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tv   Bloomberg Real Yield  Bloomberg  July 30, 2017 5:30am-6:00am EDT

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jonathan: from new york city to our viewers worldwide, i'm jonathan ferro, with 30 minutes dedicated to fixed income. this is "bloomberg real yield." ♪ jonathan: coming up, the u.s. economy rebounds, but inflation forces fade, raises questions about the fed's next move. at&t gets away with the biggest debt market deal of the year. $22.5 billion with the bon worts sold -- the market wanted even more. billionaire investor howard marks of oaktree capital issues a warning about current valuations. we begin with a big issue -- fading inflation forces raising questions for the fed. >> yes, inflation has come down.
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we have gone through a string of lower inflation. i do not think it dissuades the fed from doing what they had planned to do. >> the fact that inflation is being made out the way it is and the decision could be driven by it, i assume that they will not be data dependent. it is going to be employment and other things driven, which is doing very well. the fact that they may not tighten or may take remedial measures because of low inflation, that is news. >> yellen is getting dovish and it plays into that trend. the market has gotten a little short as well. ,hat also plays into it . >> i think this is a fed the has to wait until they see the whites of the eyes of inflation before they raise rates again. >> i think we have to understand what kind of environment we are and it is still supportive of being in risk assets. >> there's a lot of complacency in the risk market and i wonder when the fed actually does raise rates and does start to reduce the balance sheet if the market does not have to go through some sort of readjustment process. jonathan: joining me around the
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table here in new york city is is colin robertson, andrew chorlton, and over in london, marilyn watson. andrew, i want to begin with you with the idea that we move with price action one week to another week. things seem to change rapidly, but ultimately if you look at the fundamentals, nothing has really changed at all. you can take the inflation data off today, core pce, take a month on month inflation data as well and it's just trending lower and lower and reflation forces are fading. andrew: we will have the same conversation next week with payrolls and it built all the excitement in the morning and people will slowly forget about as the trading continues. i think you have to accept that there are structural factors keeping inflation somewhat suppressed in the developed world. at the same time, you have to look at the u.s. with employment where it is, there's not an enormous amount of room, so wage pressures must increase at some stage. you always get it when you look at breakevens that look at the most recent inflation number, we
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not inflation expectations, so we think there could be a trade with breakevens. jonathan: colin? colin: i think certainly we have an issue with the fact that inflation is staying so low. it puts the fed in a tough position. they can portray that they would like to raise rates and that is the strategy they would like to employ, but as investors are taking charge here and as we know from some of the information with respect to fed fund future expectations, the odds are lessening and lessening as each day goes by that they could attempt another move this year. jonathan: marilyn, we had a guest on a couple weeks ago who said actually, the burden of proof is on inflation. we have been waiting for that inflation to pick up for a while and it has not happened. is there anything for everyone out there who is long treasuries that would make you feel uncomfortable this point? marilyn: i think there's a huge amount of demand for treasuries, for yields, for liquidity. we still think on balance they are offering in this environment pretty decent yields in this
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environment. obviously, there's a huge amount of focus now on the inflation data. i think the market has pretty much priced in that there will be some changes in the reinvestment program. maybe announced in september or coming october. it is still our core view that the fed will probably raise rates in december, but between now and then, there's a huge amount of data to come. jonathan: with the reflation story, we had a really lousy tips auction the other week. the message in the price to me is that the price of inflation is not cheap enough yet. the idea that it's time to buy tips -- we are not there yet. what do you say to that? andrew: clearly it's not a fashionable trade at the moment. we looked at the inflation before and everyone has this negative inflation the. we already know from expectations that no one is expecting a rate hike in september, nor is expecting one in the meeting afterwards. may be a 40% chance in december. expectations are already kind of there. we think there might be some opportunity to take advantage of it.
