tv Bloomberg Real Yield Bloomberg October 13, 2018 2:30pm-3:01pm EDT
♪ >> from new york city for our viewers worldwide, i am jonathan ferro. this is bloomberg "real yield." ♪ coming up, risk assets try to stabilize following a week of outflows. the federal reserve taking a presidential beating. still looking to deliver more rate hikes leaving most wall street strategists to curve flattening going at the 2019. -- into 2019. we begin with a big issue.
a messy week on wall street. >> we will see more talks about u.s. treasuries. >> for us, fixed income is the biggest risk in the financial portfolios. >> what to watch is going to be credit than treasuries, because of we continue to see rates rise, what we may see is people bail out of certain sectors of credit. >> we think that means you ought to be cautious in high-yield, high grade, those are places where you need to be careful. >> there is no new information that came out about the fed. if the market suddenly got it, that is the market's issue. the fed has been clear. >> at some point to when they start fighting hard and we see the corrections and you see the implications and real data, the fed probably have to back off, -- has to back up, but that is not today. it is probably the first half of next year. jon: joining the around the table is priya misra, matt toms, and coming from london iain stealey. matt, i want to get your view on what is happening with risk assets and fixed income. high-yield started to fracture.
what your thoughts? matt: the move above 315 in the treasury markets really caused the break up above 320+ put some fear in the system that rates could move higher. that leaked into equities. bonds did not rally immediately and put a further spook into the market because the risk off was not there, there was no place to run it. jon: we are getting that risk offset and treasuries. finally this week they are doing what we think they are meant to do. do you take comfort from that? priya: i do and we had a significant amount of auctions this week. this was a technical selloff and when it is technical it is always hard to draw a line in the sand. we did not have a great bill report when rates sold off. i think the front end is very interesting. it has a lot of value here
because the markets are so well priced for the fed and as financial conditions tighten, the fed becomes a little less excited about raising rates significantly above neutral. jon: that is going to be the basis of our conversation later. i want your view of what is happening in credit. there seems to be little room for error. investment grade, you have seen the leverage being put on by a lot of companies in that segment of the fixed income market. are you concerned by what is happening at the moment or do you take any comfort from what you are seeing? >> when you look at it, you have an environment this year where
you have had the spread on the high-yield and it is about around 320 level. we really are just trading in the range. we are in the middle of a range at the moment. but the all-in yield of the high-yield space is the highest we have seen since the beginning of 2016. that could entice some people back in, what we think that credit fundamentals are strong and we think this could create a buying opportunity. jon: is that buying opportunity there for you and have you been doing that? iain: yeah, we think it is. definitely, if we get up towards 7%, that would be a line in the sand for us. the reality is spreads got tight, people got excited, and we had some decent repricing. everybody was noticing that high-yield managed to absorb all of the rates back up -- we have seen yields push-up. jon: a look of the equity markets situation struggling to stabilize, really, really messy
in new york. for the credit guys, do you sit here and say i am looking at fixed income and i do not see a credit problem? can you say that with conviction? matt: you can. you have to remember, equities did extend the run up while credit still stays, so some of this is a catch-up of the equity markets. you really still struggle to see meaningful problems that can really manifest over the next year or two. credit quality looks decent. it is better the closer you get to the consumer and further away from e.m. and corporate risk. jon: priya? priya: do you worry about the bond outflows because we had a pretty big bond outflow last week. i am nervous that in these relatively less liquid times, if we continue to see outflows, does that hurt credit? matt: that is a good question. it's acutely more important in the liquid sections. in the broader markets, we think it is the speed of inflows as they yield curves increases but high-yield, yes.
