tv Bloomberg Real Yield Bloomberg November 2, 2018 7:30pm-8:01pm EDT
jonathan: i'm jonathan ferro. this is "bloomberg real yield." coming up, the jobs report coming in hard. payrolls delivering a surprise. treasuries under pressure, yields climbing ahead of next week's big slate of auctions. in the worst month for junk bonds since 2015. we begin with the big issue, a hot payrolls report. >> a solid job report. >> now we are seeing the wage
growth that everybody said was impossible. year-over-year were above 3%, so that is a very psychological level. >> the underlying strength is good, and that is what we are seeing before we jumped up to this 3%, 4% jobs growth rate. >> growth is strong. the fed is going to keep going. >> the first derivative of growth here is stable to a bit slower. >> great for the economy. coppola fed policy discussions, and it means the markets will remain unstable. jonathan: joining me is andy, adam, and tom. this looks solid. what do you see? >> it is solid. it is broad-based growth in the jobs report today. invesco to not look
at any one data point, we look at the trends, and the trends are pointing to growth numbers around 2.8% next year, and that is kind of why we are calling for moderating growth going into tonight. jonathan: does this company things for the fed? >> no, i think they are trying to get to what they defined is neutral -- define as neutral. maybe they do it every quarter, but it appears that's where they want to get, and they probably want to get there quicker. jonathan: that is just around the corner. chairman powell says we are a long way away. who is right and who is wrong? >> i only look at how they define neutral. doing simple math, i came up with 75 basis points where they are today. does that mean they may move it? i guess they have been known to
move goalposts in their life, so that may not shock me. it might bother me when they do that, but when i think about neutral in a more simply stick way, you think, ok, they need a north of rate inflation. is it 1.5%? i don't know. jonathan: it looks like we are going into restricted territory next year. it is interesting to me that we have tension between the market within the market on where fed rate hikes are going next year, and against the fed and what they are protecting now. >> i think that is the point. the one set of people it confuses is the bond markets. the front end of the bond market needs to correct ticket three hikes next year. that is the path of least resistance from where we are today. if the midterms give us a surprise and you get fiscal 2.0, definitely on to three next year. i think it is one of those events where consensus goes so far one way, you clearly get a surprise.
if you look at all the polls, the pollsters, who we know always get it right, it is very clear that democrats will take the house and the republicans will keep the senate, but there is a chance -- we have seen all the rhetoric that has been on tv -- there is a chance to energize the base and the new get fiscal 2.0 -- then you get fiscal 2.0. the middle class tax cut comes, you get 3% or 4%. jonathan: a lot of people think that is not going to happen. could the treasury market absorb anymore issuance? your previousto question, we don't think next week is tradable. we do think fiscal policy is going to be supported in q1 and q2 of next year, but 2.0 is uncertain after that. the markets are going to price that uncertainty into 2019. two, i am not going to
all-time whether they do or not. you are late in the economic cycle, you decided to do fiscal stimulus because you think you will get sustainable, faster growth which in the end will give you more revenue, and the deficit goes down. that is the question that has not been answered yet. to your point, that is the only part of the problem for the deficit you have. you have an aging population for which you have done nothing about the social programs he promised. as you march out five years, you probably are still looking at trillion dollars of new money you need to raise each and every year through the treasury. jonathan: would you say the treasury market has adjusted to that already? tom: i wouldn't. jonathan: to what degree? degree.d for me to say i just think about, i'm going to up my issuance. central bankers are not going to
be the buyers for some time. the buyers i'm going to need to have tend to think in terms of real return. then i have to think through, what real return number is it? a 1% number? 1.5%? that part i don't necessarily know. i just know if i have a 3% cpi, all these things should probably yield more than 3%. jonathan: what number is it? >> treasuries are some of the best risk-adjusted investment. the challenge for the broader market is you have been conditioned after 10 years of q.e. and zero returns on cash. there is still trillions of dollars sitting there. you start looking at high-quality fixed income. it starts looking reasonable on a risk-adjusted basis, particularly with something more exotic. jonathan: you have to think it was attractive on the front end. and now you believe we have topped out on growth, and you
think we have? noelle: we like treasury yields here. specifically growth. it will be more uncertain into the second half of next year. then the front end is attractive. you will have probably more volatility than an investor might like on a various short-term basis. if you can withstand that, the two hikes already priced in for next year into the market, the fed in the dot plot will come down to that. jonathan: i want to get your view on real rates. real rates is what has picked up here. there is not a big inflationary component. a lot of people look at the payrolls report and wage growth figures. the productivity is slowly creeping up with this. i wonder if the administration's optimism can materialize. can you pick up an output without the inflation? tom: i think about inflation.
