Less-Liquid Credit Markets Are Pushing Traders to CDX:

Earlier today, UBS CEO Sergio er Maati sounded the alarm on fresh monetary easing, just as European policymakers appear poised to deliver yet another helping of stimulus to the markets that are expecting them. He was speaking with Bloomberg Television asked whether he is concerned that we may be headed

towards bubble territory. Take a listen. Well, you know, I think that you can see in the second in the second quarter, yes, asset prices went top, but it's not really correlated with investor sentiment and which is in my point of view, of course, a very dangerous development. And the only good things is that we observe is that hash balances with clients is very high. Uh. What they say is that they are willing to step into the

market if there is a major correction. But you know, hasset levels at such high level are are not necessarily correlated with investor sentiments. So this raises a question, are we seeing bubbles starting to form joining us now? Mike Buchanan, Deputy Chief investment Officer at Western Asset Management Co. Which oversees about four dred and thirty billion dollars and focuses on fixed income investing. Mike, you have decades of experience dating back to focused on credit markets. Do you see

excesses starting to form that are looking a little bubble ishous? Um? You know, I think when you look at the developed credit markets, UM, we're not yet seeing those telltale signs that that signal an end in the cycle or even the you know kind of the the approaching doom and turning point in the cycle. Obviously, performance UM and just the longevity of this rally UM does make you anxious.

It makes you nervous. But when we look at you know, a lot of the metrics that we try to track, the signal you know, what is this market going to look like fundamentally six months from now, a year from now, We're not really seeing a lot of evidence that suggesting UM, you know, bubble like territory. So, Mike, as we think about if not bubble like territory, just kind of maybe going the other way a little bit. I'm just thinking

about the global economic outlook. UM. Europe continues to be very unsettled, with some real weakness developing even in Germany and Brexit probably not going to be helpful. They're China slowing but still very positive, and even the US slowing a little bit. So as you think about the US market, given some of our big trading partners, is recession in

your outlook for maybe the back half of it's not? UM, we actually think that UM, we're in a in a little bit when you think of all these fixed income spread sectors and you think about the global economy, we're in somewhat of an ideal situation UM in that growth is slow UM yet positive, and even in Europe, where UM there are some real challenges. Obviously you've got the e c B providing a lot of accommodation to keep

things moving along. And we would argue that expectations are so low in Europe that you're likely to see some improvement just based on very very low expectations. So the idea of a very slow growth economic backdrop with an inflation outlook UM that is certainly challenged UM in terms of achieving most central bank targets that should keep rates pinned at these very or relatively low levels UM. And then the flip side is, you know, I think you look at a lot of the fundamentals in these spread

sectors and they look reasonably healthy to us. So uh we we we think that that the market can continue in the direction that it's been more recently, where it's you know, not dramatic performance from here, but more of a carry trade. And that's really the strategies that we have echoed throughout our fixed income portfolios. So if it's a carry trade, that means you want to go to

the assets that have the biggest carry. I'm looking right now at how your bonds returning ten percent so far year to date, even if they don't deliver that much more, it's a pretty good year. Are you saying to people buy high yield by emerging markets. Yeah, I think you've got to be careful about UM where you're getting your carry, And certainly this isn't a time to be greedy with the carry trade. We think you can. UM, there's certainly parts of those markets that you mentioned that are that

are still appealing. UM. I would say with with high yield, our focus really has been on individual issue or selection. We still think there's some you know, even if the markets yielding now inside of six percent, we're still finding in that sort of five and a half six and a half percent range, some pretty good opportunities that fundamentally and are moving in the right direction, they have the

right trajectory. UM in emerging markets, UH, probably being a little more selective there, we think just emerging market rates in general are one of the better opportunities, so you can even hedge out the currency risk by local bonds and take advantage of We think it's it's more of a secular trend. If you think about what's happened in developing markets UM with inflation where it is, with the trend in real rates going lower, UM, emerging market local

still looks pretty compelling. So we think there's opportunity there. When you talk about specific credit selection, I'm struck by volumes in the higher bond market, how much trading there is, and it's actually fallen so far. You're to date to the lowest, and I'm wondering how difficult is it for you to execute some of your company specific views. Yeah, that's a that's a great observation and I think it's accurate.

