tv Bloomberg Real Yield Bloomberg July 12, 2019 7:30pm-8:00pm EDT
>> bloomberg real yield starts right now. coming up, chairman powell .eading toward july 31 as the data in the u.s. looks resilient and europe shows signs andife, a bit of a backup markets. let's begin with the big issues. are there >> appearing in the everything rally? >> we have seen a strong rally. >> the market rally has been about discounting what the central banks are doing.
>> the fed reacting to a down shift in sentiment. >> the one thing that has not rallied in this everything rally are long dated bond prices. >> investors have been positioning ford to virgins. >> yields are much higher than they were 48 hours ago. >> we have had some recently. >> we did see a reversal. >> not just the fate -- the fed. >> a pretty positive environment for yields. >> we see an astronomical amount of money pouring in and it is not in short dated treasuries, it is the longer data. one of the most crowded trances high-quality duration. if you look at where yields are you maybe better off in the short end of the curve. >> if you get yields in equities higher, that is the pain trade. jonathan: joining me now, let's begin with you. maybe the biggest risk is the
one that is in duration and not in credit. your thoughts. kathy: every once in a while they do ring the bell. i think that with all the easing if we look at cap previous quantitative easing cycles we have seen, we have seen the curve steepen and rates move up. not too surprising with the fed getting extremely dovish, expectations for europe to have some sort of qe program. china predicting some stimulus. onit has been settle treasuries. in germany, 16, 17 basis points over the last four days and hardly any attention and hardly any this option elsewhere, what do you think? >> we have been tactically our duration recommendations to investors. at the same time, it is going to be hard to fight central banks. this is not 2009 when we saw the first inklings of qe and everyone thought it would be
inflationary. we are not there. inflation is going after the u.s. because of tariffs. we can't forget that. there was a tariff effect in the cpi number yesterday. that is not the good type of inflation that bond markets will respond well to. it will be hard to fight central banks. i would not be recommending an underweight duration position at this point. jonathan: i am sure you enjoyed some of the price action. >> it is interesting look at the last five easing cycles, the big move down and rates have been before the fed also trigger. maybe it lingers a month or two, not long after that. the market gets ahead of the fed. we has -- we think that has happened again. jonathan: the two-year yield goes lower and the fed starts cutting interest rates. what happens, the 10 year yield and 30 year yield, doesn't stabilize or shift with the curve, does it pick up, how do you see that picking up? >> it is a tongue twister but when you think about twos are 30's, probably one
third goes moderately. totallyes 50 a different discussion. assuming it is 25, somewhat steeper curve. >> i would agree. stephanie is what you would expect at this point because the market is anticipating all of the easing will have some impact. maybe it will not be a big revival on economic activity and inflation but more than what we have been discounting. >> i would offer a different perspective. it is pricing in 25 basis points worth of a rate cut. if that is all the fed delivers, risk markets will not be pleased with that outcome. i would expect duration to do pretty well in the case where the fed goes 25. if they go 50, that will be a nice steepening trade. when the fed starts cutting rates that aggressively, although foreign money that has not been investing in treasuries because the currency hedging costs, they will anticipate in the back end of the curve.
it will make it hard for the back end of the curve to sell off of the fed goes 50. >> given what has happened and we will talk about europe in more detail, i find it fascinating, the demand that you see for longer dated peripherals debt. we have had a lot of this move already, that is what some people are trying to get their heads around. what are your thoughts? >> if you are an investor and willing to go into spain given those countries have had over the past couple of years that shows how desperate you are for yields. the fed starts cutting rates in the u.s. curve stevens, why wouldn't you prefer owning a 30 year treasury when you can buy it with the currency versusnd pick yields europe? you're going to do that. beene european rally has unbelievable at this stage. i would not be jumping in there in the least. we are seeing better data.