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imagine the market if you got a positive surprise in the next print or one afterward. jonathan: how do you think about it as well? the central by the market was to be aggressively short treasuries. we look at this trade and see how it plays out. ultimately everyone got squeezed and it was painful. are we on the opposite side of that story? have we gone far enough to do what andrew has talked about? colin: we have gone far enough. clearly there was a squeeze -- no doubt about that. expectations were that rates were going to go higher no matter what, and they certainly did not do that. i think one of the issues that i have that causes me concern is the lack of true wage inflation. and so even though we are at full or what would be deemed full through employment, we just can't get any wage inflation to stick. that gives me pause when thinking about if this could be a trade that should take place immediately. jonathan: marilyn, it would be great on a program like this to just focus on fundamentals, but unfortunately the central bank in there, we have to discuss as well. you mentioned the federal
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reserve. how do you gauge the way balance sheet policy is going to roll out if they do announce in september? have you got any idea from september and beyond and december and beyond what the reinvestment policies of the fed will look like going forward? marilyn: it's obviously going to be very measured as is a huge amount of volatility that will need to be readjusted. it will have an impact on quantitative tightening. it will have an impact on credit markets overall. but when you look at it, it still has a huge balance sheet that will take time to reduce the size of that. also, when you look abroad, when you look lovely, still on the other hand, you have the bank of japan bubbling up assets. you have the ecb buying up assets. so i think while the federal reserve will look to reduce the size of its balance overall, you will still globally be seen huge amounts of buys by central banks. jonathan: what you think about the shape of the yield curve and where the market positioning is, aggressively short the long end,
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but when the balance sheet policy starts to take hold, do we think that flattens as we have gone on? colin: we do have to rethink it. it would be my expectation that even when securities start to be brought off the balance sheet that we could see some slight steepening from where we are. i think it goes back to the point you made just recently about the trade and the way it was looked at, at the start of the year and how investors got it wrong. i know from watching the show and watching through the markets that if you ask a lot of investors where the next move would be for 10 year treasuries, they would say 2% not 3%. i think that's the flipside of everybody else that came into the year and how they were positioned. i think the danger and the risk for me would be if the movement goes to 3%. jonathan: andrew, are you on that side of the trade as well now? andrew: the fed wants to withdraw the balance sheet in as subtle a way as possible. i agree with the other comments. they do not want to move on rates because that's too much of
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a headline risk. but they can withdraw liquidity and maybe withdraw and deflate some of the assets bubbles we have got across the fixed income markets particularly credit , markets. that would be a nice result for them. whether they want to impact the curve, there are some pension plans to look at. jonathan: i'm sure there would be. in the next segment, we will talk about credit and the prospect of complacency. do you think they should be targeting loose financial conditions or be sticking to their mandate and targeting inflation? andrew: i don't think they need to have financial conditions looser than they are. jonathan: exactly. andrew: central banks around the world have completely distorted the price of risk, which isn't a good thing longer-term. jonathan: colin will be staying us along with andrew and marilyn watson from blackrock will be staying with us as well. coming up next, it's the auction block. greece returning to the bond market and at&t delivering the biggest investment grade credit deal of the year so far. from new york, this is "bloomberg real yield." ♪
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♪ jonathan: i'm jonathan ferro. from new york, this is "bloomberg real yield." i want to head now to the auction block where we saw a few landmark deals throughout the week. we start here in the united with states with the treasuries $26 billion 2-year note sale that drew a yield of 1.395%, the highest since 2008. at that level, the auction had a bit to cover ratio north of 3%, the strongest since november 2015. on the corporate side this week, saw the biggest investment grade deal of the year so far and the third biggest deal in history. at&t sold $22.5 billion of bonds in a multipart offering, said to have drawn almost three times as
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many orders as there were securities for sale. and to wrap it up in europe, yield hungry investors welcoming -- guess what? some new greek paper. greek stocks $3.5 billion of tapping ine first the markets since 2014. the country paying 4.625% to borrow for five years. still with us to discuss risk and the prospect of complacency are colin, andrew, and marilyn watson from blackrock. marilyn, let's begin with the credit story. my colleague lisa abramowicz is picking up on the fact that there's a growing trend in credit. the lower quality names are boosting offerings and extending duration as well. how are you thinking about that theme at the moment? marilyn: i think looking at european growth and fundamentals, we actually have a relatively positive view, despite the fact that yields are very low and there are a lot of really yield starved investors out there. we see a lot of issues extending
