♪ jonathan: from new york city, i'm jonathan ferro with 30 minutes dedicated to fixed income. this is "bloomberg real yield." ♪ jonathan: coming up, trade war fears resurface as china announces plans to retaliate against the united states. treasuries find a bid, receiving haven assets blows, but libor keeps riding high. levels unseen since the financial crisis. we begin with the big issue for -- a patient fed chair powell. >> at this point, it looks like the fed has moved in a decidedly more hawkish way.

>> this is really the fed saying we are going with the idea that fiscal stimulus is going to overheat the economy a bit and we are ready to raise rates to deal with it. >> you could sort of say that the tilt to the risk is are they getting behind the curve? i think it's way too early for that and that's why you've only got three hikes for 2018. but we will see where that evolves by june's meeting. >> we thought they might just get the four. i mean, a close call. but given the other uncertainties and trade policy, mr. powell decided to take a cautious course. >> you are new to the job and you want to get through a meeting and a press conference , preferably without putting undue expectations in terms of policy shifts coming in the immediate future. jonathan: joining me around the table here in new york is oksana aronov, jpmorgan asset management, colin robertson, head of fixed income for northern trust asset management and coming to us from the city of london is jim cielinski, global head of fixed income at janice henderson investors.

what have we learned, if anything, about understanding the reaction of fed chair powell? ms. aronov: he played it safe. it was an inaugural meeting and so it was important to get through with minimal volatility, perhaps. although it was interesting because during the meeting, it was perceived as dovish, but in the announcement subsequently, it was perceived as more hawkish. but the reality is -- and i was writing some comments before the meeting even happened and i said look, i writing this as we are am sitting a day away from fed and it doesn't matter whether it's going to be three or whether they're going to indicate more than three. jonathan: why not? ms. aronov: as long as the fed continues to shrink its balance sheet, as long as it continues on the path of higher rates, as long as markets continue to grapple with additional supply, not only from what the government is doing but also

from, for example, less regulated banks, which are huge holders of treasuries, the technicals for the treasury market and generally everything that sets off of it are not constructive. jonathan: jim cielinski, does the argument she presents resonate with you? mr. cielinski: i think it does. i think we often get too fussed about the dots. look, the key message is they upgraded their growth and inflation forecast. and also, the terminal rate forecast. and so they are giving you a clear message as to where they think they are headed. i think to get too caught up in the -- are they going to do two or three additional hikes, i think that's probably a mistake. look, these are forecast. we are talking three years in the future. and the dots often -- you need to remember, they are not actual forecasts. they are how the fed think things will work out based on their models and their expectations. and these are models that have been largely wrong for many years. so a lot of uncertainty still

remains. jonathan: looking at the dots, i don't know what they are worth now in this program, but we can bring them up on screen. the big wager going into the federal reserve meeting was the wages piling in and looking for the spread between and 2020. december 2019 we saw a record volume come into that trade and the fed delivered exactly what that volume was looking for, which was this drift higher in rates for 2019 and 2020. that is what the fed ultimately delivered. at the front-end, there was this obsession between whether we go to four.e or ultimately, we are pretty much almost there, aren't we? we are drifting towards four. mr. robertson: i would say there are a lot of important messages that chairman powell sent in this meeting and i'm going to come right out and say it. i think the fed is only going to move one more time this year. so i really throw the dots out the window. jonathan: that is a huge call. what underpins this? mr. robertson: lack of inflation even approaching what the fed would like. pce continues to stay low and i think powell alluded to the fact

that the forecasts are just forecasts. they are no better or worse than anybody else. so i did find it intriguing when you look at the dots and you saw one who had a terminal rate of 480, i thought that was pretty impressive. but the bottom line is i think we will see the data to continue to be moderate and disappoint and i think that powell really laid it out that they made one move, one decision at this meeting, and it was to raise rates 25 basis points, and everything else just gets made as a decision in further meetings. jonathan: for most people, there -- the base case is three in the ups guide, -- upside, risk is there is no downside risk. four. not many people calling for one more this year. what do you make of that argument? ms. aronov: let me throw some stats out there. because these are really interesting. over the past two years, from march of 2016 to march of 2018, where we are today, we have seen $300 billion flow into core bond

