>> from new york city worldwide, i'm jonathan ferro with 30 minutes dedicated to fixed income. this is "bloomberg real yield." ♪ jonathan: coming up, the president is poised to write executive orders on trade with protectionist fears yet to materialize why the consensus happened. and corporate issues toward a record quarter as they try to secure financing. and the fed says the stage. we look ahead to the big event next week. we start, then, with the big issue.

why the consensus trade just became by e.m. >> e.m. looks quite exciting. >> how much the world has changed. e.m. is in a hot spot at this point. >> it's a wonderful time for investors to increase their international diversification, both developed and emerging markets. >> we do see an improvement in emerging markets and i think that the behavior of e.m. since the fed hike in march is a good example of new resilience of the asset class. >> this is the most interesting period in the emerging markets since 2010, probably. jonathan: let's see what the roundtable is talking about this trend. co-head of global fixed income strategy. re wh me in new yorkity is cathy joens for financial research. and stephen caprio. he credit strategist at ubs investment bank rate. if you take the map of emerging

markets and take a look at how credit has performed in emerging markets, you will struggle to spot the red. it's just green across the screen. brian, pessimism around emerging markets and then, bang, load up on e.m. why has this become the consensus trade, brian, so quickly in the last few months? brian: well, one, i think we've seen better growth prospects around the world. there's better opportunity there. i would stress in the fixed income markets, spreads there are getting relatively tight so i am not sure there's a lot more upside in terms of price but good coupon clipping opportunities, i think. kathy: yeah, i think i would be a little bit cautious to tell you the truth. it's had a big run since the end of last year as the spreads are very, very tight. now almost back to the lowest since 2014.

and there's a lot of question marks around global growth. if we get to the trade barriers coming in, that's not going to be great for e.m. jonathan: jpmorgan, goldman sachs all buy, buy, buy e.m. is it becoming a little bit crowded now? stephen: it's becoming a little bit crowded. you think about 50 to 70 basis points. with that said the demand is sticky for emerging markets. if the asset class that has a lot of institutional tensions aboard. and, again, i think it does come back to what kathy said, the fed is only hiking two to three times this year. e.m. will continue to see well in that environment. jonathan: brian, looking at the situation so far. you have the v.i.c.'s yielding higher. is that still the story? brian: that's the story, that's the trade. it's crowded as well as high

yield. the spreads continue to grind tighter. the value there where you're clipping that coupon as long as everything goes according to plan and if he starts to get some bumps in the road, maybe some fiscal bumps, trade policies doesn't look favorable to the markets. there's some risk there i think relative to these prices you're paying. jonathan: brian, can you divorce the e.m. code from the treasury market? treasuries have been incredibly stable. you have that favorable stop-down story for markets. the reality, how different is it? brian: i think you can divorce it a little bit. there's definitely some similarities there. we're still going to have, you know, markets moving somewhat in nandem. -- in tandem. to see what we're seeing over in emerging markets in the developed world they have been a little bit behind the u.s. there's some pickup there.

that's encouraging. again, the price is here. it looks like they are getting ahead of themselves, perhaps. jonathan: kathy, you have to see if this is trade. you can bring up wcrs. this is emerging markets against the dollar so far this year. it's pretty much everything except maybe two, three currencies that have underperformed the dollar. is that's how it's been in the last three, four months? kathy: you have had underperforming in the currencies. the peso leading up to the election. brazilian real, they have moved quickly. and the pickup in commodity prices, stabilization oil prices have helped many of these currencies but i think most of this has been driven by currency. stephen: these currencies may have more support than they did a year or two ago. real interest rates are higher. the balance of payment have cleaned autopsy bit. there's still risk.

it might take a little bit more a sideswipe so to speak to hit e.m. than it has in the past. jonathan: you have the one in the last 24 hours and they want a new finance minister, what do you do then? stephen: it's part of the issue with e.m. where spreads are tight. you do need to be careful. i think it's ok to clip coupons in e.m. at this point. again, there's a lot of maturities coming in the next few months. $50 billion, $60 billion. that's strong in the end run. jonathan: if you look at the bloomberg e.m. index, mining, energy, do you need to be bullish on the miners, the energy place to be bullish on emerging markets? kathy: i think you need to believe they can hold the oil price in a fairly narrow range. and if that doesn't happen, if it slips back below in the low 40's or whatever, the market's not prepared for that outcome. jonathan: brian, as you look at

the situation, torres, how much money has moved from nontraditional investors into this asset class so far this year, and can it unwind just as fast? brian: you definitely have investors out there looking for the hot play, the income play, the yield. obviously commodities, finding a little bit of a bit has helped. i think it's sticky in the near term. but, yeah, any big disruptions, those more volatile markets like emerging markets are definitely more susceptible to it. jonathan: we are looking at the reality check of south africa. as soon as you get the political scares bang, the money comes out. stephen: you see in q-4 when trump was elected. you south a lot of outflows from e.m. they came back quickly in q-1. when oil prices fell, they slowed but you didn't see major outflows from e.m. unlike u.s. high yield. jonathan: you bring up the president.

