Latest / Bloomberg Intelligence / Oppenheimer's Jersey on US Treasuries: Limit Not Too Far(Audio)

Transcript

Oppenheimer's Jersey on US Treasuries: Limit Not Too Far(Audio) · Bloomberg Intelligence

• 0:03
  Speaker 1: Global business news twenty four hours a day. If Bloomberg
• 0:06
  Speaker 1: dot Com, the Radio plus Mobile Act and on your radio.
• 0:09
  Speaker 1: This is a Bloomberg Business flash from Bloomberg World Handquarters.
• 0:14
  Speaker 1: I'm Charlie Pellott. Stocks are lower following declines in crude
• 0:17
  Speaker 1: oil ahead of tomorrow's job's reward SMP five hundred in
• 0:21
  Speaker 1: necks down eight now to two thousand ninety want to
• 0:23
  Speaker 1: drop there of four tenths of one percent. Nestack lower
• 0:26
  Speaker 1: a little change down half a point now down, Industrials
• 0:29
  Speaker 1: tumbling ninety points down five tenths of one percent, the
• 0:33
  Speaker 1: tenure down five thirty seconds, looking at the yield of
• 0:35
  Speaker 1: one point three eight percent, Gold down six thirty ounce
• 0:38
  Speaker 1: the thirteen sixty again there of five tenths of one percent,
• 0:41
  Speaker 1: and crude now below forty five dollars of barrel falling
• 0:45
  Speaker 1: to fort right now down to forty seven, a drop
• 0:49
  Speaker 1: there of five point three percent on West Texas intermediate crude.
• 0:53
  Speaker 1: I'm Charlie Pellett. Fat's a Bloomberg business flash. You're listening
• 0:58
  Speaker 1: to taking stop with Kathleen A in pain box on
• 1:01
  Speaker 1: Bloomberg Radio. Government bond markets have rallied tenure. German government
• 1:06
  Speaker 1: bond deals hitting new all time lows. US treasury yields
• 1:10
  Speaker 1: retesting their twenty twelve lows, hovering just under one and
• 1:14
  Speaker 1: a half percent. In fact, take a looking at the
• 1:16
  Speaker 1: tenure one point three nine percent. What does this mean? Well,
• 1:20
  Speaker 1: it means we've got to ask Ira Jersey. He was
• 1:22
  Speaker 1: fixed income strategist and senior client portfolio manager for Oppenheimer Funds.
• 1:27
  Speaker 1: Ira always a pleasure, Hey them nice to be on alright,
• 1:30
  Speaker 1: So give us, give us your best view about what's
• 1:33
  Speaker 1: going on right now in the world of fixed income. Yeah, well,
• 1:36
  Speaker 1: in for US fixed income, and like US treasuries, the
• 1:39
  Speaker 1: it has nothing to do with US fundamentals, which remain
• 1:42
  Speaker 1: relatively strong. You see higher inflation, I mean, job growth,
• 1:46
  Speaker 1: even though it's slowed a little, is still pretty solid.
