♪ jonathan: from new york city, for our viewers worldwide 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 and coveted by fed chairman powell. but libor keeps riding high. levels unseen since the financial crisis. we begin with a 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 hey are , they getting behind the curve? i think it's way too early for that, and that's why you've only got only three hikes in the median for 2018. but we will see where that evolves by june's meeting. >> we thought they might just get the four. i mean, very close call. but given the other uncertainties and trade policy, and other things, jay -- 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 aronoff, alternative fixed income strategist at 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 janus henderson investors.

what have we learned, if anything, about understanding the reaction function of fed chair powell? ms. aronov: i think he played it safe a little bit during this first meeting. 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 sort of dovish the message he was sending out but subsequently now he is perceived as more hawkish. but the reality is, and i was writing some comments before the meeting even happened, and i said look, i am writing this as we are 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: the reality is as long as the fed continues to shrink its balance sheet, as long as it continues on the rate of -- 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 that oksana present resonate with you? mr. cielinski: i think it does. i think we often get too fussed about the dots for example. look, the key message is they upgraded their growth and inflation forecast. and also the terminal rate forecast. they are giving a clear message as to where they are headed. you can get too caught up in, are they going to do two or three additional rate 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 where the fed think things will work out based on their models and their expectations. and these are models that have been, you know largely wrong for , many years. so a lot of uncertainty still remains.

jonathan: looking at the dots, and i wonder what they are worth, just looking at this program, but we can bring them up on screen. the big wager going into the federal reserve meeting was the the wages just piling in and looking for the spread between december 2019 and 2020. december 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. four that is what the fed ultimately delivered. at the front-end, there was this obsession between whether we go from three or maybe we go to four. ultimately, we are pretty much almost there, aren't we? we are drifting towards four. mr. robertson: we are drifting towards four, and i would say there are a lot of important messages that chairman powell said 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: what really underpins it is 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 that was to raise rates 25 basis points, and everything else just gets made as a decision at further meetings. jonathan: for most people, the base case is three in the upside, risk is four. there is no downside risk. certainly not many people calling for one more this year. what do you make of that argument? ms. aronov: i think -- let me throw some stats out there. because these are really interesting. over the past two years, so really 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 as a class and arguably any other asset class. the return over this time for the benchmark that all of these track 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? because ultimately, we have to bring this back to what does this mean for portfolios and where will investors get that diversification? and fixed income is 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: well, we think -- look 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 is you need to not be so base case focused. my base cases, rates are going to end the year 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? and when you look at -- i will 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, certain floating rate -- certain pockets in the markets that are floating rate instruments, certain select shorts, convertibles, if you think about where all the policies in d.c., where the constructive economic backdrop,

where does all of 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 obviously 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 opportunity -- the bottom of the capital structure is the most equity like securities we could find a fixed income, that's where you think they will ultimately be. 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 those 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 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 exactly the kind of thing oksana is talking about. one thing, the risk mitigation characteristics of areas of fixed income.

it was a bit of a novelty earlier this week when treasuries actually received some safe haven flows. it hasn't been that way over the last couple of months. was that a one-off? or do we return to that story? mr. cielinski: look, 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. right? the starting point of low yield 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 headwinds and tailwinds to consider for bonds that are not just universally positive. so i think the safe haven flow element is still there. jonathan: yeah. mr. cielinski: the amount you might see bonds rally on safe haven flows i suspect is probably a lot less than what we are used to historically. ms. aronov: this is a very important question and one i get frequently. how do investors think about a safe haven in an environment like this? and 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, dc. if you think that is an environment in which traditional fixed income will outperform cash, then that's your answer. we don't necessarily think that's going to be the case. jonathan: i do want to give you the final word. because you did come out with a pretty major call and we went off in one direction. one more hike -- express that in a market for me. that is an outlier call. what's the most mispriced thing right now based on that call? mr. robertson: well the most , mispriced thing to me would be 10-year treasuries. jonathan: and where do you want them to be? mr. robertson: i think that they could 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: no i expect , yields to either stay here or come lower. part of where i think the fed will become challenged is that -- and again, the dot plots, i'm going to throw those away because if we look at central at 1 andand fed funds 5/8, that doesn't make sense today. 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 a 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. and if that cooperation by investors doesn't take place, the fed will then be stuck with again 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.

