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tv   Bloomberg Real Yield  Bloomberg  December 1, 2019 1:00am-1:30am EST

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lisa: from new york city for our viewers worldwide, i am lisa abramowicz in for jonathan ferro. "bloomberg real yield" starts right now. ♪ lisa: coming up, inversion watch. the u.s. yield curve reporting it's longest flattening. since november 2015. investors don't care, when wages on a steepening yield curve gathering mention on wall street. and high-grade continuing to build with new debt sales and bonds rallying in the secondary market. we begin with the big issue, markets debating whether a flatter yield curve is here to stay. >> you have seen the flattening of the yield curve. >> it is incrementally flatter.
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>> we expect that to continue for the short term. >> it has been catching a lot of investors off guard. >> we are playing the flattening. >> i think it is there for a long haul. >> in the overall fed cycle, we would anticipate the curve should steepen somewhat. >> you're seeing late market cycle behavior. part of that is a flatter yield curve. >> the economy will run hot and it will keep the short and suppressed, which everyone expects. >> a market priced for recession, but it is telling you there are no risks whatsoever. that is not a tenable situation. >> the launchpad controls are in the hands of politicians right now as opposed to central banks. >> if you see these deals go through, you could see a steepener. >> if it happens, we think you create the conditions for an upside to expectations on inflation and we think it gets manifested in the yield curve steepening. lisa: joining us from london is
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iain stealy from jp morgan and james athey from standard investments. in new york, ian lyngen from bmo capital markets. we have seen a shift with a growing number of strategist saying they expect the yield curve to steepen next year. what is your take on that? james: good to see you again. essentially we've been running the steepener all year. it's essentially the combination we like for long duration and steepening risk, we prefer the duration risk at the front end of the yield curve. certainly now, what the fed has done is raise the bar, is not going to happen anytime soon. it means the yield curve is directional. when you have u.s. two years trading above the fed funds rate, historically it tells you the market is expecting hikes, which is not likely to happen. there is a massive asymmetry
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towards the front end and the combination of being long on steepeners, that can profit in a number of different scenarios. one of your guests in your clips was talking about potential inflation risks. even though i am running the steepener, i find that difficult to believe when you just look at the oil price and the base effect, notwithstanding the end of december. it seems like unless we have a massive oil rally, it will struggle to make any headway. for that reason, we are not expecting inflationary steepening of the curve but we've seen recently with bond markets it doesn't take much of a push upwards to see the curve getting dragged steeper in a bearish environment. lisa: a pretty nuanced take, we are looking at potentially a steeper yield curve but don't get too excited. is that your take? >> i think it's basically as james said. you have a two-year part of the
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curve that is effectively anchored to some extent by the fed on hold. a little bit of cuts priced in over the next year or so. the fed has essentially told us they will be on hold which means it will be bounced around, but what happens to the 10-year? it feels like we are so reliant on the outcome of trade. if we are in an environment where you do get tariffs added in mid-december, i think the reality is you will see the lows in yield for the year for the 10-year, which will be a curve flattening. the flipside is if we get a rollback, good news on trade, i think you will see yields push up and back towards this as well, and that will be a steeping. the two-year part of the curve is unlikely to move much until we see the fed talk about either moving monetary policy in either direction. lisa: i can feel the exhaustion in iain's voice. do we care about the yield curve?
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if this isn't going to say something about fed policy or signal recession, do we care about the yield curve? >> the market tends to spend a great deal of time focused on the shape of the yield curve and what it means for the next two or three months of trading. but if we look at the relationship between the three-month bill and 10-year yield, there is a year and a half lag between the curve inverting and when we see a pickup in recessionary risk. it takes that long for the spread compression to work through to corporate profitability, and that hits the employment sector, the consumer starts to lose momentum, and that's where recession in the u.s. will come from. there is a delayed effect, and it becomes a 2020 story. lisa: because we did see the inversion between the three-month and 10-year yield. i do want to talk about the exhaustion that seems to be pervading the markets, and not
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because it is the day after the thanksgiving holiday, although perhaps that is part of it. james, from your perspective, do you think bond markets have generally entered a sleepy phase where central banks globally are tamping down any volatility, and that's what we will get the next few months? james: we have been in that phase for about 12 years. lisa: except for there was 2013, there has been a couple of experiences of excitement. james: sure, 2018 was much different. we had some mini cycles where we 2012-2013, saw dramatic changes in market reactions, but what we've gotten used to is central banks in general and the federal reserve specifically just pumping painkillers into financial markets on an almost constant basis and you get this barbell of buy risk and safety. that works in almost all environments regardless of what is going on under the hood, and