I mean, liquidity, uh, and trading is definitely you know, is it is it the summer, There's probably some contribution coming from that. It's been a good year. UM. You know, the volumes have definitely slowed down, UM, but it is still I mean, we we ran run a very big investment grade book, a very big high old book and loan book, and we are still able to effectuate the

trades that we need to. UM. A little more challenging for our traders, takes a little more patients, UM, but we're still getting the things done that that we need to. But I think you just got to be a little more careful and have a little more forethought and how you want to execute those and and be patient. UM. I also think the idea that you can headge your portfolio with UM not only c d X, which is the portfolio product for these markets, but also options on

cd X. Those markets have become extremely liquid. Those allow us to take risk off and put risk on opportunistically without having to execute in cash bonds all the time. So, Mike, just real quickly, I'm looking at your third quarter global outlook. You've got this great graphic here about relative value by region. Where globally are you seeing the best value right now? Well, I think you know, hinted at one of these, but but outside of developed markets, in the emerging markets, UM,

we think that's an attractive area for US. We've we've been bullish there. Specifically, I would say Indonesia, Russia, Brazil, UM, Mexico, those are probably are you know, top picks within emerging markets. And again what we would say is just taking advantage of high local rates. There is something that UM we think is is a is a really attractive risk reward relationship. UM. I think broadly staying in the US, where the economy

is is a little healthier. UM, you've got interest rate policy, you've got uh the central bank policy that is clearly pivoted towards a more dovish stance. UM. So we think that's an area where we're going to have a US biased portfolio. Mike, Thanks so thank you so much. Mike Buchanan, Deputy Chief Investment Officer for Western Asset Management. We appreciate you coming on. Based in Pasadena, California. They are really

one of the big the experts on the fixed income markets. Well, tomorrow's special counsel, Robert Mueller, will testify before to congressional committees. The question I think on most people's minds is will he have any new information that was not contained in

the his report? To give us a sense of what we might see tomorrow, we welcome Michael Zelden, Michael's former federal prosecutor and was actually Robert Mueller's former special assistant at the Department of Justice, and Michael is currently a c and and legal analysts based on Washington, d C. Michael, thanks so much for joining us again. You were Robert Mueller's special assistant at the Department of Justice, know him well.

Do you expect him to disclose any new material information tomorrow? Well, new is the keyword, because first, no, in a simple answer, because I think he has said plainly that he's going to stick to the report. But new, yes, in the sense that I don't believe many people have read his report, so it will be new to them if they tune in, So the information will be that information which has already been put out there, but because most people haven't read it,

I think it'll be new news to them. And that's the hope I think of the committee and having him testify orally too, if you will watch the movie rather than read the books. Well, Michael, there's some controversy this morning with Democrats pushing back in a Department of Justice recommendation to Bob Mueller to stick to the script, to stick to what's in the report. But this comes as Uhbert Mueller actually asked them for guidance. Why would he

do that? Well, in the report word itself, before it was released, there was information that was blacked out redacted is the word, and that involved ongoing cases cases of personal individuals, privacy rights, and some executive privilege related materials. And so what Mueller said is, we worked out a deal in terms of transmitting this report between the Justice Department and Congress around these things, these redactions. Do you want me to stick to that or am I free

to go beyond that which has been previously redacted? And the Justpartment said, no, stick to our previous agreement. The stuff that has been redacted should remain redacted. And you shouldn't testify to it. So I think that's what the essence of that letter was. So, Michael, if under questioning tomorrow Mr Mueller's asked questions that are not included in the report, maybe outside the purview of the actual report, but he does know the answer, is he just going

to plead the fifth or just say I can't comment. Well, he's free to speak to whatever he knows. He is not a d J employee, and as long as it does not involve privacy protected, executive privilege or ongoing investigation matters, he's free to offer his opinion. So, for example, in a silly hypothetical, if they asked him, Bob, what is your favorite color that's not in the report, He's free

to say whatever his favorite color is. But if they ask him, what is your opinion on whether or not you would have indicted the president but for the Office of Legal Counsel opinion that's not exactly in the report. That's something he has knowledge of, and he is free to answer that. I don't think he will, but Justice forman cannot prevent him from offering his opinion about what is in his report. Michael, have you read the report?

