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tv   Bloomberg Real Yield  Bloomberg  November 4, 2018 10:30am-11:00am EST

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>> i'm jonathan ferro with 30 startes of . this is "bloomberg real yield." coming up, the jobs report coming in hot. payrolls delivering a surprise. wage growth with a three handle. leaving treasuries under pressure, yields climbing ahead of next week's big slate of auctions. and the worst month for junk bonds since 2015. leaving some cracks in what was once a resilient market. we begin with the big issue, a
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hot payrolls report. >> the strong headline number. >> a solid job report. >> it is a solid number, no doubt. >> now we are seeing the wage growth that everybody said was impossible. >> wage numbers year-over-year average hourly earnings were above 3%, so that is a very important psychological level. >> i think the underlying strength here is good, and it is what we were seeing before we jumped up to this 3%, 4% jobs growth rate. >> growth is strong. the job market is really hot, and the fed is going to keep going. the actual first derivative of growth here is stable to a bit slower. still good, but starting to trend down. >> great for the economy. complicates fed policy discussions and will mean that markets will remain volatile up and down. jonathan: full house around the table here. joining me is andy, head of fixed income at schroders. noel from invesco and tom, sba. -- portfolio manager at spa. let's begin with you. this looks solid. what do you see? noelle: it is solid. it is broad-based growth in the jobs report today. at invesco we tend to not look
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at anyone thing as a trend, and -- at any one data point as a trend, and the trend is pointing to growth numbers .8%, and that is why we are calling for moderating growth going into 2019. jonathan: does this complicate things for the fed, tom? tom: it is trying to get them on that path they defined as neutral, 2.75%. maybe it speeds them and they do it every quarter, but it appears that's where they want to get, and they are probably going to 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? tom: i only look at what they define as neutral. it is a moving number. i am a simple guy, did some simple math, i came up with 75 basis points from 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
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that, but if i i think about neutralf i think about in more simplicity in more simplistic ways, you think, ok, they need a fed funds rate north of inflation. is it 1%? is it .5%? is it 1.5%? i don't know. in these to be above that. jonathan: it looks like we are going into restricted territory next year. it is interesting to me that we do have this 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. tom: i think, i think that is the point. the ones that the people that it confuses is the bond markets. the front end of the bond market i think needs to correct to get three hikes next year. that is the path of least resistance from where we are today. going to get onto it, if the midterms give us a surprise and you get fiscal 2.0, definitely on for three next year. jonathan: incredible event going into next week. andy: it is one of those where consensus goes so far one way, the risk is that you clearly get
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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, and we have seen all the rhetoric that has been on tv a lot today -- there is a chance of they energize the base, and then you get fiscal 2.0. the 10% middle-class task cut you get three or maybe for next year. jonathan: a lot of people think that is not going to happen. do you think we could get fiscal 2.0, and could the treasury market absorb any more issuance? noelle: we don't think next week is tradable. we are looking at it as a long-term perspective. we do think fiscal policy is going to be supportive in q1 and q2 of next year, but you are right, the 2.0 is uncertain after that. the markets are going to price that uncertainty in into 2019. jonathan: tom. tom: 2.0, i am not going to opine on whether they do or not.
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the biggest question is you are , late in the economic cycle of some sort. you decided to do fiscal stimulus because you think you are going to get sustainable, faster growth which in the end will give you more revenue into the coffers, and the deficit goes down. that is an open-ended 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 you have promised them. as you march out five years, you get faster growth or not, you are probably still looking at a 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 -- for that's already? -- for that already? tom: no, i wouldn't. jonathan: to what degree? tom: hard for me to say degree. i just think about, ok, i'm going to up my issuance. got to have a trillion sort of number. central bankers are not going to be the buyers for some time. -- for some period of time.