i think less about the hourly earnings that went up above three. that could have some squeeze on a margin at a company. i think more about the fact it -- if the 3.1 or whatever is tending to grow at a faster rate than cpi, then the recipient of the wage has more money on a real basis to go spend. i think further and go, ok, that pushes the demand on to goods and services. the inflation part is more services driven. i go, i don't really come with a number, i just come to realize i'm buying bonds and someone is gently pushing on inflation to the upside. i have more issuance than you are generally pushing. i am probably looking at rates tending to rise and not fall. i'm not trying to figure out what might happen next week or three weeks from next tuesday. andy: i think you have a good
point, but it is consistent to own treasuries. we are beginning to look at inflation on a more granular basis. there are certain sectors that are suffering from higher input costs. packaging, logistics, all that kind of stuff is coming through. i still think that is a challenge, because it means higher rates and some of the risk assets that don't price in with a decent risk reward, you still go back to earning treasuries as a best bet. jonathan: we will talk about risk assets and fixed income in a moment. everybody is sticking with me. coming up, the auction block coming up with treasury secretary steve mnuchin. and the u.s. treasury set a record for issuance levels. a big slate of auctions coming up next week. this is "bloomberg real yield." ♪
i'm jonathan ferro. this is "bloomberg real yield." the u.s. treasury releasing its funding plan and more treasuries are coming. debt sales will surpass levels last seen during the financial crisis. a ballooning budget shortfall, issuance to $83 billion. u.s. corporate bond issuers have their worst in two months. sales totaling $4.3 billion. corn failed to move from initial prices. this is the first time this is happened for a deal since september. gep hainesville failed to attract enough demand. environmental
have also been withdrawn. still with me is andy chorlton, noelle corum and tom atteberry. are we finally seeing a bit of a fracture, or something to be concerned about? noelle: it is not quite something to be concerned about . we think growth is moderating a bit from here. as i said earlier, we expect 2.8 into the first half of next year. the second half a little more uncertain. but the thing that we are really trying to always go back to is growth is still pretty healthy. we don't need 3% growth for companies to be healthy. that is why we like credit here, although we tend to be somewhat physically positioned. andy: i don't disagree but the fundamental picture not being scary. as you say, we have had refinancing.
it gives the issuers more flexibility. not great for bondholder protections, but good for the issuers. the price are being paid in the relative value versus assets. i think people might have missed that you can get a two-year treasury yield close to 3%. that is not bad, when five years ago you had 24 basis points. the world has changed, and people are beginning to recognize that. jonathan: the risk-reward, is that more pronounced in investment great or high-yield? andy: i think i yield is more expensive, though some of my colleagues at the office will not thank me for saying that. now there is some interesting stories where high-yield has benefited from the lack of issuance. it is whether you're being paid for the risk inherent in a high-yield security. jonathan: we talk about investment great and high-yield as two separate things.
but there is this thing around the border that makes up half of ig. they may go over the border. how will we start thinking about that in the next couple of years? tom: you are correct. you have half the investment great universe that is bbb. if you look at the gross leverage that shows up in the bbb space, it is similar to 2000 to 2002. the difference being in 2000 to 2002, we had a recession. now we have a fairly robust economy. but i am at a very high the levered point. you think about, am i getting paid for that risk? when you look at the unit of risk and how much spread you are getting for each unit of risk, in 2002, i got paid 120 basis points for every unit of risk i took in a triple b bond. it is 50 now. i am is levered as i was then. i have a good economy. if the economy slows down, i
have to go through the recession with that highly levered company. and i have some very interesting names that have done some very interesting things that may or may not work out. as i look at bbb, at&t, general electric, xerox, motorola, , discovery channel. those are some names that are in there. you look at those and realize if the world does not improve them financially, their metrics will not last as bbb. there leverage is too high and they will find themselves gravitating to a bb space or a single b space. jonathan: here is the issue for a of people watching this program. a lot of these things have been true for a number of years. i think it pretty much everyone to agree the next default cycle will be ugly when it happens. a lot of issuance, loans, leverage loans. what a lot of people can't agree on is when it is going to turn. when you see spreads widening, people say, i'm looking for a
year-end rally. i want to nibble away at this. what is your message to them? tom: unlike the stock market, which does not necessarily have wide doors when people want to get out, though credit markets has very narrow doors when you want to exit. for one, lots of them don't trade very often. two, i have a brokered community that no longer stands between the buyer and the seller. they will go find that person, but they don't stand between the buyer and the seller. and everyone owns the bbb. i look in the mutual fund space. whether it is short-term or intermediate, they have 25% of their assets in bbb and below. bond fund, therm european term bond fund, both have the same amount of allocation to bbb and below. i had to ask myself, to whom are you selling it to? the other guy has it. now you have to find the new buyer. if the new buyer is going to be in the high-yield market, ok, i've got to find that analyst.