Of course, yes, okay, So what do you think is the most shocking or sensational aspect that you think the Democrats should home in on that perhaps people aren't as aware of. Well, the fact there are two parts of the port of course, there's the intelligence version, Volume one,

and that talks about collusion and conspiracy. And in that what I think Adam Schiff and the Democrats on the House Intelligence Committee want to get out is that even though Mueller found no evidence of criminal conspiracy, he did find a very willing Trump White campaign to receive help from foreign countries. I think that's what the Democrats want to get out. On the intelligence side. The Republicans want to push back and say, yes, but there was no

criminal conspiracy hence no collusion. On the House Judiciary side. Volume two, Mueller's, you know, sort of in under pound guerilla line in the report is is if I could have exonerated the president of criminal wrongdoing, I would have done so. But I couldn't. And I think what the Democrats want to drive home is why couldn't you? What was it? What behavior did Trump engage in that you

felt could implicate criminal behavior? And have him go through the report almost section by section where the report indicates that Trump told McGann to fire Mueller, where Trump told Sessions to tell Mueller not to investigate Trump. Those sort of things are that which the Democrats want to drive home UM as important as it is to their to their message. The Republicans want to again push back and

say yes but no, no criminal behavior. And bar and Rosenstein, the deputy Turney General and Attorney general at the time, UM found no criminal offense. So, Michael, from a legal perspective, do you think anything can come out of the hearing tomorrow that could advance UM those in Congress that want to move forward with impeachment. Well, it depends on how well Mueller tells the story that he has written down.

His story in his report is really rather compelling with respect to the obstructive acts or the attempted obstructive acts that he found Trump to have engaged in. If he can tell that story coherently in in movie like UM Dialogue, and people hear it for the first time, they may have an oh my moment in their appreciation of what it is that Mueller found in his report. If he's very legalistic and and and not a very compelling witness,

and sticks very much to yes and no answers. I don't think this advances the ball in any way, which it seems like it might be his tact based on his reluctance, right, I mean, why is he so reluctant to testify. He's a reluctant human being. You know, all the years that I worked with him, what we used to say about Bob all the time was he was first and foremost a marine. He would asked questions, he gave answers to those questions. He didn't elaborate, he didn't

offer opinions. And that's the way he if you watch his testimony over the years when he was in the FBI and otherwise, he is a very reluctant witness. He is very different than Jim Comey, who talks, you know, quite fluent, fluently with the media. That's not Bob. And so I think that you'll find here that same reticent personality coming through in the testimony. The only exception to that, potentially is if the Republicans started attacking his integrity or

the integrity of his team. The angry Democrats mantra that we hear a lot. He may take offense at that and there you may see some you know, emotion. Yeah, Michael Zelden, thank you so much for being with us.

Very illuminating. Michael Zelden, former federal prosecutor as well as Robert Mueller's former special assistant while at the Department of Justice, currently a CNN legal analysts, joining us from Washington, d C. We will be taking those hearings tomorrow throughout the day as we hear what Robert Mueller has to say and what the Democrats and Republicans how they try to frame the report. We're getting a slew of economic data throughout

the week from nations around the world. In the US, we got today US previously owned home sales, and we're gonna get of course, the GDP numbers on Friday. Joining us here to talk about what we can expect and how to understand what we're getting in terms of some of these economic data points, Constance Hunter, we are so glad to have you here with us in our Bloomberg

inter Active Broker Studios. Constants is chief Economistic KPMG. So let's start with the data that we have, which is the previously owned home sales which declined more than expected in June, where are we in terms of the US housing market. So to set the stage, we've actually had five quarters of negative real estate investment, and uh, that is usually a sign that your expansion is coming to an end. It's one of the many signals that economists

look at when they think is an inflation coming? Right, And obviously the one that people know about most is the yield curve in version, But this is another one that economists have in their arsenal. And so it's a puzzle because usually it is it's a leading indicator. Jobs are a concurrent indicator. But we've seen such a robust jobs market that it is a puzzle. And and so if we look at other factors around housing, right we look at the affordability index. It's long term average is four.

We're above a hundred and fifty. So it's a puzzle. And I think the puzzle comes down to supply and enough um lower priced homes that it actually makes it possible for first time homebuyers to join the market. Now, we did see an uptick in first time homebuyers, it went from thirty two percent. But but this this sluggish housing market is a bit of a puzzle, and I think it's one of the factors, even though Powell hasn't

cited it. I think it is one of the factors in the back of the minds of economists at the Federal Reserve System thinking about doesn't make sense to have this insurance rate cut. So let's let's go there. Since we're having to fed on the feet meeting. Um, you know, kind of question of an insurance cut or preemptive cut. Give us your thoughts about that. Is it are they is it effective? What's the cost associated with that? All all that kind of thing. Well, yeah, and Paul, you

