tv Bloomberg Real Yield Bloomberg September 27, 2019 1:00pm-1:30pm EDT
jonathan: from new york city for our audience worldwide, i'm jonathan ferro. bloomberg "real yield." now.rts right coming up, investors looking to shake up drama and focus on the policy. where the white house is way limits on u.s. portfolio flows into china. and credit delivering a month or month of debt supply, cracks appear in the primary market. we begin with a big issue. focusing on the fundamentals and not the politics. >> the market is not waiting for anything from washington. the impeachment process, we
will have to live through four months. i would not focus on that in our investing activity. >> fundamentally, i don't think it alters a whole lot around water economic policies. >> you almost have to ignore it and keep investing the way you would. >> we are focused on the fed, underlying fundamentals. >> for me, trade is the number one thing. >> the trade deal with china, the negative interest rates affecting the markets. >> what the market is focusing on still, they would like to see some sort of resolution on trade. that will be important. jonathan: joining me around the table is george rusnak, michael collins, and luke hickmore. luke, i want to begin with you, something i've heard all week. i want to focus on the policy and not the politics. it has not stopped anybody trying to work out what the politics means for policy. how have you been thinking about the thingweek luke:
that worries me is, our experience of politics over here in the u k is, the messier they get, the more risk it puts in the general economy. , arguably over the next two years, could be facing a recession, it increases the risk of that happening. it just does not feel like something you can walk away from and ignore. it feels it will be part of our lives for a while here and just increases the economic risk. mike collins, something difficult to ignore but it is really complex to handicap. how do you do that? michael: we are trained as fundamental research analyst, so political analysis, especially with people like trump, is difficult. our base case is you don't get a recession, the u.s. does not feel like we are in the speculative bubble type of environment. lower growth, lower rates,
moderate inflation. we actually look forward to more volatility in the marketplace. we hope this political noise creates some pockets of volatility and opportunities to be more active. george: certainly, could use more volatility in the markets, more opportunity. it is either a distraction or catalyst. a catalyst to getting some trade deals done with the u.s. and china potentially. that seems a little far-fetched. it seems like more of a distraction now. what is lost in this is usmca. if that gets through, that could add half a percent to gdp. when you are coming off of a year with procyclical features coming off, half a percent to gdp could be significant. jonathan: some of these issues are incredibly volatile from one day to another. i tried to get a baseline from pimco in what they were looking for in 2020. looking for 1% growth next year. growth slowing to
something like only 1% in the first half of next year, as the slow down in manufacturing, global trade recession, is starting to spill over into the u.s. service sector and consumer. low growth,iod of stalled speed, obviously, the economy is very vulnerable to any adverse shocks. jonathan: luke hickmore, are we ready for 1% gdp growth going into 2020 in america? is that your baseline? luke: i think our economies are a little bit about that, but the risks of that are very high. jonathan, over the last year or so, we have talked numerous curveabout how the 2/10 is such a good predictor of slowdowns. we cannot ignore that. we cannot ignore the consumer is probably at the best they will
be at the moment, employment at the best it will be. we cannot ignore that. our u.s. colleagues have been moving underweight u.s. investment grade credit for the first time indicates. it will be a problem. we are going to see slower growth. we are starting to react to it right now. jonathan: mike collins, what are your reactions? slowing, maybe about 2.5% this year, maybe high one's next year. is there going to be a recession or not, are missing the point. it is not necessarily a binary outcome. slow growth is bad for highly levered credits. is going to be a really challenging environment for a lot of companies. 1% is a militant lower than our base case. we think about 1.8. the trend line is concerning.
the bond mind is telling you that there are potentially challenges ahead. not a baseline of recession but certainly a slowdown. jonathan: we are always focused to the shargh closest to the boat. this week, it has been volatile politics in d.c. what we have not been talking about are the terrible pmi's in europe. germany confidence numbers were ugly. consumer spending in america was slightly disappointing. altogether, is this still end up appetite out there for duration at these yield levels, with the fundamentals to underpin that, too? >> slowing growth is the fuel for lower growth. there has been some pretty the u.s.,results in especially in the consumer and services sector. the u.s. feels like we are going or just below, 2 but it is hard to see a sharp slowdown in the u.s.
