tv Bloomberg Real Yield Bloomberg February 7, 2020 1:00pm-1:30pm EST
jonathan: bloomberg "balance of "bloomberg real yield" starts right now. ♪ up, they blowng up payroll report delivering a big upside. junk issuers jump back in. we begin with the big issue, another solid report. >> these numbers are impressive. >> there is a lot to like about this report. >> momentum is turning in the right direction. >> these employment gains are clearly above the underlying trend.
>> definitely trending higher. >> the u.s. economy is in a good spot. >> the u.s. is clearly the bright spot in the world. >> we have to take into account what is happening in the rest of the world. >> it will be interesting to see if the effects of the coronavirus come to our shores. >> something like 70% of production is in china. we don't know when it comes back on. >> if china takes a hit. >> the markets may be rebound as we get through this. jonathan: joining me are the table is bob michele, priya misra and matthew hornbach. great jobs report with a big caveat. all of this data for the month of january predates the scare coming out of china. priya: the jobs report is actually not that important. it is always a backward looking indicator. we had this pretty big coronavirus shock. we don't know how long it will last.
looking at the impact on china ch highers. is mu than it was with sars. it is chugging along as of january. that does not mean a lot. that is why the treasury pretty much ignored it. yields arereasury down six basis points. it is as if the payroll support never happened. matt: this remind me a lot of 2014. u.s. economic data was outperforming almost the entire year. what happened to treasury yields? they went down, down, down. it was because overseas investors bought a tremendous number of treasuries in 2014 because yields outside the u.s. were minuscule. it is the same thing. people are coming to the u.s. because you get high quality, high growth, high yield. jonathan: the u.s. economy can decouple from the rest of the world. the treasury market cannot.
are we seeing that play out again? bob: i was in europe last week. everywhere i go clients have too much cash. they are looking for reasons to get to the bond market. they are trying to find that big in the u.s. that gets them to jump in. i think the market is doing the right thing today. the employment report is fun to look at what pointless in the wake of the coronavirus. people are taking out a little protection against what could happen over the weekend. jonathan: talk to me about the range on the 10-year right now. what kind of range are you thinking about? bob: the fed does not want to change the fed funds rate. the 10-year will be in tagging 175.ance of 150 to in a risk on environment, 175 to 190. that is it for the first half of the year. priya: i completely agree with
bob. the upside is a little more gapped than the downside. can the 10-year get below 150? possibly. if the fed is starting to cut rates they can go a lot more. they told us we have your back if financial conditions tightening. if the u.s. economy slows down. if it's ok, we will let it run. jonathan: we believe you, you will keep rates low. we don't believe you can generate inflation. is that the signal you see? matt: the 10-year breakeven inflation rates cannot get out of bed. it's had good reason to try. we will have decent effects pushing up the rate on your on your inflation into the first quarter of the year. the bond market does not seem to care. the one thing that stood out to me was the monetary policy report from the fed. they acknowledged the possible downside risk of the coronavirus. this is another element that will weigh on people's thinking
when they decide what to do with their cash. treasuries is the safest place to be if the risk continues. jonathan: momentum has to matter. you look at the rest of europe and asia. the u.s. has positive forward momentum for january. december for the likes of germany, we are talking about recession risk in europe. it's a massive problem for the ecb. bob: people looked at the data out of germany and it was terrific. take us back to the crisis era levels. if you don't see yields going up and you are stuck in negative territory, you are coming into the u.s. market. there are a lot of other reasons yields are staying low in the u.s. the problems have not gone away. we see all the campaigning. we have the iowa caucus, the new hampshire primary. people are getting a little anxious about how all of this will play out in the general election. what is a phase ii deal going to look like with china now that they are mired with coronavirus?
jonathan: the debate of 2019 is not going away either. it almost got boring. manufacturing. services are resilient. we thought we would see manufacturing picking up. then we got parts in the face by a growth scare again. priya: they're probably still is an assumption that manufacturing was weak because of the trade war. the fact we got a phase one trade deal, ok, manufacturing can start to move up. that is not happening in europe. that will largely stay weak. profit margins for the u.s. corporate sector has been declining for the last couple of years. it intensified. i'm concerned the profit margin story will weigh on the service sector. bob: can china deliver on its side of the phase one agreement? it does not look like they can. they shut down the country. priya: even if they can't deliver, does the president reinstate tariffs? highly unlikely.