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they have told me they are not. the buyers i'm going to need to have, some of which are around this table, tend to think in terms of real return. so then i have to think through, ok, what real return number is it? a 1% real return number? 1.5%? that part i don't necessarily know. if i have 2%, 3% cpi, all these things should probably yield more than 3%. jonathan: let's ask you guys. what number is it? what number is it, andy? andy: treasuries are some of the best risk-adjusted investment. the challenge for the broader market is you have been conditioned of 10 years of q.e. and zero returns on cash. there is still trillions of dollars sitting there. you start looking at a short, high-quality fixed income. it starts looking reasonable on a risk-adjusted basis, particularly with something more exotic like equity colleagues. 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: yes, so we like treasury
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yields here, specifically growth. you know, it is going to be more uncertain into the second half of next year. and then the front end is attractive. you are going to have some probably more volatility than an investor might like on a very short-term basis. if you can withstand that, the two hikes already priced in for the next year into the market, we think the fed and the dot plot will come down to that. jonathan: i want to get your view on what is happening with real rates. real rates is what has picked up here. it is interesting there isn't really a big inflationary component to this. a lot of people look at the payrolls report and wage growth figures. the three handle once again. the productivity is slowly creeping up with this. i wonder if the administration's dream or optimism can actually materialize. can you pick up an output without the inflation? can you? tom: i think about inflation, i think less about the average
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hourly earnings that went up above three. that could have some squeeze on a margin in 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. so then i think to that further and go, ok, that pushes the demand on to goods and services. the inflation part is more services driven then goods. -- than goods. i go, i don't really come with a number. i just come to realize i'm buying bonds in an environment where someone is gently pushing on inflation to the upside. i have more issuance than you are gently pushing that along. i go, i am probably looking at rates tending to rise and not fall, and as a general census, not trying to figure out what might happen next week or three weeks from next tuesday. jonathan: andy. andy: i think you have a good point, but it is consistent to
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-- that you could own treasuries. the one thing we are beginning to look at when you look at inflation with the credit on a more granular basis, there are certain sectors that are really suffering from higher input costs. you talk about truckers, always in the press, but packaging, logistics, all that kind of stuff is really coming through. i still think that is a challenge, because it still 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 your best bet in a fairly volatile field. jonathan: we will talk about risk assets and fixed income in a moment. everybody is going to be 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." ♪
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jonathan: i am jonathan ferro. this is "bloomberg real yield." we are going to head to the auction block now. 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, happening to raise long-term debt issuance to $83 billion from $78 billion three months ago. u.s. corporate bond issuers have their worst in two months. sales totaling $4.3 billion. failed to drum up much interest. one example was corning, which failed to move from initial prices. this is the first time this is happened for a deal since september. and some deals in high yields, a gas company gep hainesville had a $600 million offering after it failed to attract enough demand. deals from international fc stone and gfl environmental have also been withdrawn.
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still with me is andy chorlton, from schroders, noel coram from invesco, 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 just yet. we think growth is moderating a bit from here. as i said earlier, we expect 2.8 into the second or 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. defaults remain very low in high -yield and leverage loans. that is why we like credit here, although we tend to be somewhat defensively positioned. jonathan: andy. andy: i don't disagree but the fundamental picture not being scary. as you say, we have had
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ce.inancing, less covenants actually gives the issue more flexibility. not great for bondholder protections, but good for the issuers. my issue is the price you are being paid and the relative value versus assets. i think people might have missed the fact you can get a two-year treasury yield close to 3%. that is not bad, when five years ago you only had 24 basis points. the world has changed, and i think people are beginning to recognize that. jonathan: that relative risk reward, is that more pronounced in investment grade or high-yield? andy: i think high-yield is more expensive. some of my colleagues at the office will not thank me for saying that. now there is some interesting -- e.m. has had some idiosyncratic risks. now there are some interesting stories there. high-yield has benefited from the lack of issuance. the technical there remains strong. it is whether you're being paid for the risk inherent in a high-yield security. jonathan: it is interesting that we talk about investment grade and high-yield as two separate things. but there is this thing around the border called triple b's, and they make up half of ig. they may go over the border.
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how will we start thinking about that in the next couple of years? tom: you are correct. you have got half the investment grade universe that is bbb. if you look at the gross leverage that shows up in the bbb space, it looks very similar to 2000 to 2002. the difference being in 2000 to 2002, we had a recession. as you said, 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, so you have got 1, 2, three and four. in 2002, i got paid 120 basis points for every unit of risk i took in a triple b bond. i get 50 today. i am as levered as i was then. i have a good economy, not a bad economy. if the economy slows down, i have to go through the recession with that highly levered company. and i have some very interesting
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names that are in there that have some very interesting things that may or may not work out. as i look at bbb, at&t, general electric, xerox, motorola, rubbermaid -- who am i missing -- 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. their 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 lot of people watching this program. a lot of these things have been true for a number of years. i can get pretty much everyone on this program to agree the next default cycle will be ugly when it happens. a lot of issuance, a lot of loans, a lot of leverage loans. and a lot of that is covenant. what a lot of people can't agree on is when it is going to turn. when you start to see spread widening, people say, i'm looking for a year-end rally. i want to nibble away at this.
