tv Bloomberg Real Yield Bloomberg April 20, 2018 1:00pm-1:31pm EDT
>> i am lisa abramowicz and for and this isro, bloomberg "real yield". ♪ lisa: coming up, as the yield curve flattens, it may be time to start worrying about inflation. and cap russia when back on buyers? it ister a rolling rally, time to sell junk bonds. the treasury yield curve is closer to inverting. >> the flattening of the yield
curve is so for a normal part of the process. somewhat, bute up it is totally normal but the yield curve gets flatter. too worried about the flattening that we see, it is normal to moment when you see the fed hiking. if it is inferred that it is a different story. worried about it flattening, is a signal of recession, but we don't see it in the near term because we see signalized global recovery. >> that's not get carried away, it is not unusual to see if i can and because of the front end of the curve rises faster than the login. what i am looking at is u.s. 10 year real yields are up 30 basis points, and that tells me growth is going up and that is good news. message perhaps is to stop freaking out, maybe? ,oining me is jack flaherty subadra rajappa, plus from
london is iain stealey at jpmorgan asset management. iain, i want to start with you. when do we start to worry, everyone is keen in dismissing the flattening yield curve. iain: i think it's just think because what you typically do see as rates move higher by the central banks is the yield flattens. i think what we will see a few months is when we hang around these low levels of yield curves -- and actually will happen is it moves down towards zero. when it hits zero it doesn't mean we go straight into a recession. look at the left few cycles, it could be years later we go into a recession once we hit zero. i think for the here and now, it is not time to panic. concerned am a little and will not dismiss the fact that the yield curve has gotten ahead of itself at current levels.
we don't have much room before you get too flat or inverted if the fed hikes two or three times more this year. the flattening of the curve is a concern. there is something fed officials are paying attention to and you are hearing talk from fed chair -- san francisco fed president trying our attention to the flatness of the curve. wea: jack, do you agree that have a flight or inverted yield curve? jack: i only worry if it does not convert by a lot. this is been discussed historically, flat -- to slightly, i don't think can dips is out of the range. i'm not worried about it either. lisa: i am try to score the flattening yield curve with the increase in inflation expectations. it has climbed so far this week in particular. of inflation hence
if gas, rent, and things like that could higher even though wages aren't? or is this true growth? subadra: inflation is expected to go up in march and april. the way we look at it, it is a tale of two halves. yet the first half were inflation is expected to go up mechanically, and in the second half we think rent and shelter costs will weigh on inflation. you start seeing a cooling off in the second half. that is what i think is going to eventually determine if the fed will continue to raise rates after september. lisa: you agree? i think there are pushed by the oil prices, and it is an explainer and there is no is, so i agree that things come back into line later on. i'm to talk london, about the european inflation
data. what do you make of it, do you agree with the ecb president that we are seeing some sort of possible peaks growth in the eurozone? iain: i think that is a big draghi, andmario the data has been weaker than expected. it has been a harsh winter over in europe and a lot of expectations are we start to see the data improve as we go through the second half or second quarter of the year. i think the reality is when you look at the ecb and missing amended, if the inflation is low. maybe if you squint it is in an upward trajectory, it is lower than where the ecb would like it to be. it is not held up by percent of the euro -- so there's a fine balancing act to make sure the euro doesn't strengthen to much, otherwise inflation will come back down and it will not be able to normalize policy. lisa: a question from a viewer
wondering given the flatness of the british yield curve -- sing the likelihood any much lower terminal rate than the u.s., do you think that is the case? the u.k. has a fair amount of headwinds facing it in the brexit.acc mark walked back expectations of hike at 80for a rate or 90% earlier this week. as we go through this transition with the u.k. leaving the european union, it probably does mean lower terminal rates are likely here. shift to thiso cap we are seeing between the u.s. and europe, in particular, german yields. we're looking at the gap between two-year german yields is wide, the most on record. how long can this go on?
what will we consult this gap, and is it sustainable? subadra: i don't think it is a sustainable. you are also seeing it in the back end of the curve. if you look at the 10 year treasury bond spread, it is the whitest level in history. widest level in history. tug of overseas were yields are low, and that is anchoring 10 year treasury yields. lisa: who has to give? the german yields have to rise or the u.s. bonds have to decline? subadra: i think they are rich given robust growth and inflation is slowly but surely picking up even though the forecast from the ecb is calling for just a modest rise over the next upcoming years. ithink bund yields are risked given theory up been economy is going much better, and the growth is higher in europe than the u.s..