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duration, and we are not necessarily being paid for the extended duration. what we prefer to look is down the capital stack to subordinated financial debt, for example. it actually offers better value in terms of valuation in terms of yield other than necessarily looking at the extended duration. jonathan: andrew? andrew: the chart you just put up is interesting. if you look at that duration of the day, it has extended even further. if you look at the quality, it has deteriorated since june 2014, the post crisis low in credit spreads. the composition of the market has changed. the triple b's are 25% bigger than they were before from 40% to 49%. the quality of the index is much worse. the duration is a little bit longer. and spreads continue to grind higher. it comes back to my earlier point. risk is mispriced. jonathan: do you agree with that? colin: i agree with that. with respect to the credit spreads and where they are, sure , we are at pretty tight levels
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in both investment grade and high-yield, but they can go tighter from here. part of the reason for that is to what marilyn pointed out and andrew. the danger there in my opinion is more duration than the absolute credit. that being said, where do you take spots where you might want to invest in the fixed income market if you have to with yield starved investors? i would pick the high-yield space. jonathan: andrew, at this point, let's talk about the at&t deal. there is a trench that go away at 2.4 percentage points above treasuries. it's not insanely tight, but what strikes me is the 41 year path. i struggled to find an analyst in the telecom sector that will tell me what is going to happen in the next quarter next year. try telling me what's going to happen in 41 years. with the debt pile that company has got. how much risk has actually been assumed with a deal like that? andrew: if you ask the three of us, none of us would advocate passive ownership of that for the next 41 years. if you are an active manager, there might be a trade there. but the long end is completely dominated by insurance companies
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and pension plans. for them, you can see where it makes sense. i think generally the at&t deal was pretty well telegraphed. people knew it was coming. we have certainly been waiting for it a while across the entire curve. it's now one of the biggest issues if not the biggest nonfinancial issue in the index. it is something that people needed exposure to. so it is incredible how well the deal went given the upside from 15% to 22.5%, and their tightening the pricing certainly in the short-term. and they wanted more. jonathan: looking at the comments from howard marks of oaktree capital earlier this week in his latest memo, he was warning about asset complacency. he picked out a netflix issue. he said the following, "in oak oaktree's view, it's an equity linked digital content investment totally lacking in upside potential and it's not for us. the fact that deals like this get done easily should tell you something about today's market climate." his point here, marilyn, is you take the equity like investment of netflix, he's asking the question as to why that should be reflected in the debt.
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to some extent it is. if you take a similar look at quarterly debt of netflix and look at how it is trading, it is trading below the market pricing at the moment. it is trading below where spreads are elsewhere. you just wonder why is the netflix curve there compared to the broader market? and people get excited about the name. does that concern you? marilyn: overall we have a relatively positive view of technology, cable versus some of the more traditional sectors. we actually think that technology stocks and bonds are having a huge impact. these companies are really fundamentally, structurally changing the way that investors can generate returns and how really economics globally are evolving. if you look at netflix or amazon or any of these huge technological companies, they are continuing to invest. they are continuing to innovate. as long as they continue to push
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the boundaries on that forward, we are seeing there is still volume to be found in technology. particularly in these companies that really are driving forward growth and changing the way people do business. jonathan: that sounds like an attractive equity proposition. why is that an attractive debt proposition? marilyn: when you look at the composition, on the equity side if you look at the s&p 500 and , x financials and the composition from 10 years ago to today, there has been a huge increase in the size of these tech companies and also health care and the like. but i think in terms of debt, if you like that equity, i think the debt is also comparatively attractive. i think on a long-term basis that we continue to like these and we see the evolution of the consumer really continue to point toward increasing evaluations among these type of companies. jonathan: something i want to talk about is high-yield and you talked about maybe being long. but if you look at the way europe is trading right now european high-yield, if you look , at the bloomberg barclays high-yield index, it is the tightest in 10 years. how much tighter can that index get if the ecb is going to pull
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back? colin: it can still get tighter. i mean, we might be talking near the tail end of a handful of basis points, 25 basis points, but i do think it could get a little bit tighter from here. but i think the key thing to remember here is that it could be possible that we are near the end of a trade, but it could still have duration left to it. i think when you pointed out the words that howard said about his warning about netflix, part of what was in his note was his admission of oftentimes you can be very early to the right call. so, i still feel that way really about high-yield. it could be petering out, but there's still a long process left. jonathan: howard's point is that it's better to leave too early than hanging around too late. i would ask if the risk you are assuming is really worth it if the upside is 25 basis points? colin: it's worth it if it's going to last a while because your alternatives could be what you do not want to be invested in.