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it feels like we have reentered that phase where recent policies from the federal reserve, which they might call something other than qe, but by any other definition is qe. it doesn't seem to be having the impact where equities can ignore bad news and drift higher. but they can only do that in concert with falling. it feels like that environment but i expect that to change in 2020. lisa: back to the drug addiction metaphors with the market and central banks. wondering what that says for 2020. have we brought forward that trade, going to the safe government bonds and risky assets, and calling it a day, or will we see the same thing in 2020 or will something shake the complacency? iain: it feels a little like that. if we go back, you mentioned 2018, there was a tough time and we had quantitative tightening
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and hikes from the federal reserve. we have the exact opposite now. i agree with james, they might not want to call it qe, but they are injecting liquidity into the system and it will end up inflating asset prices again at the same time the fed is easing policy. you also have the ecb back in the market. it feels like an environment where you should be happy to buy risk assets, where yields are unlikely to go much higher. i thought it was interesting, commenting around, it's obvious the yield curve inversion. yes, it's been the greatest indicator for recessions but we've not been in this environment of quantitative easing, negative yield and the rest of the world, it has to have an impact on where 10-year treasuries are. as long as we don't get any disruption on trade, and i don't want to keep mentioning it, but as long as there's not negative news on that, it feels like a market where all assets can continue to be supported. lisa: how long does this go on? ian: i think we probably have a quarter or two left of the
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euphoria. lisa: is it euphoria? ian: this is as good as it gets. lisa: you heard it here. this is as good as it gets. ian: we are starting to see some indicators that the consumer is not on particular strong footing. it takes a while for it to flow through. we have seen some disappointing retail sales prints the last few months. if we think about the amount of leverage in the core consuming cohort, the 25- to 40-year-old group, they have a lot of loans and a fair amount of defaults as well. lisa: do you guys agree that we only have a quarter or two left? james: i agree completely. the consumer and labor markets have seen the best of it.
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i don't know how long the process takes, but the broad suite of indicators and a look at corporate profitability peaked five or six years ago, and this is not a healthy looking environment above and beyond the steroids from the fed. lisa: steroids, morphine, drug addiction metaphors are back. coming up, the auction block. high-yield issuance in europe poised for the busiest month of supply in more than two years. that is next. this is "bloomberg real yield." ♪
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lisa: i'm in for jonathan ferro and this is "bloomberg real yield." to the auction block, beginning in europe. the primary market surged ahead
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of thanksgiving, 16 issuers offering more than the past two sessions combined. november is poised to be the busiest month and within two years for high-yield supply. in the u.s., junk-bond issuance slowed after last week with just two deals for $1.5 billion pricing. november volume is still moving, climbing to just over $36 billion to make it the busiest months since march 2017. a shortened week is expected to bring just over $3 billion of new u.s. investment grade bonds to the market, offering from mastercard representing the lion share of the volume. speaking with investment grade, concerns raised about the valuation in the triple-b space. >> a lot of investors are not allowed to go into noninvestment grade have gone into the lowest level of investment grade and that has in turn boosted the amount of money coming in. lisa: iain, your perspective on
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the triple-b space. we have heard a lot of doom and gloom, and this turned out to be the best performing of the investment-grade asset class. where are we headed with the triple-b's? iain: at the moment, there is a grab for yield and people are looking at triple-b. we can still buy investment grade quality bonds and get the yield pickup and it doesn't look like treasury yields will move higher anytime soon. the central banks have got our back. i think we see the demand coming in and we have more overseas demand coming back as a some of the hedging costs that were so painful to european and japanese investors over the last year are coming down as the fed has been easing policy. i think there will continue to be strong man for anything with yield, and triple-b is in a nice bucket for a lot of people. ian: for a while we've been focused on the notion that we should see some widening of the credit spread market, especially
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as the expansion moves on and on. we have not seen it yet. it's a grab for yield that will persist until we see something break. whether that is a specific credit event, a broader slowdown on the consumer side, or business spending, it will be a 2020 story. until then, i think it is a key issue, people need to add any type of yield they can. lisa: james, it seems like they are saying momentum is more to outperformance by triple-b until something breaks. you agree? james: normally what we expect, the age-old saying that they don't die of old age, i do not sign up to that, but we will not have that end to the cycle this time. the other side of the debate is to say that there is a stock of debt globally that has gone up
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immeasurably, relative to our ability to generate the necessary cash flows to pay down that debt. at the moment it is a bit of a goldilocks period for investment grade in general because the economy has not slowed so dramatically, but the fed has begun providing support for financial markets and even more cheap or free liquidity. my concern would be when we start to see the economy slide further toward that scary looking zero number, it's always the weakest links in the chain that will fall first. i would observe globally across a number of asset classes and economies and regions, we have already begun to see the weakest links in the chain starting to crack. iain mentioned auto delinquencies, we seen that rising over a number of years. you join these pieces together and you can see there are signs of what should be early warning signs of something more concerning going forward.
