tv Bloomberg Real Yield Bloomberg July 22, 2018 10:30am-11:01am EDT
jonathan: live from jp morgan asset management, this is "bloomberg real yield." coming up, stepping on the fed's independence. president trump pushing back against higher rates. chairman powell testifying that rate hikes will continue. meeting presidential resistance. the dollar rally stalling and the u.s. struggling to find stability. we began with a stepping on fed independence. >> ultimately it puts into question what the fed and fomc is and the ability to maneuver. the reserve is not going to
react from tweets from the president. they don't need to. >> it is a strong institution, and they have staying power. >> it is time to move rates back to normal. they will continue on that path. >> if people feel the fed is going to kowtow to the president and allow the economy to grow too fast and inflation to go up, interest rates will rise. bond vigilantes will kick in and rates will rise which is what the president does not want. or they be the fed will say to show its independence, it will preemptively raise rates. either way, the president is shooting himself in the foot. jonathan: joining me now from jp morgan asset is lisa coleman, the head of global investment grade corporate credit. joining also is bob michele. i should say thank you. bob: thank you for being back.
jonathan: the federal reserve pushes back against higher interest rates. does it change anything? bob: it doesn't. the fact that you have tweets yesterday tells you how independent the fed is. certainly, the president gets to appoint who they want as the fed chair, so they pick someone reasonable and moderate like jay powell. they know kind of what they are going to get. i think it was a good appointment. he is on his own now. he had laid out a credible path going forward. jonathan: it's safe to say that from the president's tweets, what is happening with the treasury curve? it has been flat, and all of a sudden we get steepest during the week. bob: there are a couple things going on. there is a belief the fed will stick to the rate path that we will see increases every other meeting for now. a great set of words. i think also there has been news out of japan that the bank of japan may tinker with its
optimal yield curve control so , they may let the long end go and be supported by market forces. jonathan: lisa, perception is everything. if it wasn't under a close watchful eye of the market, it will be more so now with powell. does his job get more difficult because of the president? lisa: i agree with bob. i think the fed will continue on with its independence. chairman powell has a path, and that won't change as a result of the comments from the present. -- president. jonathan: we have gone back and forth. you think yield could have a handle on the 10 year within months. walk me through where we get from 10 year yield and treasury 4%?break out to bob: by the way, 4% is only 100 basis points from here and is against the backdrop of the fed having raised rates for two and
a half years, indicating they will go for another year. that is a lot of upward pressure in the front and of the end of the curve. does it look reasonable to buy treasury with the 3% in 10-year? i don't think so. it is not fully into the system. you have a tremendous amount of treasury supply that will tip the market over the next 12 months. i think a good stopping point for the fed is june of next year, 2.75% to 3%. it will look like a good place to stop, but the economy will do great. jonathan: you mentioned that the issuance is at the front end. the overwhelming consensus of everyone coming on the program is at the curve will flatten. not only looking to 4%, but looking for steeper curve? bob: looking for a steeper curve. you are right.
there has been a lot of front end issuance. the treasury has made it clear that they are going to maintain waiting out maturity on portfolio outstanding debt. if they are issuing on the front end, the back and comes in the second half. curves have flattened before and have inverted and it has not led to recession, and they quickly re-steepened. 1994 to 1998 comes to mind. that was a similar environment. that was post the snl crisis and we had bond outstanding. the market continued to heat and the economy heated up into the dot-com bubble. jonathan: in bob's world, sooner or later i want 4% very why what would i a treasury, why want to buy credit, lisa? lisa: because you have a good underlying economy going on. i think it depends, despite the good economy, on where in the credit market you are going to
buy. if you look at triple b rated credits, you might not want to spend risk budget there because this is an area where we have seen a lot of m&a issues. -- issuance, and companies have leavenednd -- themselves out. maybe what you want to look at is double b. this has underperformed other parts of high-yield market. with the good economy, the balance sheet looks good, fundamentals are good and valuations are attractive. jonathan: don't they have incentive to run a triple b balance sheet? it isn't that great is it? lisa: this has been the problem. we are on pace for a record amount of acquisitions. companies have no incentive to run the balance sheet at single-a. that is why i like the double b. they are making acquisitions and fundamentals look good, and you are getting paid a spread per unit of leverage more to take
the companies than the triple b rated companies where ceos are putting on more and more debt to spur growth. bob: that is some of the disconnect in the market. you're talking about the 10-year flattening and inverting. it is a mindset that people are used to 10-year of secular stagnation, investors and bond buyers. you hear corporate america is preparing for a growing america and not a stagnant america. they are leveraging the balance sheet and they are going to take advantage of the growth and the stimulus. jonathan: the difference this time around is the two americas levering up at the same time. the other is with when you have them levering up at the same time. it could be a toxic mix. bob: ultimately, it could end
