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tv   Bloomberg Real Yield  Bloomberg  February 16, 2020 11:00am-11:31am EST

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>> bloomberg real yield starts right now. coming up, treasury yields drive low on a soft retail sales report area emerging markets revealing in the face of concerns in china. and 1 fed nominee facing even more doubt. low yields. >> yields continue grinding down. >> lower yields. >> the lower yields story. >> lower yields help stocks. > low global bond yields are
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giving the u.s. some attention. >> you buy the highest quality growth you can find. >> if software happens to fall in that category. >> in the context of low bond yields they are more attractive. >> european yields are not going to go up. low rates giving us a signal that acne -- that equities are at risk. >> they are able to issue whatever they want in the corporate bond market. >> that has caused a change in strategy already. >> bonds rallying, equities rallying because of the two-sided nature of these things. jonathan: jim keenan ofjonathan: whack walk -- let's begin with you, winnie. if you look up i everything situation in the global fixed income. a 10 year yield increase below 1%. corporate borrowing costs all-time low. treasury a record just buy everything get what you can?
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>> it's by everything but high-yield energy. it seems like investors have a lot of cash but continue to see record inflows into investment grade. triple c'snt to buy haphazardly. we don't want to buy energy haphazardly but we need to put our cash somewhere. >> do you share that view? >> i do. all things commodity oriented, some risks to it. that is playing out in the high energy yield space. last year, what you saw was weakening an economic data michael tift at 2018 tightening from the fed in the pboc. from january on you saw easing in the market. but you so weaker economic data. now the story is you're are seeing the stability of earnings. so what you're saying is everyone comfortable but you are not going into recession environment and people are going to buy -- stable earnings because all returns are going to be low based on today's valuations.
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>> i think the market is being rational. when you look at it the credits that should not be priced low are priced low. what i'm looking for is what's next. i think you see a big push into structured products. i think cielo's will do well. where you can still get some yields. there are people shying away from it. takes a little more work so that is where i am focused now. >> people will struggle to digest the line this is rational when they see headlines like greece and the 10 year below 1%. how much of it is actually rational? justified? >> really afraid of triple b last year. when was the last three investment grade companies to fall within three years i don't know the answer because it does not happen often. people get scared about credit. i come from the high-yield world as well. the default rate is very low. i think what our long-term averages for credit spreads are think we are stable.
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you will see some bad companies but as i whole we are good here. i think it's going to be structured products, things that i've had a barrier to entry. > i've been thinking whether we are -- he wrote the following after a decade of qe and declining nominal and real interest rates the substitution effect is not working as planned. toets with a direct link interest rates continue to outperform versus outlooks whose performance depends on economic growth. what you make of that quote that we are long central banks but short central growth? >> you see a significant diversions with the upping quality in the credit markets and also equities continuing to make new highs seemingly day over day. i think what we are really banking on is the fed put. that this low interest rate environment is here to stay. and you don't necessarily want to have growth in that environment. you want enough growth to keep
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us credit worthy and that we are not going to see meaningful downgrades in default. at some point yields would have to rise if we saw growth pick up. on the other hand credit spreads do start to go out want to see the treasury go to 1%. that signals a real fundamental challenge in the economy. >> at the moment the attitude low rate and low real -- low yields -- at some point in the mood points the other way were we start to look at rates and say let's think about why they are low. germany is flirting with recession. when does that turn start to happen? does that happen this year? >> i'm going to change your words a little bit that growth is not good because it's all relative. what we have right now, you mentioned qe policy. we had a world that was over levered. households and banks had a level of asset liability mismatch.