strategies, more than ever in the history of this asset class or arguably any other asset class. the return for the benchmark has been barely over 1%. 1.1%. so this happened over a period of time when the fed was at this very kind of early stages of removal of its accommodations. so if we are now in the mid-to-starting to enter the later stages of removal of that accommodation, what are those returns going to look like? ultimately, we have to bring this back to what does this mean for portfolios and where will investors get that diversification, and they are struggling to provide it as we have frankly seen in the course of this year with every part of the market down year to date. jonathan: this goes to your message, ultimately 1, 2, 3, 4, this argument over what the federal reserve does or doesn't do doesn't mean anything to your portfolio strategy whatsoever? ms. aronov: we do not build our portfolio strategy based on where we think the dot plots are or how many rate hikes there will be. right? so that's kind of the whole

point, you need to be not so base case focused. my base cases, rates are going to end here or here. the idea is to have a diversified portfolio and what that means today is to extract returns from other risks besides interest-rate risks, which is dominating markets. and that's where the alternative approach comes in. right? when you look across -- if someone could bring my screen up, when you look across fixed income sectors year to date, you see everything, including extended sectors like emerging-market debt and high-yield have posted negative returns. so whether you are invested in traditional fixed income risk or extended income risk, there has been no place to hide, because everything has been traded completely correlated and very tight from a spread standpoint. so what has actually performed this year? floating rate instruments, serve -- certain markets markets of -- pockets in the markets that are floating rate instruments, certain select shorts, convertibles, if you think about where all the politics in d.c. -- the policies in d.c., where

the constructive economic backdrop, where does all that accumulate? where do the benefits of that accumulate? to the bottom of the cap structure. as a fixed income investor, you can play that in converts, the floating rate structures given that we are in the rising rate period right now. so we will talk more about this, i'm sure, but there are other sources of return. jonathan: the bottom of the capital structure is the most equity like securities we could find a fixed income, that's where you think they are ultimately. ms. aronov: certainly, there has been interesting pockets to add as we have seen volatility. and this is kind of the issue with traditional fixed income management, frankly. when you look across portfolios for decades, they've carried cash balances between 2% and 3%, whether you look five years ago, 10 years ago, 15 years ago, and you can't take advantage of volatility up to those with that type of positioning. so one of the things that we've been very focused on is being a liquidity provider during periods of volatility. and that is not how the traditional fixed income investor typically thinks. jonathan: i want to get your thoughts on what oksana is talking about. one thing, the risk mitigation

characteristics of areas of fixed income. it was a bit of a novelty this week when treasury actually received some safe haven flows. it hasn't been that way over the last couple of months. was that a one-off? do we return to that story? mr. cielinski: i don't think that story is gone, but i think the valuations do make it tough for bonds to offer a lot of hedging ability. the starting point of low yield dust gives you limited -- just gives you limited opportunity to get that appreciation when other things are going down. add to that the concerns right around the balance of payments and deficits and the unwind of quantitative easing, i think there's enough headwind and tailwinds to consider for bonds that are not just universally positive. so i think the safe haven flow element is still there. the amount you might see bonds rally on safe haven flows i suspect is probably a lot less than what we are used to. ms. aronov: it's a very important question and one i get frequently. how do investors think about a safe haven in an environment like this?

the answer to that question really is, it really depends on how you think about an environment characterized by fiscal stimulus, a constructive economic backdrop, stirring inflation, central bank accommodation removal, all those things, pro-business washington, d.c. if you think that is an environment in which traditional fixed income will outperform cash, that's your answer. we don't necessarily think that's going to be the case. jonathan: i want to give you the final word. because you did come out with a pretty major call and we went off in one direction. i want to come back very quickly to you -- one more hike, express that in the market for me. that is an outlier call. what's the most mispriced thing right now based on that call? mr. robertson: the most mispriced thing to me would be 10 year treasuries. jonathan: and where do you want them to be? mr. robertson: i think they can clearly trade lower than where they are right now. would it be the most mispriced asset? jonathan: i'm trying to understand that. the fed only goes one more time, are you expecting yields to spike higher because they have been more accommodative for inflation and for growth, or are you expecting yields to come

low? which one is it? mr. robertson: i expect yields to either stay here or come lower. fed willhere the become challenges that -- again, the dot plot, i'm going to throw those away because if we look at central tendency and fed funds and five/eight today, we are at three and 5/8 by 2020. that doesn't make any sense to me with a 10 year treasury at 283. there's a disconnect, but more importantly, what i would say is i think what's going to happen under chairman powell is he is not going to force the yield curve inversion, and i don't think the long end of the curve is going to cooperate as people like to think there are three more hikes this year and three more hikes next year. if that cooperation by investors doesn't take place, the fed will then be stuck with my view that the data won't support hikes and if investors aren't supporting the hikes and the data is not supporting the hikes, the fed is not going to hike. jonathan: and we are going to end up with a very flat

yield curve. colin robertson, oksana aronov and jim cielinski. coming up, the auction block, ap invest opening up a cold one with the second largest dollar denominated offering this year. from new york, this is "bloomberg real yield." ♪

