jonathan: from new york city for our viewers worldwide, this is "bloomberg real yield." ♪ jonathan: coming up, there is some stormy weather in shortsville. treasury yields breaking out lower. tesla debts falling back to earth, piling the pressure on elon musk. putting march behind us. we look ahead to april and payroll friday. we begin now with the big issue of stormy weather in shortsville. kevin: i tend to subscribe to the wisdom of crowds. when everybody got on that side of the trade, 3% yield on the 10-year coming.

it is an automatic slamdunk guarantee. at that point i am like, this could turn. it just needs something to help it. eric: sentiment matters in markets. >> most recent action in the 10 year treasury is more of a flight to safety. a flight to quality. in terms of the most recent move below the 2.8 level. michael: quite frankly, i think there is a pain trade down to 2.64%. i think people have to be aware of that. andrew: with risk assets looking full in terms of valuation, we think bonds look reasonable here. fund, youlity bond might get 4% to 5% yield. that looks pretty reasonable. jonathan: joining me around the table is greg peters, jim keenan, plus, kathleen gaffney.

kathleen, i want to begin with you. i have asked many investors a couple of weeks ago when we , break out of this race for treasury, where we break out to? someone say to the upside and then we break down to the downside in a significant way. what are your thoughts? kathleen: i might have been one of those that is for the upside. we are seeing a bit of a conundrum here. some of it is a flight to quality. but i also think you have some demand coming in that is caused by the equity volatility. you have folks that are looking to de-risk and reduce their equity exposure. they are actually coming back into the treasury market. the fixed income market. jonathan: do we have a pain trade developing, mr. peters? greg: i don't know. bonds are doing exactly as they should be doing. there is a flight to quality, risk off, bonds are adjusting.

at the same time, there is a complete and utter overreaction to the upside a month and a half ago. the combination of those two factors with data being more mac -- more mixed and more expectations being high, i think it was set up for bond yields to rally. jonathan: jim, it means the move is temporary if it is risk aversion. but if it is based on the data, it could be something more fundamental and can have more longevity. what your thoughts? jim: the level of the data matters as well. you are coming in at a time that post the commodity downturn in 2016. we had a pretty big global growth and a cyclical upside. you are starting to see some of that data weakening up. obviously, there is some demand. over the last two years, you have seen a significant amount of clients pile into that equity upside trade and avoid fixed income. you are saying that demand come back. yields are at a much different level right now. jonathan: kathleen, we have spent weeks talking about the

risk mitigation qualities of treasuries and the absence of them over the last month. what has changed in the last week? the equity volatility picked up to where the bid came back into treasury. kathleen: the bid did come back. when you look at the magnitude of the volatility, i would have expected a bigger rally. i think it speaks to the demand that is coming in temporarily. i think we have to remain focused on the fundamentals. the data for the underlying economy is still positive. we are expecting a good jobs number. we have not seen wage group. things are really percolating underneath. jonathan: this is a good point. i thought the same thing a couple of weeks ago. when we had a downdraft in equities market 6%, i was quite surprised that treasuries only dropped lower by three or four basis points on a 10-year yield. it was not dramatic. why do you think that is?

i think positioning was such that i think everyone believes that rates are going to move higher. what has reset the levels here is the persistence of equity involved. you see this big spike in volatility. it persisted at a much higher level, relative to last year. that persistence in higher volatility in equities has had a slow bleed into the rate market. jonathan: the money is coming into the rate market, into 10 year treasuries, it has not come into the two-year space. i think that is what is interesting about this. this is a cycle low for this spread, we are flat, flat, flat. not completely flat but flattening. it is interesting that despite the decline, the rolling over of risk appetite, no one is taking out rate hikes for this year. the two-year is a staying anchored. money is going into the 10 year.

you and up with 46 basis points for twos instead of tens. at what point, greg, do we start looking at the front end of the curve and say, risk appetite has been damaged to such an extent that i want to start taking out rate hikes for this year? greg: that is where the dots and the rhetoric come into play. the argument a month ago was, four is not being priced in? there was a 100% probability of everything going right. i do think if the data continues to come in mixed, you will see the front end get a better bid as well, but the front end at this time is completely and utterly broken. jonathan: kathleen, are you looking at the front end and saying that is a buy? i imagine not. kathleen: not at all. not by a long shot. i think there is the potential -- it might be a low probability, that you could see an inverted curve simply because of the technicals. a lot of what has driven the market to where we are today has

been the technicals. that incentive to take risk. i find it really interesting that, at this current point in time, when the fed is starting to talk about raising rates and we're not sure if they're going to get behind the curve, all of a sudden you have the fiscal spending picking up. we have seen this tremendous issuance at the short end. the treasury bill supply has been overwhelming the market, to some extent. on top of that, you have got incentives from the tax reform that are encouraging money at the short end to be liquidated. there is a lot of selling pressure that is going on at the short end that could be continue to weigh on the market and push short rates higher. jonathan: greg, is that the reason you think the front end is broken? greg: that is definitely a big piece of it. you are seeing all kinds of huge issues with libor, bill