bad. i think some of the angst coming out of the tweets are coming at a time when borrowing is going to go up. why would you want borrowing rate to go up? the other way to look at it is the opportunity is now. you still are at relatively low levels of interest rates. there is plentiful liquidity. you have structural reform to -- through taxes. you will get some fiscal spending. you make up deregulation. let's borrow and jumpstart the economy. jonathan: what does it say that we are having these conversations when the federal reserve is still considering to -- the monetary policy to be accommodative? the rate is fairly positive and we are still having talks about risk in market and what are we talking about in 12 months? bob: 12 months from now, i think we will say this is a good place for the fed to pause. there is some digestion, and we will see what corporate america does with supply and repetitive
benefit of tax reform. we will have to look at what the bank of japan has done and has the ecb raised rates? is the economy plowing through that like 1998? if it is the market will make it , that the fed has to go higher. -- higher, and not lower. jonathan: lisa, do you agree? lisa: i totally agree with bob. coming back to the comments about the president saying the fed should not hike rates, corporate america is not feeling the pinch of higher rates. in a way it is almost a little disconnected. they can access the investment grade market and it remains attractive. jonathan: that has come full circle. do you think the president has a point that the federal reserve should slowdown? bob: this is the most pro-growth administration anyone can remember since the reagan administration.
he wants ample liquidity and low-cost funding. he will argue for that. it does tell you that he is focused on growth, growth, growth. jonathan: do you agree with him? bob: no, i don't. the fed is leaning into it for real. they have been trying to get to normal. we will see gdp print with a handle on it and we have inflation, core pce is 2%. cpi is 2.9. that is above the 2% margin. jonathan: thank you to bob and lisa. coming up, we stay at jp morgan asset management and joining us will be diana amoa to talk emerging markets. that is coming up next. this is "bloomberg real yield." ♪
jonathan: i'm jonathan ferro. this is "bloomberg real yield," live from jp morgan asset management. over to china we go, where chinese markets ended on a stronger footing. central banks moved to weaken daily currency fixing, the most since 2016. joining me to discuss china and emerging markets is a diana amoa, senior portfolio manager involved with emerging markets here at jp morgan and still with me is bob michele. always great to catch up with you. with what is happening with the currency policy, things have changed. lisa: what the chinese are doing
is absolutely the right response right now. what we have seen is they stepped back from the currency. they are willing to let the market determine where the trade -- currency levels trade. they were fixing stronger, but they are willing to see where the market is pricing it. that is absolutely the right response. for the pboc it is the right thing. today we saw announcements they to bellow some bonds investing again and easing regulations that they had, trying to read to attract liquidity. as far as china goes, the right response. jonathan: there are many ways to look at the chinese currency. you can look at it against the u.s. dollar alone or against the basket. when you look at it, what story do you see? lisa: i think the dollar and the currency is trading roughly
where we think fair value is. we have been depreciating in the trade basket, looking at euro and some of the asian currencies. that makes sense. betrayed impact right now is going more toward asia. we expect more weakness coming into the basket. the u.s. is a tough call. we just had bob and lisa discussing what the u.s. policy response is and the president pushing back against a strong dollar. jonathan: micro banks, from 2017 into 2018, january about a slowdown in china and what that means or global growth? going to a tariffs full war, i would be worried.
i think we are going to see a real acceleration. when you look at what is going on in china and with the policymakers are doing, this is the frustration you are seeing in the administration in the u.s. they look at the tariffs and talk about levying and they see chinese policymakers making accommodation for that, relaxing policy. if you are the administration you're looking at a central bank , continuing to tighten rather than trying to accommodate the reverse tariffs coming from china. jonathan: for many it is a global story. growth is dispersed. as someone managing p.m. debt, are you looking at more on the regional basis because of the trade story? lisa: we think the impact for tariff will be heavy on asia. for now we are steering clear of , the region until we get more clarity on where the trade tensions are going. we like latin america. a lot of value has been created. we're getting past the election
cycle. we have colombia and mexico having elections. that has treated well since. brazil is getting closer to the point, but markets have premium. jonathan: local dollar? lisa: very select. pick your spots. jonathan: china has had its problems. policy mistakes and central banks struggling to regain credibility. brazil also having a bit of a stumble. where are we at at the moment? bob: when i think about being a crossover investor in emerging markets, diana is right. it is difficult. i need a big bottle of ads that -- and acid to get in there and invest. -- antacid to get in there and invest. there are attractive things about latin america. currencies look oversold. the dollar is not going to go up forever. some models tell us it will flatten out. when you look at real yield, the u.s. is struggling to restore yields to its government bond markets.
