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tv   Bloomberg Real Yield  Bloomberg  December 6, 2019 1:00pm-1:30pm EST

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jonathan: from new york city, i'm jonathan ferro. bloomberg "real yield." " starts right now. coming up, the u.s. payrolls report coming in hot. counting down to another trade deadline, waiting for a phase one deal. twitter showing there is more than enough appetite for high-yield debt. we begin with the big issue, a blowout payrolls report. this was a pretty strong report. >> impressive report. >> undoubtably a really strong jobs number. >> the rebound in economic activity is underway.
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>> this was a pretty strong report. this endorses the fed pols. >> exactly what the fed is looking for. it is reasonable to expect the fed to kind of be on hold. >> the front end of the curve is selling up more than the backend. the market is saying the fed cause is warranted. >> it is probably going to remain on pause for a good portion of next year. jonathan: joining me around the table in new york, gershon distenfeld, priya misra, and krishna memani. priya, let's begin with you. what a payrolls report. priya: a good report, no way to look around it. when we check out the gm numbers, still a solid number. but i have to highlight caution a little bit. the labor market is a lagging indicator. his global growth for sure bottoming? there are some signs that it may be. is it about to surge ahead?
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i am skeptical. we are not getting stimulus out of china, europe. growth,iew, global probably models around. the trade uncertainty, we are so hung up on this trade deal. don't know even if we get the phase one deal, which is not guaranteed, the fact that the president threatened tariffs on argentina and brazil, that was just a few days ago. don't know even if we get the phase one deal, which is not now, andize tariffs uncertainty remains. we are not entirely out of the was for the economy. the labor market may be showing signs of cracking. jonathan: i have to say, it feels like two months ago. it feels like a long time ago that we got no steel levies coming through. point is a good one, that the global economy is definitely bottoming out. if there is a real celebration on folding. the consumption part of the economy driven by employment was
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never really an issue. it was always about manufacturing. as we see the turnaround, the things to watch them aware does pmi end up, where does investment end up? those are the better markers for the magnitude of the growth, rather than focusing on the employment numbers. employment certainly helps. thethan: your case of global economy bottoming out, i did not hear that from priya. she seems to be more worried than you. krishna: the global economy is certainly bottoming out. in the u.s., we are already seeing the signs. we are seeing the same signs overseas on different magnitude, but the trend is there. gershon: as strong as the number was today, this change is absolutely nothing. we are still getting two different pictures of the market. the equity market is saying everything is all in the clear. the rights market is still saying not. this mirrors the dichotomy we are seeing an economic data.
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the consumer, everything we are seeing is all clear. we are not seeing anything. in the u.s., we are already seeing the signs. it comes to manufacturing, business investment, we are not seeing it. they are basically pricing in as if we are going to get a manufacturing recovery, even though it has not happened yet. the rates market is saying we are going to see a spillover of the consumer. what will ultimately be right? only time will tell. my guess is we will see it's even to the consumer a little bit, also see manufacturing rebound a little bit. we will also see rates go a little higher. jonathan: people have picked up on what you said, they look at the treasuries market and they say we are up only a couple basis points after that. is that concern still that we are not out of the woods, or is that just a bid for income that is not going anywhere? if you had to lean into one versus the other, what would you say? gershon: don't look at the treasury market as much.
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it, thathere you see is consistent with the equity markets, still a tremendous demand for yield. i don't see how that goes away anytime soon until you see the equity market crack. the underlying data, if you believe in the consumer story, says yields should be higher at the long end. do you believe nominal growth over 10 years will be less than 2%? i have news for you. that will not be a pretty environment for the equity market, if that's the case. krishna: as a treasury analyst, what the market is telling you is the fed had truncated the distribution. they are not hiking until we get when we talk about how high the fed funds rate can go, can you get the 10-year above 2%? if the fed is not taking back these insurance cuts -- they put insurance in. if they didn't need it, are they taking it out? the reason why treasuries are
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not reacting as 2. when we talk much is the fed is telling us they are not about to hike anytime soon. krishna: that is the most important point with respect to the rights market. the fed has told you they will do even consider, let alone a rate increase, until inflation gets north of 2%, which is never. if the front end of the market is not going to move, long rates need to move a lot. i don't think that's in the cards. even if we get economic growth back to 2 can change, even in that environment, the rates will not be 3%, 3.5 percent, the way they were before. jonathan: this is a quote from cibc. this year, we have had 90 rate cuts across 45 global central banks -- and here is the punchline -- human tivoli, the biggest easing we have had since the financial crisis. every time i read that, i think, has it really been that bad? worse than 2012, worse than 15,
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16? as this year really wanted that kind of policy response? priya: if you look at financial conditions, you would say no. if you look at monetary policy sort of an -- running out of ammunition, that tells you by policymakers seem to have panicked. why have they changed their reaction function? they don't have that much ammunition left, so they have set the bar lower for us to ease. there has been a global slowdown, the u.s. has outperformed, but the fed also looked at global factors and said they had to ease. it depends on which market you are looking at. the headwinds have been heavy. gershon: i disagree slightly with you on this. , central banks, not just the fed, no one is hiking rates soon. but this notion in the market that inflation is dead forever, that will not be the case. it was only 15 months ago that we were closing in on 3.25% on the 10-year.
