tv Bloomberg Real Yield Bloomberg December 13, 2019 1:00pm-1:31pm EST
>> from new york city for our viewers worldwide, i am lisa abramowicz. bloomberg real yield starts right now. markets assessing the contours of a partial phase one trade deal. a swirl of conflicting headlines and tweets continuing to whip sovereign risk assets. keeping investors on edge, looking for more details. the big issue, markets debating what 2020 has in store for the u.s. 10 year. >> it should eventually be a good year for bonds.
>> bond yields moving sideways. >> we need them to be cheaper. >> we are going to test 1%. >> a lot of things have to go incredibly wrong to get down to 1%. 1.2% on the 10 year, we have to be looking at a global recession. i think that continues to weigh on the u.s. economy. >> the fed will have to come back and ease again. >> the fed is going nowhere. >> there has been a tremendous shift easier across the landscape in 2019. how can that happen in 2020? it probably couldn't. lisa: everyone ganging up on bob michele. joining me around the table is marilyn watson of blackrock, matt orbach of morgan stanley and subadra rajappa of societe generale. i want to start with you, maryland. that we have some condors of a trade deal, that we will see
tenured treasury yields lead her into next year? thelyn: we have to see with details are on the phase one trade deal, how much they will roll back next year, the impact for the rest of this year. it would reduce some of the headwinds if we see more stabilization. but i think going into next year where you had some of the -- we think the fed will probably be on hold until next year. that is the message we are sending out clearly this week, in terms the of the data, the u.s. year, wecoming up next
think the u.s. economy is moderating but will continue to grow. it is hard for us to see the 10 year break of the ranges it is in currently. lisa:lisa: to that point, we see treasury yields lower on the day even though we saw the removal of the december 15 tariffs yeare thinkspecifics in the announcems and the headlines we have had the last couple of days. lisa: that has not stopped people before. the lack of specifics does not necessarily mean anything. if we get a greater sense of a deal, do you expect 10 year yields to climb substantially above where we are currently? if you look at positioning, you
can see people were expecting this rally, expecting yields to come in. now they are pretty neutral heading into next year. marilyn: going into next year, it is hard to see the yield breakout from here. it could go up to 2%. it has rallied today. going into next year, unless you get some significant new news, more than the market is , then the headlines suggest, it is hard to see a catalyst for yields breaking out too much in either direction. lisa: subadra, do you think of michael's call of 1% on tenured treasury yields is not your call? subadra: it is actually more in line with our calls. we have 1.20 by the end of the year. we are calling for a meaningful growth slowed down. we think the u.s. economy could potentially go into recession under the circumstances of the
fed delivering three or four cuts. 1.20 is very much in line with michele'sel's -- bob call. subadra: i think the recession call is a tough one, but they are more skewed to the downside, uncertainty around the trade negotiations, elections next year, you are seeing people continue to purchase assets. the demand from overseas accounts is quite overwhelming, even though there has not been nearly as much currency adjusted basis. under the circumstances, i don't see yields rising from here. there is any weakness in the data, you will see a rally in bonds. the thing we are focused on next year is the confidence of the c sweet level and corporate america. the thing we are focused on next year is the confidence of thewe don't have reason to be that you'll continue to see a deterioration in ceo confidence.
in order to get the economy to slow to a point where the fed would qualify it as a material change in their outlook, you are going to have to see ceos get pretty pessimistic on the outlook in order to start laying people off. eventually and that would happen, the fed would react to that, but we don't have reason to believe ceo confidence will all that hard in an election year because of the uncertainty. you don't want to lay out 20% of your workforce prior to the election of a because if the outcome is a positive outcome, you will have to hire all those people back at higher wages. ceo confidence is a decade lows. to me, that is more of a concern. business sentiment is low, ceo confidence is a decade lows. to me, that is troubling. matt: i will reply to that. when you look at diffusion indices, that's correct.
they are at decade lows. but when you look at measures of the level of ceo confidence, they are above levels that existed prior to the election of donald trump. when you look at the level of ceo confidence, it still looks perfectly fine. lisa: your call on treasury yields? matt: we are at 1.75. marilyn: when you look at the liquidity in the system, increasing into next year as well, i think the fed is doing a lot going into year-end, helping with the repos. that willook at that, continue to contain the dollar, support growth. i is hard to see a reason why think the u.s. would deteriorate significantly from here. we think it will remain on trend. lisa: what is your 10 year treasury call? 2.ilyn: where we are now and lisa: the fed announced new repo terms, taking place this month and next.
