tv Bloomberg Real Yield Bloomberg April 7, 2018 2:00am-2:30am EDT
jonathan: from new york city and our viewers worldwide, i'm jonathan ferro, and this is bloomberg "real yield". ♪ jonathan: coming up, payrolls delivering a big miss but wages come in and line. the president fighting back, and the administration considering tariffs on another $100 billion of chinese goods. risk appetite taking a hit. junk credit looks fairly -- relatively resilient. we begin with the big issue, the payrolls report. >> this is what we should expect going forward.
>> this is a weak type of report. >> the weather was a big influence this month. >> i think there is a game of fedken it on between the and the markets. >> this makes for a cautious fed. especially in light of the global trade situation. >> the markets will respond to this report because it is a big miss and suggests we are starting to hit some limits in the labor market and that will be a constraint on 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. >> wages are still up 2.5%, nothing has changed there, what has changed is the trade protectionism threats coming out of the white house. jonathan: joining me is bob miller from blackrock, anna, and george rusnak from wells fargo.
great to have you with me around the table. bob, i want to begin with you. i think for many people, it is just drama free and kind of ok, isn't it. bob: 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 if you smooth through that, the job market looks ready solid. jonathan: we've had three really different payroll reports. the inflation shocks in january, and february was a goldilocks. and then this disappointing number four payrolls 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 strength remains despite the headline number today and the broad narrative in the markets related to economic policy or monetary policy really doesn't alter with this report or any of the other reports per se. i think there is a gradual path for rate hikes. jonathan: from the start of the year through three months in, i think people's views of the global economy has changed quite drastically. we came into the year with this big procyclical enthusiasm for what 2018 will bring in growth and earnings for the corporate, and in a bit of disappointment. -- then, something of a 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 -- q4. 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 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: great question. our view is that we are seeing a decline in the scarcity value of treasuries, relative to the post crisis period were -- where 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. clearly, the scarcity value of treasuries is declining. the sensitivity to risk off is declining. jonathan: just to dig into a couple of elements and there. the first one being the issuance story. is that a front end story or place it across the curve? what is the story for the whole curve? bob: i think it is sequential across the entire curve. what we have seen in the last couple of months is replenish the cash account for the fed. what we will see going forward, if you look at the increase in issuance from treasury announced in late january, 66% of the
notional increase is in two-year notes to three-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 and of 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 equity story is wrong, but is it actually another story that treasuries are not behaving as they used to be? anupam: a little bit of shine
come of the 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 has been impacting equity markets but hasn't bled into the fixed income markets, and i think it is smart and strong for the fixed 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, -- 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. i think it would 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 is and it could be a big problem if it escalates. bob: is that how you view things to bank? o? to anupam: i would agree with bob, unless the trade issue becomes a
real issue, because it translates to real policy, i think that is 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: i just wonder if this is a risk premium that stays in treasuries. over the long end, maybe the risk premium will stay in there. 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. there 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 the new certainty, unfortunately. 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 is going to be on inflation and the supply and demand dynamic. and the yield differential. jonathan: and inflation, to be clear, when do we start to see that kicking up? george: we believe q2 and q3. a lot of the fiscal stimulus is front and loaded. -- front end loaded. jonathan: you are staying with me. coming up, the auction block. investors becoming more picky -- picky. 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 united states, salesforce made its first trip in the bond market in five years as it issued debt to finance and acquisition. a tenure security yielding 87.5 basis points more than treasuries. and elsewhere, mcdermott international offering of 3.56 -- $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. with me around the table is bob
miller, george resnick, and anupam damani. george, we started to see this, just on the margin in credit, where 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? george: the market is becoming more saturated with what is going on. you are seeing late cycle behavior, especially in credit, where you are seeing the idea fundamentals waking up to debt. you are seeing triple c's outperforming. they've outperformed the last nine or 10 weeks. 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? i don't think it is the end by any means.
starting to 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. if we have a chance to pull it up. 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 on where you think 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 for capital with 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 curve argues for the front end, and intermediate part 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 duration risk.
jonathan: george, does that argument resonate 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 -- good 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 and -- back end and 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 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.
they would have to go at a faster pace than is priced in order to quickly deteriorate. the alternative is owning that front end, if we 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.? we are talking about this competition for capital, and more broadly, 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 a steep divergence and growth is picking up in many emerging markets. the disinflation process remains intact, so you have local rates and fx actually looking quite attractive.
talking about the front end of the curve, there is amazing income generation potential the -- at 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 what he has to say. >> 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 the hierarchy of vulnerability. you would expect junk bonds to come before ig. that has sort of done this. high-yield has been resilient. that viewt to express
that things are going to do bad, doing it through high-yield has been difficult, why? bob: largely positioning and flows. in high-yield, 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 have got to see an increase in the link went to default to erode that 6.5%. 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 -- ramping bill issuance to fund the cash account. a combination of those things created a perfect storm in the front end of the ig space. i think those are different things that are idiosyncratic that will likely pass.
meeting, look out for them. plus look out for jpmorgan and citigroup earnings, and the possible nafta deal announcement. we will get various readings on global cpi, including in the united states. quickly,hings up, final thoughts. just to wrap things up with how the global economy has performed. europe reported pmi's in the last few months that have disappointed relative to expectations. is this global synchronized growth story that we got sick of hearing about at the turn of the year, has it changed? anupam: it really hasn't changed. global pmi's hasn't changed, they are coming off of extremely high levels. a little bit of tapering off is actually good for risk markets. some of the concerns about -- around overheating related to inflationary risks may die down. i think that bodes well for risk assets.
george: i agree, i don't think it has changed. i think what has changed is kind of building up what bob said before is that the central bank safety net is no longer there. you see more volatility in the markets. certainly in the u.s. and i think it is going to expand. jonathan: the data points have been stable for quite some time and that has played into the low volatility story, low volatility data. george: certainly. because of the fiscal stimulus coming on, it should be coming soon. bob: i would agree with that. the interesting thing about fiscal stimulus, a year ago when the market got disappointed by a lack of legislative process is because there was a lack of legislative process. this time, they did the tax cut, but you have the bipartisan budget. the bills are just being written, the spending hasn't started.
the spending is nearly $300 billion in the next couple of years, plus tax cuts. it puts the trade war stuff in perspective. if we're going to put a tariff on a $100 billion worth of goods, it needs to be a really large tariff to offset the fiscal stimulus that is coming into the pipeline in the second half of the year. jonathan: thank you very much for your time, bob miller, anupam damani and george rusnak. from new york, that is a for us. we will see you next friday. this is bloomberg tv. ♪
julie: i am julie hyman in for scarlet fu and this is bloomberg "etf iq." we focus on the assets, risks in rewards offered by exchange traded funds. ♪ julie: tech stocks have been battered over the past months, taking a lot of etf's with them. we talked the manager of the world's biggest blockchain etf about surviving in this environment. we go globetrotting to explore the growth of
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