tv Bloomberg Real Yield Bloomberg July 13, 2019 5:00am-5:30am EDT
jonathan: from new york city for our audience worldwide, i'm jonathan ferro. bloomberg "real yield" starts right now. ♪ coming up, chairman powell heading toward july 31, teeing up rate cuts. the data from the u.s. looks resilient and europe showing signs of life, fueling a bit of a backup in government bond markets. let's begin with the big issue. are there cracks appearing in the everything rally? >> we have seen a strong rally. >> the entire market rally so far has been discounting with -- what the central banks are
doing. >> the one thing that has not rallied in this everything rally are long dated bond prices. >> investors have been positioning for continued divergence in that correlation. >> we have had some better data recently. >> inflation data did see a reversal of some of the weakness. >> a pretty positive environment for yields. >> we have seen an astronomical amount of data in this year. it is not in short dated treasuries, it is an longer dated. one of the most crowded markets is duration. you may be better off at the short end of the curve. >> if you get yields higher and equities higher, that is the pain trade. jonathan: joining me around the table to discuss is mike schumacher, kathy jones, and matthew hornbach. kathy, let's begin with you. maybe the biggest risk is the
one in duration, not in credit. thoughts? kathy: every once in a while they do ring the bell. i think with all of the easing, if we look back at previous quantitative easing cycles we have seen, we have seen the curve steepen and long rates move up. not too surprising with the fed getting dovish, expectations for europe to have a qe program, china introducing stimulus, that we are starting to see long rates back up. jonathan: very subtle on 10 year, 30 year treasuries. in germany, 16, 17 basis point over the last four days, hardly any disruption elsewhere. what do you think? matthew: we had been neutral in our recommendations to investors. at the same time, it will 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 just not there.
inflation is going up in the u.s. in part because of tariffs. there was an effect in the cpi number yesterday. that is not the good type of inflation bond markets will respond well to. it will be really hard to fight central banks. i would certainly not be recommending an underweight position. jonathan: mike schumacher, i assume you have enjoyed the last couple of days. mike: if you look at the last five easing cycles, a big move happen before they pull the trigger. the market gets ahead of the fed, we think that has happened again. jonathan: how the curve involved will be a big debate as well. you know the two-year rate goes lower if the federal reserve starts cutting. does the 30-year stabilize with -- stabilize, or shift with the whole of the curve does it pick , up? mike: i think you get a bit of a backup on the backend. generally a bit steeper, probably not a town if the fed goes moderately.
if powell goes 50 on july 31, forget it totally different , discussion. assuming it is 25, somewhat steeper. kathy: i would agree. steepening is what you would expect in this part of the cycle. the market is anticipating all of this easing will have some impact. maybe it will not be a big revival in economic activity, but certainly more than what we been discounting. matthew: i would offer a different perspective. already pricing in 25 basis points of a rate cut. if that is all the fed delivers, risk markets will not be particularly please without at come, and i'd expect duration to do well in the case where the fed only goes 25. if it goes 50, that will be a steepening trade. when the fed starts cutting rates that aggressively, all of this foreign money that has not been investing in treasuries because of the hedging currency cost, they will participate in the backend of the curve. it will be hard to selloff if the fed goes 50.
jonathan: given what has happened in europe, i find it fascinating the rally we have seen, the demand you see for longer dated peripheral debt. surely we have already had this move. what are your thoughts on the matter? matthew: if you are willing to go to spain and italy given the problems those countries have had over the past couple of years, that just shows how desperate you are for yield. if the fed starts cutting rates in the u.s. curve start steepening up, why wouldn't you prefer owning a 30 year treasury when you can buy it with a currency hedge and pick yield versus europe? of course you are going to do that. kathy: the european rally has been unbelievable at this stage of the game. i certainly would not be jumping in there. in fact, you are starting to see
a bit of better data there and there is nothing to be had. jonathan: isn't that what is amazing this week? the data getting better in europe. the eurozone data is also better. the data in the u.s. is a little more resilient. this is what strikes me as odd. this slowdown has been going on for 18 months, and finally the ecb capitulates? finally the federal reserve says it's low target inflation. aoc, larry kudlow, all agree they should throw the phillips curve under the bus. surely there are some people thinking that is a little of it -- a little bit too consensus now. maybe i need an upside call, a call option on the inflation story. are we getting too complacent? kathy: i think so. we have been advocating long-duration since last year. we are now back to a much more neutral stance. the one thing about the phillips curve, they should look at real wages, not nominal wages.