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we should get curve steepness as soon as we get inflation. real rates are still essentially negative at the long part of the curve. i don't believe that will be the case in the long run. jonathan: people are looking at this labor market, seeing a jobs print north of 200000 and say there is more slack. if there is more slack, we can turn out payrolls growth north of that, i will not worry about inflation. this story has a long way to run. is that your take? krishna: absolutely. disagree with gershon, not the first time. the point is, inflation really has not picked up since the financial crisis. the rate increase that gershon was talking about, higher level of rates, was driven by what the fed was going to do. the is not going to be --
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fed learned its lesson in 2018. the policy tightening they implemented was a policy disaster, was not warranted, and they the fed learned its lesson are rega. when we talk about the rate cuts on a global basis, two different drivers. in the u.s., it was on mind of an unwarranted policy type by the fed. , things have actually slowed down meaningfully. if you look at the growthif youe relative to trend in emerging markets, europe, things are -- were significantly worse. those were warranted, here it was not. the tightening was unwarranted, so it is an unwinding of that tightening. jonathan: you made one of the best calls of 2019, you said the most important thing will be the calls on policy. to underline that, you could have gone the economic all right in germany on the brink of recession, and the market call was wrong. the dax ended up searching about 25%. the policy response we have had, they say it is not qe. there are so many people who look at this balance sheet and
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say, it's expanding, it looks like kiwi. for me, that looks like you eat, i will traded as it is. krishna: you can call it what you want. at the end of the day, it's an expansion of the balance sheet of the fed, and a meaningful expansion. if you look at three things that would qualify it as qe, is the balance sheet expanding? yes. the term premium going down -- was already low, so it cannot go down a lot. third, what is that telling you from a forward guidance standpoint? especially after powell came out and said what he said about tightening, that is not happening. call it whatever you want them a protest as much as you like, it is qe. markets are not full. they will assume it as such an act accordingly. jonathan: brea, there will be people screaming at the tv saying i agree with chairman powell, it is not to eat. -- qe.
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does it matter? priya: this is a communication challenge for the fed. they are trying to put reserves in the system. they should not have let the portfolio run off as long as they did. if the equity market is here because of this so-called qe, then it's a mistake. if the equity market is here because the consumer is resilient, then there is some merit to it. we are in this inflection point. is the consumer going to stay resilient? that should be the call for equity, not this qe balance sheet. krishna: that's an interesting point, but from an investor perspective, what matters? , our rates going to be relatively low for the foreseeable future? that is the bottom line. if that is the case -- jonathan: we are out of time. ating up, twitter borrowing some of the lowest costs ever in
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high-yield. that conversation is coming up. this is bloomberg "real yield." ♪ ♪
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jonathan: i'm jonathan ferro. this is bloomberg "real yield." i want to head to the auction block in the auction block and begin in asia where dollar bond sales from the continent remain steady this week. the market chalking up a new full-year record for issuance. in the u.s., investment that dude butes made some this week almost $15 billion, almost a clip the entire month of december 2018. , it'sr is offering inaugural bond issue yielding in7%, the lowest security
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eight years or more of the u.s. junk market. sticking dude with high, michael collins on whether it is start -- time to start by ccc debt. >> ccc spreads are 200 basis points wider. it's a weird relationship we have not seen. unless we are going into recession, there may be value emerging in the lower quality tears of the credit market. if you can find 20 or 30 of them that have been thrown out with the bathwater, i think there is value in that part of the market. jonathan: there is a big debate. weighing in is gershon distenfeld, priya misra, krishna memani. your take on whether it is time to rotate from some of the winners to the losers in high-yield? gershon: you're going to hear that a lot from high-yield managers. we have 33 years of high-yield data. 23 years, it has been treasuries. in 21 of those 23 years, ccc's have been the upper former. two exceptions, 2005, 2019.
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this has been an abnormal year but very good year for managers. vendors can buy anything without taking risk and outperform. that is a joke, twitter is high-yield with a three handle? that is low yield. that is indicative of the market. the math does not work. way you'll make money on that is it that goes to 2.5%. that won't happen. the only way you can promise investors to make even 7, 8, nine percent, let alone 12% this year, is to say ccc's are cheap. it is a trip. if you can pick the right 20 or 30, i agree. the question is how smart can you get that hit rate? that's a tricky thing. krishna: i like the line, that is not high-yield, that is low yield. three handle calling it high-yield. jonathan: you could still call the junk if you want.
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just not high-yield. krishna: the other point her son makes is a good one, there is no alternative. the one issue i would make with the statement is the day of reckoning is going to arrive. not a 2020 issuesue i would anymore. the employment number to some extent rooms that. the underlying economic growth has bottomed out. it is re-excel rating. the lower part of the market is left behind because we were worried about recession. now it has an opportunity to come back. is that a good trade over the next 10 years? i don't know. i'm focused on what will work in 2020. gershon: we have been talking a lot about this bifurcation of the market. i think it's become more than that. there are other parts of the market. it is notit is not just triple's these sleep at night credits. there are parts of the market that are going through secular changes.