mean the business uncertainty goes away. stick -- at what point does the corporate sector say it will affect hiring? jonathan: not just about the outlook and the balance of risk, you think the hard data in the u.s. is about to rollover at some point this year? priya: yes. that's why we had the fed easing later this year as well. it could take a while. the labor market is still strong, but the reigning concern is if there is no let up in uncertainty, no let up in the global growth drag, the corporate sector cannot do this alone. which is what it will multiply spill over into consumption. matt: if that were the case, i would want to see it show up in measures of ceo confidence and small business optimism. we are not seeing that yet. these measures are bouncing.
they are not back in the pre-u.s.-china trade conflict levels, but they are heading in that direction. they might not continue but i want to see those if it lower again before i started to get more concerned about the u.s. economy. bob: we are finding their complacency. they are able to issue whatever they want in the corporate bond market at ridiculously low levels to service the debt. they are using that to buy back shares and raise dividends and maybe even buy each other. why wouldn't you be a happy ceo with that environment? jonathan: any policy initiatives on the horizon? are there any policy initiatives on the horizon you can see that changes the dynamic we are discussing rather stable? from china, europe, the u.s., the fed? bob: i think central banks want to stay where they are. over changed the dynamics is the physical impulse come out of somewhere. i don't see who has the courage, capability or ability to do that.
matt: when i look around the world at the central banks that have been opining on policy and the risks around their outlooks since january 1, i can't find one central bank that wants to cut rates aggressively, nor a bank that was to talk and more hawkish tones. they just want us to believe they are on hold for the foreseeable future. that is what you don't get villa tilly in the marketplace. -- volatility in the market place. fx vol is at all-time lows on our metrics. jonathan: if you want to put capital to work, what do you do? is there an inflation call option you would like to take at the moment even no one is pricing in higher inflation? priya: you put on steepeners. the market is not pricing in the fed easing or inflation risk premium going higher. they will conclude his inflation premium by the middle of the year. they will push on the theme they
will let the economy run hot. the u.s. treasuries are assuring 20-years. jonathan: do you like that trade? matt: we like another version of a steepening trade. it's because there is an asymmetry with respect to how worst things can get or things get better. if things can get better, the yield curve steepen a touch. if they get dramatically worse, we can see it bring the fed into play. we still have more of a risk off mentality and the recommendations we have for our investor base. we think there is more to go on the risk off. bob: i am all in. there is too much liquidity looking to get into the bond market. i want to get into emerging market debt. when the fear of her coronavirus subsides you have central banks that have capacity to bring yields down a lot. you have high real yields and fx that can kick in at a big white. jonathan: bob michael's is all is all in.ichele
jonathan: i am jonathan ferro. offuld like to start things right here in the united states. companies boosting deal sizes and weekly ip issuance. sales of high-yield heading for its second as week of the year with roughly $14 billion in bonds priced in multiple times over. in europe, closing the biggest corporate bond deal since 2016. 9.3 billion euros of bonds.
placed at negative yields. headwinds to investing in high-yield. >> the credit markets today are challenging. i think you have to be tactical around that. you get in, you have got to get out of it. liquidity down the credit spectrum is really tough. we are all in, all-out, and you cannot trade that much. jonathan: back with us, us, bob michele, matthew hornbach and priya misra. you are leaning into this? bob: yeah. it looked like we were heading towards recession. the central banks eased. we totaled 88 central bank rate cuts. you got compromise on trade. what is there to fight? i look at it from the perspective, you worry about high-yield. if you think you are going to lose money, you need default
rates they go up and they go up when you have a recession. if the probability of recession is reduced so dramatically, why do i want to fight that? i will not lose money and i have got loads of clients looking to get into something that has a positive yield. jonathan: summer of last year this was a 180. you were worried. what was the inflection point for you? we need to lean into this and turn the other way? bob: shock and often the central banks. providing liquidity backdrop and expansion of the balance sheet again. that was the inflection point. a compromise on trade was a nice tail end. priya: the fed reaction point is critical here. the fed was highly divided when they cut rates, yet even the fed officials did not want to cut rates and are not talking about hiking now.
the fed is behind this on hold easing, but the balance sheet is growing. i'm concerned about growth but not necessarily over the next few months. i think credit is ok for now but i would say hedging that liquidity risk might make sense. hedging the default risk in long treasuries. matt: you had two things happened that was a shock and all. one was the ecb. massive easing. if you look at the shadow sure great measures of what the ecb did, they had a tremendous about of impact on the market by flattening the bund curve. but cut 75 basis points, they told us once the uncertainty went away they were not going to take the 75 basis points back from us. that is a gift. to me that explained the risk on in the fourth quarter much more so than the balance sheet expansion. jonathan: you talked about the s message -- asymmetric risk.