in on this, weighed saying the fed fever expects this to be large and they want to make sure they provide that level, or they just wanted to make sure everyone knew they were not going to undersize it. i would not expect is to be fully subscribed, but it should be fully comforting to participants that it will be available. the interesting thing is that we have seen of the recent repo operations oversubscribed. does this indicate there is some concern among market participants? i wouldn't call it stress or concern. people are stressed out a couple when, in the wake of what happened in september, they thought we need to get our act together for year-end. i don't think there is necessarily going to be a lot of stress over year-end, in part because the fed is sending a significant signal here. you also have to remember the treasury's cash balance is
expected to go up, so the fed will have to provide some extra liquidity to account for that. lisa: do you think the repo man cometh is more of a bogeyman, will there be any serious disruption? marilyn: there are signs of stress in the market, but the fed is doing as much as it can, is demonstrating that it is willing to step up and help the situation. it is not that there is no risk that it is a diminishing. lisa: credit suisse this week was talking about qe 2. subadra, do you think the federal reserve will be forced to buy coupon treasuries in the face of stress that could materialize by the end of the year? subadra: it is possible but unlikely. they still have a lot more room on the rate cutting side of the equation. we are well above the zero lower bound, so the fed has more room to cut rates before they start doing qe. the thing that is happening right now, there is sort of stealth qe going on, buying bills, potentially could buy
front and coupons. that is where the uncertainty comes from. some easing of monetary policy, even though the fed is suggesting they'll be on hold for the rest of next year. lisa: matt, you look like you are itching. matt: not at all. lisa: please go ahead. matt: the fed can certainly buy coupon securities. powell suggested they were considering that. it is not something that we expect them to do until may when they convert their $60 billion a month of t-bill purchases into purchases that are meant to sustain the level of reserves in the system, as opposed to building them up, which is what they are doing today. in may, we expect them to concern -- convert that $60 billion a month. that is what they are doing with their agency pay downs. lisa: i did say qe 2 but i did mean qe 4. coming up, the auction block.
offerings from canadian imperial bank and apollo management. junk bond issuers rushed in early this week as yields dropped to a fresh two-year low. junk bondcox media led the pack. sticking with credit markets, peter share of academy securities says it may be harder to find value in the junk space going forward. i look at in the high-yield space, for every dollar that comes into high-yield, it is going to strip portion of a into bb. they don't want to own ccc and energy. there are some companies that have benefited too much. it is time to be a credit picker. the valley is not there the way it was a year ago. us is marilynth watson, matt hornbach, subadra rajappa. do you read it is time to lighten up on high-yield debt, ilyn? marilyn: going into next year
when we have a moderate growth environment, i think it's really important to focus on the underlying fundamentals. we will see increasing dispersion tween the performance of individual corporate bronze. this year, that should be interesting. we have seen a higher number of upgrades and downgrades. corporate focusing on deleveraging a little bit. in this environment, given the supply and demand dynamics, we still have a huge amount of demand compared to supply, so there is a huge focus on income, carrie. really understanding the underlying fundamentals will be important. lisa: so you are punting. matt: our global head of credit strategy is of the similar view, we continue to like being up in quality in credit, particularly investment-grade. we expect another range bound year for investment-grade credit spreads. because we expect a range bound year for treasury yields.
when you are looking for high-grade corporate credit, you'll have to look even harder next year. that is what we are recommending investors do. lisa: i don't mean to be flip about that because a lot of people are saying that, and even this year you soccer dispersion that was dramatic. is there a way to scope the amount of credit we have seen? marilyn: when you look at the performance of durations, corporate bonds, that has had a huge impact. we are not going to see that next year as well. we need to price in how much duration risk will be. we have a strong preference for getting toward the front end of the curve. now when you look at the liquidity, that is incredibly important in the market as a whole but also underlying issuers. look at the management, financials, you have to understand the risk return dynamics. lisa: subadra, that brings us to your space and the concept of duration. duration has grown to some of the highest levels on record in
the investment-grade and high-yield space, spreads shrinking to the lowest in more than two years. do you think this is going to be a risk or tailwind next year? can credit spreads rally, can you see a rally in treasury yields? it is possible. i think it has more to do with demand dynamic for corporate bonds. if the u.s. economy goes into recession, you tend to see credit spreads widen. demandthis time around with tht of demand you are seeing from overseas accounts, especially man from japan, what you man from japan, what you tend to see is a lot of demand for corporate bonds and any higher-yielding assets. when you are seeing is this constant demand. my concern is that people will become complacent to the risks in the underlining economy going into a recession, credit spreads