♪ jonathan: i'm jonathan ferro, this is "bloomberg real yield." i want to head to the auction block now, where underwriters are bidding more against each -- more aggressively against each other for work. at least when it comes to money bond options. that is because the money gone south is drying up. the volume of the sales plan for the next 30 days has dropped, issuance-to-date money down 21%. the second largest dollar denominated offering, raising

enough money to refinance more than half the debt it has been maturing in the next two years and finally, uber was the headliner in the leveraged loan market with $1.5 billion in sales lead financing, the company was negative earnings rode through headline risk to borrow more than planned it better terms, reflecting how hot the leverage loan market is still running. still with me around the table, oksana aronov from jpmorgan asset management, colin robertson from northern trust asset management, and jim cielinski from janus henderson ndersonce hester' investors. through the week, one of the big stories over the last month has been the drift higher, real aggressive rip higher in libor. what are your thoughts? -- what are your thoughts on what is happening with short-term borrowing cost and libor more specifically? ms. aronov: libor moved up to about 2.3% and we have seen a floating rate product perform well on the back of that. floating-rate loans have run a dutch are one of the few sectors

here today that posted positive -- are one of the few sectors here today that posted positive returns. credit expansion security is another pocket, and securitized market has also got floating-rate, probably a bit lesser-known because it's a new market but the idea the basically the transfer risk directly to investor from fannie and freddie's balance sheet, and it's not entirely surprising that libor is moving up. there are some murmurs out there about this eventually signaling some sort of risk in the financial sector, perhaps related to european banks. not likely. this is sort of a natural occurrence with the rising rate environment in the u.s. and central banks globally following suit. and in this kind of environment, it's going to be very difficult for traditional interest rate driven product, even spread product that is trading so tight to perform well. jonathan: jim, the bottom line for most people, the consensus view, is that this isn't a symptom of credit stress elsewhere. the murmurs about something someone in europe, but ultimately it's not a sign of

credit stress, but there could be consequences and i'm just wondering what your thoughts are on what the consequences might be. mr. cielinski: it does increase funding cost. you see many countries worried about outflows, for example, and it does have an impact on policy. i do agree. it's not corroborated by any other signs of stress that i see. you always want to worry about getting too complacent, but i would agree. i think it's more due to technical factors. jonathan: the question that keeps coming up on this program is at what point does this aggressive shift from short-term borrowing costs start to compete with capital elsewhere? are we there yet? is it still too soon? mr. robertson: i think we are there. jonathan: where are you seeing it impact most parts of the fixed income universe? mr. robertson: in the short end. i think part of the increase in libor ois and the libor rate, number one has been mentioned. it is consistent with rates moving higher. so that's no surprise to me. i'd also concur that i do not believe that it is an indicator

of any type of stress in the market whatsoever. so i think there is an opportunity there. also, i think what's important -- and that we haven't pointed that out yet -- is the repatriation of cash from overseas. i think that has a significant effect on where this level is going. jonathan: where are the opportunities as far as you are concerned, colin? mr. robertson: in the fixed income market overall? jonathan: based on your thoughts. you said there would be opportunities. where are they? mr. robertson: if you think about my forecast, and a lot of areas of fixed income have seen deteriorating performance. obviously, with my view, high yield would be attractive. high-yield bonds would be attractive. that would be both domestically and globally. there would be opportunity in certainly the treasury curve, but even with diversification sense, we are not getting paid zero for cash anymore. so people can diversified -- diversified there in a really

low rate environment and actually get some yield only. jonathan: why take duration risk and why take credit risk? oksana, you came on a couple of months ago and said i want triple c's? and guess what has outperformed? triple c's. ms. aronov: we were talking at that time about the fact that we generally went from being extremely bullish on high-yield and lower rated credit to being very bearish on that because of the spread compression that we saw, and i said look, the only pockets that perhaps remain because of security selection is in that lower rated bucket, the triple c bucket. and the reason is -- again, you have to be extremely selective and i want to emphasize that generally, we have taken a huge step back from credit exposure because it is so tight. to give you an example, when high-yield goes inside of roughly 450 basis point spread to treasuries, it starts to be highly positively correlated to treasuries and starts to act more like a treasury in terms of sensitivity to interest rate risk. high-yield after this most recent quote unquote blowout, is still hovering around 400. emerging-market debt is around 300.