that is the additional layer on top. matt: when i look at what is priced into the front end the curve, we have about 1.5 rate cut in the price for this year. that does not stand up to me as being egregious. i can see that going to three rate cuts this year if things really deteriorate. that is not what i'm expecting but it can happen. jonathan: let's talk about the price. we are rich. we could have said that over the last for years for sure. they issued debt with negative yields, is that something you want to be on the other side of? bob: i think you are looking at tired old antiquated metrics of default, risk premium, yields, credit spreads. there is a new world. if you're not going to lose money and you have abundant liquidity, yield points and credit spreads are just math. it will come in and flood the
market. do i want to be dogmatic and happy derek -- academic and fight it? do i want to invest with it until something changes? the thing that has to change is the probability of losing money. the central banks are underwriting this. that 75 basis point in cuts led to be huge mortgage rebuy. consumers are spending that money. you have a very stable environment. jonathan: let's take tesla. the 2025 note. that yield when it was first issued, everybody knows the story. record low yield. the yield on that now is 480. 4.8%. on triple c credit. there's a big equity at the moment. we have the cash flow story that is improved. all those things in this credit's favor. 2025, isying tesla
that when you can yield on five-year money from a triple c credit? bob: i think tesla is a phenomenal one-off story where the stock quadrupled in price. that is like looking at government debt to gdp at 100% and somehow gdp quadrupled. the debt has not changed but now it is only 25%. i think that is some of the dynamic that is going on. it's an interesting company. there is a lot of moving belts. they only have one outstanding fixed rate bond. go ahead. jonathan: the majority of the profile has been the convertibles as well. it is all in its favor. the traditional metrics, if they don't matter anymore, how do you assign evaluation? bob: it's overwhelmed by the liquidity. that is the metric you have to weigh in. you have to be willing to write that. i was telling this -- you have to be linked to ride that.
i will put money in your income fund. it puts it out into the different sectors. you can't fight that dynamic. if you're not going to lose money, why would you? priya: it is a global market as well. the liquidity bob was talking about is a global issue. at -40 basis points. it will take real rates much lower. i think the fact the entire selloff over the last week was thatriven by real risk, tells you by the table report did not matter. it doesn't make sense in this global liquidity environment. jonathan: sticking with us. still ahead, the final spread. jay powell's semiannual testimony to congress.
jonathan: i am jonathan ferro. time for the final spread. the fed speaks. jay powell, his testimony to congress. cpi data coming out of china. and u.s. retail sales to close out the week. bob michele, priya misra, matthew hornbach back with us. policyiew of monetary for the fed and the ecb. what are you looking for? bob: inflation targeting. are they moving off the 2% target? that is phenomenally what i want to see. priya: i would agree. the fed has said they would not move their inflation target, but they are talking about range or how much will they let the
economy run hot? what are the new tools? are they going to be effectively easier when the economy is hot? are they looking for details? they are not done with it at the middle the year. matt: number one, i'm curious to see what they would do with the dot plot. it's an important for guidance divide. the second thing a looking for is some inkling of a plan for what they will do when they get back to the zero lower bound. what will the next round of qe look like. will it be a yield curve control type program? are they giving up their balance each of the marketplace or something less aggressive? former on whether they will shift things away for the inflation targeting. is there any scope of surprise given the fact there is plenty of evidence that the review goes on and a lot of this is bleeding into the reaction function and the decision-making at the fed already?
matt: the scope for surprise is probably low. we don't expect them to do anything that binds their hands to a certain policy task. it's all about language. language matters. it is part of their forward guidance strategy, using language. the language will be key. jonathan: we will do the rapidfire around. the 10-year yield in united states. 1.6% on the u.s. 10-year right now. what do we had first? -- hit first? 140 or 180? priya: 140/ bob: 180. matt: 140. jonathan: in at around 350 basis points on u.s. high-yield spreads. re: tighter or wider by year-end? wider?we tighter or
matt: tighter. bob: wider. priya: wider. jonathan: 3, 2, 1 or none? priya: two. matt: none. bob: one at year end. jonathan: great to catch up with you all. bob michele, priya misra, matthew hornbach. that does it for us. we will see you next friday at 1:00 p.m. new york time. this was "bloomberg real yield." this is bloomberg tv. ♪
constitution's emoluments clause s. the president was accused of profiting from forward spending. a federal appeals court in washington dismissed the case, saying nevers of the house and senate lacked standing to sue the president. the outbreak of the coronavirus will not stop china from eating purchase goals outlined in the recent trade deal with united states. white house economic advisor larry kudlow tells bloomberg chinese president xi jinping told president trump iphone phoneg will keep up --by beijing will keep up its end of the deal. >> he assured president trump while there might be some delays in the purchase of american exports, the job, the markers, the $200 billion over the next couple of years will be met. has: kudlow says china informally asked for exceptions to the purchasing targets,