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shorter duration, less yield. as marilyn pointed out earlier, we are certainly in an environment where there are yield hungry and bond hungry investors across the world. so sure, at some point, there could be a judgment day, but i just don't think it's right around the corner. andrew: i am more value orientated, so do not particularly agree. how much do you need position before it is going to happen? by the time it happens, there will be a small door everyone is trying to get through to get out. the challenge with things like high-yield -- you do not want something that is going to yields to the asset class, per se, it is about owning that high-yield, per se. jonathan: guys, you're sticking with us. colin robertson alongside andrew chorlton and i'm pleased to say marilyn watson from black rock stays with us. let's wrap up the week, check on markets of where treasuries have been. yields just a little bit higher
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on the front end by single basis point. by six on the 10 year and 10 on the 30 year yield. back up to 2.90 on the u.s. 30 year. still ahead on this program, the final spread, the week ahead features a bank of england rate decision, which apparently is not a non-decision, and the u.s. jobs report as well. it's payrolls friday just around the corner. this is "bloomberg real yield." ♪
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♪ jonathan: from new york city to our viewers worldwide, i'm jonathan ferro. this is "bloomberg real yield." it is time now for the final spread. coming up over the next week, venezuela could decide on an assembly in a step that could lead to a rewrite of its constitution. and a decision from bank of england. another round of earnings highlighted by the world biggest company, apple, and, of course, the u.s. payrolls report just around the corner. still with us to discuss is
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colin robertson, andrew chorlton, and marilyn watson. marilyn, i want to begin with you. drawing on your experience with the bank of england from years gone by, what are we expecting from the boe next week? why is the idea of a rate hike even up for discussion? marilyn: certainly the last monetary policy decision was not unanimous. it was a 5-3 decision. obviously inflation is running above the 2% target. that being said, i think recently inflation if anything has surprised to the downside. there's a lot of uncertainty obviously around the state of the economy going forward and economic growth in relation to brexit. so, we don't think that the bank of england is going to act anytime soon. in fact, if anything, we are actually long yields. but there has been a huge amount of disagreement and concern around the inflation profile, but so far we are actually seeing that it's not too concerning for the bank of
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england. jonathan: andrew, i thought this was really straightforward. take a leap from the mervyn king playbook. you except inflation spikes in -- you take inflation spikes in the short-term and focus on supporting the output. we are not taking a cue from the mervyn king playbook. andrew: i think if there's one country in the developed world that should risk inflation running hot, given what the country has to face in the next 18 to 24 months. it is the u.k.. i find it astonishing that it's even a question to be honest with you. we have got enough potential risks on the horizon and using using monetary policy is absolutely appropriate. jonathan: marilyn, your call on guilds and staying long, what are the pillars that is based on at the moment? marilyn: economic growth is remaining relatively robust. again, it has proven better than a lot of people expected. on the other hand, we are seeing relatively high inflation. but it is not too high, we do
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not think the bank of england will act anytime soon. we actually quite like the duration here. it will offer investors decent yields, practically in comparison to some of the other yields you can certainly get around europe but also globally. jonathan: going to wrap up the program and you know how it works. we will put you in a box in the rapid fire, which means i asked ask the questions and you keep answers as short as possible. the first one -- would you hold greek five year debts with maturity or at&t's 41 year trench? colin: at&t 41 year. andrew: some maturity greece. marilyn: at&t. jonathan: really interesting. payrolls friday -- the estimate is 180,000. upside or downside surprise? colin: upside. andrew: upside. marilyn: upside as well. jonathan: for the federal reserve, a bit of a dilemma. inflation is soft and conditions are loose. should they target inflation or should they target looser financial conditions to tighten
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them up? target inflation or loose financial conditions? colin: loose financial conditions. andrew: loose financial conditions. marilyn: loose financial conditions. jonathan: guys, great to have you with me. thank you very much. my special thanks to colin robertson from northern trust asset management, andrew chorlton from schroders, and marilyn watson from black rock. it has been my pleasure. that does it from new york city. we will see you next friday at 4:00 p.m. new york time 5:00 time,2:00 p.m. new york 5:00 p.m. in london. this has been "bloomberg real yield." you're watching bloomberg tv. ♪
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♪ david: coming up on "bloomberg best," the stories that shaped the week in business around the world. the federal reserve holds the line. the central bank sees balance sheet normalization starting relatively soon. we hear what that will mean for markets going forward. >> that means to me is slightly higher 10 year rates, perhaps 2.5% over the balance of the year, but not much. david: it's an earnings bonanza. the busiest week for corporate reporting's of the season. we hear from tech giants alphabet, samsung, amazon, and facebook. >> we had a really strong second-quarter and it was based on increased engagement and increased ability to work with marketers. david: deutsche bank earnings


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