issuance, other factors around tax policy, and there is really no bid. jonathan: jim? jim: i think there are opportunities to get high-quality carrier or some income on the front end of the curve. we do like the bank loan market. more floating rate instruments. there are opportunities that you can buy credit instruments globally and hedge back the dollar. you can get a pretty nice carry associated with that. in a time when you're seeing a lot of volatility and you are certainly seeing a regime shift with regards where the markets are going and where policy is going, right now, on the front end of the market, you can get a decent income play on the front-end. jonathan: you said the same thing. greg: totally agree. yes. there is an opportunity there. i am not sure you will get a lot of love out of it over the near-term, but there is real opportunity. pull do have this poll --

to maturity. jim: if you look at the rally this year, and certainly in january, if you look at the aggregate levels of risk, when you think about the return scenarios, they're going to be far more compressed or lower than what we have seen over the last couple of years. as a way to protect yourself and get some return profile, the front-end is a very good risk. jonathan: greg peters, jim keenan, and kathleen gaffney, sticking with me, thank you very much. coming up, elon musk creditors are having a serious bout of buyer's remorse. that conversation coming up next. ♪

♪ jonathan: i am jonathan ferro. this is "bloomberg real yield." to the auction block now where the united states treasury auctions almost $300 billion of notes and bills through the week. it is the largest supply ever. sale30 billion 2-year note 2014.e biggest since looking closer at the two-year auction, that sale had a yield of 2.13%. the highest since over in august 2008. europe, corporate sales fell about 30% compared to a year ago. they were weighed down by a plunge in corporate issuance. elsewhere, we get to a flashing warning sign from tesla. back in august, investors lined up for a chance to back the

ambitious rollout of its model three sedan. after a bunch of setbacks, including a credit rating downgrade, tesla's notes have plunged. still with me greg peters, jim keenan, and kathleen gaffney. in august of last year, that tesla issue was a record low yield of 5.3%. it has fallen out of bed. is it a tesla issue specifically, or is it something broader in credit markets? jim: in general, you have seen volatility increased significantly since that issue. it is a combination of aggregate volatility in equities and what that has meant for spread volatility. the credit market is certainly in the high-yield market has been weaker since that issuance. on top of that, you have seen the yield curve move. there has been a duration component to that. lastly, you have seen some issues with tesla in the unfortunate events of the crash and regulation between that and uber.

there are a combination of offense that have weighed on the credit. when you look at the issuing itself, it is obviously a very significant, probably around a 45 alien dollar market cap company that is growing. it has to issue a lot of paper or raise a lot of capital. that is certainly going to weigh on sentiment as well because they know they have to come back to the market. jonathan: greg, they are burning through cash. last august, investors were willing to fund the dreamlike returns. except you are a debt holder. receive thegoing to fruits of that dream. what was going on? greg: that is exactly right. in terms of a free cash flow, negative company that is highly leveled, i think it speaks to the penalty for missteps. maybe this time last year there was not the same kind of penalty. the benefit of the doubt, perhaps. what we're seeing broadly in credit is dispersion. we are seeing a separation of winners and losers. i think that is a good thing.

it is not just a single beta trade where you will get rewarded for selecting the right corporates and companies and you'll be punished for making mistakes. that is how it is supposed be done. jonathan: let's be clear, $.87 on the dollar for this tesla issue. if they have to come back, it is going to be pretty expensive. when you compare this to the c's, triple fees -- triple this is trading rich compared to some of their peers in the market. that issue, kathleen, spoke to how tight things got in credit. do you see the dispersion or the discrimination in this market? kathleen: i don't see that dispersion just yet. we are seeing some cracks in the high-yield market. the new issues that have been coming to market have been struggling if they do not have strong covenants or if the companies are highly leveraged. there is some discernment coming

into the primary market. high-yield spreads more broadly have not really widened out. tesla is very much facing the pressures, as greg and jim have already mentioned. high-yield still has a way to go. if the short end keeps going up, it does mean that the corporate costs of borrowing are rising. what i think is interesting about so many folks who were jumping into the short end to pick up that additional yield, is that with high-yield credit or levered loans, you want to have a longer runway if they have to grow into their capital structure. tesla is a good example of not potentially having enough runway to grow into their capital structure. jonathan: jim, talk to me about that. the opportunities that you might see in high-yield at the moment. triple c, through the year that is where the outperformance was. can that continue?

