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

drop there of four tenths of one percent. Nestack lower a little change down half a point now down, Industrials tumbling ninety points down five tenths of one percent, the tenure down five thirty seconds, looking at the yield of one point three eight percent, Gold down six thirty ounce the thirteen sixty again there of five tenths of one percent, and crude now below forty five dollars of barrel falling to fort right now down to forty seven, a drop

there of five point three percent on West Texas intermediate crude. I'm Charlie Pellett. Fat's a Bloomberg business flash. You're listening to taking stop with Kathleen A in pain box on Bloomberg Radio. Government bond markets have rallied tenure. German government bond deals hitting new all time lows. US treasury yields retesting their twenty twelve lows, hovering just under one and a half percent. In fact, take a looking at the tenure one point three nine percent. What does this mean? Well,

it means we've got to ask Ira Jersey. He was fixed income strategist and senior client portfolio manager for Oppenheimer Funds. Ira always a pleasure, Hey them nice to be on alright, So give us, give us your best view about what's going on right now in the world of fixed income. Yeah, well, in for US fixed income, and like US treasuries, the it has nothing to do with US fundamentals, which remain

relatively strong. You see higher inflation, I mean, job growth, even though it's slowed a little, is still pretty solid. But it's all about what's going on overseas. You have negative rates out to almost twenty years in Japan, you have negative rates in Germany um out to just a through ten years. So it's really about flows and where yields are. So people who need any kind of yield

still have to come to the US. It's hard to it's really difficult to say this, but the US, even with the tenure at one point four percent, is still a global high yielder among developed bond markets. Well, ira, uh, the economy may look pretty good to you, but the feder Reserve was cautious enough last month. Well, first of all, they changed their view a lot from December to March, not four rate hikes to two. Then at the last meeting, Wow, you know six six seventeen saw only one interest rate

increase this year. So it seems that the FED is also supporting this bond market rally by suggesting that there will be one, maybe only one hike this year. And some people are saying, you know, you're not going to see anything until at least seen Yeah, well, certainly after the Brexit vote a couple of weeks ago, you priced out hikes basically for almost two years, and and certainly

that's supportive. I think it's central bank policy, not only here in the US, but also what the Ropean central banks likely to do, what the Bank of Japan certainly is going to do, keeping um interest rates negative and and continuing to buy a lot of bonds. I mean, we have to keep in mind, like one of the other aspects of all of this is yes, it's true

that the said might not hike. But even if the FED were to hike once this year and a couple of times next year, UM, that wouldn't necessarily impact the ten year treasury that much. That really is going to impact two year treasuries, which right now of more or less priced out hikes for the almost the next year and a half UM. So, so that would be the risk in the market if the FED were to hike. But the tenure, it's things like the ECB buying investment

grade corporate bonds in Europe. Just the supply of positively yielding assets is shrinking, believe it or not, at shrinking. We had, um, we had supply that was a record in investment grade US corporates in May and June was was actually June was pretty good until the brigsit time and which basically shut down the market. But um, but because this of the shrinking supplies, people have to go somewhere.

There's still large pools of money that chase fixed income assets and um, you know, the U S Treasury mark it's not immune to that. And it's you know what's really astounding to me, it's yet, yes, ten year treasuries are are exceptionally low. But you look at thirty year yields at two at two point one four percent right now, and you know, it's hard to imagine someone needing an annuity that only pays you, you know, twenty dollars for

every thousand dollars bond you buy. UM, that's not you know, it's certainly not an attractive return um, and that I you know, anticipating your next question, you might ask me, well, is this a bond bubble? And the the answer is that the simple answer is probably not given the policy environment, but it's still not very attractive, not very attractive yields. Talking about the European Central Bank and its bond buying program, why buy the highest grade bonds when there's always a

bid for those particularly? Yeah, well, so part of that is there is their own struck sure and how much credit risk they're willing to take, I mean they want to be the idea of buying corporate bonds by central banks is relatively new. It's not something that really has been done since the Great Depression, and um, the ideas is to get borrowing costs down for corporations so they

can borrow money cheaply and hopefully expand operations. I think part of the problem with a lot of this monetary policy and one of the reasons why many people are skeptical if it's if it's helping, and I think it is helping at the margin, But at the end of

the day, it's really the animal spirits. Will you take the money that you borrow and invest it in new plant and equipment or and or expanding your business to a new geography, which is then helping the overall economy and UH and and growing um things like employment and growing um and and growing hopefully your own profits in the process. But you know, people are still very skeptical and don't want to take that kind of risk. And I think that's really what's kind of keeping the monetary

policy check. And you know, monetary policy can only go so far if there was maybe a fiscal response, so loosening of the purse strings in by governments, perhaps that will happen, But it doesn't look like there's much appetite in in the world capitals in order to do that. So ira UM the bond market rally um it looked, you know, once the tenure punched down to one point three six on the yield like, given the right set of headlines, it would be honest way to one percent.

So where are we now? What could keep look? Could give this rally another kick and high gear? What's going to turn everybody around? Squaling? For the exits want as many as they can't as fast as they can. So I think on the rally side for rates is that is that you know U S treasuries are still a flight to quality asset. Like I was thinking, I think a lot of people thought that well, at very low yield, even if like stock sell off you ten percent, that

treasuries won't rally because there's nowhere to go. And I think that that that premise has been proven false. They still are a safe have an asset. So so if you think if you get another risk off, that can push yields lower. Another thing that I looked at recently was you know who are the incremental buyers of of treasuries? Because it's not probably not US domestic investors. It is international investors who have the option to buy negative yielding

assets or uh something like treasuries. And given that you get down to about one and a quarter and it's not attractive for Japanese investors for example, to buy US treasuries anymore. So there probably is some limit and it's not too far from here. Ira Jersey, thank you so very much for helping us understand what's driving the bond rally. Big day tomorrow for bonds, for actually all the markets

around the world. He joined us from Oppenheimer Funds. This is Bloomberg coming up on taking stock Cheetos, Fritos, Derrito's, and also a little seven up and Pepsi. You've got details as Pepsi shares move higher, that's next