there is nothing to be had. aboutnot what is amazing this week, the data has gotten better. frenchld think that a ipc would move the market. the data in the u.s. is more resilient. this is what strikes me as odd. the slowdown has been going on for 12, 18 months and the ecb capitulates and the federal reserve turns around and says, maybe not transient. aoc, jay powell all agree that they should throw the phillips curve under the bus or in there are some people thinking that that is to consensus. maybe i need an upside call, a call option on the inflation story. are we getting too complacent? >> i think so. advocatingn long-duration since late last year and we are back to more neutral stance and one thing about the phelps curve, people
should look at real wages, not just nominal wages. they are rising. so at that that will trigger an inflationary spiral in the next six months, but real wages are picking up as the unemployment rate goes down. the consensus has gotten to dovish. >> tips will do ok. inflationary expectations beating down. dangerous but when you think about equities doing all right, the fed leaving the punch bowl at the party and adding to it. a bit of realized inflation seems that a good recipe. >> may be the party's getting started. for markets in europe and china 18 months ago. that is what is stunning about all of this, the timing of the easing we are said to get after a significant time of a downturn in economic data. how late are they? like central banks are very rarely early.
they try to be. unsuccessful usually. this is exactly why we are recommending that investors position portfolios with a steepening bias with the yield curve, get this great asymmetry. if they are too late and they have not done enough easing the yield curve will steepen because powell and company are not messing around. they will go aggressive on july 31. they will deliver 50 basis point rate cuts. the more push back the better i feel. jonathan: morgan stanley making headlines, they had than on a month ago. your thoughts, shaking her head. >> i am in the 25 camp and the reason, part of the reason is they only have so much ammunition on the rate side so why is it up all are well -- all up right away? we are not spiraling into recession. why not give more time and see what 25 dozen see how the
numbers play out. it seems it is not an emergency. jonathan: you use 50 basis points in a because you need to do more with less and because you have limited ammunition you can't wait for the downturn to materialize because you will not be able to respond. as any of that resonate? >> i talk to client after client and people say what am i missing? equities or rhetoric at high. thanks a pretty good. if the fed were to go 50 could rack fire and scare a lot of people. they could say we missed something so probably counterproductive. we think 25. >> i could go on and on. the one thing i see about the communication is it is not just about size of the rate cut, it is also how they frame it and if the frame a 50 basis point rate cut live reverting to the patient language and people -- telling people we are confident in the outlook of the economy but we think this insurance is necessary, i think things will be fine.
32 billion euros, more than the amount raised in any form or your previously and sticking with europe, with italy, the latest country to lock in with the nation receiving 17 billion euros in orders. i would like to stay with europe. bond bullstill some left in the market. >> ecb is likely to deliver what they said they will deliver at the meeting. even maybe more. favor funds over treasuries because we believe the ecb is likely to deliver the full amount of priced in monetary policy easing. jonathan: the key line for many of you, you should have seen the faces being pulled when that was
being aired on this program. buns and -- outperforming treasuries. >> we would take the opposite side of that trade. not to say that we are haters of that our viewhink is the fed is more likely to overdeliver than the ecb is. >> i would agree. the ecb can't really do much so it is difficult to get super excited, >> i could see in the short run you might see bunds outperform just because depending on the duration, the steepening of the curve. over the long run it is hard to see you -- see that. basisan: we have had a 17 move. the chart tells in the story. it has been quiet. have that hardly anyone has talked about it. >> if you think about the big selloff, it is not germany so much, it is duration in general selling off. jonathan: we talked a lot about
this polish 2029 euro denominated note with a yield of 20 basis points and heading toward zero. aggressively.ught when we you start to see german bunds repricing? have us look across the fixed income universe. >> the yields are so low and everything is compressed that even a little bit of positive news or a little bit of disappointment from the ecb, there is room for their rates to move up and how much room is there to move down? jonathan: not much. in the junk-bond market in europe. some things in europe, a lot of things in europe, it does not make a lot of sense. >> i can imagine why people say we are constrained.