bring up a good point, what is the cost? So insurance is really good to have, but we all know it's not free, right, So there is a cost um, and especially the closer we are to the zero lower bound, that cost goes up, right because there if they they they have so much arsenal, and if they're using it up now and it doesn't work, then they have less arsenal to use later. But if we look back, so there's two UH parallel situations from the nineties. So the

first is from UH nineteen four and ninety four. The FED heights in November seventy five basis points in the market wasn't expecting that. They weren't sure if we were

gonna get twenty five or fifty. Greenspan surprised with a seventy five basis point rate increase, and if you recall a mirror four weeks later, we started to have the Tequila crisis at the end of nineteen four that bled into n We ended up bailing out the Mexican because of the Mexican bond crisis and sorry, thank you for for everybody for for those everybody got threw up their hands into the part. They probably did that too. So the FED did some preemptive cuts or some insurance cuts

because it was external turbulence, uh, and it worked. Then fast forward to we've had the Asian financial crisis that sort of bled into the Russian default and devaluation, which caused a bunch of purchasing of off the run treasuries, which was not what long term capital management had planned for.

And so in conjunction with with the long term capital management liquidity squeeze, the FED did another set of almost a hundred basis points over the course of a year preemptive cuts, and that allowed us to continue the expansion to two thousand and one and right now, what we're seeing is if you look at different indicators like the yield curve that you talked about, it seems like markets believe that the Federal Reserve will effectively stave off a

near term recession with the expected three rate us UH that is currently being priced into the market. Do you agree with that, Yeah, and economists broadly agree with that.

So the National Association for Business Economics NAME did a survey UH recently and the percentage of people who expect a recession has great in the second half of this year, has greatly diminished from about twelve and then in the first half of it's diminished, and so now people are betting on second half of So people don't think we're going to avoid a recession altogether, or at least that's not what the most recent NAME survey shows, but they

do think it's going to prolong the expansion, and of course that is that is, you know, consistent with the Fed's mandate right try to get maximum employment and full full GDP as long as possible. How concerned are you about manufacturing globally continues to be sluggish, certainly versus the consumer. When is that going to become a real problem for

where the US. For per se, well, I think it's already somewhat of a problem for US in that UM we're seeing the manufacture of the regional FED manufacturing indicries more or less b be somewhat weak UM with somewhat mixed in the in the latest that have come out. But but globally that manufacturing cycle is really important and

it bleeds over into services. But if you see what GETA Gopinath talked about this morning when the IMF released its report, they have a whole chapter on this diversion between UH, the services economy and the trade economy, and we see that divergent also divergence also in price indusease. Right, so the services prices are well in line with UM, the Fed's goal of two percent, they're out or above two percent, whereas it's good prices that are really dragging

down the overall index. So this is a dichotomy that UM has so far hasn't affected the broad economy, but certainly has the potential to bleed into the broader economy. Constanta, thank you so much for joining us. Constance is a chief economist for KPMG based here in New York City, joining us in our Bloomberg Interactive Broker studio. One thing. I'm just I'm still thinking about the housing market. I'm just buy sell um. I'm an owner, so that I

do have invested interest full disclosure. But I do have to wonder how much the weakness is due to a lack of foreign investment in the United States. Are falling investment from the from Europe and China? I don't know. I just I mean, certainly in big cities, well, certainly New York City. I mean, a lot of these mega high rises that we see in mid midtown have been you know, occupied primarily primarily by overseas customers, and so it's just been propping up the high end of the market.

So I'm not sure if it's your side of the market, don't know. Probably you're right, You're totally down there. This is Bloomberg earlier today, Boris Johnson, the public face of the Brexit campaign. One of the content has to succeed Theresa May is British Prime Minister, maybe taking the country closer to a no deal brexit. That's according to Moody's. We want to get some insight from our Bloomberg opinion columnists. Terra's Raphael joining us now from London, Bloomberg opinion editor

covering European politics and economics. Uh sores, what first do you expect Boris Johnson to do when it comes to Brexity has but I think a hundred days right to come to some sort of uh determination and plan. Yeah. So Boris has run a campaign that is very different from the stance at Theresa May took on Brexit. So whereas May originally threatened to leave without a deal if she couldn't get a good deal, the threat was never credible.

