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tv   Bloomberg Real Yield  Bloomberg  March 10, 2017 12:00pm-12:31pm EST

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city, i amew york jonathan ferro. with 30 minutes dedicated to fixed income, this is "bloomberg real yield." coming up, death, taxes and a rate hike -- how long before the ecb follows suit? racking up and ugly week for treasury bulls -- u.s. bonds continue the lowest slide to slide 12 -- longest license
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2012. and corporate issuance surges. how much longer is the window open to lock in low rates? we start with a big issue, the federal reserve almost guaranteed to hike after a goldilocks jobs report. overall, especially good for wall street because it has a goldilocks element in the context of a fed hike cycle. >> to think these types of create will000 jobs continue, is a stretch to my way of thinking. >> we think there is enormous demand filledo the system just from what we see from ceos coming to the white house, and that will grow demand for workers. >> this is another report today showing economic momentum is broadening, improving, and more importantly, i think, with it, confidence is starting to increase in a way we have not really seeing in this recovery yet. jonathan: to some extent, the
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jobs report managed to arrest and ugly week in treasuries. to discuss, let's bring in the guests -- here with me on set, joe higgins,nfeld, and krishna memani. to the treasury market -- is that what we call this, a goldilocks jobs report? krishna:: yes, it is a good report. i think there is no doubt economics strength, just in the u.s., but on a global basis is with us. the data is to be very very strong. the real question is is it strong enough and sustainable enough to put the said behind the curve -- fed behind the curve if at some point they decide that is what is going on, or does the data sort of, soften up down the road? we can debate both sides of the moment. jonathan: let's have the debate. joe higgins, for many people, the jobs report validates the
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slow pace of interest rate hikes looking wages what struck me, treasury yields at 2017 highs, but the shape of the curve has hardly changed. what is the message there? joe: the curve is telling us there is more growth ahead and the fed -- it is undetermined the fed isthe curve what one can we like to look at it participation rate versus unemployment rate. what we need to see in the thats and period ahead is people do come back into the employment pool, and that could help to slow down wage pressures. if we don't have a pickup in the participation rate, either with baby boomers waiting longer to retire, or do people coming to the market, wage growth will move faster. the fed to fall behind the curve in that case. jonathan: gershon distenfeld? sillyn: i think it is that we sit here and decipher each piece of data as if that will change the fed's mind.
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if we get a bad number or good number, should not change the trajectory. the fed is behind the curve. jonathan: the fed is behind the curve. here is a story -- we had a story in the last 30 minutes or 40 mins about rates over at the ecb. here's the message -- the governing council expects the key interest rate rate to remain at present or lower levels for an extended period of time and well past the horizon of not asset purchases. this morning here at bloomberg -- a question to you, krishna -- we have learned there was a conversation with the ecb that they might raise rates s.fore qe end do you see that happening? happen, and held was -- draghi was asked the exact question, and his answer was circumspect. they could do that -- the deport -- depot rate could be raised.
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i have a great difficulty, kind of, except in that. hat uld be, like, the fed doing things with it balance sheet long before it raises rates. is it possible, yes. is it likely, the answer is no. jonathan: the answer is no -- i look at a bond market in germany. you look at a fed market behind yieldsve, with 10-year blowing out -- that is a huge 48 basis points. which one is anchoring which? thebund market anchoring treasuries? treasuries are the anchor for the world. i certainly do not believe the ecb would want to raise rates, you know, while doing qe by any means. they have learned their lesson. they have tightened too soon in the past. there are output gaps still there. i think things are out of control in europe and in the state in that the power of an
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individual rate increase, a quarter-point relative to our 10-year yields now, is really very significant. i have a concern -- just that the supply element of labor, or not, keeps up, and keeps inflation -- the true goldilocks scenario would be wages that continue to move very slowly. jonathan: what is the potential for a tantrum in germany? gershon: it will happen at some point. it is a question of when. we have to remember driving in central bankers are under an obligation to telegraph exactly what they are going to do. their job is to minimize the economic situation and what they are supposed to do. driving's comments -- draghi's comments were appropriate. here's what we intend to do, and we can change our mind. there have to tell us. jonathan: you can the average maturity of the bundesbank, and we can do that here on the bloomberg --you see the chart. you have completely rolled over the bundesbank. the average maturity has come all the way in, looking at the
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chart. now, if you are an investor, how do you deal with that, because you will get crushed at the front end of the curve, aren't you, krishna memani? global: yes, for a interest rate market, that is really the biggest challenge. we have situations, not in the u.s. anymore, and in other places, where rates are negative, negative and a big way. huge amounts of money piled in on the front end of the curve. that brings you back to the comment the other gentleman was making -- if the ecb doesn't ofe people some idea ahead time, there will be such a massive move, they cannot deal with that. so, for that very reason, when they are ready to do it, they will be telling us with reasonable timeframe for us to be able to adjust our portfolios because if they surprise us on that front, it is going to be a big problem for the bundesbank. jonathan: if you get that, i
