Europe monster debt issuance and amazon joins in. That is really the elephant in the room for us. Where are they going to be tomorrow . Its a little bit of a leap of faith here. Its a little concerning. From a credit perspective, you have kind of an opaque Business Model here. You dont have a lot of disclosure to the markets. That make it tough for us. Youhis is a dynamic really see across the market. Even after we are into the fed hiking cycle, the borrowing cost for the u. S. Corporate and european corporate are near the lowest that they have ever been. This remains a very good time from a cost perspective for corporate to borrow money. This still is demand for yield. The fed is going through this process of slow Balance Sheet adjustment and policy normalization. Theyre still image store a demand. An extraordinary demand. Their issuing long bonds a very tight spreads. The very Corporate Market overall has expended quite a bit extended quite a bit. They are trading 20 chilean dollars a fixed income assets. Private investors have to buy something. They have to go somewhere. Jonathan johnny around the , and is christian omani also coming to us from chicago, matt floyd. With you, lets begin and talk about the 40 year security that amazon can to market with and the amount of duration that has come into the index this year. Of duration is increasing but increasingly tight. How do we work through that . Christian the companies are making the right decision. That is that debt is very cheap and therefore extending your duration as much as possible and as much as you can is something that you should do. The real question is why are investors buying it . The reason investors are buying it is because they have no other choice. Portfolio that needs long bonds, the Government Bond market does not give you enough yield and therefore you going to the Corporate Bond market to get that yield few i. It really is that simple. You can make it complicated, but it really is a. Nt. Jonathan what if you are forced into buying a 40 year bond company . Krishna you are ensuring those companies have been around for 30 or 40 years and that something you should Pay Attention to. Having said that, i think a lot of these companies, you couldve said the same thing about ibm 40 years ago and they are around. Microsoft and all those companies. I think its more about credit analysis and about the Company Rather than making a generic statement. Jonathan lets try some credit analysis. What are your thoughts on it . Matt when you think about amazon, tesla, or any of the disruptors out there in the market, we find those challenging from a fixed income perspective. They have tremendous promise in terms of future profits, but they dont have a lot of profits today. If you think about tesla, its a very large holding in our convertible portfolios. The upside downside ratios in there, but we passed on the most recent deal because we do not think we were being paid enough for the risks. I totally agree with your other guests. It really is credit by credit decision. For some of the disruptors, youre better off on the equity side or the convert side. Jonathan lets talk about that. You have hit right on it. Its an equity like dream. Its not going to be captured by the debt. The most you can hope from the debt side of the story is to get repaid. When you look at the performance of tesla, that issue has been absolutely hammered. It makes me wonder why people were buying into it in the first place at the kind of levels they did when so many people warned about it. Matt again, theres a lot of things to like in the tesla noty, and im certainly going to talk about the motivations of the other buyers, but we take a very bond by bond, very heavy credit focused approach. You have to look at the risks versus the rewards. For a lot of these new issuances , they are not in balance. Jonathan many people come out and talked about what is happening in the credit market and maybe some complacency. The Federal Reserve likes to talk about valuations, but they usually talk about stocks. Should they look at what is happening in the credit market . I think they look across the spectrum on a variety of products. They look at commercial real estate, auto loans, what is happening in credit markets. A lot of the fed speakers have alluded to the fact that conditions are sure nearly right now with the tightening of credit spreads. That is something that is definitely on the top of their might when it comes to tracking financial stability. This is something that we will be looking for in yellens speech later this week when she speaks at jackson hole. That is going to be the centerpiece of her conversation. Jonathan we will get into that in just a moment. For the wider issue in story, we spoke earlier and the numbers are huge and theyre making a lot of headlines, but ultimately what matters is net issuance, what the money is being used for. What is really the big gross issuance number . When you look at net issuance, it is a little more favorable toward credit. Krishna absolutely. If you are central bank and youre looking at valuations and of themselves come of their meaningless. In of themselves, they are meaningless. If credit growth is extraordinarily high, that is something that should bother you. Having said that, when you look at the rates of net credit growth, if you look at what the net credit growth rate has been in the economy since the financial crisis, it is higher than what used to be before but relative to the pace of credit growth historically, it is still significantly lower. Credit the highest growth rate is in the corporate sector. From a vulnerability standpoint, that is where we should focus on. We are nowhere close to the ates that we saw 2007 8 2008. Jonathan the demand side has been massive and the auto books have been huge. How import is the indexing role in all of this . If you come to the market and issue even more coming will go to the bigger side of the index. If youre an investor, if you get to that issue, there will always be an investor who wants to buy it. Matt you hit on a really important point. Cap weighted indexes are momentum strategies. On the equity side coming to argue thats ok and that youre allocating more successful companies. On the fixed income side, youre allocating more to the reckless borrowers. Im not sure that that is necessarily a great strategy. Research has of shown that on active fixed income portfolios, managers have a much higher hit rate or success rate of beating those passive indexes. Its a really important point that the strategies that may work on the equity side are dangerous on the fixed income side. Jonathan you are all going to stick with us. Coming up on the program, the Auction Block. Amazon is not the only tech giant to sell bonds this week. Apple heads north for its offering. We will get to that in a moment. From new york to our viewers worldwide, this is bloomberg real yield. Jonathan im jonathan ferro. This is bloomberg real yield. I want to head to the Auction Block now. Usually august is a slow month. Not so month this year in 2017. The amazon deal a lot with British American tobacco is driving the secondbiggest august and a decade. The highest volume summer has pushed sales to almost 1 trillion this year. Over in asia, its no different. 