lisa: you agree? the qe that is going on there that is missing up the relationships. we need to see that normalized and when that is going to happen sure.m not that is to happen before this becomes normalized, but these levels are out of balance. lisa: people have been saying this week after week, and in fact since the beginning of february -- we have seen the total volume of negative yield that increase in the world, pushing investors to the u.s. credit market in particular. the ecb doesn't necessarily have to raise rates all that quickly. that you see a likelihood german bund yields are going to rise maturely simply because of gravity and what is happening in the u.s.? iain: the way i think about it
is what happens when the ecb stops buying bonds. that is a driving factor, there's a lack of supply and the german bond, and the ecb is there everyday distorting the market. when you see a yield curve that has a two-year government bond the negative 50's -- that is back to normalized. i would be surprised if we get thehe end of this year and ecb buying come at that is when we see a normalization within the yield curve to get to a normal standing. but i still don't see bund yields rising dramatically until the ecb is in play and looking to raise rates. we talking about four basis points priced into the market by this time next year. that is not happening anytime soon. lisa: i want to finish up here with the move this week in 10 year treasury yields. it has been a market climb upward toward the 3% threshold. you think we are going to cross it? subadra: our forecast for the
end of the year is 3%. and itk we get to 3%, depends on the trajectory of hikes. in june andikes again in september and beyond that, i think hikes are in question. 3%,ould temporarily push but not any sustained basis. lisa: we have lots more coming up. ,ack flaherty, subadra rajappa and iain stealey from jpmorgan asset management. coming up, the auction block, russia makes a return to the bond markets. from new york, this is bloomberg real yield. ♪
jonathan ferro and is boomer "real yield". we head to the auction block as return --es its the government on wednesday told all 10 billion rubles of notes offered and received bits three times that amount and placed $2.2 billion of ruble for think debt. and in the middle east, qatar and saudi arabia raised $23 billion the sales have helped rich on sales climbed to $46 billion this year, the most since 2007. and incorporates, it's was company had a six part, $4.5 billion deal to refinance its $40 billion takeover. order books were more than four times covered. still with me is jack flaherty,
subadra rajappa, and iain stealey. andnt to start with russia talk about when bond investors are going to get confident to go back to that nations that given the conflict with the u.s. and sanctions. declinee you using this in the press of russian bonds and yields as a buying opportunity? very i think it is difficult to do that at the moment because there's so much uncertainty. russia was a failure trade for people are numerous reasons. yield, andhigh citrobacter was in and easing and i have those fundamentals removed for the moment because your insight is what is actually going to go and is limited, and there is trading risk at the moment. we had a big selloff in russia, but if you look at the levels 2014, there's some pain
this. lisa: so you are neutral. jack, what about you? jack: dipping our toes. it is not a bad way to placement in the oil market. i am not a credit analyst but from a treasury perspective, what we are seeing the russia is showing selling of treasuries because the currency has been moving. concerned,redit is to me, there is a lot of uncertainty. the currency is still starting to be volatile because of sanctions. i would probably wait to see some stability for entering the market. lisa: meanwhile in emerging markets yet increasing amount of flow into local currency em.
this is a huge but the dollar will continue to weaken. this is aou think good bet to go into local currency em, or are we seeing perhaps a start of a shift here? jack: em is still good. we are seeing really good flows into our em funds. the fundamentals are still pretty strong and hasn't turned to get of. there's a lot of fundamentals there that's the place should stay. lisa: em, are you still quite local currency em? and what isy agree, good is that russia is being treated socratic they -- some chronically. the feeling look at the broad-based young complex, it is north of the russian story, and that is because the fundamentals are strong. . they're strong global growth and
china is doing well and oil prices are on the up those high yields you see in emerging markets are looking attractive to people, and i would agree with that. lisa: i want to shift to a specific corporations and general electric is one of the beaten up children and equity markets. now they came out with earnings that were to absolutely terrible and some people are rethinking their sales and going back into general electric. ge is currently set to be in talks to unload its rail business in a deal with lock tech. are you buying general electric? are not doing anything and general electric right now, there's so many moving pieces. i would like to see some spinoffs and because i'm a so you can put your arms around some boxes and get involved. but we are just watching it with interest. iain: we are looking at a corporation as a whole, and we are faring credit in general.