president trump set to sign executive orders today. will they have a big impact? you see e.m. just rip since the election after the initial dropoff. will they materialize? kathy: it looks like they will. executive orders give the president a lot of leeway to make some changes in trade without having to go through congress and not have the same problems with the a.c.a. it looks like we will get some sort of trade barriers. if they talk about trying to renegotiate with everybody, that could probably take four years or more. i am not really sure where we go. if they go at china first and then mexico, the big trading partners, we could have a scare in e.m. jonathan: that enough to be bearish? stephen: a little bit more cautious and we will see what comes out later today. jonathan: brian rehlin, stephen caprio and cathy joens, thank you so much.

it was a record quarter for corporate issuance, and it was sucked up by the market but are cracks starting to show in the margin? this is bloomberg. you are watching "real yield." ♪

jonathan: i'm jonathan ferro from new york city. this is "bloomberg real yield." i want to head to the auction block now, and what a quarter it has been for issuance. the busiest first quarter for debt sales since 1999. u.s. investment firms push it to more than $415 billion. that surpasses the previous record at $381 back from 2009. over in europe, syndicated primary issuance was active every single business day of the quarter. issuance volume is poised to reach almost 446 billion euros

and you have to wonder whether there is pushback. they are trying to lift the offer from 8% to 10%. i want to bring back a roundtable. brian, kathy and stephen. kathy, we had this big wall of debt come into the market and the market just suck it all right up. is that going to continue? kathy: we think it's going to continue early into the year because the in-flows, the mutual funds for corporate debt has been very strong. 15 consecutive weeks of weekly in-flows. and as long as that's the case, demand will be driven, they'll go out and buy up all the corporate bonds they can buy to satisfy that demand. jonathan: stephen. stephen: i think that's right. the demand for u.s. investment grade is very strong at the moment. you are starting to see a little bit of cracks abroad. it deals with japan that is

hawkish but by and large the demand from mutual funds remains strong. jonathan: who is getting a better deal here, the issuer or the buyer? brian: long term the buyer. in the short term the issuer since we've seen spreads retract quite a bit over the last eight months. long term, there's some, you know, secular demographics and other things at play that i think will keep rates low for longer period of time. jonathan: stephen, you talked about a crack. you mentioned europe, you mentioned japan. kathy, do you look at energy for where the cracks are? we talked about the energy plan. they want to come to market. they want to market it around 8% and they have to lift it up to 10% to get the bid, are we going to see more of that? kathy: i think so.

if you look at my bloomberg, you see that whole play in energy when we had the drop prices an suspends spiked up and they came back down and tightened to where the rest of the market is. i think people might get a little bit nervous here because we don't know what will happen with energy prices so you are not get look of premiums for the risk in the marketplace. jonathan: brian, is that a concern for you as well what's been happening with energy over the last couple of months? a chart we showed on this program is where spreads where when crude went to $80, there where they are at now and crude is $50, does that make any sense to you? brian: it makes sense but i do think a lot of the bad players we kind of shook out last year through the energy collapse. so if oil's able to stay around the $50 a barrel level, i don't see big risk in that space from a default perspective. if we start pushing down towards $40 or even through $40 again, yeah, those concerns are going to be more heightened. jonathan: stephen, there is that high yield energy crude screen for you. how will it reconcile? stephen: we think it will go down.

shale will start it. again, a lot of these names have lower break even cost to some extent. but, again, with the lack of premium high energy yield names, these names -- there's definitely some risk. jonathan: as we sit here and talk about record quarter for issuance, they will say what was the money actually used for and, stephen, you said it's about refinancing. i want to bring up the m&a hangover that needs to be talked about. you see the number of deals out there. these guys, a lot of them still need to come to market to get the financing in place for these deals. when the debt is issued to finance some of this stuff, the things start to -- do things start to change a little bit? stephen: it will be in the -- it will be a supply -- there will be supply to hit the market. there's plenty of demand to offset that. in general, where we are more broadly in the cycle, again, there's plenty of indicators we look at in terms of leverage,

lending standards. even terms of, say, payables, length of time that account payables are outstanding. it's a very different environment than we were in 2013-2014. demand may be there but if you get supply and the economy is only ok, not great like the market's expecting, you will see spreads go. jonathan: credit quality, the amount of leverage these companies got. at&t is at the top. you see the big telecom companies, at&t, verizon, etc., it keeps doing this. it keeps rising. you've seen that reflected in the price of the debt? kathy: not yet. not yet. i think that's because there's so much demand out there for investment grade paper. so not until probably we see some, you know, real slowdown in revenue growth, a real slowdown in the top line outlook for some of these companies and then you probably see the spreads start to widen out. jonathan: let's talk about telecom, for instance. i see the consumer price tolerance. i recognize it's still low.

