tv Bloomberg Real Yield Bloomberg July 14, 2019 11:00am-11:31am 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 towards july 31 teeing up rate cuts. as the data from the u.s. looks resilient and europe showing signs of life, fueling a bit of a backup in core government bond markets. let's begin with the big issue. are there cracks appearing in the everything rally? >> we have really seen a strong rally. >> rally. >> rally. >> the entire market rally so far has been discounting what the central banks are doing. >> the fed that is reacting to a downshift in the sentiment.
>> 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. >> yields are much higher than they were 48 hours ago. >> we have had some better data recently. >> inflation data did see a reversal of some of the weakness. >> the fed has gotten dovish. >> it is not just the fed. >> the ecb remains on this dovish stance. >> it's a pretty positive environment for yields. >> we have seen an astronomical amount of money pouring in, and it is not in short dated treasuries, it is longer dated. one of the most credit trades in the market is high quality duration. if you look at yield curves, 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 here in new york to discuss is mike schumacher from wells fargo, kathy jones from charles schwab, and matthew hornbach from morgan stanley. kathy, let's begin with you. maybe the biggest risk is the one that is in duration, not in credit.
your thoughts? kathy: every once in a while they do ring the bell. i think, with all the easing, if we look back at previous quantitative easing cycles we have seen, we actually 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: has not been a really big move on map. very subtle on 10 year, 30 year treasuries. but in germany, 16, 17 basis points over the last four days, and hardly any attention or any disruption elsewhere. what do you think? matthew: we have been neutral in our recommendations to investors. at the same time, it will be very hard to fight central banks. this is not 2009, when we saw the first inklings of qe, and everybody thought it would be inflationary. we are just not there. inflation is going up in the
u.s. in part because of tariffs. we cannot 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. so i think it will be really hard to fight central banks. i would certainly not be recommending an underweight duration position. jonathan: mike schumacher, i expect you have enjoyed the last couple of days. mike: it is interesting. if you look at the last five easing cycles by the fed, a big move tends to happen before they pull the trigger. maybe it lingers a month or two, but not longer than that. the market gets ahead of the fed, we think that has happened again. jonathan: how the curve evolved will be a big debate as well. you know the two year yield goes lower if the federal reserve starts cutting interest rates, that is a given. what happens with longer, the 10-year, the 30 year yield? does the 30-year stabilize with with the whole of the curve? does it pick up? mike: i think you get a bit of a backup on the backend. if you look at 2/10's, 10/30's, generally a bit steeper, probably not a ton if the fed goes moderately.
if powell goes 50 on july 31, totally different discussion. assuming it is 25, somewhat steeper curve. jonathan: what do you think? kathy: i would agree. steepening is what you would expect in this part of the cycle because the market is really anticipating that all of this easing have some impact. now maybe it will not be a big revival in economic activity and inflation, but it certainly will be more than what we have been discounting. jonathan: matt? matthew: i would offer a different perspective. it is already pricing in 25 basis points of a rate cut. if that is all the fed delivers, i think risk markets will not be particularly pleased with that outcome, and i would expect duration to do pretty well in the case where the fed only goes 25. if they go 50, that will be a real nice bull steepening trade. here is the issue. when the fed starts cutting rates that aggressively, all of a sudden, all 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 just make it really hard
for the back end of the curve to selloff if the fed goes 50. jonathan: given what has happened in europe, i find it fascinating the rally we have seen in europe, the demand for longer dated peripheral debt already. surely, we have already had this move. what are your thoughts on the matter? matthew: if you are an investor and you are willing to go into spain and italy, given all the problems those countries have had over the past couple of years, that just shows how desperate you are for yield. that is why, if the fed starts cutting rates and the u.s. curve starts 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: yeah, i think the european rally has been unbelievable at this stage of the game. and i certainly would not be jumping in there. in fact, you are starting to see
a little bit better data, and there is nothing to be had. jonathan: isn't that what is amazing about this week, though? the data getting better in europe. who would have thought that a french ip would have moved the bund market as it did. 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 12, 18 months, and finally, the ecb capitulates? finally the fed turns around and says maybe that is not transient. aoc, larry kudlow, jay powell all agree they should throw the phillips curve under the bus. surely there are some people thinking out there that that is a little bit too consensus now. maybe i need an upside call, a call option on the inflation story. are we getting a little bit 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. and one thing about the phillips
curve is people do not realize -- they should look at real wages, not just nominal wages. when you look at real wages, they are actually 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. so i think the consensus has gotten a little too dovish. mike: we think tips will do ok. so inflationary expectations are probably beaten down. i know it's dangerous to ever say tips will do well, but perhaps, when you think about equities doing all right, the fed leaving the punch bowl at the party and perhaps adding to it, and a bit of realized inflation we have seen this week, seems pretty good. jonathan: bringing the punch bowl to the party, but maybe the party, but maybe the parties just getting started, not ending. the party ended for emerging markets and europe and china 18 months ago. that is what is stunning about all of this, the timing of the easing we are set to get here after a significant period of a downturn in economic data. how late are they? matthew: central banks are very rarely early. of course, they try to be. unsuccessfully, usually.