there is subordinated credit and the high-yield market is where we see the value. the spreads that compensate you for the expected default rates. so i would say yes, credit let's get to us. lisa: real quick, em, do you think junk bonds in the u.s. -- would you sell? great question because what we are seeing now in the last couple of days is from the crisis, and that the levels we saw in january. that is not to say they will go lower if you go back to 2007, pre-financial crisis at a 200 handle. you could see at a glance lower, but there's little stability at these levels. where i would say there is an opportunity is the european complex, because the hasn't rebounded to the same extent and hasn't seen a demand in the last couple of weeks. lisa: thank you so much, we have more coming up, everyone is sticking with me. jack flaherty, subadra rajappa,
♪ i was samba limits in for jonathan ferro and this is bloomberg "real yield". different decision from the ecb and boj as they visit the white house, and french president emmanuel macron and angela merkel and north and south korea hold a historic summit. with me is jack flaherty, subadra rajappa, and iain
stealey. with some rather surprising words from mario draghi when he was speaking at the imf. he said notwithstanding the latest economic indicators, which suggests the growth cycle may have paid, the growth momentum is expected to continue. has suggested that growth might have peaked in the eurozone sent euro tanking and yields lower as well in euro region's. you make of this and what guidance to the will get next week? iain: i think they are concerned of how the data reacted in the first quarter. the way i would look at it is if you look at pmi data, they are too optimistic. at some point, eurozone growth 24%, a little unrealistic, and have come down levels.onable
weekis critical is next and see if they stabilize next week to some extent. if they continue running down, don't be a big concern for mario draghi. i wouldn't expect much from the ecb. we are told they are not going to mention when we will see the end of bond purchases or the framework for that until the june or july making. i think he is what this enough some questions regarding the slowdown in growth and whether it is your to stay or if will rebound back again. seriousis raises questions, because if we see the peak of european growth, and ecb cannot hike without disturbing the economy, what does that mean as far as ammunition in another cycle as well as if we might see in little more stagnation in the zone? subadra: that is a very good question. if you look at growth in the u.s., the first quarter slow
down. i think most economists have an optimistic outlook for the u.s. at 2.5%. we're expecting growth below 2.5% in 2018. was the economy starts to slow down, and we are a global economy -- and what's the rest once the slow down -- u.s. starts to slow down, and including mario draghi's comments about european growth -- i think you're going to start seeing a spell over and slowdown in global growth. -- itt think one economy is what would happen in the u.s. which a think that the economy could go into a recession in late for the 19 or early 2020. under those circumstances i do see the ecb being cautious in its monetary policy stance. lisa: you think the ecb will
ever hike rates? yes i do, but not for a wild. in thatcribed correctly people got excited a little too much, so expectations group more than they should have. i don't think the growth has picked, i think people's expectations have it for the short-term. if to realize there is a trend and then there's volatility around the trend. the trend is still intact. lisa: it is time for rapidfire, the final round. or holdld you rather by over the next quarter, high yields or investment-grade? iain: high-yield. subadra: high-yield. jack: high-yield, oh my goodness. lisa: two-year or 30 year treasury's? iain: 30 year. subadra: two years, the kerry is attractive. jack: two years.
lisa: when does the u.s. yield curve invert? jack: soon. subadra: i don't think it inverts in the cycle. iain: back into this year, early next year. lisa: i thanks to jack flaherty, subadra rajappa, and iain stealey from jpmorgan asset management. from new york, that does it for us, who was you next friday at 1:00 p.m. new york time. from new york, this is bloomberg "real yield". ♪ welcome to the xfinity store.
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recording numbers was expected, mainly due to the favorable american economy and increased private sector employers or able to pay graduates more money. have a preparations are underway in houston for tomorrow's funeral for former first lady, barbara bush. a public hearing is taking place today, and mourners are lining up ahead of time to pay final .espects mission the visit to the u.k. to deal with violent protests in his country -- demonstrators are c allegedwith police over government corruption. he urged police to show restraint. the syrian president says the prestigious legion of honor is on to assad has been returned to france. press re