i don't think we will get three hikes next year. i think that number, that terminal number is going to be lower. one of the things that has benefited the u.s. economy a lot was that the dollar did not run up this year like people thought it would. i think the administration and the fed are aware of that. if they start raising, and as you describe, that differential starts to kick in where it starts to bring a high dollar, they will see that as a bad thing. jonathan: looking at the situation in europe at the moment, these people that are out there are talking about shorting german bunds. how difficult will that be? i look at the current program -- seven times net issuance is with the ecb is currently buying in europe. if you look at the adjusted net flow of what will come out of europe even next year, many countries will be negative territory. the ecb function on the bloomberg, the adjusted net flow as it stands right now. germany -- the ecb is buying more than is issued and more.
the short bunds is a tough trade. kathleen: absolutely, but the rules have to change at some point because if there is a scarcity in bonds and at the same time you have unrest across europe, you still have italy and spain to deal with, they may not want to be driving yields that low. so i think they have to be careful there. i think asia is something we want to talk about, with china asserting itself and abe's election, they are looking at changing the constitution and a military buildup happening in asia. that an investment will pull money away from the u.s. jonathan: interesting: and into -- interesting, and into where? kathleen: back home in japan. jack: can i jump in before you leave europe? the one country you did not was the u.k. jonathan: we will get there, don't worry. jack: we are not quite out of there yet. for us, the best place we had short duration has been in the
u.k. it is a much more open economy. the lower pound has contributed to some inflation, even though their growth has not been so great. that has been a better way to play the short developed market. jonathan: i got a question from a bloomberg user i want to address to you. is inflation the only answer for high term premiums in the german long end, assuming prolonged ecb asset purchase program is going to firm up the prospect in europe? jack: i think it is. i think inflation is the key across the world. i live in new york city. i feel inflation more than seems to be reported. nonetheless, if we are staying below target rates, that will affect what their policy is going to be. jonathan: thoughts on german debt? joern: i would not be short bunds at the moment. i am much more optimistic about europe overall than kathleen is. i think -- we will see some
riots and dramatic pictures in catalonia over the next couple of weeks, but overall i would consider this more of a buying opportunity. overall, i believe if spreads, for example, if they widen as they did to 135 basis points 10 years over bunds, that would be a fine buying opportunity. jonathan: at the moment europe is insulated from the market because of the policies mario draghi has. is that rational to think that way from markets or is that another sign of complacency? is that in the same vein as when we talked about treasuries? kathleen: no, i think that is what is going on there. you are keeping things as calm as possible, but it's still driving with the low rates. it is driving that reach for yield into, as you mentioned, the supply with netflix, china, and mongolia. it is an issuer's dream market. jonathan: an issuer's dream is not really an investor's dream. kathleen: not at all.
jonathan: what do you think about the netflix issue? kathleen: absolutely insane. you are not compensated for the credit risk you are taking. jonathan: kathleen gaffney, great to catch up with you. she is staying with us. joern wasmund and jack flaherty. just want to get you an update very quickly on the race for the fed chair. the president of the united states is said to announce a fed chair pick next week, that's according to dow jones. not bloomberg, according to dow jones. trump is said to announce the fed chair pick next week. the story on the board is where treasures have been this week. yields grinding higher this week. 2.42 on the u.s. 10 year, levels we have not seen since march of this year earlier this week. we trade at 2.94% on the u.s. 30 year. higher by about four basis points -- those colors are confusing. still ahead, the final spread. the week ahead features the u.k.'s unreliable boyfriend, the bank of england's mark carney. this is "bloomberg real yield." ♪ ♪
jonathan: i am jonathan ferro. this is "bloomberg real yield." time now for the final spread. coming up over the next week, a trio of central bank decisions from the bank of japan, bank of england, and the fed. plus, the u.s. jobs report and president trump's trip to asia. it is widely expected his fed chair decision will be known by then. still with me around the table, kathleen gaffney, joern wasmund, and jack flaherty. jack, you mentioned the u.k. the bank of england in focus, potentially the first rate hike in over a decade. now, i looked at some u.k. retail sales figures that came out and they dropped off a cliff. i looked at u.k. gdp, it was like 0.4% better than expected, but it is not really compatible with what i would call a time for a rate hike. jack: yeah, but the inflation has scared them a little bit. the weaker pound inflation has come through. it is a very open economy and i
think that is what they want to address. i think it is important they address things now rather than later. they will potentially need some ammunition later on. jonathan: kathleen, if you google "unreliable boyfriend" and go to images, i found out this week that governor carney's picture comes up everywhere. [laughter] jonathan: it happens because he guided us towards a rate hike several years ago. he did it again and then did it again. a famous politician in the u.k. came along and called him the "unreliable boyfriend" because you could not rely on guidance from the bank of england. can you still rely on guidance from the bank of england? kathleen: i think it is tough, he is pretty unreliable. but i think he is reacting to -- as jack pointed out -- what is going on in the economy and wanting to keep money at home. brexit is a big deal. jonathan: what is the appropriate trade? walk us through. you did earlier, but be more specific if you can, jack. jack: in general, being short the long end of the gilt has been a good trade and can
continue to be a good trade especially on a relative value basis. jonathan: do you trade the same way and have the same thoughts on the u.k. in the gilt market? joern: i believe he is doing a policy mistake. but to some extent, he is reliable because this is well telegraphed. it is similar to draghi or yellen. the central banks are well telegraphing this. jonathan: he telegraphed it back in 2014, 2015 and it never came. joern: now he will do it, i am pretty convinced. will it have a big effect on the pound? probably not. this is more about the transition negotiations, whether or not they will come through. i am a little doubtful. jonathan: guys, i am going to get to the rapidfire now. you know how this works. posted into the cameras and i will ask you a series of questions and you keep the answers as short as possible. is the next fed chair janet yellen, taylor, powell or a wildcard? so yellen, taylor, powell or a
wildcard? beginning with you, kathleen. kathleen: yellen. joern: powell. jack: powell. jonathan: is it the beginning of the end of the bond bull market? the beginning of the end -- yes or no? kathleen: yes. joern: no. jack: yes. jonathan: next week we could get the first rate hike in over a decade from the bank of england. we have heard it before from governor carney. he has given us some forward guidance in 2014 and 2015, it never came. do we have an unreliable boyfriend or the first hike in over a decade in the united kingdom? kathleen: yes. joern: hike. jack: hike. jonathan: thank you very much for joining us. kathleen gaffney, joern wasmund, and jack flaherty. that does it for us from new york city. we will see you next friday at a different time. 11:30 a.m. in new york. that will be 3:30 p.m. in
london. so look out for that and remember, next week before the president goes on his trip around asia, we should have the next chair of the federal reserve. will it be chair yellen, will it be governor powell, or will it be john taylor? i look forward to bring the news right here on "bloomberg real yield." from new york city to our audience worldwide, you are watching bloomberg tv. ♪ who knew that phones would start doing everything?
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