tv Bloomberg Real Yield Bloomberg December 15, 2019 11:00am-11:30am EST
>> they are cheaper. >> we will test 1%. the 10l get to 1.2% on year. >> i don't see a resolution on the trade front. i think that weight will continue to weigh on the u.s. economy. back will have to come again. >> there has been a tremendous shift across central bank landscapes in 2019. how do you think that could happen? it probably couldn't. lisa: everyone ganging up on bob michele. we have more perspective. joining me around the table is marilyn watson of blackrock, matt hornbach of morgan stanley and subadra rajappa of societe generale. marilyn, i would love to start with you.
do you think that now that we have some contours of a trade deal, that we will seek 10 year treasury yields bleed higher into next year? marilyn: we have to see what the 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 of the data, the u.s. election coming up next year, we think the u.s. economy is moderating but will continue to grow. it is hard for us to see the 10 year break out of the range it is in currently. lisa: to that point, we see treasury yields lower on the
day, even though we did get some kind of removal of the december 15 tariffs. why aren't yields lower? matt: at 1.95, what the market was pricing in a phase one deal that included a lift of the tariffs from september 1. we got half of that. at 1.70, you are probably pricing in no rollback of anything, so we split the difference, rallied into the middle of that range. subadra: i think we have been trading in line with the cny. we track the 10 year treasury yields versus the inverted cny. that correlation has been very strong. this is i would say this is trading very much in line with the trade sentiment, as marilyn pointed out, there are no details or specifics in the announcements and the headlines we have had the last couple of days. lisa: that has not stopped people before, certainly. 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, for example, you can see people were expecting this rally, expecting yields to come in. now they are pretty neutral heading into next year. marilyn: i think that's right. 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, either more than the market is expecting, than the headlines suggest, it is hard to see a catalyst for yields breaking out too much in either direction. lisa: subadra, do you think that bob michele's call of 1% on 10 year treasury yields is not your call? subadra: it is actually more in line with our calls. lisa: really? subadra: we have 1.20 by the end of the year. we are calling for a meaningful slowdown in growth next year. we think the u.s. economy could potentially go into recession. under the circumstances, the fed could deliver three or four cuts. 1.20 is very much in line with bob michele's call. lisa: so you agree, and the people are ganging up and saying no way subadra: i think the recession call is a tough one, but they are more skewed to the downside, there is uncertainty around the trade negotiations, elections next year, you are seeing the
ecb continue to purchase assets. as well as the demand for treasuries from overseas accounts is quite overwhelming. even though there has not been nearly as much yield pickup currency adjusted basis. under the circumstances, i don't see yields rising meaningfully from here. if there is any weakness in the data, you will see a rally in bonds. matt: the thing we are focused on next year is the confidence at the c suite level in corporate america. we don't have reason to believe that you'll see a continued 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, if that were to happen, the fed would react to that, but we don't have reason to believe ceo confidence will fall that hard in an election year because of the uncertainty. you don't want to lay off 20% of your workforce prior to the election, because if the outcome is a positive outcome you will have to hire all those people back at higher wages. subadra: ceo confidence is at decade lows. to me, that is more of a concern. business sentiment is low, ceo confidence is at decade lows. that to me is troubling. matt: i will reply to that. when you look at diffusion indices, that's correct. the diffusion indices 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, that it is increasing again into next year as well, i think the fed is doing a lot going into year-end, helping with the repos. when you look at that, that will continue to contain the dollar, support growth. it is hard to see a reason why i think the u.s. would deteriorate significantly from here. we think it will remain on trend. lisa: what is your 10 year treasury call? maryland: we are between 1.8 and 2. lisa: you mentioned repo, that is the magic word. the fed announced new repo terms, taking place this month and next. a strategist weighed in on this, saying the fed expects take up to be this 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 this to be fully subscribed, but it should be fully comforting to participants that it is available. the interesting thing is that we have seen all of the recent repo operations oversubscribed. does this indicate to you there is some concern among market participants? matt: i wouldn't call it stress or concern. i think people were stressed out a couple months back when, in the wake of what happened in september, they thought we need to get our act together for year-end. i think that caused a lot of stress. i don't necessarily think there's 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, and it is demonstrating that it is willing to step up and help the situation. it is not that there is no risk, but 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 end coupons. that is where the uncertainty comes from. there is 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: i think the idea that the fed can certainly buy coupon securities is one to think about because powell suggested they were considering that. but 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 more 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 convert that $60 billion a month into $15 billion a month and buy coupons across the curve, which is what they are doing with their agency pay downs.