this is exactly why we recommend investors position their portfolios with the steepening rise of the yield curve. because you get this great asymmetry. if they are too late and they actually have not done enough to easing, this yield curve will steepen massively. because powell and company are not messing around. they will go very aggressive on july 31. we think they will deliver a 50 basis point rate cut. i can't tell you how much push back i get on that. the more push back i get, the better i feel. jonathan: kathy, what do you think? morgan stanley making a lot of headlines this week with a 50 basis point call. a call i assume barclays shares as well. your thoughts on that? shaking your head. not a believer? kathy: no. i am in the 25 camp. part of the reason is they only have so much ammunition on the rates side. so why use it all up right away? we are not spiraling into recession right now, so why not give a little more time, see what 25 does, see how the numbers play out? it seems to me it is not an
emergency. jonathan: i am familiar with the argument. you use 50 basis points now because you need to do more with less, and because you have limited ammunition, cannot wait for the downturn to materialize, because you will not be able to respond to it. does any of that resonate with you? mike: here is the problem -- i talked to client after client over the last month, and people call and say, what am i missing? equities at a record high, granted that is partly due to the fed. things look pretty good. if the fed goes 50, that could scare people. they could go wow, we missed something. so it is probably counterproductive. we think 25. jonathan: final word of defense on 50 basis points. matthew: i could go on and on. the one thing i would say about the communication is it is not just the size of the rate cut but how they frame it. by reverting to the patient language or telling people that 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: matt hornbeck again with us as well as kathy jones and mike schumacher. coming up on the program, the
jonathan: i'm jonathan ferro. this is "bloomberg real yield." i would like to head to the auction block now, beginning here in the united states and the treasury market, where a 30 year treasury auction was met with less than stellar demand. investors submitting bids for just 2.3 times, generating the highest tails since 2016. borrowers in emerging markets are issuing debt in euros at a record pace. em sovereigns have collected over 33 billion euros from new bonds this year, more than the
amount raised in any four years previously. and sticking with europe, with italy, the latest country to lock in lower borrowing costs. investors showing their appetite for duration. the nation receiving 17 billion euros in orders. a 3 billion euro offer of 50 year bonds. i would like to stay with europe. blackrock proving that there are still some bund bulls left in the market. here is what he had to say. >> the ecb is likely to deliver what they say they will deliver at the central meeting. in fact, even maybe even more. as odd as it may sound, we, in the near term, favor 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." you should have seen the faces being pulled when that quote was being played out live on the program. your thoughts on that, bunds outperforming treasuries?
matthew: we would take the opposite side of the trade. it is not to say that we are haters of bunds, but i think our view is the fed is more likely to overdeliver than the ecb is. jonathan: mike schumacher? mike: i would agree. the ecb cannot do much. it is difficult to get super excited at this point. jonathan: kathy? kathy: i would see, in the short run, you might see boones -- you might see bunds helper form depending on the duration, the , steepening of the curve. but over the long run, it's hard to see that. jonathan: what do you make of the quiet selloff in the german bond market? we have had a 16, 17 basis points on the 10 year. mike, it has been so quiet, hardly anyone has talked about it. why not? mike: high correlation to treasuries right now. if you think about the big selloff, it is not germany so much, it is duration in general selling off. that, to us, is the theme. jonathan: i am wondering if this can start the repricing in europe. we talked a lot about this
polish 2029 euros-denominated note with a yield of -- wait for it -- 20 basis points, at one point seemingly heading towards zero. anything issued in euros right now is being bought and bought aggressively. then when you see german bunds starting to reprice a little bit, i wonder how this bleeds across the fixed income universe in europe. kathy: i think you have to be nervous about that. because the yields are so low, the spreads are so compressed, that even a little bit of positive news or a little bit of disappointment from the ecb, there is room for those rates to move up. and how much room is there for them to move down? jonathan: not much. we counted the numbers earlier this week. euro denominated 14 issuers with negative yields in the junk-bond market in europe. some things 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. i cannot imagine my people,
unless they were incredibly constrained, would not do that. jonathan: elsewhere, looking for yield in emerging markets. inevitably, people see this as inevitable. rate differentials start to narrow between the u.s. and europe. therefore, they are in favor of euros, out of favor with the dollar, the dollar has to weaken. let's say the assumption is correct, that rate differentials have to narrow. why does that also mean the dollar needs to weaken? kathy: yeah, well, the idea is, at current levels of the dollar, which has been pretty steady and firm over the last couple years, at current levels, because of those rate differentials. 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 just has not moved. it really, despite people's complaints in washington, the dollar has not made that much of a move recently. jonathan: listen to the chairman this week. why does he want to drop interest rates? he wants to drop interest rates
because he is worried about uncertainty in the global economy and what that means for the united states. rate differentials can narrow, but if they are narrowing because the fed is cutting interest rates, because of the risks elsewhere, essentially with that fx call, you are telling me we are going to buy the weakness in the rest of the world and sell the dollar. that simple equation does not add up. morgan stanley is looking for the weaker dollar call. why? matthew: we have been looking for a weaker dollar for some time. i think 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 as of last november and now we are pricing in four rate cuts over the next year is ultimately because the u.s. is the best house on a bad block. we are seeing investors are coming to the u.s. not just for high-grade fixed income securities but also equities. we are seeing defenses outperform. seeing utilities, staples, they all doing very well in equity complex.
