tv Bloomberg Real Yield Bloomberg April 15, 2018 1:00am-1:30am EDT
jonathan: from new york city for our viewers worldwide, i'm jonathan ferro with 30 minutes dedicated to fixed income. this is bloomberg "real yield". ♪ jonathan: coming up, investors exhausted from political narratives, from the trade war fears to geopolitical concerns. one thing washington can guarantee -- more debt, the cbo forecasts $1 trillion deficits are around the corner. the u.s. needs foreign investors to step up. this week's auction suggests they are taking on the sidelines. geopolitical concern. >> it is a tough question. it is trying to protect unstable politics. >> the middle east has more
faultlines than any other geopolitical part of the world you can think of. >> top of the list is trade and geopolitical. >> we are dazed and confused by the tweet storm, by the geo policy rhetoric. >> the middle east has moved way beyond what we think of it. it is humpty dumpty time. we are not going to bring back the old middle east, the old syria, the old libya, the old yemen. the middle east is seriously broken. not too far away from a tipping point. think about where positioning is right now. the massive short from the global macro community in the 10 year space. any sort of catalyst like this can really set it off. jonathan: joining me here in new york city is craig bishop, leader of u.s. income fixed strategies. joining us from illinois cosi
co-cio and head of fixed income strategies. rachel, i want to begin with you and tell us how quickly we switched from one narrative to the other with such velocity. why are we doing this? >> we enter the last couple years with a very positive macro backdrop. the first quarter tends to get very distracted by disappointments on data, and the noise, there is a lot of uncertainty. guess what? there is uncertainty over time. you are never going to know what happens next. i don't think we feel the uncertainty right now. is it materially more worrisome? yes. it is not just the middle east, it is china, it is russia. all of these have the potential to become something bigger. frequently, the market can get through geopolitical things like that. there is a mix of narratives, one is the healthy global
economy, low defaults, but the volatility around geopolitical has put some foxes in the hen house, if you will. jonathan: it is the equities side of the story obsessed over these narratives. we have not seen this story grip credit in the same way we have seen as equity. >> that is absolutely true, the impact you have seen is those risk-off, risk-on environments, which tend to be more frequent than they were in the past. that will be the case as we go forward. with regard to the global risks, the geopolitical risks, as they simmer, depending whether or not that simmer turns to a boil will determine how fixed income is impacted. certainly treasuries benefiting
from spiked equality and similar to the equity markets, the long-term impact of corporate credit. jonathan: just to bring you into the conversation, someone said to me earlier in this week 16 income -- week fixed income investors, a few tweets shaped by washington, d.c. is not the way to go. >> no. the markets need to remember we survived bill clinton's scandals. we survived the bush wars, both one and two. we survived some of obama's policies that might not have been as business friendly. themedium has changed with tweets. i agree with the other panelists. these sorts of risks, the technicals change much more than the fundamentals do.
jonathan: i haven't seen much of a story for the havens at all. you don't see a proportional move from equity into treasuries as we did a year ago. it has been a big focus of the program. i am trying to get a better understanding as to why treasuries don't have the same risk aversion characteristics, that safe haven quality they used to. what has changed? >> we are seeing the correlations between stocks and higher-quality bonds change. one of the reasons is we are getting more back to normal, more back to an inflation mindset. clearly you are right. it does not feel risk-on, risk-off anymore. it feels as though things are moving in the same direction. that is causing problems for people. working.ges aren't they may have too much leverage giving to volatility. there is no quick answer, and i think it is going to take a couple quarters at the earliest
to see which way this falls. i think the inflation answer is the strongest right now. rachel: we don't disagree, although we think the more bullish case is possibly around the corner, that there is some technical and fundamental headwinds, for particularly the treasury asset class. you are seeing more issuance and the deficit moving up. the expectation is there will be more issuance. you have seen less buying. you have seen the balance sheet beginning to shrink. we think the demand is somewhat limited, because people are concerned about u.s. political behavior at the moment. if they are concerned about geopolitical uncertainty, they will hold off on the bond market. we think demand will be there, as inflation moves up, it will bring people back to the treasury market. we expect this could be a
material move. jonathan: just to pick something rachel said, the cbo saying we could reach a $1 trillion deficits. is that what is waiting on treasuries as well? -- weighing on treasuries as well? >> i think markets are always somewhat anticipatory. the rising debt is not necessarily a new story. our view on rates is we likely have seen close to the highs this year. 295, maybe 3%. we don't see rates moving significantly higher into next year either. jonathan: where you on the front
you on the front end? >> the front end will continue to be dictated by fed policy. that means a flatter yield curve. jonathan: is that what you see too, matt? do you see a flatter yield curve throughout the year? is that why so many people expect higher front yields despite risk aversion elsewhere? matt: divide the yield curve into two halves, the front that the fed influences, and the long end driven by growth influences and expectation. rachel's point on the supply demand is a serious long-term concern, whether it is social security fund having to sell, whether it is deficits. in the short run, we think
inflation expectations have peaked. i think inflation going up is baked in the cake. i don't think it is going to get dramatically higher than 2.25%. we think global growth is doing well. look at the fed minutes. they talk about moderating, flattening. inflation actually starting to weaken. that is supportive of the long end. on the front end, the chair has been clear they want the fed neutral funds rate to be near -- we have this interesting dynamic of fed funds on the short end of the curve. nothing too dramatic. 2.5% by next summer. the long end being supported by global growth. it is not dissipating, just
stalling out where it is. jonathan: would you be willing to buy the long end? the conversation i have with so many people is, i don't want to take the minimal yield risk down the curve. do you want to take that duration risk? matt: right now we think your duration should be at or slightly below your benchmark or your targets. we think that makes sense. we would build that with a combination of front end exposure. a small slice of long duration. that is a great hedge if economic conditions weaken unexpectedly, so a small slice. >> we like duration. to us, each rate hike from the fed brings us closer to a time
saudi sell received more than $50 billion in bids. qatar raising to surpass the saudis. the sale receiving more than $53 billion in bids. it was the auction that failed to happen. u.s. sanctions against russia forcing russia's finance ministry and the biggest state bank to pull bond sales, the first debt auction russians abandoned since 2015. a remarkable story over the last year. the investor appetite has not gone anywhere. i caught up with goldman sachs asset management to ask if he was still comfortable with taking the fx risk. take a listen. >> i want to take the risk. it is not just a level of complacency, i think you will see depreciation.