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qe and fiscal stimulus over the last decade has helped stabilize the market and reduced volatility of economic data. so when you look at growth, growth is low because of headwinds of the aggregate leverage in the system. the stability of the low growth is much higher because of some of those policies. if you're going to try to price assets over the long term and put discounts attention volatility of corporate earnings, if you look out several years and you think you have a high conviction of a 2% growth rate or 1.5% to 2%, what does that mean for 3% earnings growth, you can put a better price on that. whether spread compression or multiple compression, i think it is low growth but it is not bad. >> another thing that has been going on is the shift over the past two years -- i think people used to view their equity portfolio and fixed income portfolio and try to mess with both. people are looking at it more
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holistically. people say what is my entire portfolio so they are comfortable owning equities and don't feel the need to sell them because they bought a lot of long dated treasuries and other things. there's all sorts of easy ways -- for even retail to do that. that i think allows people to be more patient. in the past year and a half every time stocks went down bonds rallied. while that works i think we are kind of in this low rate good equity environment. >> how much of this market is trading above its core price at high-yield in the united states? > it looks a little more like the loan market. trading 60 -- trading above its call price. what that means, we talk about low yield or high yield or tighter spreads, we do think they are supported by the growth profile and earnings profile. your aggregate total return is limited based off of that call protection so you're going to get a 4% or 5% carry market where your coupon interest, if
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the market rallies and people are more optimistic on growth equities will outperform credit and a sizable way and rates will probably selloff. high-yield right now, even at prettyevels, still a nice relative return in an aggregate portfolio. >> we have been less constructive on high-yield and it is all valuations to start the year. when you look at what's going on in the high-yield market with issuers taking out their existing debt and lower and lower coupons, this year we have seen more for percent or lower high-yield deals priced than in all 2014 which was the all-time low in high-yield deals. moreective can terms get -- on the other cited that i think the high-yield market has a higher quality than a theorically has, given triple c's kind of segmenting off into another part of the market and so much of the new
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issue that has been more hairy has gone into the loan market. so high-yield is insulated. >> i think the high-yield people have to start looking at the triple b credits. triple bees have been the weekend of investment grades. you see a lot of engraftment -- investment grade or folio managers underweight triple b. i think look for that. up on the program, the auction block, the u.s. issuing 30 year bonds for the lowest coupon on record. that conversation is up next.
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this is bloomberg real yield.
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to the auction block now. right here in the united states where the treasury's $19 billion offering of 30 year bonds to a record low 2.06% in the highest bid to cover ratio since august 2014. the busiest start to the year and more than a decade for junk issuance. double b rated debt at the lowest coupon since at least 2009. in europe, deutsche bank selling its first 18 one bond since 2014 with a reduced coupon of 6%. drawing orders 11 times higher than the issue size. still making the argument to look outside of the united states. >> the u.s. is priced to perfection so if we want to have meaningful gains, you need to see earnings pick up. europe, the expectation is so low i think stability in a market downturn will occur. late 2018, best-performing asset class because it was hated for
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so long. let's turn to you, peter. there was this appetite to go abroad coming to get outside the united states and then china happened and we had a growth scare. what you make of that trade at the moment? >> i think we are looking for opportunities. the are going to be some neat things that go on. think we were already starting to see people coal supply chains out of china and look to move elsewhere. i think that's going to accelerate area this going to be countries that benefit from that. we avoid a lot of the middle eastern debt in turkey. we see a lot of issues. -- that itgenerals ran would not retaliate right away. we are starting to hit that window. we used to think we might see something in the cyber front. i would avoid that area. as a whole i think this is an opportunity. local currency will become really interesting after the big selloff we've seen.
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>> before we get the local currency, -- >> i think this is going to take longer to resolve them before. i think what people are not focusing enough on, to me it's really about tourism. china has become the biggest outbound consumer of tourism. very large consumers of u.s. tourism. five cannot come in and out of their. i think that's going to have a bigger impact than we are aware of and the whole focus of supply chain that may or may not get results quickly. >> i think this really amplifies when we have seen in china with trade wars. tariffs on steroids were companies are urgently trying to figure out how do we get out of dealing with issues like cap endemic's or supply chain issues. >> we are all evolving in the information flow. at the same time i do think there's a big opportunity. we just talked about the
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financial easing we've seen over the last 12 months. ultimately that's going to find its way into emerging market. you will see some level of cyclicality depending on the timing of all of this. back.ll see bounce at the same time you will see dispersion. we talked about commodities, certain regions have significant impact with regards to the weaker commodity sector. in a low growth environment, beyond that there are opportunities to find decent returns relative to the develop markets. >> that's what i find intriguing about the moment. if you think about what is lacking its base metals, energy, high yield as well. when you guys speak to clients and speak to people in the market there's a consensus about a v-shaped recovery. places like china, and yet there's a reluctance to get into the commodity trade and i find that hard to reconcile. if you believe that china's going to go through a stimulus why wouldn't that be a trade you
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what to get behind? >> let's make sure we define i think the v-shaped recovery is around the chinese economy because the rest of the world had a drag but not necessarily a real headwind to growth more recently. if you look at this, we do think that you will see a recovery. this is probably going to be more prolonged, have an impact on certain sectors more than others. a huge economy that is still growing and you will see it bounce back. the further the pullback the further the recovery you will see a timing of that. from a commodity standpoint there is a called pesce correlation associated. china has a demand that is weakened because -- for the commodities but you had a supply impact, we've seen this over the course of the last five years. i think that is a bigger issue. the changes around commodities,
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certainly energy. >> one of the sad realities is it it's grown a strong ability to inflate financial prices. i think that's partly what we are seeing here the financial assets are responding well to the dovishness coming out of the fed. the awareness that central banks will be helpful. michael's into financial assets and i think it's harder to push the commodities space that way. >> considering where yields are and rates are relative to inflation and some of these countries of the moment is there much capacity to ease and emerging markets at the moment? >> i would like to say no but history has taught us whatever we thought was a rational level to be at, all out the window and they continue to push lower and lower. i think it's a most impossible to bet against the easing. stat, 8000 central bank easing's in the past 10 years. you can't fight it. >> one final thing for emerging markets, the dollar. where'd you come down on the dollar right now?