jon: you bring up loans, everyone is discussing how high-yield has been through 2018. loans are rocksolid through this week. why, how, and can they continue? matt: really interesting that the flows into the bank loan space continues. that is the sign of the rate concern. a lot of spl created and importantly, the clo controls that. we are not as concerned about an unwind. jon: this is an important point. as you look at fixed income in any market participant, is this still a rate story that dominates fixed income? >> i completely agree. when we look at credit, i agree, it looks healthy to us. we are going to come through earnings, but earnings are likely to be reasonable. we see a fairly great growth backdrop, but it is really driven by what happens on the treasury market. people felt that would hold, and i think there are a lot of
people that would be biased at that level and that manifest itself around the fixed income space. jon: i listen to you and you seem to be bullish on credit, still. if you are going to bar balance on fixed income, this week it has done its thing. do you take confidence it will continue? priya: yes. the auctions came in and that is a good sign. the fed is going to be interesting because ins are at an inflection point. the markets are rising at this neutral rate. for us to continue to feel confident, we have to have the fed not talk about going significantly above neutral. i think the entire selloff -- we had a cpi report, and we've been saying if whether it is a one-off thing, a bunch of one
offs start making a trend that inflation is no tpicking up. but what is going to keep us together with the fed next week -- do they really push on this or do we have to go above neutral? jon: your work has been tremendous and one of the things you have done is drawn a line in the sand at 1% real rates. we have bounced off of the real rates line. priya: when i look for is productivity moving higher, and i think that move structurally grows in the u.s. if they move higher, there is nothing to factor above the 1% level. we are somewhat in a sugar high, but if it is all temporary, you are not seeing it pick up and -- in long term growth. matt: i completely agree. it looks like the server support.
some hefty demand to cover the ratio was at the highest level since january. china and the trade war sold $3 billion of bonds. u.s. investor offshore participation, notably lower compared to last year. on the corporate side, uber is said to have gathered enough for private placement of $1.5 billion of junk bonds. all of that despite the volatility in the markets through the week. the flashpoint for a lot of people was the president of the united states once again taking on the fed chair, jay powell. pres. trump: i think the fed is far too stringent and they are making the mistake and it is not right. despite that, we are doing very well, but it is not necessary in my opinion. and i think i know about it better than they do. jon: still with me, priya misra, matt toms, and iain stealey. priya, i will not ask if it is
going to make a difference because i assume every single one of you does not think it will. i will ask if the president has a point, if the fed might be setting themselves up to go too quickly. priya: as the fed is hiking, it wants to tight financial conditions. there are unintended consequences. the problem is the speed of the tightening. if it gets overdone, the fed says they are data dependent. i would argue the financial conditions keep tightening and the fed is going to slow their trajectory so they are trying not to make a policy mistake. they are not ready for a model that they have to keep hiking. i do not think that he has a point and i do think that he should not talk about the fed. we need the dollar as a safe haven. we need it to remain as a reserve currency.
matt: i agree. it is very important to realize that we have escaped from 0. to get away from 0, it provides a cushion. the fed is playing a long-term cycle and they need this to three years ahead. getting away from zero, big success, the president is underestimating the importance. jon: central bank officials, finance ministers, all supporting the fed chair in the face of criticism. i wonder whether you think of the president might have a point, maybe they are going too quick. iain: i think is the reality is that everyone has an opinion but what jerome powell will be looking at is, we will be saying, we have a dual mandate, economy growth and data, which look good. the cpi printed this week was a little below expectations, but
we are hovering around the 3% mark. i think they have got every right to continue going. they are going at such a slow, gradual pace compared to other cycles. they are taking their time. i agree with other comments. if they see the data roll, they will be happy to pause. jon: there was one high profile capitulation on wall street. he was over at morgan stanley. i'm going to catch up with him on tv on monday. but for the most part, a lot of people have stuck with it. we're going to get a flattener, do you stay with that view? iain: if you take a long-term view, yes. the fed raises rates and we get to zero, you will see the curve flatten probably get down to zero and then slightly inverts. the reality in the near-term as
you could well see the curve have a little bit of a steepening impacting the rate move. the pension reforms move, pension demand. there is a lot of issuance the u.s. has to do and it could lead to a little bit of a curve capitulation and the flattening of the curve which is served to summon people so well. -- so many people so well. jon: i spoke with someone and he also is on that side of the trade as well. do you subscribe to that view? priya: i do like a steepener in the short term. i see lower rates in the front end given the tightening and financial conditions. and given this risk of bond outflows. if i want to just tied out somewhere, the front end is finally giving me positive real rates.