they are going to look at the world differently. all of a sudden there is really not that much liquidity, but trying to time it becomes extremely difficult. it is back to andy, who says, am i paid for the risk i'm taking? jonathan: why take the credit risk, the liquidity risk when i can buy treasuries? tom: or some other high quality asset, right? where i don't have that problem. jonathan: is that the answer for you, noelle? not.e: it's we just don't think growth is going to shut down next year. there will be uncertainty. if you look at past performance, high-yield does not need 3% growth to perform well. it performs well and we're calling for 2.8%, but it performs well at a 2% growth story type year. that is very doable next year. there are uncertainties and these guys are making great points, but at the end of the day, we think credit is not quite time to go short credit.
we do like leveraged loans. i see your smirk. [laughter] andy: it is a smile. le: there have been new deals that have been a little bit more aggressive in their credit and leverage and those are concerning, but we do think leveraged loans -- we have portfolios for those. because of our column- peaking growth, we are well-positioned right now. but the demand is still there. they are seeing minor retail flows, but the institutional demand is still there. foreign demand is still there. something these guys have not mentioned yet is the technical picture for credit is very positive going into year-end. jonathan: my producers will tell me that you can come back. they will be sticking with us. great to have them with me. coming up on the program, we will bring you the market check.
jonathan: i am jonathan ferro. this is "bloomberg real yield." coming up over the next week, a decision from chairman powell and the federal reserve. plus, we have midterm elections coming up, and fed speakers including john williams. still with me, andrew chorlton, noelle corum and thomas atteberry for final thoughts. andy, to continue the conversation on credit, your thoughts. andy: i will try to be the diplomat. i don't think the relative value is there. the fundamental story has not
changed yet, but you want to be positioned before it changes because when the defaults start to change, it will be way too long. the doorway take it out of credit in the market, credit is expanding and it's really tricky. those things in bbb-land, that's $100 billion. a lot of bonds. jonathan: i think it is the credit equivalent of the barn door and the horse. i can't get my head around it. what is the leading indicator you should be paying attention to? tom: price. am i getting paid? it is price. it comes back -- from our view, what is the value of the entity? can i come up with some valuation of this thing and get a sense of, how overleveraged it is, or does it still got maneuverability? without covenance, which we seem to have gotten away from, yes,
it gives the company's flexibility up until the time they don't have it. to us, i need to be much better at valuing the business, valuing the assets. when it finally doesn't work, you never -- whenever that case is, that's all i've got because i could never have a conversation with a company beforehand and say, you know, we need to talk about your leverage. you are just going to talk about it when you're sitting in the lawyer's office about bankruptcy. jonathan: is the price relative to what? for the last 10 years, i could ask the question, am i being compensated for the risk i'm assuming? for the bulk of the last decade, the answer might have been no. but it is relative to what? tom: if you think high-yield -- this does not go to bank debt to a degree. you are much further up the capital structure than bank debt. bb or single b capitalization, there is not a
lot of shareholder equity. there may be none listed but it is very small. if i'm going to buy this bond, the next thing up the capital structure, i basically took the equity risk on the capitalization of the business. if that is the case, i need an equity-like return for doing that. you think about the s&p 500 or the russell 2500. whatever you want, you sort of come to a number that looks more like 10%. long-term equity returns. i need to be able to get that. hasto the bank debt, which become a bigger piece of the capitalization, i think it has started to approach sevens and eights and nines. bank debt and less capitalization below me than the was before. to give the relative, much and i be thinking about, i'm willing to buy this, yes or no? jonathan: we will wrap it up with some rapidfire questions for each guest. let's get to the first one. have we seen peak growth in the united states? andy: yes. noelle: yes. tom: yes.
jonathan: who is right in 2019, market pricing or fed forecasts? andy: fed. noelle: market. tom: fed. jonathan: value in high yield or more spread widening to come. andy: more to come. noelle: i still like high-quality high-yield here. tom: more spread to come. widening to come. jonathan: great to catch up with you both, and noelle, you have been fantastic as well. [laughter] andy chorlton, noelle corum, and tom atteberry. we will be with you next friday at 1:00 p.m. new york time, 6:00 p.m. in london. for our worldwide audience, this was "bloomberg real yield." ♪
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