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tv   Bloomberg Real Yield  Bloomberg  February 14, 2020 1:00pm-1:30pm EST

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jonathan: from new york city for our audience worldwide. i'm jonathan ferro. bloomberg "real yield." now.rts right coming up, treasury yields drive lower on his soccer retails does report. emerging markets resilient amid concerns in china. one white house fed nominee facing even more doubts. we begin with the big issue, low yields in the drivers seat. >> the bias is to lower yields. >> lower yields. >> yields move lower. >> alone global bond yields are certainly giving the u.s. some attention.
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>> that is the crux of the market. >> software happens to fall neatly in that category. >> do equities need to re-rate because rates are so low? >> are they giving us a signal that equities aren't risk? >> they are able to issue whatever they want in the corporate bond market. >> you can see that has caused a change in strategy already. >> it is like everything becomes a bond. >> bonds are rallying, gold is rally because of the nature of these things. jonathan: joining me around the table are james keenan, winifred cisar, and peter tchir. it feels like a buy everything situation. the 10-year increase below 1%. u.s. corporate borrowing costs at an all-time low. is that what does is right now, just by everything, get when you can?
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winifred: everything but high-yield energy. it seems investors have a lot of cash, we see record inflows into investment grade but the bias is very much to be up in quality. we don't want to buy ccc's haphazardly, by energy haphazardly, but we had but the money somewhere. >> they are idiosyncratic issues. some risk playing out in the high-yield energy space. as a whole, last year, what you saw was weakening in economic data relative to 2018, tightening that you saw from the fed and pboc. from january on, you saw weakening in the market. now the story is you are seeing the stability of earnings, so everyone is comfortable that you're not going into a recession environment and people are going to buy any kind of yield at this time where they can get stable earnings. all returns will be low based on today's valuations.
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peter: the markets are being rational. the credit that are not priced well are not priced well. i don't get this bubble mentality. i'm looking at what is next. i think you'll see a push into structured products. if you are not, you are supposed to get in. if you are in, you are supposed to get more. it takes a little bit more work. that is where i'm focused now. jonathan: people will struggle to digest the line that this is rational when they see the 10-year increase below 1%. how much is justified? peter: last year, everyone was afraid of bbb. one question i asked everyone, what were the last three investment-grade companies to fall within the last year? it doesn't happen very often. people get scared about credit. default rates are very low. we are moving back to what our long-term averages for credit spreads. we are stable around here.
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you'll see good companies, that companies. to what isng back next, and i think that is structured products. jonathan: whether we are long central banks and short growth. he wrote this. for a decade of qe and declining nominal interest rates, this is not working as planned. assets continue to outperform versus assets whose performance depends on economic growth. what do you make on that? we are long central banks much short growth. winifred: you see a pretty significant divergence with the up in quality of the credit markets and also equities continuing to make new highs seemingly day over day. not today. i think what we are really banking on is the fed. this low interest rate environment is here to stay. you don't necessarily want to have growth in that environment.
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you want to have enough growth to keep us credit worthy, and that we will not see meaningful downgrades and defaults. but at some point, yields have to rise if we saw growth pick up. on the other hand, credit spreads start to blow at once you see the 10-year treasury go to 1%. that signals there is a fundamental challenge in the economy. jonathan: at the moment, the attitude too low yields is that it is supportive of risk assets elsewhere. at some point, it goes the other way, where we look at rates we say, let's think about why they are low. growth is not good. germany is flirting with recession. what does that turn start to happen, this year? james: i don't think this year. i will change your words a little bit, that growth is not good. it is all relative. you mentioned qe policy. we had a world that was over levered. there was a level of asset liability mismatch.
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and fiscal stimulus over the last decade have helped to stabilize the market, reduce volatility of economic data. when you look at growth, it is low because of the headwinds of the aggregate leverage in the system, but the stability of that low growth is higher because of those policies. toyou are going to try price assets over the long-term, discount the volatility of earnings, if you look at several years and you think you have a high conviction of a 1.5% to 2% growth rate, what does that mean for three percent to 7% earnings growth? you can put a better price on that. whether spread compression or multiple expansion --it is low growth but not bad. peter: another thing that's been going on is the shift over the past two years. people used to view their equity portfolio and fixed income portfolio as both. now they are looking at are holistically.
