tv Bloomberg Real Yield Bloomberg April 6, 2018 7:30pm-8:00pm EDT
markets. leaving every competitor, threat and challenge outmaneuvered. certainly in the u.s. and i think it is going to expand. comcast business outmaneuver. jonathan: the data points have been stable for quite some time and that has played into the low volatility story, low volatility jonathan: from new york city data. i'm jonathan ferro, and this is george: certainly, because of bloomberg "real yield". ♪ the fiscal stimulus coming on, it should be coming soon. bob: i agree, the interesting thing about fiscal stimulus, a jonathan: coming up, payrolls year ago when the market got disappointed by a lack of legislative process is because delivering a big miss but wages there was a lack of regicide of are in line. process. this time, they did the tax cut, the president fighting back, and but you have the bipartisan the administration considering budget. tariffs on another $100 billion the bills are being written and the spending hasn't started, and the spending is nearly $300 of chinese goods. billion in the next couple of years, plus tax cuts. credit looks fairly it puts the trade war stuff in resilient. perspective. we begin with the big issue, the payrolls report. if we're going to put a tariff >> this is what we should expect on 100 and dollars worth of going forward.
goods, and needs to be a really >> this is a weak type of large tariff to offset the fiscal stimulus that is coming report. into the pipeline in the second >> the weather was a big half of the year. influence. jonathan: thank you very much >> i think there is a game of chicken going on with the fed and markets. >> this makes for a cautious fed. for your time, bob miller, anupam damani and george rusnak. especially in light of the global trade situation. >> the markets will respond to this report because it is a big that does it for us, we will see you next friday. miss and suggests we are starting to hit some limits in this is bloomberg tv. the labor market and that will ♪ constrain growth and push up wages. i think there will be a reaction to this report. but it is the kind of report we should look at going forward. >> i think it leaves the fed in the same place. they will keep moving but they are not in any race and it will not rush it. >> nothing has changed there, what has changed is the trade protectionism threats coming out of the white house. jonathan: joining me is bob anna, andm blackrock, george rusnak from wells fargo.
theink for many paper, report is trouble-free? >> you could see the impact over the last three months with over 100,000 jobs in weather sensitive sectors, positive in february and a decline in weather sensitive jobs this past month. i think you smooth through that and the job market looks ready solid. jonathan: we've had three really different payroll reports. inflation shocks in january, and february was a goldilocks. and then this disappointing number in march. what do you make of the volatility that we see in the data points through the labor market in january and through the first quarter? anupam: the underlying trend of job strengths remains despite
the headline number today and the broad narrative in the markets related to economic policy or monetary policy really doesn't alter this report or any of the other ports per se. i think there is a gradual path for rate hikes. jonathan: from the start of the -- start ofhs in, the year through three months in, i think people's views of the global economy has changed drastically. we came with a procyclical enthusiasm for what 2018 will bring in growth and earnings for the corporate, and in a bit of disappointment. have you changed your view and what has changed about the world? george: we change in fiscal stimulus and we think it is coming more in q2, q3 or q4 purity i think what people are struggling with right now is
that q1 is a traditionally slower quarter. you are seeing a little bit of a tick up in wage inflation pressures. i think that is a good sign. it is healthy growth but not too out of control. jonathan: i have to fold in the trade conversation. through the week it has been interesting, when you get a hit to risk appetite, it hits equities but it does not spill over to rates. you don't see a big increase in treasuries significantly. we woke up wednesday morning that stocks are down hard, and treasury down a couple of basis points. what is the action coming from treasuries and rates at the moment? bob: a great question, what we see is a decline in the scarcity value of treasuries, relative to the post crisis period were central banks were buying a lot of treasuries at large-scale. this is clearly going the other way in the u.s. and there's less aggressive purchasing outside the u.s. more importantly, the fiscal impulse coming is increasing the treasury issuance substantially