: robertson, sticking with us oksana aronov and jim cielinski. ,dennis henderson investors. 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 aggressively against each other for work. at least when it comes to money bond options. that is because money bond sales are drying up. the volume of the sales plan for the next 30 days has dropped to the lowest level in several years with year-to-date money issuance down 21%. the second largest dollar denominated offering, raising

enough money to refinance more than half the debt it has been -- it has 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 investors. joining us down in london. through the week, one of the big stories i would say over the last month has been the drift higher, real aggressive rip higher in libor. what is 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 -- have the run of a few sectors

here today with 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 -- is basically to transfer risk directly to investor from fannie and freddie's balance sheet. and it's not entirely surprising that libor is moving up. there is some you know murmurs out there about this potentially signaling some sort of risk in the financial sector, perhaps related to european banks. you know 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, again 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. to her the murmurs about point, something someone in europe, but ultimately it's not a sign of credit stress, but

there could be consequences, and i am just wondering, jim what , your thoughts are on what the consequences might be. mr. cielinski: it does increase funding cost. you see many countries worrying about outflows, for example, and it does have an impact on policy. but i do agree. look, 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? or is it still too soon? mr. robertson: i think we are there. jonathan: so where are you seeing it impact most parts of the fixed income universe? mr. robertson: where it is having an effect? jonathan: yeah. 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. and so i think there is an opportunity there. also i think what is important, and we haven't pointed 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: opportunities in the fixed income market overall? jonathan: yeah. based on your thoughts. you said there would be opportunities. where are they? mr. robertson: number if you one, think about my forecast, as she mentioned 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, and -- but even with diversification, in the diversification sense, we are not getting paid zero for cash anymore. diversify 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: even at that time 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, you know 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 you know 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 you know 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: very selectively. we do still have some exposure there. we like floating-rate loans more. the credit risk transfer market, but i mentioned securitized -- we like select shorts in the em space, given how tight spreads are, and cash is not trash. to your point, i mean, cash currently in the liber 2.3%. you can hold two-year treasuries and not much more there with a lot of duration risk. so cash gives you that optionality in portfolio that cannot be substituted, given the deteriorating picture of inventory that the street is carrying. there are no shock absorption mechanisms that used to exist 10 years ago.

jonathan: oksana aronov, with colin robertson from trust management and jim cielinski from janus henderson investors. in the markets, where bonds have been this week, treasuries, twos, 10's 20's and 30's. yields lower two basis points , lower on the week at 283 and we and slower by basis point on a 30 year bond yield. -- we inch slower by basis point on a 30 year bond yield. in the united states. 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 j.p. morgan asset management colin robertson from , northern trust asset management, and jim cielinski from janus henderson investors. jim, as we look out for next week, and i imagine through the weekend, and as people look at the show as it re-airs, there will be a lot of noise coming from washington, dc whether it's about white house palace intrigue or trade wars. just 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. mr. robertson: well, i do think as 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 suspect 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 kind of pull back a little bit if he gets some positive messages from china. so 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, right 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 take the opportunity 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, i will give you the choice of that and the tesla security, so 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 mean, i would have to go with 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: there we go.

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 moving to four? three or four? ms. aronov: four. mr. robertson: one. mr. cielinski: three. jonathan: there we go. it's been great to have you with me around the table to round out a dramatic week for many people in the market. oksana aronov, colin robertson, from northern trust asset management, and jim gillette ski from janus henderson. that's it for us. this was "bloomberg real yield," this is bloomberg tv. ♪

♪ haidi: talking trade that the u.s. is having productive negotiations in china that might avoid a damaging trade war. betty: president trump ready to get rid of russian diplomats in response to a nerve agent attack in the u.k. a new governor pledges to serve the economy. he says china is able to stand death withstand threats. betty: qantas celebrates the first nonstop flight between australi