5. 3 billion have been sold, more than double compared to a year ago. Busy summer, this am also the 1. 96 billion of sevenyear bonds in canada to fund guess what . Buybacks in dividends. It is the biggest single Debt Offering by a foreign issuer in canadian dollars. Rumors that gary cohn to quit the white house. Who haseconomic adviser been leading the trump administrations efforts to overhaul the tax code will remain in his position as the director of the National Economic council, but why is he seen as such a critical figure on wall street . Adra, with us is sub krishna, and matt. Why is that . Why is he seen as the face of tax cuts and all that is good for wall street . Krishna theres a significant amount of expectation built into the equity markets for tax policy. The center of textil tax policy has been the said and that is not been the case since Steve Mnuchin became treasury secretary. The center of that nexus is gary cohn and the white house. I think thats why its important and its real. Jonathan do you think the rate markets should be moving that much on the potential direction . Has denied it, but the direction of one single policymaker in the ministration . Subadra the moves in the last week have not been because of just the gary cohn story. This been a lot going on the geopolitical side as well as the clinical side in the u. S. ,es, i think that the market like krishna pointed out, is waiting for meaningful tax reform. He is seen as the leader of this whole initiative in the white house as was working with the treasury secretary. That is why i think he is so important. Jonathan we have this push and pull. It is risk on if gary cohn stays and risk off if steve bannon goes. What do you make of that interpretation by investors at the moment . Matt any given day, any given headline, you can point to that direction. When you think about valuations, valuations are kind of high and equity markets now and they are bouncing around. When you look at treasury rates, we think treasury rates are about right. There is some normal volatility, especially for august. In terms of what is priced into the markets, we are not pricing in significant tax reform this year. I think you are seeing a lot of uncertainty being generated and i think that uncertainty its easy to have an opinion, but you cannot have a lot of conviction behind it. Jonathan the other tugofwar added into the white house volatility is financial conditions. We touched on this. The Federal Reserve has been hiking, but financial conditions have gotten easier, and easier, and easier. Is it a problem for them or green light to keep going . Subadra its a good thing for the fed, but its a problem for the ecb. If you look at things in europe, the euro continues to strengthen. Inflation is still a problem for europe, but for the u. S. , i think its a perfect situation, especially as you are getting ready to unwind the Balance Sheet. Theres indications that they will continue to hike and possibly deliver another hike in december. Jonathan yes, financial conditions are easier and its a green light to hike, but the Economic Data is not a green light to hike. The real tugofwar is the soft inflation data versus be very easy financial conditions. They are actually concerned about the financial aspect of it. Krishna they have taken on this third mandate of financial stability. I think what they ought to focus on is making sure that the growth does not get hampered in any significant way because of policy moves. Us to live enjoying the circumstance, which is instead of enjoying the circumstance, where financial conditions are not tightening themselves, thereby moaning the fact the financial conditions are remaining the same. I dont know why that is such a terrible thing to be happening. Jonathan we talked earlier this week about the market that actually priced in to some extent stimulus. He also talked about his own forecast and that it hasnt changed. If you match up the fed forecast to where inflation has actually ended up, does he have to changes forecast . Krishna nobody believes anything that the fed puts out with their expectations anyway. Yes, he can change that and bring it back to the market and declare victory, but i do think it really doesnt make sense. Key issue here is the fed and most people at the fed are still sticking to the phillips curve in some fashion or the other. What we are finding out in the real economy is that at some point it works, but today its not working. What are you going to do . They will tell us they are continuing to tighten in the market continues to discount that assertion. Jonathan matt, did you want to jump in . Matt i did. A couple of really important points first, history is only important if you look. Its very unusual for the fed to be raising Interest Rates and financial conditions to be accelerating like they are. We think that is due to the actions of global central banks. First they took their foot off the accelerator. Soon they will be tapping on the brakes. It really depends on how hard the rest of the world central bankers pushed from behind to keep those conditions easing. That is getting much harder to analyze. To the point of hiking rates, typically they hike rates when inflation is a problem and accelerating. Over. U see it rolling i think its because their models dont work in an environment of high debt. Weve come through a Balance Sheet recession and not an inventory led recession. Whether its debt or demographics or the combination of the two, their models are not working in the current environment. Jonathan guys, youre going to