• 1:49
  Speaker 1: But it's all about what's going on overseas. You have
• 1:51
  Speaker 1: negative rates out to almost twenty years in Japan, you
• 1:55
  Speaker 1: have negative rates in Germany um out to just a
• 2:00
  Speaker 1: through ten years. So it's really about flows and where
• 2:03
  Speaker 1: yields are. So people who need any kind of yield
• 2:06
  Speaker 1: still have to come to the US. It's hard to
• 2:09
  Speaker 1: it's really difficult to say this, but the US, even
• 2:13
  Speaker 1: with the tenure at one point four percent, is still
• 2:16
  Speaker 1: a global high yielder among developed bond markets. Well, ira, uh,
• 2:21
  Speaker 1: the economy may look pretty good to you, but the
• 2:22
  Speaker 1: feder Reserve was cautious enough last month. Well, first of all,
• 2:26
  Speaker 1: they changed their view a lot from December to March,
• 2:28
  Speaker 1: not four rate hikes to two. Then at the last meeting, Wow,
• 2:32
  Speaker 1: you know six six seventeen saw only one interest rate
• 2:35
  Speaker 1: increase this year. So it seems that the FED is
• 2:37
  Speaker 1: also supporting this bond market rally by suggesting that there
• 2:40
  Speaker 1: will be one, maybe only one hike this year. And
• 2:44
  Speaker 1: some people are saying, you know, you're not going to
• 2:46
  Speaker 1: see anything until at least seen Yeah, well, certainly after
• 2:49
  Speaker 1: the Brexit vote a couple of weeks ago, you priced
• 2:52
  Speaker 1: out hikes basically for almost two years, and and certainly
• 2:55
  Speaker 1: that's supportive. I think it's central bank policy, not only
• 2:58
  Speaker 1: here in the US, but also what the Ropean central
• 3:00
  Speaker 1: banks likely to do, what the Bank of Japan certainly
• 3:03
  Speaker 1: is going to do, keeping um interest rates negative and
• 3:07
  Speaker 1: and continuing to buy a lot of bonds. I mean,
• 3:08
  Speaker 1: we have to keep in mind, like one of the
• 3:10
  Speaker 1: other aspects of all of this is yes, it's true
• 3:13
  Speaker 1: that the said might not hike. But even if the
• 3:15
  Speaker 1: FED were to hike once this year and a couple
• 3:17
  Speaker 1: of times next year, UM, that wouldn't necessarily impact the
• 3:20
  Speaker 1: ten year treasury that much. That really is going to
• 3:23
  Speaker 1: impact two year treasuries, which right now of more or
• 3:26
  Speaker 1: less priced out hikes for the almost the next year
• 3:28
  Speaker 1: and a half UM. So, so that would be the
• 3:31
  Speaker 1: risk in the market if the FED were to hike.
• 3:34
  Speaker 1: But the tenure, it's things like the ECB buying investment
• 3:37
  Speaker 1: grade corporate bonds in Europe. Just the supply of positively
• 3:42
  Speaker 1: yielding assets is shrinking, believe it or not, at shrinking.
• 3:45
  Speaker 1: We had, um, we had supply that was a record
• 3:48
  Speaker 1: in investment grade US corporates in May and June was
• 3:53
  Speaker 1: was actually June was pretty good until the brigsit time
• 3:56
  Speaker 1: and which basically shut down the market. But um, but
• 4:00
  Speaker 1: because this of the shrinking supplies, people have to go somewhere.
• 4:03
  Speaker 1: There's still large pools of money that chase fixed income
• 4:06
  Speaker 1: assets and um, you know, the U S Treasury mark
• 4:09
  Speaker 1: it's not immune to that. And it's you know what's
• 4:11
  Speaker 1: really astounding to me, it's yet, yes, ten year treasuries
• 4:14
  Speaker 1: are are exceptionally low. But you look at thirty year
• 4:17
  Speaker 1: yields at two at two point one four percent right now,
• 4:20
  Speaker 1: and you know, it's hard to imagine someone needing an
• 4:23
  Speaker 1: annuity that only pays you, you know, twenty dollars for
• 4:26
  Speaker 1: every thousand dollars bond you buy. UM, that's not you know,
• 4:30
  Speaker 1: it's certainly not an attractive return um, and that I
• 4:33
  Speaker 1: you know, anticipating your next question, you might ask me, well,
• 4:35
  Speaker 1: is this a bond bubble? And the the answer is
• 4:38
  Speaker 1: that the simple answer is probably not given the policy environment,
• 4:42
  Speaker 1: but it's still not very attractive, not very attractive yields.