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wonder what treasuries reprice to, krishna, if the ecb got out of the way? krishna: treasury is reprice because the fed told us they would be more aggressive than we were anticipating. again, i would say at this rate, the central banks really cannot afford to surprise us. they have to prepare us, and we will adjust portfolios accordingly. to face a process that is a new regime altogether. joe: i would add to your point, krishna, if the fed were two cents or to observe, as they have been, rising yields, that might give them more comfort in raising rates here because it would mean the dollar would be less likely to pop higher, and you get more of that, so-called, goldilocks potential. jonathan: back to a point you made, gershon, when you said the fed is behind the curve. what is the risk the ecb is behind the curve in a significant point, or is that
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too early? it is probably too early. central banks look at their job to balance inflation and employment, and also to worry about asset prices. as long as that is the mantra, theywillir oe side of doing too little versus too much. are they behind the curve now -- it is hard to say. with the eventually behind the curve -- probably, because they will go slow when they should be going faster. jonathan: you guys will stick with us. joe higgins, krishna memani gershon distenfeld,. our investors headed for the exit? we discussed that next in our auction block. this is "bloomberg real yield ." --"bloomberg real yield ♪
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jonathan: from new york city, for our viewers worldwide, i am jonathan ferro. this is "bloomberg real yield." bigas been a big year -- -- week. the 30 year auction was awarded a 3.17%, wrecking the highest 30-year auction since september, 2014, in terms of yield. we also saw a surge in of the corporate side of things. more than $43 billion in investment grade, $17 billion in high yield. thursday alone, the busiest day in high-yield in over two years with over 6.5 billion dollars coming into the market. day, theof the big upside issue, so that much richer levels than other data on the market. joining us now to discuss, i want to bring in the roundtable.
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gershon distenfeld, joe higgins, and krishna memani. gershon, witty and with you. -- we begin with you. what a jew think of the issuance? demand comehave had and buyers are tired ofaying up to buy existing debt. they are full on the debt. there has been pressured to bring supply, and bankers will always respond to pressure. , the pressurehna tubing supply -- i wonder how much of this is a window that they want to lock in low rates. is there a story there? krishna: i'm sure there is a bit of a story there, but i think most of those people, if they wanted to do that, they could certainly hedge part of that exposure that way, that is do things by themselves before they actually issue. i think the real story here is for creditat demand
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access is extraordinarily good, and companies, kind of, see that, and wanted to take advantage of it. the fact that rates are going up get them closer to issuance, but -- joe: things are frothy, but it is not a rational. generally, it makes sense that given the fiscal stimulus we are default is see -- traditionally one of the enemies of the high-yield performance. that is pushed off. the other element is the spread does protect you a bit from the rise in rates. the spread product, to some extent, is reductive, unless rates rise to pass. gershon i think it is -- gershon: i think it is frothy
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for different reasons in addition to those reasons. people need income. even to equities, people have said ari him -- am i going to get the returns i have gotten in the past that i think it is an income story. jonathan: it is one of those stories where it is an income story, and everyone wants to believe they will see the inflection point and get out first. spreads are still tight. yes, we have repressed a little bit, but spreads are still tight. the one people have caught up to this morning, today, and this week, is the chart of the junk bond etf, and the outflows that have come out for it. rising rates, crude plunges, and all of a sudden we get a little bit nervous about junk bonds, and the potential influence is going to the exit. those outflows on the screen right there --does that get your attention in any way, gershon? it is modest compared to what we have seen. it is a small fraction. we saw outflows when commodity prices were weak in 2014 and 2015 -- a couple billion a week.
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this is pretty modest. again, there is a lack of places to go. unless there is some signal that people -- how long have we been hearing about race going up? basically, my whole career. yes, it's a point, it is going to happen, but until then, it will continue to get scared, but until it really, really happens and people are convinced it is going to continue, i think you will see tremendous outflows. . jonathan: krishna, what is the trade for credit for stock in the united states? krishna: before i get to that, living make one observation -- that is if rising rates have a significantly negative impact on the equity market, then it certainly -- and it certainly could -- i think we will have a problem in the credit market at a think tank. the likelihood that equity markets correct because of higher rates and we do not go anywhere in trade market is just unrealistic. the trade and credit -- in credit, i think, has been missing for a while. loans -- senior, floating-rate loans -- are the best, risk-adjusted asset out there, not because they provide you the
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highest amount of yield, but because they provide a good amount of income with a significantly lower level of risk, either in terms of isis going down, or a potential -- prices going down, or a potential default cycle leading to huge losses. completely --gershon: completely disagree on loans. companies have the option to prepay loans. more and more people throw money in because that is the consensus view -- loans are cheap. we will see yields and returns continue to go down. the second thing -- just to elaborate, i agree, if rates go up, he does not like it can impact the equity markets, not the credit markets. it will impact both markets, but i would argue it could impact the equity markets even more. we talk about duration as if it is only a fixed income concept. thomas duration out there are agrees, perpetual securities.