they are abundant across latin america. if we get stabilization, we expect money to recycle into the external and local markets. jonathan: the question for j.p. morgan asset management in speaking to on a regular basis, very nature of this conversation talking regionally, not local securities. how important is it to be in that space? lisa: it is extremely important. the security selection or regional selection that you get with the latin money, you will have safety tightening and liquidity will have to be a factor. what we have seen in the past cycle is asset managers have struggled merging some of the flows in and out of the second -- sector, whereas positioning allows you to manage liquidity. at this point in the cycle, go to an active manager. jonathan: is that a pitch from j.p. morgan?
diana amoa and bob michele, you are sticking with me. looking at treasury through the week. closing out last week with a yield curve, but it was flat at about 25 basis point. -- points. today we steepen. slightly through the end of the week. next up, the final spread, the week ahead. a decision from the ecb and mario draghi. this is "bloomberg real yield." ♪
and gdp in the u.s. here is quick final thoughts. i am joined by bob michele. want to go over your for convictions. do you believe the federal reserve will raise former times -- for more times and then close? bob: absolutely. that brings the fund rate to two and three quarters to 3% depending where inflation is. that is a real yield of about 0.5% to 1%. that is still generous by historic fed terms, but not overly accommodative. they will have raised rates for 3.5 years. why not step back and see what the other central banks are doing and also see how the economy is doing? jonathan: that takes me to the second conviction. short duration. yields.are bearish on as the fed raises rates and supply it's the market and quantitative eases the tightening yields will drift
, higher across the curve. we want to hide in the front end of the curve. short securitized for example. jonathan: do you see that more pronounced in europe or in the united states? bob: i think more in the u.s., frankly. people will have to adjust to what the curve looks like in a growing america. i think you are going to see the new fed get its feet under itself and the market will have to interpret that a year from now. jonathan: that takes us to the spread between europe and the united states. u.s. high-yield and european high-yield, will they narrow and spread over the coming years and from which direction and why? bob: both look great. u.s. high-yield has traded in a range of 330 to 380 since february. we are in the middle of that range. as lisa pointed out, there is a tremendous tailwind coming to corporate earnings and that will be reflected in better credit
quality and u.s. high-yield tends to go to 300 over. there is at least 50 to 60 basis points of tightening. you have european high-yield at a 4% handle. europe looks good. you have an accommodative central bank, you have them buying investment corporate grade. that will spill over to the european high-yield market. we would expect yields to go to 3%. jonathan: should we get to the elephant in the building? bob: absolutely. jonathan: talk about companies this week in european high-yield. what is the thinking? bob: it is a reflection of looking at european central banks and trying to understand why they continue to print money and invest in corporate debt. they don't need to do that, and you want to be careful not to entrench bad practices in corporate behavior across europe. it is a valid warning, and i
think the ecb will be sensitive to that. our expectation is at next week's meeting you will hear more clarity on what the plan for normalization looks like. they can't be happy with their last meeting when they talk about not raising rates until the end of next summer and then seeing a rally. jonathan: is that a soft call? bob: it is 3.5% to 4%. i take your point. i like the 4% call. corporate america is growing again, we are not in stagnation. the fed is scrambling despite the administration to get something that looks normal. credit is readily available, and you are seeing companies in the early stages of accessing at. -- it. wait until we see what it looks like. jonathan: typically, i rise to
work on friday and get a list of thoughts from my guest. i got a list of thoughts from my guest and the fifth call was nothing to do with markets. it said support liverpool and nothing count. bob: we are ready. next year is the champions league. we have the brazilian keeper. jonathan: you have more conviction about that than the treasury market. bob michele, jp morgan, thank you very much. bob: thank you. jonathan: we will be back before the year is out. from new york, that does it for us and we will see you next week. from new york, this was "bloomberg real yield." ♪ retail.
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