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portfolio?entire they are comfortable owning equities, and they don't feel the need to sell them because they have long dated treasuries as their hedge. there are all sorts of easy ways to take advantage of that. that allows people to be much more patient. the past year and a half, every time stocks went down, bonds rallied. while networks, we are in this low rate, good equity environment. jonathan: let's talk about high yield. how much of the market is trading above its core price? james: the high-yield market looks more like the loan market. 60% is trading above it's called price. we talk about low yield or high-yield, tighter spreads. we think they are supported by the growth profile and earnings profile, but that said, your aggregate total return is based on that. 5% are going to get a 4% to kerry market, where if the market rallies and people are
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more optimistic on growth and equities will outperform credit and a sizable way and rates will selloff. high right now, even at these levels in the carried market, 4% to 5%, is still a pretty nice relative return in aggregate polio. winifred: we have been less constructed on high-yield. it is all valuations to start the year. when you look at what is going on in the high-yield market with issuers taking out their dead and continuing to issue at lower coupons -- we have seen higher yield deals since all of 14, the all-time low. prospective returns keep getting more and more compressed across the high-yield market. on the other side of that, the high-yield market has a much higher quality than it historically has had, given the surge in bb, ccc's segmenting off into another part of the market. part of the new issue that's
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been more hairy has gone into the loan market. high yield is inflated and has a nice technical. peter: the high-yield people have to look at some of the bbb credits. bbb has been the weekend of investment-grade. you'll see a lot of investment-grade portfolio managers underweight bbb. bb have been squeezed a little bit. look for that. jonathan: coming up on the program, the auction block. the u.s. issuing 30-year bonds with the lowest subscription. this is bloomberg "real yield." ♪
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jonathan: i'm jonathan ferro. this is bloomberg "real yield."
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i want to begin here in the united states, where the treasury's $19 billion offering of 30-year bonds to a record low of 2.06%. the highs bit to cover ratio since august 2014. a busy start to the year for junk issuance. at the bb rated debt lowest coupon since 2009. deutsche bank selling its first bond since 2014 with a reduced coupon. than the times higher $1.25 billion issue. wealth stillate making the argument to look outside the united states. >> the u.s. is pretty much price to perfection. if we want meaningful gains in the balance of this year, you need to see earnings pick up. europe, the expectations are so low, stability in a market downturn will occur.
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jonathan: back with us are james keenan, winifred cisar, and peter tchir. there was an appetite to go abroad, get outside the united states, and then china happened. what do you make of that trade at the moment? peter: you still want to do it. there will be some things that go on. obviously, a lot of em has been hit hard, what is going on with oil prices. we were already starting to see people pull supply chains out of china and look to move elsewhere. that will accelerate. there will be emerging-market countries that benefit from that. at the same time, we would avoid the middle eastern debt and turkey. one of the generals that we talk to -- our thought was that iran would not retaliate right away. we are starting to hit that window. we think we could see something in the cyber front in the coming weeks. as a whole, i like the asia-pacific. i don't know when the right time will be but local currency will
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be interesting after that big selloff. jonathan: are you part of the v-shaped crew? peter: i think it will take much longer. everyone is talking about the supply chain but i think it's more about tourism. china is the biggest consumer of outbound tourism. they are shut down, flights cannot come in and out. that will have a bigger impact on the u.s. economy that we -- then we are aware of. the supply chain will be a much more difficult thing. winifred: this really amplifies what we have seen in china over the past 18 months with trade wars. tariffs on steroids. companies are urgently trying to figure out, how do we get out of dealing with issues like epidemics with supply chain issues? james: certainly something to watch. we are all evolving and information flow is coming out. at the same time, i think there's a big opportunity.
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we just talked about the financial easing we have seen over the last 12 months. will find itsat way into a flow of capital in the emerging-market. you will see some level of cyclicality, depending on the timing of this, but you'll see some bounce back post coronavirus. at the same time, you'll see some dispersion, not just because of the virus, but commodities, certain regions have a different impact. that being said, in a low growth environment, and beyond that dispersion, there is some decent yield and returned you can find. jonathan: that is what i find intriguing. when you think about what is lacking, it is commodities, base metals, energy. when you speak to clients and people in the markets, there is a consensus about a v-shaped recovery. yet, there is a reluctance to get into the commodity trade while there are things attached to it. if you believe china will go through stimulus, why wouldn't
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that be a trade you want to get behind? james: i think the v-shaped recovery is around the chinese economy. the rest of the world has had a drag but not necessarily a real headwind to growth. this, we think that you will see a recovery. this is probably going to be more prologue, have an impact on certain sectors more than others, you'll see a stimulus. you have a huge economy that is still growing. you will see a bounce back. the further the pullback, the further recovery you'll see, and the timing of that. from a commodity standpoint, there's a correlation associated to that, but there is more being paid into the commodity space. china has a demand that has been slow their they economy, but you have a supply impact, we have seen this over the course of the last five years. that is a bigger issue, the secular changes and technology
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changes, certainly around energy. peter: every time the fed has expanded its balance sheet, it has shown a strong ability to inflate financial asset prices. that is probably what we are seeing here. financial assets are responding well to the new awareness that central banks will be helpful. that goes into financial assets. jonathan: would love your assessment on the scope of easing in e.m. right now, where yields and rates are relative to inflation. is there much capacity to ease in emerging markets at the moment? peter: i would like to say no, but history has taught us, whatever we thought was rational in the normalization has gone out the window, and they continue to push lower. it's impossible to bet against the easing. i don't know if it is right or not, but there have been 8000 central bank using's in the past years. jonathan: let's talk about the dollar. where do you come down on the
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dollar? people thought it would be a weak dollar year. peter: it makes sense with what is going on with the coronavirus. the intriguing part to me is parts of the emerging-market, which will then it from this shift away from china. i think there are opportunities, if you sit through the rubble. some em currencies. jonathan: still ahead, the week ahead, featuring a slew of fed speak, and the minutes of the fomc january meeting. that is next. this is bloomberg "real yield." ♪
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jonathan: i'm jonathan ferro. this is bloomberg "real yield." week, up over the next u.s. markets close on monday, long weekend for president's day. wednesday, u.s. housing starts and minutes from the fed's latest meeting.