so why don't i just sustain and wait until the equity markets stabilize so i can see the curve steepen, but we need the risk complex to stabilize. jon: steepening typically scares people because it could mean that the federal reserve is about to make a return and going to rate cuts because things are not looking too good. can we get a bull steepener that is not a risk off? matt: we do not believe so. in the short term the bias is toward the steepener. the issue in the front end of the curve is that it is set to ramp over the next six to 12 months. the back pressure is going to keep the front from rallying. we have been calling for a steepener of two tenths for about four months. we think a 50 level is probably as far as we can go. jon: iain stealey, would you go with that in the short term for the 50 basis points? iain: i think that is a very
reasonable level. we've had a similar view over the last few months and finally coming to fruition. i do think you will get a flattening curve in the term. -- longer term. jon: really interesting stuff. iain stealey, matt toms, and priya misra, sticking with me. i want to get a market check because treasuries last week week battered. this week, money coming back in. they retain those risk mitigating characteristics once more in the face of a big debate. 332 is your yield in the long end. ten year yields at 314. still ahead, the final spread and the week ahead featuring minutes with the fed and another round of earnings in the u.s. banks. this is bloomberg "real yield." ♪
it is time now for the final spread. coming up, u.s. retail sales and housing data coming out. plus, minutes from the federal reserve coming up on wednesday. we get more bank earnings coming on monday. plus, the governor speaks here in york city with the brexit talks ongoing in brussels. and we get the official treasury currency report. will china be labeled a currency manipulator? that is one to discuss over the weekend. still with me, priya misra, matt toms, and iain stealey. final thoughts as we go through the weekend into next week. what are you looking for? priya: the move in the cmi is going to be pretty critical. are we going to get to the seven level? it is a psychological level that is going to trigger risk off. i think the market was happy to see all of the china data
overnight, but it does not help the trade because the trade has reached a record. china will be important and i will look at the housing data. primary mortgage rates reached the highest level since 2011 but affordability is not that great. do we start seeing the first signs of this impacting the housing market? jon: interest in you mentioned china, we are going to get that treasury department report and the reports ahead indicate the treasury could be leading saying no, they are not a currency manipulator. if they were labeled one, what would it mean to you? priya: you wonder what does that mean for risk assets -- does it mean more tariffs? it is very risk off. they do not satisfy any of the criteria. if they are not labeled, it is still interesting to see if it is really able to rally. china is weakening to before any of the data. in 2019, how much can the u.s.
continue with the world economy slowing? iain: i would like to see what is going on in italy over the next week. we have the budget and we have got concerns regarding the levels that are likely to be announced for next year that has been pushed back. i think that would be a very interesting to see how that plays out over the first few days. jon: are you confident that we will not cross that 400 basis point line in the sand? iain: from where we are today, we are around 300, 400 is a long way away. jon: a couple of days. [laughter] iain: i think it takes something big to get us up to that sort of level. when we look at italy and we look at the rest of the periphery, they are starting to be levels that are attractive.
jon: matt? matt: cmi is important and we think the narrow ink has some benefits. -- narrowing of the trade focus to china has some benefits. less uncertainty. this war could become a bit more dangerous. we also think a dissecting the earnings for signs of inflation is critically important. any signs of a more inflationary push over the next two weeks, look out. jon: you pick up on that. identifying price pressure and the official data is not. there are two different to stories coming out of corporate america and the official economic data? matt: there is a potential the earnings could be squeezed a little bit. so far, so good. but the risk is if it gets passed through. jon: what do you make of that? priya: until you have significant wage inflation, amazon is a big component, you could have a robot talking about rates, so that is the issue. we can have robots doing things overall, does that keep wage inflation low and does that mean that cpi stays. jon: do we abolish productivity in america?
priya: long-term, yes. we need the big data. that has to feed through in the way we process things. i think that could be a pretty long cycle. jon: it is time for rapidfire questions. i'm going to give you one question, one short answer. will jay powell serve a second term? matt: and a third. priya: yes. iain: yes. jon: there we go. would you buy the spread widening in u.s. high-yield, yes or no? matt: yes.
priya: no. iain: definitely. jon: treasury flattener or steepener going into year end? matt: steepener. priya: steepener. iain: steepener. jon: great to catch up with you, matt toms, priya misra, and iain stealey. from new york city, that does it for us. we will see you next friday at 1:00 p.m. in new york time. this was bloomberg "real yield." and this is bloomberg tv. ♪
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