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we're not there yet, it is a 2020 story, but personally i don't think you are being rewarded for taking on the risks in a segment bigger than the entire high-yield market. lisa: you are not buying triple-b's? james: absolutely not. lisa: this is an interesting conundrum. you raise an interesting point. a growing number of investors and policymakers are highlighting what are the unintended consequences of more stimulus. europe's largest asset manager warning investors of a blowup and credit. "beyond the short-term, the trend is toward a more aggressive mix, and the extension of the credit cycle that could end in an explosion although it is unlikely to happen next year." the chart we showed earlier shows how triple-b rated credit is the highest proportion of overall investment-grade credit ever, nearly half of all this kind of debt is now triple-b rated.
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i'm struggling to understand when we care about that. ian, are you still buying and trying to get the last out of the rally? since there is no catalyst to end it in sight? ian: i don't think that we will know the catalyst until after the fact. i think we will look back and say of course it was the retail sector, or whatever it ends up being. i would not be aggressively adding in triple-b space for that reason. that's a broader macro story. lisa: iain, what asset class is most vulnerable when we get the blowup people are expecting will inevitably come? iain: i think you still got to look at quality. when we look at the high-yield market, and that is interesting because we've seen the differentiation in the u.s., not so much in europe, but we seen investors to
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discriminate between triple-c, you are not even making your coupon relative to the double-b part of the curve. you have that quality trade in high-yield, i think it is the bottom of the capital structure people will focus on, and that's where you're going to see the largest amount of spread widening. the way we look at it is we may have a slow down and even a recession, but it is likely to be shallow, which means full -- which means default rates will pick up and i don't think we will get anywhere to where we got to a decade or so ago. it will be the weak hands that will have the impact and already to some extent the market has taken account of that. lisa: are you buying triple-b's? iain: i think you need to look at it on a company-by-company basis. some companies will probably make the journey down toward high-yield. but if you can get the right credit selection and buy good quality triple-b's and maybe
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move up if they do some things and try to get leverage ratio down, i think it is an environment where that grabs the yield. i also wouldn't be surprised if you start to see some people currently sitting in high-yield credit with good returns there this year start to look at upping quality trade and moving of the spectrum. there's not much yield in treasuries, so you kind of barbelled in the middle space to get the kick you need. lisa: everyone sticking with us. still ahead, the final spread, and the week ahead including a slew of reports. that is next. this is "bloomberg real yield." ♪ lisa: i'm lisa abramowicz in
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for jonathan ferro. time for the final spread.
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over the next week, on monday we get u.s. ism manufacturing numbers, and on tuesday a rate decision from the rba and u.s. auto sales. wednesday, euro area finance ministers meet. thursday, german factory orders. friday, the main event, u.s. jobs report. our guests are still with us. there is a question given the central bank support of markets right now, does it even matter what we get with respect to economic data? what is the most important data point that you are focused on? ian: it's the unemployment rate, and the way it blows through at this point in the cycle matters. we see a small uptick in the next four or five months and we probably will face recession in the next 12. lisa: are you also looking at the unemployment rate or does inflation matter and wage gains? iain: i think you need to be looking at the unemployment
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rate. that is really what people are focusing on. if you see that tick back up it will be a big red light for the federal reserve. i think also we should continue to look at the manufacturing numbers. we had a sharp decline that has reversed. if we can get some stability there, i think people were very concerned the weakness we saw in manufacturing was not going to roll over into services. we've had some form of stability, maybe a bottom in manufacturing, and it would be good to see that flow through. lisa: what do we need to see with respect to economic data to change the fed's policy path or to push forward at least for a rate cut? james: i definitely think rate cuts are a lot easier to see. what the fed has told you is there needs to be material disappointment relative to outlook. they have a fairly negative growth outlook for q4 in line
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roughtly with market consensus. the top end has probably come closer to market consensus now. we need to see some disappointment relative to that. possibly as soon as the next month, that might be a bit too soon, but into q1, broadly speaking if we see data underperforming relative to expectations, that will do it. but we also know the federal reserve is sensitive to the financial markets, and i don't think it would take much disruption in the equity market to bring back questions about whether or not more policy is needed. i also agree with the other chaps, it is about jobs for me. i want to see forward-looking employment components, that those things tell us about job growth going forward. lisa: time for the rapidfire round. which will perform better next year, high-yield or investment-grade? iain: investment-grade. james: treasuries. ian: i'm going to go with high-yield.
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i think we are at an interesting inflection point. lisa: have we already seen the cycle lows for u.s. treasury yields? iain: definitely not. james: absolutely not. ian: no way. lisa: will we see a credit explosion in the next two years? iain: i don't think so. james: yes. ian: yes as well. lisa: thank you all so much. from new york, that does it for us. this is "bloomberg real yield." ♪ ♪
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francine: how do you breathe life into one of europe's biggest lenders? let's ask jean pierre mustier. the frenchman has led italy's biggest bank since 2016. under his leadership, it has posted higher earnings and stronger capital. it's also changing the way it is run, down to making fiat the ride of choice instead of luxury cars. today on "leaders with lacqua," we meet jean pierre mustier, the chief executive of unicredit. jean pierre mustier, thank you so much for joining us. what does it mean being a banker in 2020?


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