dwindling this week, just under $4 billion of new debt has been sold thus far including offerings from canadian imperial bank and apollo management. in high yield, junk bond issuers rushed in early this week as yields dropped to a fresh two-year low. cox media led the pack. on track to price $8.4 billion by the end of the week. speaking of credit markets, peter tchir of academy securities says it may be harder to find value in the junk space going forward. >> one thing i look at in the high-yield space, for every dollar that comes into the high-yield, it is going disproportionately into bb. they don't want to own ccc and bbb. there are some companies that have benefited too much. it is time to be a credit picker. lighten up on what is risky. the value is not there the way it was a year ago. lisa: still with us is marilyn watson, matt hornbach, subadra rajappa. do you agree it is time to lighten up on high-yield debt? marilyn: going into next year when we have a moderate growth environment, i think it's really important to focus on the underlying fundamentals.
i think we will see increasing dispersion between the performance of individual corporate bonds. this year has been very interesting. we have seen a higher number of upgrades than downgrades. a number of 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, carry, but really understanding the underlying fundamentals will be incredibly important. lisa: so you are punting. marilyn: we will be very selective. 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 are expecting another range bound year for investment-grade credit spreads. because we expect a range bound year for treasury yields. ultimately 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, marilyn, because a lot of people are saying that,
and even this year, you saw credit dispersion that was dramatic. is there a way to scope the amount of credit dispersion 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 being towards 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, look at the 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, with 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? subadra: it is possible. i think it has more to do with the demand dynamic for corporate bonds. typically if you see a meaningful slowdown or if the u.s. economy goes into recession, you tend to see credit spreads widen. this time around with the amount of demand you are seeing from overseas accounts, especially looking at the balance of payments and demand from japan, what you tend to see is a lot of demand for corporate bonds and any higher-yielding assets. about 13 trillion to 15 trillion
in negative yielding assets. what 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. i think credit spreads will not be a good indicator of a recession, or a meaningful slow down, because of the demand dynamics. matt: i guess what i would say here is 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 are going to become. if you are an investor in japan and you have spent the past couple of years not hedging your foreign bond portfolio, you will probably raise your currency hedges, and you'll be able to pick up more carry when you do that. the need to own corporate credit as the fed takes rates to zero diminishes. i would actually 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. barclays calling for lower returns in the high-yield space, writing, we expect triple c spreads to be relatively unchanged in 2020 with higher default losses and price declines remaining elevated for downgraded bonds in this ratings bucket."
you also had ubs coming out talking about how the ccc space and the weakness we have seen in leverage loans 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 unknowns that we have yet to price into the markets for next year. lisa: matt, ccc's, polling nice, you or staying away? matt: we are staying away. definitely the focus of our
strategy group is up in quality. that has been our focus this year and that will continue to be our focus in 2020. lisa: everyone is sticking with me. coming up, the final spread, the week ahead featuring 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. coming up over the next week, on sunday, china reporting retail sales and industrial production numbers. tuesday, the fed's 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. subadra, which rate decision will be the most important to keep an eye on?
subadra: with all of the brexit developments, i would pay attention to what is coming from the bank of england. we have seen a collapsing on breakevens in the u.k. we will see what we get from them. i think there is more room for policy accommodation coming out of the u.k. matt: i completely agree with subadra. i think 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? marilyn: we think that brexit will remain on hold the next week. next year 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. potentially leaving the eu, looking at the underlying data, events next year will be crucial. but next week from the bank of england i think it will be more of a steady as she goes
conversation. lisa: 2019 was a year of easing. the biggest wave of global easing collectively of all the central banks in the direct aftermath of the financial crisis. there is a question, is that not to be 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 30 years of seeing central banks in these 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. subadra: 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 inflation remains muted, the bias will be toward easing. that is what i feel will drive the bond markets. lisa: i love that you have a contrarian take. time for the rapidfire round. the first question, matt was
cheating. will the fed cut rates next year? marilyn: no. matt: no. subadra: yes. lisa: are 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: do you prefer emerging markets or developed market corporate debt? marilyn: treasuries but also emerging markets. matt: emerging markets. subadra: emerging markets. lisa: the reason i said you were cheating, matt, is you were reading the questions first. which is smart. marilyn watson, matt hornbach, subadra rajappa. matt is never coming back. from new york, that does it for us. "real yield" will be back next friday at 1:00 new york time,