i think we can bolster the rest of the world. if that does not transpire, and you see weakness abroad, 10 year treasury at 1.70 has a lot of scope to fall from here. jonathan: how big of the demand will there be, how sensitive is it to hell yields are already in the united states? i agree, we could go lower from here, probably need the fed to kick in again, and that maybe next year with the rhetoric changing recently. now, the dataght has improved a little bit, better than people expected. if you look at the u.s. economic surprise indices, they have been pumping up. we make it august feeling ok, and the numbers in september as well feeling ok, but it feels like that will be a short-term relief. the problems are building up in the u.s. economy are enough that 1%will be talking about sub
growth pretty regularly next year, and that means duration is a great buy from here. i think thet now, direction is down, but not significantly. i do think a neutral view on duration is where you want to be right now. you will see things ticked down in a gradual manner. jonathan: we are talking about credit in the following segment. coming up, the auction block. a record number of high-grade borrowers coming to the market this month. that conversation is next. this is bloomberg "real yield ." ♪
display with it of at the week selling 6.7 5 billion euros of bonds. month, u.s.the investment grade market, what a month it has been. bond sales cracking the $150 billion mark this week, marking september as one of the busiest months in history. borrowers pricing roughly $29 billion of two september, making it the busiest months of the year so far for junk issuance. staying on credit. >> i think it is time to be .areful, not to pull back we are investing every day, we are essentially fully invested, other than an hour funds which are expressly reserved funds. we are trying to get fully invested in others. but with caution. as i described earlier, we take a risk controlled approach to
our risk asset classes. when i say with caution, i say even more cautious than usual. start with you, mike collins, your thoughts on credit. a cautious approach, warranted? there has been a lot of supply, but it's been contained. a lot of the supply we see is refinancing existing debt. that is a good thing. you have a huge increase in treasury supplies, a pullback in the that supply of corporate debt, so technicals continue to be strong, especially with qe in europe, credit spreads continue to tighten. i agree on the risk side, you have to be careful. you are definitely seeing push back into credit markets with some of these. jonathan: one of the busiest months ever for investment grade issuance through september, busiest month of the year for high-yield. where are you seeing cracks in the primary market? mike: all the lousy, highly levered issuance went into the
loan market. the loan market was seeing flows from clo's, bank investors. the loan market was accepting any kind of lousy deal, and then it shut down because all the money is pouring out. 30% of the loan market has gone out the door in the last year. now those issuers are trying to tap the high-yield market. the high-yield market is pushing back. yieldically, the loan market was the high your yielding part. the higher yielding part is saying we want covenants and leverage. these issuers who thought they could act as the loan market -- jonathan: it sounds counterintuitive, but when rates if it is up,, i wonder because rates are coming down on this dynamic is playing out. is that what is happening? mike: the loan market is the topsy-turvy part of the bond market. when the fed is raising rates,
people want loans. when the fed is cutting rates, people avoid the loans because your coupon is going down. what did you make of that push that we have seen in the primary market? why haven't we seen that spill over into the secondary market, in terms of where spreads are? we have seen push back in the primary market. i'm not seeing why the spreads after that. why not? luke: if you break it down more into the high yield in particular, there are signs of stress coming through. the first half of the net, you had ccc's performing well. the latter part of the month, that tailed off quickly. we have had three or four deals pulled [indiscernible] jonathan: getting some problems with the connection there. spreads have started to widen. me, is interesting to around 350 basis points on a
high-yield index, we are struggling to get back down. every time we come close, we widen again. what kind of signal does not provide us? george: we are underweight high-yield. there is no great opportunity right now. spreads are so tight. if you look at these companies, they have leveraged up. now you are seeing the cracks build up. the only thing that gives me optimism, we are seeing tremendous appetite from the individual. the individual is dying for yield anywhere with a lack of appreciation of risk. i would not doubt if it holds and a little bit. after that, probably going to back up. jonathan: explore that further, ofuggling to test the tights 2019. michael: you are starting to see the leading credit indicators of risk peering in the markets. putback, spot cap, cyclicals underperforming.
weirdield, we have this market, where spreads are tighter, high-yield has done great, but bb's have outperformed. we are selling bb's. a lot of the demand we are seeing especially overseas is in that higher-quality part, is taking the value out of that part of the market. but the single b and triple c market actually looks like decent value. george:8 you are seeing the stronger ones outperform. jonathan: i don't suppose the oil move -- who would've thought oil would be back to where it was the last couple of weeks just before the aramco attack, that we would be back to those levels within a couple of weeks. i imagine that is not helping high-yield's cause. ig, somethingto that you've noticed, mike, the levering up that is being done
is being done by the higher rated issuers. the companies behind some of those ratings are doing some of the hard work still. what do you make of that dynamic? youael: investment grade, are not pay to be a aa anymore. the double is go to the single-a's. once you are triple b come you are really reticent to go into job. then your liquidity dries up, financing dries up. a $100not refinance billion balance sheet in a junk markets. these high levered triple d's are delivering to some extent. i would say on average. we are still cautious in that space. you don't always have to lever up by increasing debt. sometimes it is the ebitda for earnings or cash flow going down. when you have a flat earnings growth picture right now, which you do, expected to be zero this year, that means half of the company will make money, half will lose money. your ebitdaitda --
is going down, that is a problem. jonathan: pimco said to me earlier this week it is a lower conviction review. i think recovery. with that in mind, you face the question, i want to be prepared for the worst a present for the best. what do i do? michael: you own high-quality bonds. fixed income has value, especially in the u.s. i think there's a lot of spread in high-quality bonds, senior debt of banks, subordinated debt, even preferred debt. these have really big spreads relative to treasuries. i think those will continue to outperform. on the credit side, you have to be careful. there are bonds that have pretty attractive expected returns. george: i agree. we don't think you should take risk in duration. where you should focus on is the second there's. we like preferred, investment grade corporate.
