tv Bloomberg Real Yield Bloomberg September 29, 2019 11:00am-11:30am EDT
jonathan: from new york city for our audience worldwide, i'm jonathan ferro. bloomberg "real yield" starts right now. coming up, investors looking to shake up drama and focus on the policy. on the front, where the white house is on limits on u.s. portfolio flows into china. and credit delivering a month of debt supply, cracks appear in the primary market. we begin with the 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 for months in a very divisive election. i would not focus on that in our investing activity.
>> you can't trade this stuff right now. >> fundamentally, i don't think it centers a whole lot around he policy war. >> you almost have to ignore it and keep investing the way you would. >> we are focused on the fed, we are focused on the underlying fundamentals. >> for me, trade is the big thing. >> tariffs. >> 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 in new york city is george rusnak, michael collins, plus luke hickmore. luke, i want to begin with you, it is something i've heard all week. i want to focus on the policy and not the politics. it hasn't stopped anybody trying to work out what the politics means for policy. have you been thinking about hat this week?
luke: the thing 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. when the u.s., 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 entirely ignore. it feels it will be part of our lives for a while here and just increases the economic risk. jonathan: 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 analysts, analyzing bonds and companies, 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 markets. we hope this political noise creates some pockets of volatility and opportunities to e more active. george: certainly, could use more volatility in the markets, more opportunity. it is either a distraction or atalyst. a catalyst to getting some trade deals done with the u.s. and china potentially. that seems a little far-fetched. we think it is 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 when you have 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 on what they were looking for in 2020. looking for 1% growth next year. take a listen.
>> we see u.s. growth slowing to something like only 1% in the first half of next year, as the slow down in manufacturing, the global trade recession, is starting to spill over into the u.s. service sector and u.s. onsumer. during a period of low growth, during a period of stalled speed, obviously, the economy is very vulnerable to any dverse shocks. jonathan: luke hickmore, are we ready for 1% gdp growth in america going into 2020? is that your baseline? luke: it is certainly mine. 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 saw numerous times about how the 2/10 curve 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 at the moment. we cannot ignore that. our u.s. colleagues have been moving underweight u.s. investment grade credit for the first time in decades. 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 thoughts on the matter? mike: growth is slowing, maybe about 2.5% this year, maybe high one's next year. it is only slowing trajectory. people who say, 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. we have had a big relevering in corporate america, and 1% growth is going to be a really challenging environment for a lot of companies. george: 1% is a little bit lower than our base case. our base case is high ones, 1.7, 1.8. the trend line is concerning. the bond market 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 sharks closest to the boat. this week, it has been volatile politics in d.c. it is interesting that what has hardly been spoken about is terrible pmi's in europe. we looked at them for five minutes, we moved on. germany confidence numbers were ugly. consumer spending in america was slightly disappointing. put that altogether, is there still enough appetite out there for duration at these yield levels, with the fundamentals to underpin that, too? >> slowing growth is the fuel for lower yields. we look at the other side of the data, and there have been pretty resilient results in the u.s., especially in the consumer and services sector. the u.s. feels like we are going to hum along at 2 or a bit below, 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 continue to see weakness abroad, 10 year treasury at 1.70 has a lot of scope to fall from here. jonathan: what are your thoughts on that matter? how much incentive will there be to high yields that are already in the united tates? luke: i agree, we could go lower from here. we probably need the fed to kick in again, and then maybe next year with the rhetoric changing recently. right here, right now, the data has improved a little bit, better than people have been expecting. if you look at the u.s. economic surprise indices, they have been pumping up recently. we might get a little pulse feeling ok, and the numbers in september as well feeling ok, but it feels like that will be a short-term relief. the problems that are building up in the u.s. economy are enough that we will be talking
about sub 1% growth pretty regularly next year, and that means duration is a great buy from here. jonathan: final word, george? george: right now, i think the direction is down, but not as significantly as some of my counterparts. i do think a neutral view on duration is where you want to be right now. you will see things tick down in a gradual manner. jonathan: you guys will stick with me. 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. from new york, this is bloomberg "real yield." ♪
italy selling 6.75 billion euros of bonds. the 10 year portion price per yields at all time lows. wrapping of the month in the u.s. 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. in high-yield, a busy month, too. borrowers pricing roughly $29 billion into september, making it the busiest months of the year so far for junk issuance. staying on credit. here is howard marks of oaktree weighing in. howard: i think it is time to be careful, not to pull back. we are investing every day, we are fully invested in our funds, which are expressly eserved 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. jonathan: let's start with you, mike collins, your thoughts on credit. a cautious approach, warranted? mike: yeah -- there has been a lot of supply, but the net supply has 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 net supply of corporate ebt, so technicals continue to be strong, especially with qe in europe, you are seeing credit spreads continue to tighten. i agree on the risk side, you have to be careful. you are definitely seeing pushback into credit markets with some of these. jonathan: let's talk about that pushback. one of the busiest months ever for investment grade issuance through september, busiest month of the year so far for high-yield. where are you seeing cracks in the primary market? where is the pushback at the moment?
michael: in the last couple years, all of 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 the loan market shut down because all the money is pouring out. 30% of the loan market has gone out the door in the last ear. now those issuers are trying to tap the high-yield market. the high-yield market is pushing back. historically, the loan yield market was the higher-quality part and the high-yield was the riskier part. the higher yielding part is saying we want covenants and lower leverage. these issuers who thought they could access the loan market can't even get into the high-yield market. jonathan: it sounds counterintuitive, but when rates are coming up, that is one covenants were disappearing and i wonder if it is because rates are coming down on this dynamic is playing out. is that what has happened in the last couple years? michael: the loan market is the topsy-turvy part of the bond market. when the fed is raising rates, people want loans. their coupons float up. when the fed is cutting rates, people avoid the loans because your coupon is going down.