you have to think about the flows of capital. flows of capital are going to the higher growth markets in emerging markets. developing markets much more questionable. jonathan: matt, i want to put the question to you. there seems to be an immense comfort taking fx risk. given how benign the move has been in the dollar, it has been a much weaker dollar over the last year. are you comfortable taking that fx risk to get the pickup in the end? >> the dollar has clearly been on a weakening trade. we are neutral em from a debt perspective. we like it on the equities side. some of the things that hurt the dollar, slower u.s. growth relative to europe, it feels like we are in transition where the united states is doing
better relative to europe. i think the dollar may pause and consolidate. i don't think you will get the easy gains you had over the last six months. craig: with our positioning in em, we are confident. we think there are opportunities, as the dollar continues to be somewhat soft. you have to be cautious monitoring the bigger holdings in various etf's out there. jonathan: i think the consensus view was to have -- i keep hearing more about the risk. it started this summer, and the continuing concerns. this morning morgan stanley, rising interest rates may shutter the junk-bond window. yieldare you guys on high
credit now? rachel: there are questions about technicals, fundamentals. on the fundamentals side, defaults are low. it brought the average default rate up over 2%. that is very low historically. release expects the default rate to declined between now and year end. we see leverage moving up, but when you look at high-yield, what is the level of issuance and triple fees? we saw a 5 year period from 2003 to 2007 where issuances were as high as 33% in 2007. right now 12% of issuance year to date. over theen 10, 11, 12 last 4 years.
the average level in the new issuances is extreme dread there have been outflows from a high-yield asset class. 20 billion has flown out of the mutual funds. that could seem an alarming number. there is a lot of cash flow that comes out of the high-yield bond market. we see about $20 billion just this month being freed up. worry that don't much about the supply-demand. jonathan: morgan stanley also pointing out the maturity wall for high-yield is very dated. >> negligible. we have seen the last years pushing maturities way out to the future. what is the backlog of deals that need to be financed? one thing we came into 2018 believing is there would be a ton of new issuance because there would be some m&a announcements. broadcom and qualcomm, that is a huge deal that did not happen. there is a risk that the att time warner deal is likely to
come undone and put $30 billion back into the market. very few transactions in high-yield at the moment, so we can be nimble. jonathan: you talked earlier about how treasury can give you the risk on, risk averse protection. matt: it is hard to talk about ccc's broadly as a group. they are a market of individual stories. we have seen support in the energy space. i think it is fascinating energy stocks are unchanged on the year, despite the increase in oil prices. you have seen a nice reaction in the credit markets, with a lot of those names that were iffy in 2016 doing quite well. when we look at high-yield, the fundamentals are quite strong.
the high-yield market today is actually smaller than it was three years ago. you have to pick your spots. the one area we are cautious on is the longer, higher-quality high-yield. we think that area could potentially lose twice. it will lose if rates go up, and it will lose if it spreads wide. we are picking our spot. rachel: high-yield has done well relatively year to date. investment grade has done less well. if we had to pick between the two of them for the second quarter, it would be investment grade. jonathan: you are sticking with us. let's get a market check. the two-year note yield claimed -- climbed nine basis points. you do not get the same of further down the curve. you end up with a flatter yield curve. the final spread of the week ahead featuring earnings from u.s. banks.
realyield." it's time for the final spread. next week,ver the u.s. isseason in the picking up with bank of america, goldman sachs, and morgan stanley reporting. the president of the united states will be meeting with prime minister of japan shinzo abe. bank of canada will make a rate decision. we get the fed book as well. still with me, craig, rachel, and matt. just time for some final thoughts. i want to reflect on the final quarter as quarterly earnings come through. what has changed in the last three months despite all the volatility we have seen in equities and global politics? rachel: that is just it, i don't think a lot has changed, and yet
the market has gotten flustered by the pickup in equity volatility. in the zip code of 15 to 20, it doesn't disrupt things. earnings are going to be solid. you have tax reform that is going to help. we agree with the market. s&p 500 earnings up 70%. supply and demand. it has been a relatively calm period. near-term smooth sailing on global economies. the comment that the pace of growth is slowing, absolutely true, but that could lead us back into a goldilocks environment. >> i think we are in the goldilocks environment still. growth we are still waiting for, fiscal stimulus to boost the economy. hasn't happened yet. to me, that has already been built in.
expectations of tax reform started in february 2017. that is already built-in. i don't think we're going to get a boost, in my mind. jonathan: you don't think this story over equities is going to become a more widespread issue? >> i don't know. right now the normal story seems to be far off. to me, volatility will continue. what we have seen so far is what investors should expect going forward. jonathan: i will direct quick fire questions at each of you to wrap up the program. over the next few months, does the rate issue start to pick up, or does the equity issue roll over? does that volatility story bleed into rates or just roll over? rachel: rolls over. matt: i think that is right, it rolls over. craig: we have seen it with fully equity looking, especially in the credit space. jonathan: we have seen a dovish
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