in the triple b sector, you have to be selective. we even like a emerging market debt him a you will have to go to different places to get that yield in some sect yours. jonathan: we will try to reestablish that connection with luke hickmore. still ahead, the week ahead featuring a big leap with economic payrolls in the spotlight. that is all coming up. this is bloomberg "real yield." ♪
jonathan: i'm jonathan ferro. this is bloomberg "real yield." time for the final spread. next week, sunday night, it begins with pmi out of china and industrial production from japan. tuesday, u.s. manufacturing. thursday, more economic results from the u.s. including factory orders. friday, chairman powell will be speaking. the main event, u.s. payrolls report.
george rusnak and michael collins is with me. we have not been able to reestablish that connection with locate are in edinburgh. how quickly sentiment has swung from week to week, and the degree to which the price is shaping the narrative. many have noticed over the past couple of weeks, we started the show one way, started another way next week. people have change the way to think about the world on very little. treasury markets have been , up 20 basis points, down 20 basis points. what explains that? we seem to be at an inflection point in the economy, rate cycle, central bank cycle, and that creates a lot of uncertainty in the day today as the economic data comes out. there is a lot of fomc members who think we should be raising rates over the next couple of years. it is very data dependent. the genera duration positioning has been really volatile.
when rates rally, people have been panicking and buying duration, chasing them further down, and then rates start selling off. people get optimistic on the economy. george: i think there is a directional trade that's been going on. a lot of it is due to positioning, some short-term affects where people have gotten positioning for rates to go up. s exacerbated some of this. nobody knows what to expect from atrial do perspective, where we will go next. i don't think you should be positioning for the short-term move but the long-term. jonathan: what is the key to a more sustainable move higher? is it the fed, the trade story, europe? george: i think it is more the fed then the trade story. you saw this a little bit last week in the fed talk. they gave the dovish action of lower rates, gave a little less dovish on the verbiage around
the. the markets acted very vigorously, and they haven't. if they pull back on that, you could see rates come back. jonathan: a lot of people might say it is the trade story. thebloomberg talking about what putting portfolio limits on china. it feels like a very early preliminary conversation, but still, you have to think about these things. what do you do? clearly, the trade thing is volatile, and it will be. no big resolution will be coming in the next few quarters. people who expect that will be disappointed. today's announcement is just another example of the tit-for-tat negotiating process. if the fed starts pulling back on its dovishness, says that we will do one more hike in the me are done, and then the hawks start to win's way. jonathan: let's be clear, it feels like that is very are going. talking about
going into wait and see mode. michael: the front and, which is still pricing in more cuts pushes back up. i don't think that means the back end of the curve elevates. the back and will continue to be weighed down by these big global flows. i look at our yields, 10 year treasury at 1.70, and sometimes i wonder why it does not have a zero handle. when you look at the yields and the rest of the world, sometimes you have to look at it twice, it is still in the one's. it feels like global flows will continue to weigh in on the back end of our marketing. jonathan: we are going to do the quickest rapidfire round we have ever done. luke hickmore will not be with us, so it's just the two of you. the impeachment inquiry in the u.s. people trying to work at what this means for policy elsewhere. did the president -- or back off? does the president hardin or softened his stance with china going into trade talks next month? michael: soften.
george: soften. pimco put it,, as the window to u.s. recession or recovery? george: recovery. michael: recovery. jonathan: let's finish with a question on credit. have we seen the tights for high-yield spreads. yes or no? michael: no. george: no. jonathan: thank you very much to michael, george, and luke hickmore as well. we will see you next friday, same time, same place. ."is was bloomberg "real yield this is bloomberg tv. ♪ devices are like doorways
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at the center of the congressional impeachment inquiry. him and the commons in a closed-door meeting with u.s. discipline that's -- u.s. diplomats. >> i want to know who is the person that gave the whistleblower -- who is the person that gave the whistleblower the information? that is close to a spy. you know what we subdue in the old days when we were smart, right, to spies andreesen? -- and treason? least to handle them element differently. >> this caused many [indiscernible] pakistani prime minister imran khan has denounced india's crackdown ink ahmir. he warned about a bloodbath in the disputed region. he says wants a curfew is lifted, locals will be out in the streets. what will the soldiers do? they will shoot them. a northern iri