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friday, fed vice chairman richard clarida speaking in new york. final thoughts are james keenan, peter tchir, winifred cisar. a hearing taking place for teedo white house fed picks. one is going ok, the other one is more difficult with judicial 10. i want to gauge as you guys market participants. if judicial 10 got a place on the federal reserve, would your thoughts about fed independence change in any way? peter: i don't think attention to what they say anymore. i'm not worried about it. james: i wouldn't challenge the independent. the bigger question is those who are on the bed or any central bank, are they more naturally hawkish or dovish? that is more of a focus of mine than independence. winifred: i think it comes down to the fed motivation and what they are looking at. with the u.s. deficits ballooning where they are, they have to look at the real-time
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borrowing costs for the u.s. if we keep yields low, that makes the u.s. economy a little more stable than otherwise. upathan: let's wrap things by talking about the federal reserve and where policy is going. how low is the bar for a rate cut? winifred: we are at least going to have a few more months before we see a rate cut. the market is clearly pressing in a rate cut at the end of the year. if growth continues to hover in the 2% range and coronavirus is , itained relatively shortly don't think the fed will be up against the wall for a rate cut. monitoring the shape of the curve on the front end. inversion is not super healthy for financial markets as a whole. it is something probably the fed is also trying to consider. james: i don't think you'll see a rate cut this year. i do think, because growth will be supported. the risk to that are a prolonged
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coronavirus. but naturally, we will see liquidity infusions from the pboc in china. the fed will watch. i know it is priced in now. growth and at u.s. the data, it's generally supported toward stability. i don't think you'll see the fed cup liquidity in. what the bar is -- if they are forced to -- they will change language first. if you see declines from uncertainty, they will put liquidity in. jonathan: march 2 soon? james: definitely. peter: unless coronavirus turned out to be worse than thought -- 1.80% to 2% back to on the 10-year up. the economy has been doing ok, decent numbers. a rate cut is a bit overdone. jonathan: is this week just a couple of cracks? retail, stripping out a lot of noise. coming in at 0%.
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it is difficult to get your hands on the u.s. economy at the moment. it feels like trend growth around 2%, but certain things that you struggle to reconcile. you look at what is happening with the jobs growth. it could be a with a story, but initial claims look solid. remember,have to december, we didn't know we were going to have a phase one trade deal with china. that was not priced in. we had the attack in a iran. it is difficult. you just go back to what it has looked like over the last four months. nothing seems to be changing that trend growth. james: i think you'll see cyclicality in the market. you will probably see more frequent cycles but to be more mild to the up and down side. you will see variance with regards to regions and industries, and that will play into the numbers. we will debate them every month, but as peter said, if you smooth them out, we are in a low growth environment that is most
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supported. winifred: as demographics change in this country, people moved to different regions, tax policies affect different regions, you'll see a big -- give-and-take. moving things out is the only way that you can get any sense of where we are headed. jonathan: three quick questions, three quick answers. 10-year yield at the moment around 1.60. what do we see first. 41.80 on the u.s. 10-year? peter: 1.40. jonathan: u.s. high yield on the barclays spread around 3.40. where do we go for, 320 or 3.60? james: 3.20. winifred: 3.20. jonathan: rick 10-year yield, around 1%. 1.50 or 50 a good? ? 50 basis points or 1.5% winifred: 50 bits. james: 50 bits.
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peter: 1.50. jonathan: jim keenan, winifred cisar, peter tchir, thank you for joining us. from new york city, that does it for us. if you are stateside, enjoy the long weekend. over in london, see you next friday at 6:00 p.m. this was bloomberg "real yield." this is bloomberg tv. ♪
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mark: i'm mark crumpton with bloomberg first word news. federal prosecutors have decided not to file any charges against former fbi deputy director andrew mccabe.
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the justice department's inspector general had accused him of repeatedly lying about authorizing a subordinate to share information with a newspaper about an fbi probe into the clinton foundation. mccain has denied he intentionally misled anyone. is 2018 firing was politically motivated. defense officials are standing behind her decision to divert nearly $4 billion in funding for military aircraft and other programs to help pay for a walk on the u.s. mexico border. some in congress and the move was illegal. defense secretary mark t. esper border security is national security, and our national security is our mission. the pentagon also indicated that more money may be moved to pay for the wall. city wherechinese the viral outbreak began, is taking new steps to slow the spread of the infection. officials say residents must stay home who are set to receive medical ca


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