the lowest on record for emd was 200 in 2007, so we are still hovering close to some of the most tight levels in all of these credit sectors and we think there will be better opportunities to get on. jonathan: let's be clear, do you still like triple c's? ms. aronov: we like floating-rate loans more. there is still some exposure there. we like select shorts in the em space, given how tight spreads are, and cash is not trash. to your point, cash currently is at 2.3%. you can hold two-year treasuries and make not much more there for -- with a lot of duration risk. so cash gives you that optionality in portfolio that cannot be substituted, given the deteriorating picture of inventory being carried. there are no shock absorption mechanisms that you used to see 10 years ago. jonathan: oksana aronov,

with colin robertson and jim cielinski from janice henderson investors. in the markets, where bonds have been this week, treasuries, twos, 10's 20's and 30's. two basis points lower on the week at 283 and we and slower by basis point on a 30 year bond yield. still ahead on the program, the final spread. the week ahead featuring a fresh reading on u.s. inflation. this is "bloomberg real yield." ♪

♪ jonathan: i'm jonathan ferro, this is "bloomberg real yield." it is time now for the final spread. coming up over the next week, it will be a shortened trading schedule due to good friday ahead of the easter holiday. we get a series of u.s. economic data points, including personal spending, housing, and a look at inflation through core pce.

still with me around the table in new york is oksana aronov from jpmorgan, colin robertson from northern trust and jim cielinski from janus henderson investors. jim, as we look out for next week and through the weekend, and as people look at the show as it re-airs, there will be a lot of noise coming from washington, d.c., whether it's about white house palace intrigue or trade wars. set me up for your framework for thinking about what is happening in the nation's capital in the united states and how you draw a line between noise and news. nski: i do think if you look forward to next week, it's less about the data and quieter on the central bank front. it's going to be about the news and in particular, probably trade is the key element to watch. i think what we have is fear of retaliation and we will get some from china. but look, they, i think, are playing their cards and looking longer-term and i think we may begin to get a sense of whether trump is trying to get china to

behave better pertaining to north korea, and those negotiations that are coming up, or whether he is willing to pull back a little bit if he gets some positive messages from china. i think that is the thing to watch. i think any heightened expectations now of a trade war -- because it's not a war yet, it's just kind of a scuffle. if that worsens, i think that's probably the key element to watch next week. jonathan: i think a trade skirmish rather than a war seems to be the consensus. guys, i want to get some quick answers from you from some quick questions. just to get you all lined up. just for kicks, the uber leveraged loan they got issued this week, do you want to take the credit risk from tesla or a different kind of product with a leveraged loan from uber? ms. aronov: i have to go for the fact that we like leveraged loans more, just given the floating-rate nature. jonathan: colin? mr. cielinski: tesla. jonathan: jim? mr. robertson: i would go with

the loan. jonathan: libor. signaling the beginning of the end, yes or no? ms. aronov: no. mr. robertson: absolutely not. mr. cielinski: no. jonathan: are we sticking with three hikes for 2018 or four? three or four? ms. aronov: four. mr. robertson: one. mr. cielinski: three. jonathan: it's been great to have you with me around the table to round out a dramatic week for many in the market. oksana aronov, colin robertson, and jim cielinski, that's it for us. this was "bloomberg real yield," this is bloomberg tv. ♪

♪ scarlet: i am scarlet fu and this is "etf iq," where we focus on the assets, risks and rewards offered by exchange-traded funds. ♪ scarlet: it is march madness and we are on the prowl for underdogs. which etf's are punching above their weight? china ranks high in attracting funds. a new front has opened up in the etf seymour's. issuers make their push into europe, reducing costs with expansion across the continent. we get a status update from brian lake, head of international eps -- adf jpmorgan