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people thought it would be a weak dollar year. >> i think a strong dollar makes sense with what's going on with coronavirus. the real intriguing part to me is going to be parts of the emerging markets so i think they will benefit with the shift away from china. everything got thrown out the past couple of weeks. i think there's opportunities for em currencies right now. >> the week ahead featuring a slew of fed speak. that will be next. this is bloomberg real yield. ♪
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ferro this isn bloomberg real yield. coming up over the next week u.s. markets close on a monday, a long weekend for presidents' day. we get u.s. housing starts and minutes from the fed's latest meeting. thursday as u.s. ppi data and on
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friday, richard clara speaking in new york. guys, hearing taking place at the moment for two white house fed picks. one of them seems to be going ok, the other more complex and difficult. i want to gauge from you guys as market participants, if judy shouting got a place on the federal reserve, which are perception of fed independence shift in any way? >> i only pay attention to what the chairman says anymore. they clearly take the lead everyone falls in line. i'm not worried about it. >> i would not challenge the independence. i think the bigger question is those on the fed or any federal bank, are they naturally hawkish or more dovish? that is more of a focus of my. >> i think it comes down to the fed's motivation and what they are looking at. with u.s. deficits looming they have to look at the real-time borrowing cost for the u.s. and
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if we keep yields low, that makes the u.s. economy a little bit more stable than otherwise. >> let's talk about the federal reserve and get your thoughts aware policy is going. i massively high bar to get another rate hike anytime soon. have are at least going to a few months before we would see a rate cut. the market is pricing in a rate cut at the end of this year. if growth continues to hover in the 2% range and coronavirus is contained relatively shortly, i don't think that the fed is going to be up against the wall for a rate cut. we are closely monitoring the shape of the curve on the front end. inversion there is not healthy for initial market as a whole. that is something the fed is also trying to consider. >> i don't think you will see a rate cut this year. i do think growth is going to be supported and the risks to that
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are a prolonged coronavirus. i think naturally that will see liquidity infusions from the pboc or in china so i think the fed will watch. i know it's priced in. if you look at u.s. growth and you look at the data i think it's generally supported toward stability. i don't think you will see the fed put liquidity end. if they are forced to i think they will change language first. if you see growth start to decline they will -- march 18, a too soon? it's going to be a drag on the economy. if it goes away relatively quickly we should be back to 2% on the 10 year. we are artificially low because of these fears. we've had decent numbers so i think if the rate cut is a bit overdone. >> is this week just a couple of cracks? big input for gdp stagnating, strips out a lot of noise. up at
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tech click quite difficult to get your hand around u.s. economy. certain things you struggle to reconcile. retail sales with consumer sentiment. you look at what's happening with jobs growth it could be a weather story for january but that initial claims, how do you get your hands around the economy? >> december we did not know we were going to have a phase i trade deal with china so that was not priced into some of the data. we had the attack on iran, they could's difficult. you go back to what does it look like over the last three to four months and that trend of 1% to 2% growth nothing seems to be changing that for me. > i think you see cyclicality in the market. you probably see more frequent cycles. and you're going to see variance with regard to regions and industries and that will play into the numbers and we will debate them every month. if you some of them out we are in a low growth environment that is well supported.
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> as demographics change in this country and people moved to different regions, you are going to see this give and take across the country. so i think smoothing things over is the only way you can get a sense of where we are headed. > three quick questions and answers if we can. your first question, 10 year 160, and -- in and around three questions on that. 140, or 180 on a u.s. 10 year? >> 180. >> 180. >> 140. >> where to go first, three 20 or 360? >> 360. >> 320. >> 320. >> greek 10 year yield, and at around 1%, do we go back to 150 or down to 50? 50 basis points or 1.5%? >> 50 bits.
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>> i will say 50. >> 150. >> thank you very much for joining us. from new york city that does it for us. we will see you next friday at 1:00 p.m. new york time. if you are stateside, enjoy the long weekend. in london i will see you next friday at 6:00 p.m. this was bloomberg real yield. this is bloomberg tv. ♪
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