• 4:47
  Speaker 1: Talking about the European Central Bank and its bond buying program,
• 4:50
  Speaker 1: why buy the highest grade bonds when there's always a
• 4:53
  Speaker 1: bid for those particularly? Yeah, well, so part of that
• 4:57
  Speaker 1: is there is their own struck sure and how much
• 5:00
  Speaker 1: credit risk they're willing to take, I mean they want
• 5:02
  Speaker 1: to be the idea of buying corporate bonds by central
• 5:06
  Speaker 1: banks is relatively new. It's not something that really has
• 5:10
  Speaker 1: been done since the Great Depression, and um, the ideas
• 5:13
  Speaker 1: is to get borrowing costs down for corporations so they
• 5:17
  Speaker 1: can borrow money cheaply and hopefully expand operations. I think
• 5:21
  Speaker 1: part of the problem with a lot of this monetary
• 5:23
  Speaker 1: policy and one of the reasons why many people are
• 5:26
  Speaker 1: skeptical if it's if it's helping, and I think it
• 5:28
  Speaker 1: is helping at the margin, But at the end of
• 5:30
  Speaker 1: the day, it's really the animal spirits. Will you take
• 5:33
  Speaker 1: the money that you borrow and invest it in new
• 5:36
  Speaker 1: plant and equipment or and or expanding your business to
• 5:39
  Speaker 1: a new geography, which is then helping the overall economy
• 5:43
  Speaker 1: and UH and and growing um things like employment and
• 5:47
  Speaker 1: growing um and and growing hopefully your own profits in
• 5:51
  Speaker 1: the process. But you know, people are still very skeptical
• 5:54
  Speaker 1: and don't want to take that kind of risk. And
• 5:56
  Speaker 1: I think that's really what's kind of keeping the monetary
• 5:59
  Speaker 1: policy check. And you know, monetary policy can only go
• 6:02
  Speaker 1: so far if there was maybe a fiscal response, so
• 6:05
  Speaker 1: loosening of the purse strings in by governments, perhaps that
• 6:08
  Speaker 1: will happen, But it doesn't look like there's much appetite
• 6:11
  Speaker 1: in in the world capitals in order to do that.
• 6:14
  Speaker 1: So ira UM the bond market rally um it looked,
• 6:18
  Speaker 1: you know, once the tenure punched down to one point
• 6:21
  Speaker 1: three six on the yield like, given the right set
• 6:23
  Speaker 1: of headlines, it would be honest way to one percent.
• 6:26
  Speaker 1: So where are we now? What could keep look? Could
• 6:29
  Speaker 1: give this rally another kick and high gear? What's going
• 6:32
  Speaker 1: to turn everybody around? Squaling? For the exits want as
• 6:37
  Speaker 1: many as they can't as fast as they can. So
• 6:39
  Speaker 1: I think on the rally side for rates is that
• 6:41
  Speaker 1: is that you know U S treasuries are still a
• 6:43
  Speaker 1: flight to quality asset. Like I was thinking, I think
• 6:46
  Speaker 1: a lot of people thought that well, at very low yield,
• 6:49
  Speaker 1: even if like stock sell off you ten percent, that
• 6:52
  Speaker 1: treasuries won't rally because there's nowhere to go. And I
• 6:54
  Speaker 1: think that that that premise has been proven false. They
• 6:57
  Speaker 1: still are a safe have an asset. So so if
• 7:00
  Speaker 1: you think if you get another risk off, that can
• 7:01
  Speaker 1: push yields lower. Another thing that I looked at recently
• 7:05
  Speaker 1: was you know who are the incremental buyers of of treasuries?
• 7:09
  Speaker 1: Because it's not probably not US domestic investors. It is
• 7:12
  Speaker 1: international investors who have the option to buy negative yielding
• 7:15
  Speaker 1: assets or uh something like treasuries. And given that you
• 7:21
  Speaker 1: get down to about one and a quarter and it's
• 7:23
  Speaker 1: not attractive for Japanese investors for example, to buy US
• 7:26
  Speaker 1: treasuries anymore. So there probably is some limit and it's
• 7:29
  Speaker 1: not too far from here. Ira Jersey, thank you so
• 7:31
  Speaker 1: very much for helping us understand what's driving the bond rally.
• 7:35
  Speaker 1: Big day tomorrow for bonds, for actually all the markets
• 7:38
  Speaker 1: around the world. He joined us from Oppenheimer Funds. This
• 7:41
  Speaker 1: is Bloomberg coming up on taking stock Cheetos, Fritos, Derrito's,
• 7:49
  Speaker 1: and also a little seven up and Pepsi. You've got
• 7:53
  Speaker 1: details as Pepsi shares move higher, that's next