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if we do get much, much higher rates, you will not see the s&p traded at 19, 20 times. it would be equivalent to a 5% long rate. jonathan: krishna, what you say back to that? krishna: the first thing about loans is interested. loans are not cheap, by any measure, but i think the safety and loans relative to a high-yield bond is, as i say, obvious. that is the likelihood that loans will under perform meaningfully, and high-yield bonds will do well in that regard -- in that context is just not, again, not possible. yes, hi-yield bonds -- loans have been getting repriced, but at this intent, they still provide you significant income, and they are a lot safer than high-yield bonds. that is the right way to think about loans. sorry, go ahead, finish. krishna: as far as the equity markets and the impact of higher
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rates on equity markets -- just member, you know, valuations are extraordinarily dependent on where rates are going to be. you know, ignoring rates altogether because earnings are going to go up, let's say, 7%, 8%, doesn't really make any sense, so, i would say if rates , and gote rapidly above, let's say, 3%, or 3.5%, there is going to be a correction in premarket, and at that point -- in a court he markets, and at that point if there will be a correction in credit markets as well. . yieldn: so, krishna u, the aveh fund was down 26%, the loan fund was down 21% in 2008. my argued there was some other downside, and loans have no upset because issuers can refinance them. jonathan: sticking with us. , gershon distenfeld, and krishna memani.
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a big repricing across the curve -- a five basis points on the two-year, a loving on the 10-year so far this week, and 10 basis points on the 30-year bonds. we take to the final spread, the return of the u.s. debt ceiling, and a decision from the fed. it is all coming up next week. from the york city, this is "bloomberg real yield." ♪
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jonathan: time now for the final spread -- coming up over the next week, a big week for central bank decisions. --thursday is this one again the limit on the nation's debt, otherwise known as the debt ceiling, is reinstated as part of a 2015 deal. the treasury will have to slice is operating balance to $23
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billion. , --with us, our roundtable, gershon distenfeld, joe higgins, and oppenheimer funds krishna memani. --one expects the headline the rate to drop. what else are you looking for? krishna: i think the hike itself is a given. i think it is more interested in terms of the class and what people are thinking in terms of how many titans. there will be a little -- a bit of sleuthing to do there. the risk now is the fact that we formore than three potential hikes in 2017 that is the case, the bond market would have trouble doing with that news, i think. jonathan: joe. joe: that is a possibility.
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fed will pace,he whether it is june, or later, against what they see as financial market conditions, as evidenced partly by where equities are lending and the like. the last thing the fed wants to do is cut off this apparently strong recovery. jonathan: gershon? gershon: i must be the only one rooting for higher rates. i think about the end investor -- they are getting choked might not have enough income. in the mud market, we feel bad when rates go up, but to the extent it will help generate more income -- that is what people need. . jonathan: is that more than for the economy -- is that good for the economy more broadly, joe? joe: i think there is an output gap. for people might come into the market. the under-employment rate is declining, but there is more to do. that was chair yellen's goal. they will air on the side of caution and pace accordingly. jonathan: krishna, as we look
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--ad you look at the dots those people will not exist at the fomc. how much attention will you pay to 2018, 2019,? when they just want not be there? think 2018, 2019 will tell you what they are going to do in 2017, and what the risks are relative to what they will do in 2017. it is important in that perspective than anything else. the challenge for the fed is how do they deal with the current, single as global recovery that we have that is, kind of, going on since the second half of 2016? if they believe this is permanent and sustainable, then they should tighten faster. i do not think they are convinced. now, they may not have -- if data continue to be a strong as it has been -- they may not have a whole lot of operating freedom, and i think that is really what --what we have to
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learn about over the next few meetings. jonathan: final question for you all, one-word answers, 200 30 spread. by the end of the, flat or steeper. joe: flatter. joe higgins flatter. -- gershon: flatter. krishna: flatter. jonathan: we get them to agree at the end of the program. happy friday to you all. a, we'll come to you -- next friday we will come to you 30 minutes earlier -- 11:30 a.m. new york time, that will work out at 3:30 p.m. in london because of the clock change and 11:30 p.m. in hong kong. other than that, it is, 30 minse for our viewers worldwide. this is "bloomberg real yield. ♪
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bonnie: live from bloomberg world had chris in new york, i am vonnie -- headquarters in new york, i am vonnie quinn, and this is bloomberg markets. we's check the markets as head toward the halfway session. the euro continues to strengthen. the dollar index is lower primarily because of that, the 10-year yield is off its high of the day at 2.9% following the better than forecast jobs report. crude oil futures still trickling under $49 a barrel -- weaker by another, almost, 1% today, and i just put up the canadian, 1.3474. the continues to weaken as well. on the oil stocks weakening -- let's get more details now. here is abigail doolittle. abigail: relative to the major averages in the usa, on the better than expected jobs report, we are looking at small gains -- the dow, s&p, and the nasdaq modestly higher. the dollar the s&p 500 are up

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