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take the health care market. whatever your political leanings are, either side of the aisle has a plan. when you have sectors like that, you want to play the equity market because there will be winners and losers. then you have the u.s. energy sector. we talk about how we are still late cycle? we are now in the second downturn in a four-year period. high-yield managers are sitting there in a predicament they created themselves. iny financed these companies 2013, 2014, refinanced them again in 2017, 2018, and now are realizing that these companies don't generate cash even in the best of times, and now they are stuck with them. of them andone somehow oil goes to 90, i will underperform. managers don't know what to do, so they are saying, let me by these other triple c's. the economy is still pretty good. that is the only way i can get
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double-digit returns. high-yield managers don't know what to do. jonathan: does this trouble you, when gershon is pointing out these risks, and then krishna is saying there is no other alternative. for a lot of people, that's the case. priya: if your treasury alternative is 1.75 -- gershon: all relative high-yield. priya: when you live in this relative world, bund yields are still negative. the problem is default risk is extremely low-priced. if the economy is ok, that's fine. you should have a hedge for that. just a year ago, we went to a liquidity scare in the fourth quarter. what if you have any year and funding issues? is credit, particularly the riskiest part of credit, more
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susceptible? having some hedge, treasuries are cheap as a hedge or against any risk asset. jonathan: there is a cycle that keeps on coming up. krishna, you think four more years now. you see more conservative on priya, about what is happening in the cycle at the moment. gershon, i'm struggling to get my hands around where you think we are in the cycle. priya, about what is happening in the cycle at the moment. gershon: i don't believe in cycles. it is too simplistic a way of looking at the world. you look at some of the industrials in asia, latin america, i would argue they are early cycle. you look at the industrials in the u.s., we are later cycle, at least from a metric perspective. you have health care and retail going through secular changes. i don't like the whole cyclical talk. i think you have to decompose the parts of the economy. all sticking are with me. still ahead, the week ahead featuring an fomc rate decision, and another news conference from chairman jay powell.
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that is coming up next. in thisthis is bloomberg "real yield." ♪
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jonathan: i'm jonathan ferro. this is bloomberg "real yield." time for the final spread. coming up over the next week, what a week we have coming up. saudi aramco starts trading wednesday. u.s. cpi and an fomc rate decision. thursday, the ecb and the swiss national bank making their own decisions. and the u.k. heading for its general election. friday, the consumer back in focus with u.s. retail sales. final round of thoughts with priya misra, krishna memani, gershon distenfeld. the federal reserve and the ecb, and a big consensus forming going into 2020. the rest of the world outperform the u.s. where do you stand on that debate? priya: the rest of the world
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probably models along. we think the u.s. underperforms. we struggle to see, where is the growth engine for the rest of the world? of the pace of this celebration will slow down, so you can flatline. this has big implications for the dollar. if you get this convergence in growth, we have certainly seen it in global yields, but how much can the dollar weakened? you need the fed to capitulate. the fed needs growth, we have cy seen it in global yields, to saa material assessment and we need to start cutting. only then will the dollar start to fall. gershon: you have to look at a couple of factors. one is the sensitivity to trade, how all that turns out. second is just a policy response. you look at europe, how much ammunition is left? even china has a lot more that they could do, should weakness or merge. krishna: i think for the overseas economies, for them to do better, basically, the dollar has to weekend.
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that means, as per your was indicating, every acceleration overseas has to be far more substantial than in the u.s. there is a case to be made. it is unclear today whether that will be the case are not. if it is unclear today, what that means is, expecting the dollar to weaken may be something we have to think about a little bit. big debatese of the going into 2020, let's get to the rapidfire round. more 2020 calls. double-digit returns in investment grade credit in the united states through 2019, next year, either flat to negative, mid single-digit returns, or double-digit returns in 2020. what are you looking for? priya: negative. krishna: low signal digits. agree withhate to krishna, low single digits. jonathan: the 10-year this year, 2.18, the low, 2.14.
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the retest the highs that year or test the lows this year next year? do we test the highs or lows in 2020? gershon: both. priya: highs. -- lows. krishna: highs. jonathan: i think we did the whole program not talking about trade, december 15, does a round of tariffs going to place or delayed or suspended? priya: delayed. gershon: delayed. krishna: delayed and suspended. withhan: great to catch up you all. gershon distenfeld, priya misra, krishna memani. that does it for us. this was bloomberg "real yield." tv. is bloomberg ♪ whether you're out here on lte.
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authorities are investigating whether the shooting was terrorism related. the attack left four people dead, including the assailant. seven people were wounded. the shooting was the second had a u.s. naval base this week. china when i'll require u.s. diplomats to give five days notice before holding meetings with chinese officials and academics. china says the new rule is a direct response to washington's to require october all chinese diplomats to preregister for meetings with officials in the down to the municipal level them as well as visits to educational and research in the two shins. china has asked the u.s. to correct its mistakes and revoke the decision. set for ason appears clear victory in next week's u.k. general election, according to senior officials in both his ruling conservatives and the main opposition labor party. bloomberg has learned johnson's campaign promise to "get brooks & is


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