being too tight. credit spreads will not be a ,ood indicator of a recession or a meaningful slow down, because of the demand dynamics. matt: if we did have a rally in the treasury market next year, i would suppose it would be on the back of an aggressive fed easing cycle. the more the fed eases policy, the lower those currency hedging costs will become. if you are an investor in japan and you have spent the past couple of years that hedging your foreign bond portfolio, you will raise your currency hedges, and you'll be able to pick up more carrie when you do that. the need to own corporate credit as the fed takes rates to zero
diminishes. i wouldn't expect to see treasury yields go down and credit spreads widening in that particular scenario. lisa: sounds like it is not very good for credit. for loweralling returns in a high-yield space, writing, we expect triple c spreads to be unchanged in 2020 with higher default losses and price declines are many elevated for downgraded bonds in this ratings bucket." you also had ubs coming out spaceg about how the ccc and the witness we have seen is a leading indicator of what we may see next year. marilyn, do you agree? marilyn: next year, talking about dispersion, duration, i think it is really going to be critical what we see from the u.s. china trade talks. also the huge uncertainty coming from the u.s. election. we have yet to see the policies of the democratic candidates, yet to see in terms of the fiscal space in the u.s., what will be possible. there are huge amount of we have yet to price into the markets for next year. ccc's, polling nice,
or staying away? matt: definitely the focus of our strategy group is up in quality. that will continue to be our focus in 2020. lisa: coming up, the final spread, the week ahead featuring ccc's, polling nice, or staying away? more fed speak and another round of global rate decisions. that is coming up next. this is bloomberg "real yield." ♪
lisa: this is bloomberg "real yield." time for the final spread. oning up over the next week sunday, china reporting retail sales and industrial production numbers. tuesday, robert kaplan and eric rosengren speaking in new york. wednesday, ecb president christine lagarde speaking in frankfurt. thursday, rate decisions from the bank of england and bank of japan.
marilyn watson, matt hornbach, and subadra rajappa are still with us. what rate decision will be the most important to keep an eye on? subadra:marilyn watson, matt ho, and subadra rajappa are still with us. with all of the brexit developments, thing attention to what is coming from the bank of england. we have seen a collapsing on breakeven in the u.k. we will see what we get from them. there is more room for policy accommodation coming out of the u.k. i completely agree with subadra. that is a place to focus on. i would say it gets more interesting the deeper into 2020 we get. next week may not be much of an event. lisa: marilyn, will anything be much an event coming up? think that they will remain on hold the next week. next week will be important because we will also learn who will be nominated to replace mark carney as the head of the bank of england as well. next year not only will you have someone else heading the bank of england, but as we go into brexit negotiations, the u.k.
eu,ntially leaving the looking at the underlying data, events next year will be crucial. but next week from the bank of england, it will be more of a steady as she goes conversation. lisa: 2019 was a year of easing. there is a question, is that not to beevents next year will be crucial. repeated? are we going to see something, if not to the same magnitude, the same direction? matt: that is not in our forecast, i can tell you that. after seeing 30 years of central banks using a bunch and not seeing inflation, you can never discount the possibility you get another wave of central bank easing. but it is not in our forecast at this point. it is in our forecast. we think the ecb stays the course, the fed could cut rates, if there is a meaningful slowdown in the u.s. economy. for the most part, as long as theation remains muted,
bias will be toward easing. will drivet i feel the bond markets. lisa: i love that you have a contrarian take. time for the rapidfire round. , matt wasquestion cheating, will the fed cut rates next year? marilyn: no. matt: no. subadra: yes. lisa: ourmarilyn: no. matt: ccc rated bonds a buying opportunity or catching a falling knife? marilyn: be selective. lisa: all right. matt: catching a falling knife. subadra: i'm in agreement with matt. lisa: emerging markets or corporate market debt? matt: emerging markets. subadra: emerging markets. were the reason i said you cheating, you were reading the questions first. which is good. marilyn watson, matt hornbach, subadra rajappa. matt is never coming back.
every day, comcast business is helping businesses go beyond the expected. to do the extraordinary. take your business beyond. mark: i'm mark crumpton with bloomberg first word news. the white house has started to map out its plan for defending president trump in an impeachment trial likely to happen early next year.
differences between the president and senate majority leader mitch mcconnell over the proceedings have so far cut the strategy short. one key decision has already been made. lawyer patouse cipollone will represent the president in the senate trial. the house is expected to vote on articles of impeachment next week. the senate plans to pick up a trial in january. the u.s. up in court could rule as soon as today on whether to consider president trump's effort to keep his financial documents out of the hands of congress and a new york prosecutor. the court could schedule a landmark constitutional showdown for early next year, or force the quick turnover of documents mr. trump has fought for years to shield. the british prime minister boris johnson is urging u.k. citizens to come together, and in his words, let the healing begin. johnson gave a victory speech saying, it's been a divisive three years since the brexit vote.