this year and the year after. combined with the balance sheet runoff, the issuance per treasury funding in a fiscal deficit is simply creating a more balanced supply and demand ♪ dynamic for high-quality assets than we have had at any point in the last eight years. ofwelcome to the best clearly, the scarcity value of treasuries is declining. the sensitivity to risk off his bloomberg daybreak middle east. the key headlines this week. -- is declining. jonathan: just to dig into a by spanking in the middle east, couple of elements the issuance lender tells us why the , story, is that a front end is spending big on the local market to read >> the opec story or place it across the curve? president and energy minister on what is the story for the whole curve? life after the production company. bob: i think it is sequential across the entire curve. >> determine tells us the housing market is not balanced. what we have seen in the last >> first off, it couple of months is replenish the cash account for the fed. forward,ill see going if you look at the increase in issuance from treasury announced in late january, 66% of the
notional increase is in two-year and two-year notes combined. if you take the issuance and look at it on an apples to apples basis of tenure equivalent, it is evenly spread across the curve. a third of it comes in the front and, and a third in the long end. even with the percentage increase in issuance is small on a dollar basis, the amount of duration is equally spread across the curve. that only starts to bite the next few months. jonathan: the other element that bob brings up is how treasuries behave in the risk mitigation of treasuries and whether that has diminished somewhat over the last three months. has it? i looked at equities getting smacked around and the treasury looking stable and i thought, maybe things aren't that bad and but is itry is wrong, story that treasuries are not behave as if they used to be? anupam: a little bit of shine
has come of of treasuries, cash looks more attractive as a risk-free asset. but i think the market correlations between equities and treasuries has gone back to the traditional norm. there's massive risk aversion taking place, and you run into what is somewhat a safe haven, the treasury bet. i think the fed remains focused on financial conditions, and so does the market. if financial conditions are tightened due to sharp equity volatility, you may have a slower fed. george: uncertainty is the new certainty. the idea of trade tariffs and the headline of the day impacting equity markets but hasn't bled into the fixed income markets, and i think it is smart and strong for the next income markets to look more strategic. jonathan: what has been intriguing for a lot of people in the market, stocks can get hit as hard as you like to the week, and two-year treasury
yields will barely move because so many people have concluded the fed is not going to change , course on what is going to happen on the equity market and the fed is not changing course based on what may or may not happen with the u.s. or china, at least not anytime soon. is that the right view? george: i think it is and we will learn more when chairman powell gives his speech. our expectation is the recent noise in the market around trade related issues, specifically, has not yet risen to a level that will create a change in tone from the federal reserve. it will have to escalate a lot from here. that said, it is important to keep in mind that the trade issue is a nonlinear issue. it is not a problem until it has -- until it is and it could be a big problem if it escalates. anupam: i would agree with bob, unless the trade issue becomes a real issue, because it translates to real policy, i think that is what we -- when it
becomes a problem. again, i would highlight the fed remains focused on financial conditions and the uncertainty in the markets, the big drawdowns come if we see them, it could cost them to be more cautious. jonathan: is this a risk premium that stays in treasuries. over the long end, maybe the risk premiums will stay in their. i spoke to officials in the white house, i spoke to larry kudlow today, and the message i got for the moment is there is no time horizon for the situation with china. that are no official negotiations taking place now. there is a 60 day period to consider proposals on the table. this could go on for months and months, you have that safety on treasuries to a certain extent for the time being? george: uncertainty is unfortunately the new certainty. the fixed income market seems to be digesting that fairly well. it hasn't bled out to the other
areas of the market, and to bob's point earlier, the idea of a strategic imbalance of supply and demand with fixed income markets will play out. but it is strategic. it will play out over the longer run. focus will be on inflation and the supply and demand dynamic. and the yield differential. jonathan: and inflation, to be clear, when we start to see that kicking up? george: we believe q2 and q3. a lot of the fiscal stimulus is front and loaded. jonathan: you are staying with me. coming up, the auction block . investors becoming more picky tiered that conversation is next. this is "real yield". ♪
♪ jonathan: i am jonathan ferro and this is "real yield." we head to the auction block and start in europe with volkswagen, the financial services unit posted the week's biggest bond offering in europe. here in the u.s., salesforce made its first trip in the bond market in five years as it issued debt to finance and acquisition. yielding 87.5ity basis points more than treasuries. and elsewhere, mcdermott international offering of 3.56 billion in the leverage of high-yield bonds. the company is using the funds to back its takeover of chicago bridge and iron.