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what is your message to them? tom: unlike the stock market, which does not necessarily have wide doors when people want to get out, the credit markets has -- have very narrow doors when you want to exit. for one, lots of them don't trade very often. very few do. number two, i have a broker-deal 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 into the mortgage -- into the mutual fund space, and -- mutual fund space, and whether it is a short-term or intermediate, they have 25% of their assets in bbb and below. if the short-term bond fund, the intermediate bond term fund, both have the same amount of allocation to bbb and below, and they have to sell, 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.
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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 to us becomes extremely difficult. it is back to andy, who says, am i paid for the risk i'm taking? jonathan: and the answer you both seem to come up with is 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? noelle: no, it's not. [speaking simultaneously] [laughter] noelle: we just don't think growth is going to shut down next year. there is going to be uncertainty. but 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 in 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. jonathan: leveraged loans as well? noelle: we do like leveraged
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loans. i see your smirk. [laughter] jonathan: it is not a smirk, it is a smile. carry on, please. noelle: there has been some 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, there is -- we have room in our portfolios for those. because of our column-peaking growth, we are essentially well-positioned right now. but the demand is still there. in leverage loans. they are seeing minor retail flows, but the institutional demand is still there. foreign demand is still there. clo demand is still there. that is 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. noelle coram going to be sticking around. great to have the others with me. coming up on the program, we will bring you the market check. shaping up as follows, up 12
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basis points on a 10-year. up on the front end as well. it has been a soft week for treasuries. still ahead, the final spread of the week ahead, featuring a decision from chairman powell on the fed. this is "bloomberg real yield." ♪
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jonathan: i am jonathan ferro. this is "bloomberg real yield." it is time for the final spread. coming up over the next week, a decision from chairman powell in the federal reserve. plus, we have midterm elections coming up too, a euro ministers meeting, 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 am going to try and be the diplomat between the others. i don't think the price is the relative value is there. i agree with noelle the
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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. to tom's point, the doorway take it out of credit in the market, credit is expanding and it's really tricky. some of those issues in bbb-land, that's $100 billion. a lot of bonds. jonathan: i do listen to the default rates, and i think it is the credit equivalent of the barn door and the horse bolting. 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? am i getting paid? it is, it is price. it comes back -- from our view is, what is the value of the entity? what is the value of the business? can i come up with some valuation of this thing and get a sense of, how overleveraged it is, or it still has room it has got maneuverability? without covenance, which we seem to have gotten away from, yes, it gives the companies flexibility up until the time
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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, whenever that case is, that is 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 and it is in 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? and 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 because you are much further up the capital structure that you are in bank debt. -- than you are in bank debt. if you are at a bb or single b company, you look at its capitalization, there is not a lot of shareholder equity. there may be none listed, but it is very small. you realize if i'm going to buy this bond, the next thing up the capital structure, i basically
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took the equity risk on the capitalization of the business. well, if that is the case, i need an equity-like return for doing that. so than you think about, if 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%. that is long-term equity returns, 8%, 10%. i need to be able to get that. and to the bank debt, which has become a bigger piece of the capitalization, i think it has started to approach sevens and eights and nines. because there is more bank debt and there is less capitalization below me than there was before. to give the relative, much and i -- what should i be thinking about, i'm willing to buy this, yes or no? jonathan: glad to have you with me. we will wrap it up with some rapidfire questions for each of our guests. let's get to the first one. we kind of already answered this one. have we seen peak growth in the united states? andy: yes. noelle: yes. tom: yes. jonathan: who is right in 2019,
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market pricing or fed forecasts? andy. andy: fed. noelle: market. jonathan: tom. tom: fed. jonathan: value in high yield or more spread widening to come. andy. andy: more to come. jonathan: noelle. noelle: i still like high-quality high-yield here. tom: more spread to come. widening to come. jonathan: guys, it has been great to catch up with you both, and noelle, you have been fantastic as well. [laughter] jonathan: andy chorlton, noelle coram from invesco and tom atteberry from equity. that does it for us. we will be with you next friday at 1:00 p.m. new york time, 6:00 p.m. in london. for our audience worldwide, this was "bloomberg real yield." ♪
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