i look at companies like at&t and verizon and the monthly bills and the only way they can get revenue up it seems is just by a pure volume play. at what point does the debt and the interest rate they get and pay to investors, what point does that have to reflect their actual ability to increase revenue, to increase profits? brian: well, you know, those big kind of blue chip firms, i mean, spreads are tight. we have some room here for spreads to widen under such a scenario. those debt payments are quite a bit more secure. you also have the large dividend payments out of the equities that can help support the debt payments. over the long term, those investment grade names, i'd like to move up a little bit up in quality even from those at these prices. but, you know, i think those payment streams are a little bit more secure than when you move down in credit quality.

jonathan: stephen, is it time to move up in quality? stephen: i think it is. we are looking at single a rated names. and technology. technology names as well which on the policy front if you get repatriation that's passed at some point this year, even early next year, that could be a cut in supply. these names could bring cash back to do m&a and buybacks. jonathan: a lot of the story is the repatriation story is in the price. is it in the price of the debt? stephen: tech is underperforming the broader market. investors have room to say a triple b rating than single a rating. jonathan: is it time to move up in quality? kathy: we have been moving up in quality for a while because of our concern how tight spreads are. what we're seeing is a slowdown in loan growth which may prestage a slowdown in overall g.d.p. growth because they're highly leveraged. if you look at this chart i pulled up, you can see the loan growth, commercial industrialen loan growth has slowed down a lot since 2015. and really even with all of the optimism about fiscal policy, it's slowing down.

so that may be an indicator that things are slowing down. in terms of growth later this year and it's priced into the market. jonathan: you are sticking with us. cathy joens, u.b.s. stephen caprio. i want to get a quick market check. twos, tens, 30's in the markets, it's been quiet. unchanged. 125. bid on the margin, we are down a basis point on the 10-year. and 3%, up two basis points so far. still ahead on this program, it's the final spread. trump and xi set to meet in florida. the u.s. jobs report as well. we look ahead to next week. this is "bloomberg real yield." ♪

jonathan: i'm jonathan ferro.

this is "bloomberg real yield." a full agenda including a meeting down in florida. two presidents. one being president trump and the other president xi. a french presidential debate, fed minutes and the jobs report. ahead of all of that, particularly here in the united states, the long end of the u.s. treasury curve that's been doing the outperforming. the barclay's index that matured more than 20 years out, up 2% from the start of december. that's despite two rate hikes or maybe because of it. brian rehling from wells fargo investment institute. kathleen hays from swab. and stephen caprio from u.b.s. brian, i want to begin with you. what do you think of the outperformance against all the inflation rhetoric? brian: well, i think where we saw the outperformance start to play in is when the headquarter failed. so i think there's some questions there about kind of the fiscal policy doing some of

the heavy lifting as i think many in the market expected. but also, you're right, fed hiking rates. we should be at this period in the cycle see that curve flatten and we are seeing that a little bit. jonathan: kathy. kathy: i agree, the curve flattening should be kicking in with the third rate hike and it has. i think the market got way ahead on the policy agenda. they priced in and we see nothing shovel ready. jonathan: a lot of conversation this week about policy normalization. fed balance sheet normalization. >> wouldn't surprise me sometime later this year or sometime in 2018 should the economy be performing in line with their expectations that we'll start to gradually let securities mature rather than reinvesting them. jonathan: brian, several years ago 2013 you had bernanke whisper the word taper and the market blew up. why do you think they'll normalize with a $4.5 billion

balance sheet? brian: we want to know what the new fed will look like. we had several appointments from trump as well as nomination of a new chair. i think this balance sheet normalization is going to be put off to the new chair. so let's see what the new chair's opinion is and what they look like there, but there could be a market reaction once some of those unknowns become known. david i think balance sheet : normalization will occur largely in q-3 of 2018. that's kind of the meet yum expectation by the market right now. i think the market is priced for that in the long end. one of the reasons it has held in so well and, again, even the more bearish clients that we speak to, they see it go to 3% as well. before it starts to come down with the high debt loads. i think it would be good if they let the balance sheet roll off

later this year. and we are talking about 30 base points. jonathan: guys, i want to wrap up the program and ask you each one question. you get one-word answers. the first one, buy u.s. high yield or buy e.m.? high yield or e.m., brian? brian: e.m. jonathan: kathy. kathy: high yield. stephen: e.m. jonathan: buy or sell on tips, brian? brian: buy. kathy: buy. stephen: buy. jonathan: you mentioned this one -- will chair yellen be in charge when the fed starts normalizing the balance sheet? brian: no. kathy: no. stephen: no. jonathan: and then the big one next week. payroll friday. the median estimate right here at bloomberg, 175,000. upside or downside to price, brian? brian: upside. kathy: downside. stephen: downside. jonathan: we got a market with you. our thank you to brian rehling. kathleen hays and u.b.s.'s stephen caprio. coming up on this program and

later on bloomberg tv, u.s. and from new york city, that does it for "bloomberg real yield." i'll see you next friday at 12:00 new york time. that's 5:00 p.m. in london. it's 30 minutes dedicated to fixed income. this is "bloomberg real yield." ♪

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