when you look at real wages, those are rising. not that that will trigger a big inflationary spiral of any type in the next six months or so, but real wages are starting to pick up as the unemployment rate goes down. the consensus has gotten a little too dovish. mike: we think tips will do ok. inflationary expectations are beaten down. i know it's dangerous to say tips do well, but perhaps when , you think about equities doing all right, the fed leaving the punch bowl at the party, or has adding to it, and a bit of realized inflation, seems pretty good. jonathan: maybe the party is just getting started again, not ending. the party ended for emerging markets and china 18 months ago. that is what is stunning about all of this, the timing of the easing we are set to get after a significant downturn in economic data. how late are they? matthew: central banks are very rarely early.
they try to be, unsuccessfully usually. that is why we recommend investors positioned their portfolios with the steepening of the yield curve. if they are too late and they actually have not done enough to easing, this yield curve will steepen massively. powell and company are not messing around. they will go aggressive on july 31. we think they will deliver a 50 basis point rate cut. i cannot tell you how much pushback i get on that. jonathan: morgan stanley making a lot of headlines this week with a 50 basis point call. your thoughts on that? kathy: i am in the 25 camp. part of the reason is they only have so much ammunition on the rates side. why use it up all? we are not spiraling into recession, so why not get more time, see what 25 does, see how the numbers play out. it seems it is not an emergency.
jonathan: i am familiar with the argument. you use 50 basis points now and because you need to do more with less. and because you have limits of ammunition, you cannot wait for the downturn to materialize. does any of that resonate with you? mike: i talked to client after client and people say, what am i missing? equities at a record high, things look pretty good. if the fed goes 50, that could scare people. probably counterproductive. we think 25. matthew: the one thing i would say about the communication is it is also how they frame it. by reverting to the patient language or telling people, we are still confident in the outlook for the economy but we think this additional insurance is necessary, i think things will be fine. jonathan: coming up on the program, the auction block.
em sovereigns have collected over 33 billion euros from new bonds this year, more than the amount raised in any four years previously. sticking with europe, italy, the latest country to lock in lower borrowing costs. investors showing their appetite the nation receiving 17 billion , euros in orders. with an offer on 50 year bonds. i want to stay with europe. blackrock proving that proving there are still some bond bulls left in the market. >> the ecb is likely to deliver what they say they will deliver at the central meeting. in fact, maybe even more. as odd as it may sound, we have a near-term favor of bunds over treasuries because we believe the ecb is more likely to deliver the full amount of priced in monetary policy easing. jonathan: the key line for many of you, as odd as it sounds, bunds outperforming treasuries.
matthew: we would take the opposite side of the trade. not to say that we are haters of bunds but our view is the fed is more likely to overdeliver than the ecb. mike: i would agree. the ecb cannot do much. it is difficult to get super excited at this point. kathy: i could see in the short run you see that outperform, depending on the duration, the steepening of the curve. over the long run, hard to see that. jonathan: what do you make of the quiet selloff in the german bond market? 16, 70 basis points on the 10 year. mike, it has been so quiet, hardly anyone has talked about it. mike: high correlation to treasuries right now. it is really duration in general selling off. jonathan: i am wondering if this can start the repricing in europe. we talk about this polish 2029
euros-denominated note. anything issued in euros right now is being bought aggressively. then when you see german bunds starting to reprice, i wonder how this bleeds across the fixed income universe in europe. kathy: i think you have to be nervous about that. yields are so low, spreads are so compressed, even a little bit of positive news, a little bit of disappointment from the ecb, there is room for the rates to move up. how much more room is there for them to move down? jonathan: not much. 14 issuers with negative yield in a junk-bond market in europe. a lot of things in europe do not make a lot of sense. mike: it seems a little bit silly. you can go elsewhere with your money. jonathan: elsewhere, looking for yield in emerging markets.
