WEBVTT - Oppenheimer's Jersey on US Treasuries: Limit Not Too Far(Audio)

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<v Speaker 1>Global business news twenty four hours a day. If Bloomberg

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<v Speaker 1>This is a Bloomberg Business flash from Bloomberg World Handquarters.

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<v Speaker 1>I'm Charlie Pellott. Stocks are lower following declines in crude

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<v Speaker 1>oil ahead of tomorrow's job's reward SMP five hundred in

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<v Speaker 1>necks down eight now to two thousand ninety want to

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<v Speaker 1>drop there of four tenths of one percent. Nestack lower

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<v Speaker 1>a little change down half a point now down, Industrials

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<v Speaker 1>tumbling ninety points down five tenths of one percent, the

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<v Speaker 1>tenure down five thirty seconds, looking at the yield of

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<v Speaker 1>one point three eight percent, Gold down six thirty ounce

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<v Speaker 1>the thirteen sixty again there of five tenths of one percent,

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<v Speaker 1>and crude now below forty five dollars of barrel falling

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<v Speaker 1>to fort right now down to forty seven, a drop

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<v Speaker 1>there of five point three percent on West Texas intermediate crude.

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<v Speaker 1>I'm Charlie Pellett. Fat's a Bloomberg business flash. You're listening

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<v Speaker 1>to taking stop with Kathleen A in pain box on

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<v Speaker 1>Bloomberg Radio. Government bond markets have rallied tenure. German government

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<v Speaker 1>bond deals hitting new all time lows. US treasury yields

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<v Speaker 1>retesting their twenty twelve lows, hovering just under one and

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<v Speaker 1>a half percent. In fact, take a looking at the

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<v Speaker 1>tenure one point three nine percent. What does this mean? Well,

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<v Speaker 1>it means we've got to ask Ira Jersey. He was

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<v Speaker 1>fixed income strategist and senior client portfolio manager for Oppenheimer Funds.

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<v Speaker 1>Ira always a pleasure, Hey them nice to be on alright,

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<v Speaker 1>So give us, give us your best view about what's

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<v Speaker 1>going on right now in the world of fixed income. Yeah, well,

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<v Speaker 1>in for US fixed income, and like US treasuries, the

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<v Speaker 1>it has nothing to do with US fundamentals, which remain

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<v Speaker 1>relatively strong. You see higher inflation, I mean, job growth,

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<v Speaker 1>even though it's slowed a little, is still pretty solid.

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<v Speaker 1>But it's all about what's going on overseas. You have

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<v Speaker 1>negative rates out to almost twenty years in Japan, you

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<v Speaker 1>have negative rates in Germany um out to just a

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<v Speaker 1>through ten years. So it's really about flows and where

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<v Speaker 1>yields are. So people who need any kind of yield

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<v Speaker 1>still have to come to the US. It's hard to

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<v Speaker 1>it's really difficult to say this, but the US, even

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<v Speaker 1>with the tenure at one point four percent, is still

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<v Speaker 1>a global high yielder among developed bond markets. Well, ira, uh,

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<v Speaker 1>the economy may look pretty good to you, but the

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<v Speaker 1>feder Reserve was cautious enough last month. Well, first of all,

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<v Speaker 1>they changed their view a lot from December to March,

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<v Speaker 1>not four rate hikes to two. Then at the last meeting, Wow,

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<v Speaker 1>you know six six seventeen saw only one interest rate

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<v Speaker 1>increase this year. So it seems that the FED is

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<v Speaker 1>also supporting this bond market rally by suggesting that there

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<v Speaker 1>will be one, maybe only one hike this year. And

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<v Speaker 1>some people are saying, you know, you're not going to

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<v Speaker 1>see anything until at least seen Yeah, well, certainly after

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<v Speaker 1>the Brexit vote a couple of weeks ago, you priced

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<v Speaker 1>out hikes basically for almost two years, and and certainly

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<v Speaker 1>that's supportive. I think it's central bank policy, not only

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<v Speaker 1>here in the US, but also what the Ropean central

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<v Speaker 1>banks likely to do, what the Bank of Japan certainly

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<v Speaker 1>is going to do, keeping um interest rates negative and

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<v Speaker 1>and continuing to buy a lot of bonds. I mean,

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<v Speaker 1>we have to keep in mind, like one of the

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<v Speaker 1>other aspects of all of this is yes, it's true

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<v Speaker 1>that the said might not hike. But even if the

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<v Speaker 1>FED were to hike once this year and a couple

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<v Speaker 1>of times next year, UM, that wouldn't necessarily impact the

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<v Speaker 1>ten year treasury that much. That really is going to

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<v Speaker 1>impact two year treasuries, which right now of more or

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<v Speaker 1>less priced out hikes for the almost the next year

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<v Speaker 1>and a half UM. So, so that would be the

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<v Speaker 1>risk in the market if the FED were to hike.

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<v Speaker 1>But the tenure, it's things like the ECB buying investment

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<v Speaker 1>grade corporate bonds in Europe. Just the supply of positively

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<v Speaker 1>yielding assets is shrinking, believe it or not, at shrinking.