joining me is bob miller, george resnick, and anupam damani. on the margin in credit, things used to have the initial talk and then tighten to execution go to the market and rally above heart. we are not seeing that play out so much when these new issues come to market. why? bob: the market is becoming more saturated with what is going on. you are seeing late cycle behavior, especially in credit, you are seeing the idea fundamentals waking up to debt. the are seeing triple c's outperforming. they've outperformed the last nine or 10 weeks. george: you are also seeing the idea of weaker covenants issuance, and unfortunately the market is pushing back a little on the weakening fundamentals, and not able to digest it as well. jonathan: is it the beginning of the end of the good times? it's ursa feel like a gradual shift away from the pricing from
year-to-year. bob: i think we are in a regime change, and i know my colleague was almost morning talking about this. we're moving away from the post crisis period of monetary policy with no help from fiscal and regulatory policy, if not sure suppression from both, and now that entire policy mix is reversing. we are getting substantial fiscal. i brought a chart that shows the unusual nature of today's fiscal policy. we are getting substantial regulatory relief, as well as the monetary policy tightening. gradual, but in that direction. the combination of that puts more pressure on the markets to respond to organic changes. central-bank dominance is no longer the theme in the u.s. clearly that is still in issue in japan and europe, but less so and moving away in the u.s., and that is the regime.
jonathan: something blackrock has been on top of is this pick up in short-term rates and what it ultimately means for risk assets elsewhere and the competition for capital. could you elaborate where this is headed? bob: the issuance is known, and it is going to be double net issuance this year and it grows over the next several years because of the fiscal deficit financing. at the margin, treasuries will compete with capital for other asset classes. investment rate credit, high yield, etc., all need to stand on their own relative to a more attractive treasury. as we talked about during the break, the flatness of the yield end, argues for the front look attractive on a risk-adjusted basis. you get a substantial portion of the total yield available in the curve in the front end, and for substantially less depression
-- less duration risk. jonathan: george, does that argument resonates with you? george: it does. it doesn't seem to make sense from a volatility perspective -- if you are staying low and in good credit, you can get it yield, and that is good protection for us. that is a good combination for us. bob: we are along the front end of the curve. we are short on some of the back in, index based funds, and running last duration risk beyond the 10 year point in the book of our business. we are along the front end of the curve. jonathan: if there is a risk, is the federal reserve going to run -- to move more quickly? bob: that is the risk. there are two more price hikes for this year. in my be a little insufficient if everything goes smoothly for the next year and half, but not
by a lot. i don't think they will go more than one or two more times. it would have to go at a faster pace than is priced in order to quickly deteriorate. the alternative is owning that end, if we front have a true trade war, equity markets are down a lot for a while. the first thing that will happen is the market will take the 80 basis points and applied tightening out of the curve. that will perform reasonably well. jonathan: are you can seeing the concerns spill over into e.m.? were talking about petition for , and more broadly, and willie part of that. -- and e.m. will be part of that. do you see it taking place? anupam: not at all, and in local markets, q1 was the best-performing asset class because there is stick divergence and growth is picking up in many emerging markets. nflation process remains intact, so you have local rates looking quite attractive.
talking about the front end of the curve, there is amazing income generation potential the front end of em curves with policy rates expected to come down. jonathan: em is looking resilient, and high-yield as well. it has been difficult to short. take a listen to this. >> things that are making the short work out in the past month or so is the global trade situation and the potential economic problems that higher interest rates place on low quality corporate credits. eventually, it forces spreads wider. jonathan: someone messaged me about vulnerability, you would expect junk bonds to come before eiji -- ig. high-yield is been resilient.
if you're going to express the view that things are going to do that, doing it through high-yield has been difficult, why? bob: largely positioning and flows. you had substantial outflows for a couple of months late last year and early this year. a number of the more fickle capital has already left the asset classes. you have a yield at 6.5%. you got to see an increase in the link went to default to the that 6.5%.erode with regard to investment grade, it is clear that events have taken place around the repatriation tax and the pressure in the front and that occurred at the same time that the treasury was wrapping a cash account. a combination of those things created a perfect storm in the front end of the ig space.
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