>> elsewhere looking for yields in emerging markets. this isly, people say inevitable. rate differentials zero between the u.s. and europe, they are in favor of euros and out of favor with the dollar. the dollar has to weaken. the first one let's say that assumption is correct. it is inevitable that rate differentials need to narrow. why does that mean the dollar needs to weaken? >> the idea that at current levels which has been pretty steady and firm over the last current levels, because of those rate differentials, it makes sense to be here if you'd narrow that differential. then the dollar should go down. the market has been looking at this rate cut for a while now three of the dollar hasn't moved. it despite people's complaints, the dollar has not made that much of a move recently. >> why does the chairman want to
drop interest rates? he is worried about the uncertainty about the economy. rate differentials can narrow but if they are narrowing because of the risk elsewhere, with that call you are telling me we are going to by the weakness in the rest of the world and sell the u.s. dollar. just that simple equation does not add up. morgan stanley is looking for that weaker dollar call. why? for ahave been looking weaker dollar for some time. the issue we have been seeing, why has the dollar been weakening despite the fact we have gone from pricing in two rate hikes since last november, now we are pricing in four rate cuts over the next year. the u.s. is the best house on a bad block and we are seeing lots of investors come to the u.s. not just for high-grade fixed income security but for equities. we are seeing defenses , staples,, utilities they are all doing very well within the equity complex and it
is because people are nervous. people are not certain about the future given what is going on with trade and global growth which are the two issues that powell is highlighting. that is why the dollar has been strengthening but once the u.s. shows its true colors, we think things will change. comfortable with that dollar call? >> it has been our call. sometimes the rate differentials threaten currencies, sometimes they do not. there has been a dollar flight but if you look at the world generally, is it a safe haven place now? equities are rocked, everything has done well. it is not that obvious you will see a massive exodus. of viewserpins a lot in emerging markets, the reason why people want to stop buying hard currency. do you put that weaker call with a long: local currency debt in the a.m.? >> it depends on how much yields go up. people feel pushed, feel
desperate. we talked about high-yield in europe. e.m. is another manifestation. if u.s. yields go up a lot they can force learned. >> we are not enthusiastic about e.m.. we don't actually see the dollar moving a whole lot. we are not dollar bulls anymore. we not bears on the dollar. it is a countercyclical currency and it should drive e.m. but there is enough problems and yields are low. >> still ahead on the program, i share, get your market treasuries look like this on the week, up on the 10 year by it basis points, the 30 year up by 10 basis points, a lot of that coming on thursday. 265, the yield on the 30 year treasuries. still ahead, the final spread, the week ahead featuring a slew of u.s. economic data and fed speak. that is next.
>> this is bloomberg real yield. the is time for the final spread. we get a load of data from china. we get industrial production, retail sales results, and a little bit of duty. on wednesday, g7 finance ministers and central bank chiefs meeting near paris to discuss the state of the economy and housing starts and the fed's thursday. john williams is speaking and friday, jim bullard and eric rosengren's taking center stage alongside the bank of japan kuroda. standing by with final thoughts, looking ahead to next week, what are you looking for? >> i think clearly we will be looking at the data. it is not clear that the matters a whole lot to the fed at this point. they have made up their minds or
the consensus on the committee has. i would say one of the things that is worthwhile looking for our trade headlines. we started to see the headlines pop up late this week with the president of the u.s. suggesting he was not happy with the fact that china has not continued to why agricultural products as the he thought they may have as suggested during the g20. ,he trade conflict is not over it is ongoing. that is one of the things that is leading the fed down this path. >> looking at the trade numbers from china, really not pretty. the import from the u.s. down 31% year-over-year. is that going to be a source of tension in the coming months question mark >> sure. much of that is soybeans, agricultural goods that are grown in some of the swing won, it is arump political and hot button.
thehe thing to focus on is earnings season. if earnings were to come in slightly weaker perhaps it takes a bit of froth away from the equity market. >> what about credit, you guys went underway to couple weeks ago, why the change? ,> we have been considering it we are under -- underweight high-yield and neutral investment grade. the reason the spread is low on the os -- oas. despite all the talk about easing, that has not moved even though the equity market has jumped, the spread has stayed stable. we think the credit quality keeps deteriorating and the risk reward does not look good. >> staying at 370 most of this week. do you share the views on higher credit quest -- higher credit? >> you probably do not get
strength compression but nothing wrong with picking up security. jonathan: three quick questions and three quick answers. the first question, a crowded trade that you want to fade, duration risk versus credit risk, what would you be fading if you had to fade one, duration risk or credit risk? >> duration risk. >> duration. >> credit risk. >> the 10 year yield, around 2%, is the next stop 40 basis points north or south, do we hit to 50 or one 71st, what do we hit first, 250 or 170? >> 250. >> 170. >> 250. >> the bund yields repricing, up around 16 or 17 basis points. we saw -40 basis points on the german ten-year yield, that was
the record low. have we seen the low of the year on the german ten-year yield already? >> probably is. >> yes. >> we have. >> there we go. thoughts one your the global fixed income market from new york to my that is it for us. we will see you next friday. from new york, this was bloomberg real yield. this is lumbered tv. -- this is bloomberg tv.
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