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<v Speaker 1>We had, um, we had supply that was a record

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<v Speaker 1>in investment grade US corporates in May and June was

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<v Speaker 1>was actually June was pretty good until the brigsit time

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<v Speaker 1>and which basically shut down the market. But um, but

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<v Speaker 1>because this of the shrinking supplies, people have to go somewhere.

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<v Speaker 1>There's still large pools of money that chase fixed income

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<v Speaker 1>assets and um, you know, the U S Treasury mark

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<v Speaker 1>it's not immune to that. And it's you know what's

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<v Speaker 1>really astounding to me, it's yet, yes, ten year treasuries

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<v Speaker 1>are are exceptionally low. But you look at thirty year

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<v Speaker 1>yields at two at two point one four percent right now,

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<v Speaker 1>and you know, it's hard to imagine someone needing an

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<v Speaker 1>annuity that only pays you, you know, twenty dollars for

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<v Speaker 1>every thousand dollars bond you buy. UM, that's not you know,

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<v Speaker 1>it's certainly not an attractive return um, and that I

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<v Speaker 1>you know, anticipating your next question, you might ask me, well,

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<v Speaker 1>is this a bond bubble? And the the answer is

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<v Speaker 1>that the simple answer is probably not given the policy environment,

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<v Speaker 1>but it's still not very attractive, not very attractive yields.

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<v Speaker 1>Talking about the European Central Bank and its bond buying program,

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<v Speaker 1>why buy the highest grade bonds when there's always a

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<v Speaker 1>bid for those particularly? Yeah, well, so part of that

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<v Speaker 1>is there is their own struck sure and how much

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<v Speaker 1>credit risk they're willing to take, I mean they want

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<v Speaker 1>to be the idea of buying corporate bonds by central

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<v Speaker 1>banks is relatively new. It's not something that really has

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<v Speaker 1>been done since the Great Depression, and um, the ideas

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<v Speaker 1>is to get borrowing costs down for corporations so they

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<v Speaker 1>can borrow money cheaply and hopefully expand operations. I think

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<v Speaker 1>part of the problem with a lot of this monetary

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<v Speaker 1>policy and one of the reasons why many people are

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<v Speaker 1>skeptical if it's if it's helping, and I think it

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<v Speaker 1>is helping at the margin, But at the end of

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<v Speaker 1>the day, it's really the animal spirits. Will you take

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<v Speaker 1>the money that you borrow and invest it in new

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<v Speaker 1>plant and equipment or and or expanding your business to

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<v Speaker 1>a new geography, which is then helping the overall economy

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<v Speaker 1>and UH and and growing um things like employment and

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<v Speaker 1>growing um and and growing hopefully your own profits in

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<v Speaker 1>the process. But you know, people are still very skeptical

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<v Speaker 1>and don't want to take that kind of risk. And

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<v Speaker 1>I think that's really what's kind of keeping the monetary

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<v Speaker 1>policy check. And you know, monetary policy can only go

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<v Speaker 1>so far if there was maybe a fiscal response, so

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<v Speaker 1>loosening of the purse strings in by governments, perhaps that

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<v Speaker 1>will happen, But it doesn't look like there's much appetite

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<v Speaker 1>in in the world capitals in order to do that.

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<v Speaker 1>So ira UM the bond market rally um it looked,

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<v Speaker 1>you know, once the tenure punched down to one point

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<v Speaker 1>three six on the yield like, given the right set

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<v Speaker 1>of headlines, it would be honest way to one percent.

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<v Speaker 1>So where are we now? What could keep look? Could

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<v Speaker 1>give this rally another kick and high gear? What's going

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<v Speaker 1>to turn everybody around? Squaling? For the exits want as

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<v Speaker 1>many as they can't as fast as they can. So

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<v Speaker 1>I think on the rally side for rates is that

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<v Speaker 1>is that you know U S treasuries are still a

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<v Speaker 1>flight to quality asset. Like I was thinking, I think

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<v Speaker 1>a lot of people thought that well, at very low yield,

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<v Speaker 1>even if like stock sell off you ten percent, that

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<v Speaker 1>treasuries won't rally because there's nowhere to go. And I

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<v Speaker 1>think that that that premise has been proven false. They

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<v Speaker 1>still are a safe have an asset. So so if

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<v Speaker 1>you think if you get another risk off, that can

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<v Speaker 1>push yields lower. Another thing that I looked at recently

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<v Speaker 1>was you know who are the incremental buyers of of treasuries?

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<v Speaker 1>Because it's not probably not US domestic investors. It is

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<v Speaker 1>international investors who have the option to buy negative yielding

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<v Speaker 1>assets or uh something like treasuries. And given that you

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<v Speaker 1>get down to about one and a quarter and it's

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<v Speaker 1>not attractive for Japanese investors for example, to buy US

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<v Speaker 1>treasuries anymore. So there probably is some limit and it's

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<v Speaker 1>not too far from here. Ira Jersey, thank you so

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<v Speaker 1>very much for helping us understand what's driving the bond rally.

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<v Speaker 1>Big day tomorrow for bonds, for actually all the markets

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<v Speaker 1>around the world. He joined us from Oppenheimer Funds. This

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<v Speaker 1>is Bloomberg coming up on taking stock Cheetos, Fritos, Derrito's,

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<v Speaker 1>and also a little seven up and Pepsi. You've got

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<v Speaker 1>details as Pepsi shares move higher, that's next