jim: it can continue, but it is not sustainable. obviously some of that is because of the yield curve move, and the duration component associated with double b's when spreads are supertight. if you just take a step back, growth is certainly uncertainty on a go forward basis. growth is still pretty healthy. corporate earnings are strong. there is a regime shift in regard to the structural volatility, it will be increase with where we are in policy, where we are with regards to the output gap and the cycle. that is going to have more volatility. when you look at the underlying, credit fundamentals are still pretty strong. even though you have seen some backups, spreads are still pretty tight. the underlying fundamentals, can you pay back the debt? it is still pretty good. we are debating the level of growth, but not a recession. jonathan: we had a conversation with someone from jpmorgan last week on this show.

she said, what we want is the most equity like products and securities and fixed income. the performance will come. the capital returns will come. this is a week where the hype that securities got smashed around. some people might be screaming at the tv and saying, that is a deutsche bank story. you did see that certainly the other way this week. tell me why that is still going to be the story. the most equity like securities and fixed income. why? jim: when you are buying, you are buying a solid growth story that is leading to good corporate earnings. there is not going to be volatility. i do think you're going to be in a period of time where you will see more volatility and more dispersion in assets. the winners and losers will start to play out. there's going to be vol spikes. i think credit in general does not have the upside. in this environment, you do have the ability to get some income that is now mid-single digits. you are protecting against that

drawdown risk that you saw in equities in february. jonathan: greg, you're going to have to give us a clue of what you have been doing. what have you been looking at? greg: we are interested in the short end of the investment grade corporate market. what is notable is that you are seeing stress and strain on investment grade corporate on the front-end and not in high-yield. it has underperformed its data. on the high-yield side, we have been more involved in triple c's . the part of the market that confuses me the most in high-yield is the short doubled yields on paper. i think it is well over owned. no upside it all. nothing but downsides. i think the rotation there is something to look at. jonathan: greg peters, jim keenan, and kathleen gaffney are sticking with me. coming up, we're going to run

you through some of the markets. treasuries, twos, tens and 30's. a big move along the treasury curve. 30 years down by nine basis points. down nine basis points on a 10 year as well. a very small bit of the front end leaves us with a much flatter curve. still ahead, the final spread and the week ahead featuring a new month and a new u.s. jobs report. this is "bloomberg real yield." ♪

♪ jonathan: i am jonathan ferro. this is "bloomberg real yield." it is time now for the final spread. coming up in the next week, it will be a short trading week and -- week in some areas of the world. mainly due to easter monday. we will look at balanced numbers and the march jobs report in the u.s. plus, the debut of the secured

overnight financing rate, which is being called america's libor replacement. still with me, greg peters, jim keenan, and kathleen gaffney. i want to wrap things up with a conversation about what has been happening with libor. kathleen, the conversation continues because the grind high er continues for how many days for libor. why does that signal a flashing for you? kathleen: i think we want to watch and see how long this is going to persist far. i think it is a market consensus that when we reach april 15 and we start getting revenues in the u.s., you are going to see that come down. i do think we should pay attention to that. if it continues to persist, we are likely to start to see the market and credit risk react to tighter financial conditions. jonathan: how close are we to that actually happening, greg? 37 days, the three-month libor has done this and is drifting higher. greg: i agree. i think it is about persistence.

the issue with this is that it is not a single factor. it is not just t-bill issuance. there are other factors at play. it is hard to disentangle what the true driver there is. there is a big debate around it. if this continues to widen and if it continues to remain at these high levels, it is a de facto tightening and i estimate that is already happening. it is causing credit spreads to tighten. if it persists at these levels that is something to really , worry about. think we shouldn't waste too much time talking about if it is a flashing sign regarding credit stresses. when i speak to all of you, you always say no, it is not. you have real consequences. have you seen it start to fight at all? jim: they have nailed it. it is the persistence of it and there is an expense on it. you are seeing people shrink their books because the cost of leverage and the cost of

borrowing is more expensive now. you are seeing some of that play in. i think that is some of the reason you see some of the front end of investment markets start to weaken out. it also has an impact when you think about some of the foreign buyers of u.s. credit or assets on the front end. you have seen some selling on that side. it is having an impact. the longer it stays, the arbitrage of leverage does not work in our favor. jonathan: something we will continue to watch. before i let you go, you know how this works, i have put you on the box and we do a quick round of quick questions. low end of the treasury yields, 240 for 2018, have we seen the low for 2018? greg: no. jim: no. kathleen: yes. jonathan: buy the two-year note, the treasury, or get out of the way, the fed is still coming? greg: get out of the way. jim: no. kathleen: get out of the way. 2025, or netflix

through to year end? both companies have burned through cash. both companies had to raise a lot of capital. tesla 2025 or netflix of a similar maturity through to year-end? greg: netflix. jim: tesla. kathleen: don't make me choose. netflix. jonathan: there we go. thank you very much for your time. that does it for us. that does it for "bloomberg real yield." we will see you next friday at 1:00 p.m. new york time. this is bloomberg. ♪ retail.

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