jonathan: what did you make of that pushback that we have seen in the primary market? to take it another step, why haven't we seen that spill over into the secondary market, in terms of where spreads are? we have seen pushback in the primary market. i am not seeing materially 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 month, you had ccc's performing well. the latter part of the month, that tailed off quickly. jonathan: what is more nteresting to me is the tights of the year around 350 basis points on the bloomberg high-yield index, we are struggling to get down to them. every time we come close, we widen again. what kind of signal does that provide us? george: right now we are underweight on high-yield. there is no great opportunity right now.
spreads are so tight. from our perspective, 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 individuals are dying for yield anywhere with a lack of appreciation of risk. i would not doubt if it holds in for a little bit. after that holds in for a little bit, probably going to back up. jonathan: explore that further, struggling to test the tights of 2019. michael: talking about topsy-turvy markets. you are starting to see the leading credit indicators of credit risk appear in the markets. you see it even in equities, the ipo pushback, small cap, cyclicals underperforming. high-yield, we have this weird market, where spreads are tighter, high-yield has done great, but bb's have performed triple c's. triple c spreads have really lagged. a lot of the demand we are seeing from especially overseas investors is 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: there is a split where you are seeing the weaker credits underperform and stronger ones outperform. jonathan: i don't suppose the oil move of the last couple weeks -- 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 kind of levels within a couple of weeks. that happened very quickly. i imagine that is not helping high-yield's cause. just to tap into ig, something that you've noticed, mike, the levering up that is being done is being done by the higher rated issuers. the company behind those ratings are doing some of the hard work still. what do you make of that dynamic? michael: investment grade, you are not paid to be a aa rated company anymore.
once you are triple b, you are really reticent to go into junk. then your liquidity dries up, financing dries up. you cannot refinance a $100 billion balance sheet in a junk bond market. these high levered triple b's have actually found religion to some extent, and they are the levering -- delevering 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. when you have a flat earnings growth picture right now, which you do, expected to be zero this year, that means half of the companies will make money, alf will lose money. if you have a lot of debt and your ebitda is going down, that is a problem. jonathan: if i asked someone their baseline, recovery or possession. pimco said to me earlier this week it is a lower conviction view. i think recovery. with that in mind, you face the
fundamental question -- i want to be in the market, i want to be prepared for the worst and 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 of the banks. 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 is value out there. there are bonds that have pretty attractive expected returns. george: i agree. you have to be selective. we don't think you should take risk in duration. you should not take credit risk. where you should focus on is the sectors. we like preferred, investment grade corporate. in the triple b sector, you have to be selective. we even like emerging market debt. you will have to go to different places to get that yield in some subsectors. jonathan: still ahead on this program, the final spread.
jonathan: i'm jonathan ferro. this is bloomberg "real yield." it is time for the final spread. coming up over the next week, sunday night, it begins with pmi out of china and industrial production from japan. tuesday, u.s. manufacturing and construction data. thursday, more economic results from the u.s., including actory orders. friday, chairman powell will be speaking, plus the main event, u.s. payrolls report. george rusnak and michael collins is with me.
i wanted to pick up with you , mike, how much 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 changed the way they think about the world on very little. it is because treasury markets have been really whippy, up 20 basis points, down 20 basis points. nothing much has changed. what explains that? michael: part of it is that we see this inflection point in the economy, rate cycle, central bank cycle, and that creates a lot of uncertainty in the day to day as the economic data comes out. the fed is very data dependent. 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. i think the treasury positioning and the general 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 more optimistic on the economy and they try to sell them. george: i think there is a directional trade that's been going on. a lot of it is due to positioning. i think there have been some short-term affects where people have gotten positioning for rates to go up. when they go back down, they have to cover some of the shorts, and that has exacerbated some of this. no one knows what to expect from a trade deal 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 toward the treasury yields? is it the fed, the trade story, europe? george: i think it is more the fed than the trade story. you saw this a little bit last week in the fed talk. they gave the dovish action of lower rates, and they gave a little less dovish on the verbiage around that. the first time they did that, 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
think it is the trade story. bloomberg in the last couple moments broke this story about the white house weighing limits on to portfolios into china. it feels like a very early preliminary conversation, but still, you have to think about these things. what do you do? michael: clearly, the trade thing is volatile, and it will be. we don't think there is any big resolution that will come 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. generally speaking, i think if the fed starts pulling back on its dovishness, says that we will do one more hike and we are done, and then the hawks start to win sway. jonathan: let's be clear, it feels like that is where they are going at the moment. bullard, evans talking about going into wait and see mode. michael: that is a curve flattener. the front end, 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 of the curve 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 in 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 on the back end of our marketing. jonathan: we are going to do the quickest rapidfire round we have ever done. the most rapid rapidfire round we have done, because luke hickmore will not be with us, so it's just the two of you. let me begin with the impeachment inquiry in the u.s. people trying to work out what this means for policy elsewhere. what did it mean for trade -- did the president double down or back off? does the president harden or soften his stance with china going into trade talks next month? harden or soften his
stance? michael: soften. george: soften. jonathan: 2020, as pimco put it, the window to u.s. recession or recovery? let's take one, recession or recovery in the back half of 2020. george: recovery. michael: recovery. jonathan: let's finish with a question on credit. have we seen the tights on high-yield spreads for the year already? yes or no? michael: no. george: no. jonathan: thank you very much to michael collins, george rusnak, and i should also say thank you to luke hickmore as well. from new york city, that does it for us. we will see you next friday, same time, same place. this was bloomberg "real yield." this is bloomberg tv. ♪ here, it all starts with a simple...
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