that is because people are nervous. people are uncertain about the future, given what is going on with trade and global growth, the two issues that powell is highlighting. that is why the dollar has been strengthening. once the u.s. will start 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. talking to our ethics team, they -- talking to our effects team, they say, look, sometimes these rate differentials drive currencies, sometimes they don't. i agree there has been a dollar flight. but if you look at the world generally, is it really a safe haven place right now? it doesn't seem that way. equities have really rocked, obviously. everything has done well. so it is not obvious to us that you will see a massive exodus. maybe a bit weaker. jonathan: the reason i ask, it underpins a lot of views in the emerging market. the reason why a lot of people want to start buying not the hard currency but the local currency debt. do you put that little -- you put that with a long call in the em? mike: probably depends on how much em yields go up. if people feel pushed, feel desperate -- we talked about high-yield in europe.
em is another manifestation of that phenomenon. if you really have to go yield, they will go em. if u.s. yields go up a lot, they probably forswear it. jonathan: do you share that view? kathy: yeah. we are not enthusiastic about em here, 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's a countercyclical currency. it should drive e.m. to better returns. but there is enough problems in e.m., and the yields are low. jonathan: kathy june sticking with us alongside mike shoemaker and matt hornbach. 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. still ahead, the week ahead, featuring a slew of economic data and fed speak. that is coming up next. this is "bloomberg real yield." ♪
jonathan: i'm jonathan ferro. this is "bloomberg real yield." time for the final spread. coming up over the next week, we get a load of data from china. we get industrial production, retail sales results, and a little bit of gdp too. on wednesday, g7 finance ministers and central bank chiefs meeting near paris to discuss the economy. plus, u.s. housing starts and the fed's beige book thursday. new york fed president john williams speaking. friday, fed presidents 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 you looking for? matthew: clearly, we will be looking at the data, but it is not clear to me that really matters a whole lot to the fed at this point. i think they have made up their mind, or at least the consensus
on the committee has. but i would say one of the things that is worthwhile keeping your eyes peeled for are trade headlines. we are starting to see these headlines pop up late this week, with the president of the united states 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 during the g20. so you just 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, really not pretty. imports from the united states down 31% year-over-year. is that going to be a source of tension in the coming months? kathy: sure. because much of that is soybeans, agricultural goods grown in some of the swing states that trump wants. so it is a political hot button as well as an economic hot button.
jonathan: what do you think? mike: i like it a lot, so i'm glad to see the price of soybeans drop. the thing to focus on is the turning season. i know it is real yield, but it earnings were to come in slightly weak, it takes a bit of froth away from the equity market. jonathan: why the change in the moment? kathy: we have been considering it for some time. we are underweight high yield, still neutral on investment grade. the reason is simply that the spread is so low. we are around 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 just think that the credit quality keeps deteriorating, and the risk reward does not look that attractive. jonathan: stayed in and around 3.70 through most of this week. do you share the view on high-yield credit? mike: we think it is positive. we think it is a decent carry product right now. 50 basis points unlikely, but nothing wrong with picking up
some decent carry at this point. jonathan: let's get to the rapidfire round. three quick questions. three quick answers. 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 fade duration risk or one, credit risk? kathy: right now, duration risk. jonathan: mike? mike: duration. jonathan: matt? 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? what do we hit first? 2.50 or 1.70? mike? mike: 2.50. jonathan: matt? matthew: 1.70. jonathan: kathy? kathy: i will go 2.50. jonathan: the german ten-year bund yield pricing up around 16, 17 basis points. we saw -40 basis points on the german 10-year yield. that was the record low. have we seen the low for the
year on the german 10-year yield already? matt hornbach? matthew: probably, yes we have. jonathan: kathy? kathy: yes. jonathan: mike? mike: yes, we have. jonathan: there we go. kathy jones, mike schumacher, matthew hornbach. really appreciate your thoughts on the global fixed income market. that is it for us. from new york for our audience worldwide, this was "bloomberg real yield." this is bloomberg tv. ♪
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