Britain was not prepared. Boris has made clear from the outset that a no deal exit is you know, not only something he's willing to do, but something actually thinks wouldn't be as disastrous for Britain as pretty much every

series economic analysis suggests it would be. So I think of the first thing he's going to try to do is, uh, he'll have to appoint a cabinet, and then he's going to try to meet with EU leaders and see if he can get some traction there, and and I would expect him to have an early meeting in Ireland because the key to this this whole thing is obviously the Irish border issue. So tres, do you think he can

get the support for a no deal brexit. It seems like the arguments are pretty consistent across many party lines that it would in fact be very catastrophic for the UK. Yeah, I mean, I guess that's two questions. Can he get the support for it in Parliament? The answer to that is is an emphatic no. Parliament is voted many times against an odeal. They are still trying to prevent him from uh, you know, from fulfilling that pledge. But the

other questions can he do it anyhow? And can he win enough backing in public opinion to make the threat seem credible? Um? And I think that's something EU leaders

are going to watch very closely. If it looks like Boris, who is uh you know, let's face at a very skilled, convincing communicator, can can convince the British public at large that he has a plan, that it's credible that the fears of an odeal brex that are not are you know, are are somehow exaggerated, then EU leaders may may start worrying that that's where he's going to take things and if there is to be an early election, which many think is quite likely, that he will lead the Conservatives

to victory. And then I think we start to see some movement from the EU side, although the room, it must be said, is very very small. I'm struggling. Just let's take a step back. So Boris Johnson resigned at one point. He is a very colorful character. He has led a number of populist movements. How much popular support does he have as he rises to be the Prime Minister of UK. Well, here's the interesting thing about Boris

Johnson and public opinion. Um So, if there was a commerce poll recently and when asked between the two Conservative part the leadership candidates, which one would do better at managing the economy? The answer came out Jeremy Hunt. Which one would make a better prime minister? The answer came out, Jeremy Hunt. Which one would be better at UH dealing with foreign leaders? The answer came out Jeremy Hunt. When you ask which one has a better chance of delivering Brexit,

it was Boris Johnson. Tax cuts, it's Boris Johnson. So in a way, Johnson is the one that people UH turned to UH for, you know, in a way, a sort of ideological satisfaction. But I think opinion UH can be very fickle when it comes to him, and if he's the trust levels are low people you know that the the pole after pole shows people don't trust him. So I think if he breaches you know, the trust that's been put on in him by the Conservative Party early on, we could see a vote of no confidence

in Parliament. We could see another backlash. But you know, he is uniquely skilled in appealing to the public and I think that's the sort of X factor about Johnson that's really hard to just dismiss. So treas if there is if this impasse kind of results in another general election in the near term, is that to any one side benefit? You think, Well, I don't think it's to

Jeremy Corbyn Labor Party leaders benefit. Right now, his party is, you know, has been adrift on Brexit UH, beset by all sorts of internal wrangling, not not least and and latest over anti Semitism UM. So I think the Labor Party is now going to want to avoid UM an early election. Be very interesting to see how the Liberal Democrats take that they have a new leader, Joe Swinson, very young dynamic UH leader and they have picked up UH points in the polls after the European elections with

a very solid pro remain UH platform. So you know, Boris may like his chances, but I think only if he can get Britain out of the EU. I think he would take a giant risk going to UH an early election before he's delivered Brexit. Tores Raphael, thank you so much. Tres As Bloomberg Opinion editor covering European politics economics,

joining us from the London bureau. You can read more on this and other stories from Bloomberg Opinion at Bloomberg dot com, Slash Opinion and of course on the terminal by typing o p I n go for Bloomberg Opinion. Some of our best work I think coming out of Bloomberg News from great analysis. But it just this is interesting to see, you know, with bar Boris Johnson, presumably

tomorrow will be named Prime minister. Um, you know what is in his toolbox that he thinks he can get this deal done that maybe Teresa May did did not? Is it just his personality? Well? Is it just this chaos theory, this idea that he will come in and he'll say I will take a no deal brexit and that's fine by me because that was not fine, uh with with Teresa May. And so you would that threat be enough for the E or will you not care? They say all right, go ahead exactly. Just looking at

pounds sterling right here. Weaker on the day at one point to four or four seven down slightly. Thanks for listening to the Bloomberg pen L podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. I'm Paul Sweeney. I'm on Twitter at pt Sweeney. I'm Lisa abram Woy. It's I'm on Twitter at Lisa abram boits one before the podcast, you can always catch us worldwide. I'm Bloomberg Radio