stay with us. Lets get you an update on the markets this week. What a with the week it has been for treasuries. Up two basis points on the twoyear. Up a single basis point on the u. S. 10 year. From new york still ahead, the final spread. The week ahead futures Janet Yellen Mario Draghi at the annual fed conference in jackson hole, wyoming. This is bloomberg real yield. Jonathan i am jonathan ferro. This is bloomberg real yield. Time after the final spread. Military this week, drills involving literally tens of thousands of troops from the United States, south korea, and others as well. If you on geopolitical risk watch, that is something to take note of. Donald trump speaking in arizona. Mario draghi and janet yellen speaking in jackson hole, wyoming. My producer forcing the senate the Solar Eclipse in the United States on monday. Solicitor jackson hole for you . Krishna Solar Eclipse. , withan matt, to you the ecb and whats happening to mario draghi, it is supposed to be the main event. We were not going to get the kind of news we were looking for regarding tapering. They asked the concerned about a euro overshoot. Risk of phase the save the risk a little bit. Is it diminished for you guys . Matt it has a little bit. The problem is that Everyone Wants to talk about having a strong currency, but no one really wants their currency to be that strong. I think the rhetoric will be dialed down a little bit, but the ecb is clearly the wildcard in world central banks. Jonathan a lot of people had said that the ecb holds the key to global rates. Does mario draghi hold the key to global rates . Subadra in my opinion, yes. What they are going to be very careful to do this to not rattled the markets with another taper tantrum. Bond yields are at historic lows. If you see a decent pricing in germany or in europe, i think that is going to push global yields higher. Jonathan its worth pointing out that the task in front of the ecb as a whole lot different than the task in front of the Federal Reserve. Yields on buns are about 50 basis points. Spread on credit europe are ridiculously tight. Unlike the fed, the ecb has been buying corporate debt as well. Mariohallenge bigger for draghi than was for ben bernanke at the time . Subadra i think so. They have to be very careful to not undo what they have done so far. They have to be extraordinarily careful about communication. Like a pointed out earlier, the environment right now is not very conducive for them to taper because of the fact that the euro continues to be very strong. I think that they have a tough balancing act ahead of them. Jonathan i know a lot of people are critical of the timing rule and where rates would be implied by it. If you look at the breakdown of europe and the taylor rule for a country like germany and where rate should be of the periphery, we can guess the line of the bottom. That is where rate should be for the periphery. You can guess which country is the white line because that is where rate should be for germany. That picture has gotten somewhat better. That is still ultimately the problem for the eurozone, isnt it . Krishna the eurozone has structural issues. There is no denying that. What the markets has been totally surprised by his the eurozones ability to grow at close to 2 . Five years ago if you told me europe was going to grow at 2 , i wouldve laughed you out of town. Actually i did. [laughter] i think that is the thing that mario draghi is dealing with. He does not know at this growth rate is sustainable or not. If it isnt, then taking a is ae by tapering to early risk that he, unlike the fed, does not want to take because the fed does not face the same structural issues. Jonathan is it a little premature to talk about removing accommodation at this point . Krishna if you look at growth, no. If you look at inflation, absolutely. That is the dilemma of the world central banks. Growth wise, we have gotten to where we need to. From an inflation front, we have not. The underlying risks of falling back into deflation is very much othere. Social big policy to some extent has to be cognizant of that. Jonathan its time to where we wrap up the last party five of 30 mins or so as we look ahead to next week. It is the rapidfire around. One question to each of you with one word answers if you can. We begin with a conversation about credit. Is a buyandhold story. You have to hold some maturity. Similar maturity of amazon or tesla and you have got to buy and hold. I know you are rates person, but you got to play. By and hold amazon or tesla . Subadra amazon. Krishna amazon. Matt i will go for tesla. It is wider here. Jonathan if i could give you one speech now, you could take away the speech and do whatever you want with it. Would you take yellens speech or Mario Draghis . Subadra mario draghi. Krishna mario draghi. Matt mario draghi. Jonathan who is at jackson hole next year chair yellen or chair cohn. Subadra cohn. Krishna cohn. Ee. T is three for thr cohn. Jonathan guys, it has been great to have you with us on the program. Thank you very much. From your, we will see you next friday. To our viewers worldwide coming up and watching bloomberg real yield. To our viewers worldwide, you have been watching bloomberg real yield. Track your pack. Set a curfew, or two. Make dinnertime device free. [ music stops ] [ music plays again ] a smarter way to wifi is awesome. Introducing xfinity xfi. Amazing speed, coverage and control. Change the way you wifi. Xfinity. The future of awesome. Vonnie it is called 30 p. M. In new york and 5 30 p. M. In london and 12 30 a. M. In hong kong. I vonnie quinn. I am vonnie quinn. Welcome to bloomberg markets. Vonnie from bloomberg World Headquarters in new york, here the top stories on the bloomberg from around the world that we are following. U. S. Stocks have erased earlier losses. The rebound coming after a report from axios that a decision on what has advisor Steve Bannons future is imminent. Foot locker gets caught up in the retail rout. The footwear chain suffered its worst decline since after the recession after reporting a bleak outlook. We will take it with of the winners and losers from this weeks earnings frenzy. And apples iphone is giving a little known supplier a longawaited payday. We dig into the latest details about the longawaited iphone. Lets get a quick check on the markets now. We did see a rebound following that axios news
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