inevitably, people see this as inevitable. rate differentials narrow between the u.s. and europe, they are in favor of euros, out of favor with the dollar, the dollar has to weaken. let's say the assumption is correct, rate differentials have to narrow. why does that also mean the dollar needs to weaken? kathy: the idea is at current levels of the dollar, which has been pretty steady and firm over the last couple years, because of those rate differentials at current levels, it makes sense to be here. if you narrow that differential, the dollar should move down in theory. the market has been looking at this rate cut from the fed for a while now. the dollar has not moved. despite people's complaints in washington, the dollar has not made that much of a move recently. jonathan: listen to the chairman this week. he wants to drop interest rates because he is worried about uncertainty in the global
economy. rate differentials can narrow, but if they are because the fed is cutting interest rates, essentially with that fx call, you are telling me we are buying the weakness in the rest of the world and selling the dollar. that simple equation does not add up. morgan stanley is looking for the weaker dollar call. matthew: we have been looking for a weaker dollar for some time. the issue that we've been seeing, why has the dollar been weakening despite the fact that we have gone from pricing in two rate hikes in november and now we have four rate cuts over the next year, ultimately, because the u.s. is the best house on a bad block. investors are coming to the u.s. not just for fixed income securities but also equities. we are seeing defenses outperform, utilities, staples. all doing very well in equity complex. it is because people are
nervous, uncertain about the future, given what is going on with trade and global growth, the issues that powell is highlighting. that is why the dollar has been strengthening. once the u.s. starts to show its true colors, things will change. jonathan: are you comfortable with this dollar weaker call? mike: it has been our call for a while. sometimes these rate differentials drive currencies, sometimes they don't. i agree there has been a dollar flight. but is the world a safe haven place right now? it doesn't seem that way. everything has done well, so it is not obvious to us that you will see a massive exodus. jonathan: the reason i ask, it underpins a lot of news in the emerging market. a lot of reason why people want to buy the local currency debt. mike: probably depends on how much u.s. yields go up. people feel desperate. we talked about high-yield in europe. em is another manifestation of that phenomenon.
if u.s. yields go up a lot, they could probably forswear it. kathy: we are not enthusiastic about em because we don't see the dollar moving a whole lot. we are not dollar bulls anymore but we are not bears on the dollar. it is a countercyclical currency. it should drive e.m. to better returns. there are enough problems in e.m. and the yields are low. jonathan: still ahead on the program, i want to get a market check. treasuries look like this on the week. up on the 10 year by eight basis points. up on the 30 year by 10 basis points, a lot of that coming on thursday. 2.65, your yield on the 30 year treasury. coming up, a slew of economic data and fed speak. that is coming up. this is bloomberg "real yield." ♪
jonathan: i'm jonathan ferro. this is bloomberg "real yield." time now for the final spread, coming up over the next week, we get a load of data from china. industrial production, retail sales results, and a little bit of gdp. on wednesday, g7 finance ministers and central bank chiefs meeting to discuss the economy. u.s. housing starts and the beige book thursday. john williams speaking. friday, jim bullard and eric rosengren taking center stage alongside the bank of japan. still with me for final thoughts, mike schumacher, kathy jones, and matt hornbach. looking ahead to next week, what are we looking for? matthew: clearly looking at the data but it is not clear to me that really matters a lot to the fed at this point. i think they have made up their mind, or at least the consensus
on the committee has. one of the things that is worthwhile keeping your eyes peeled for are trade headlines. starting to see these headlines pop up late this week, with the president of the u.s. suggesting he was not quite happy with the fact that china has not continued to buy agricultural products as he thought they may have suggested in the g20. you have to be attuned to this, the trade conflict is not over. it is ongoing. that is one of the things that is leading the fed down this path. jonathan: kathy, looking at the trade numbers from china, not pretty. imports from the u.s. down 31% year-over-year. is that going to be a sense of tension in the coming months? kathy: sure. much of that is soybeans, agricultural goods grown in some of the swing states that trump won, so it is a political hot button as well as economic hot button.
mike: i'm glad to see the price drop. the thing to focus on is the turning season. i know it is real yield, but it earnings were to come in slightly week, it takes a bit of the froth away from the equity market. kathy: we have been considering change for some time. underweight high yield, neutral on investment grade. the spread is so low, about 3.70 on the oas. interestingly, 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 that attractive. jonathan: around 3.70 through most of this week. do you share the view on high -yield credit?
mike: we think it is a decent carry product right now. nothing wrong with picking up some decent carry at this point. jonathan: let's get to the rapidfire round. three quick questions. to begin, 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 do one, duration risk or credit risk? kathy: right now, duration risk. mike: duration. matthew: credit risk. jonathan: the u.s. 10-year yield, around 1.2%. is the next stop 40 basis points north or south? do we hit 2.50 or 1.70 first? mike: 2.50. matthew: 1.70. kathy: 2.50. jonathan: the german ten-year bund yield up around 16, 17 basis points. we saw -40 basis points on the german 10-year yield. have we seen the low for the
designed to save you money. whether you use your phone to get fit or to find the perfect gift, you'll use less data with a network that automatically connects to millions of wifi hotspots and the best lte everywhere else. so you save hundreds of dollars a year on your wireless bill. xfinity mobile has the best network. best devices. best value. simple. easy. awesome. click, call or visit a store today.
♪ francine: how do you insure for products that do not exist yet? that is a key challenge facing zurich insurance. it is one of the biggest players in the industry and has to contend with the technology and risks of the future. things like driverless cars, space travel, and a little closer to home, the internet of things. today on "leaders with lacqua," we meet mario greco. how much will your industry, the insurance industry, change