jonathan: from new york city for our viewers worldwide, this is "bloomberg real yield." ♪ jonathan: there is some stormy weather in shortsville. treasury yields breaking out lower. tesla debt falling back to earth. they put a downgrade, cutting the pressure in putting march march. behind us looking forward to , april, we look ahead to payroll friday. we begin now with the big issue some stormy weather in shortsville. kevin: i tend to subscribe to the wisdom of crowds. when everybody got on that side of the trade where inflation was coming in 2% yield on the 10-year coming.

it is an automatic slamdunk guarantee. the fed is going to raise four times. at that point i am like this , could turn. it just needs something to help it turn. eric: sentiment matters in markets. they can take a longer-term perspective. >> the most recent action in the 10 year treasury is more of a flight to safety, a flight to quality, in terms of this most recent move, the low to 2.8 met -- level. michael: quite frankly, i think there is a pain trade down to 2.64%. maybe 2.6% in the next few weeks there. i think people have to be aware of that. andrew: with risk assets looking for in terms of valuation, we actually think that bonds look pretty reasonable here. a high quality bond fund now, you might get 4% to 5% yield. that looks pretty reasonable. jonathan: joining me around the table in new york is greg jim keenan, head of global credit at blackrock plus , kathleen gaffney, portfolio manager at eaton barnes

management. kathleen, i want to begin with you. i asked many investors just a couple weeks ago when we break out of this titrating race for treasuries and where we break out to? most of them i imagine would say to the upside. we break down to the downside in a significant way. what your thoughts? >> i think i might have been one of those that was for the upside. but we are seeing a bit of a conundrum here. some of it i think is a flight to quality. but i also think you have some demand coming in that is caused by the equity volatility. so you have folks that are looking to de-risk and reduce their equity exposure. and 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. i mean bonds are doing exactly , as they are supposed to be doing, right? there is the flight to quality, risk off bonds are adjusting. , at the same time, there is a complete and utter overreaction

to the upside, you know a month , and a half ago. the combination of those two factors, with data being more mixed and expectations being too high, i think it was set up for bond yields to rally. jonathan: if this is risk aversion, it moves temporary until risk appetite picks up again. if it is based on the data, it could be something more fundamental, and it could have a little bit more longevity. what your thoughts? jim: the level of the data matters as well. you are coming at a period of 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 starting to weaken up. as kathleen points out, then there is some demand. of the last two years, you have -- over the last two years, you have seen a significant amount of clients pile into that equity upside trade and avoid fixed income or rates. you are seeing that demand come back. yields are at a much different level right now. jonathan: kathleen, we have spend weeks and weeks on this program talking about the risk mitigation quality in the

absence of them over the last month. what has changed in the last week where the equity vol picked up to a certain extent where actually the bid came back into treasuries? kathleen: the bid did come back. but i think when you look at the magnitude of the volatility, i would have expected a bigger rally. so i do think it speaks to the demand that is coming in temporarily. and 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. jonathan: yeah. kathleen: we have not seen wage group. things are really percolating underneath. jonathan: greg, i think this is a really good point that kathleen makes. i thought the same thing a couple of weeks ago. when we had a downdraft of 6%, i was quite surprised that treasuries only dropped lower by about three, four basis points on a 10-year yield. it wasn't dramatic. why do you think that is?

greg: because i think positioning was such that everyone believes that rates were going to move higher. i think what has kind of reset the levels here is the persistence of equity vol. you see this big spike in volatility. it has persisted at a much higher level relative to last year. i think that persistence in higher volatility in equities has had kind of a slow bleed into the rate market. jonathan: the money is coming into the rate market and into 10 year treasuries, where it has not come and is the two-year space. i think what is interesting 210 is down to 50 basis points which is a cycle low for the spread. we are flat, flat, flat. not completely flat, but flattening. i think it is interesting that despite the decline, the rolling over of risk appetite, no one is taking out rate hikes for this year. so the two-year spend really angered. the money is going into the 10-year. you end up with 46 basis points. versus 10's. two's

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 the fundamentals have taking out rate hikes for this -- fundamentals have rolled over, and 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, how come four is not being priced in? there was like 100% probability of everything going right. now it is sold at three, but if the data continues to come in mixed, i think what you will see is 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 any closer to looking at the front end and saying, that is a buy? i imagine you are not. kathleen: not at all. [laughter] kathleen: not by a long shot. i think there is the potential. it might be a low probability. but 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. and i find it really interesting that, at this current point in time, when the banks are starting -- 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. so the treasury bill supply has been overwhelming the market, to some extent. and on top of that, you have got incentives from the tax reform that are encouraging money at the short end to be liquidated. so there is a lot of selling pressure that is going on at the short end that could continue to weigh on the market and push short rates higher. jonathan: greg, is that the reason you think the front end is broken? the dynamic above -- dynamic at the front and? greg: that is a big piece of it. you are seeing all sorts of huge issues with libor, bill issuance, other factors around

tax policy, and there is really no bid. jonathan: jim? jim: i actually think -- there are opportunities to get high quality carry or ticket some income on the front end of the curve. we actually do like the bank loan market. there are more floating-rate instruments you can buy at this time. 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. at a period of time when you are seeing a lot of volatility, you are certainly seeing a regime shift in regards where the markets are going and where policy is going. you know right now, on the front , end of the market, with the back-off, you can get a decent income play on the front-end. jonathan: you said the same thing? greg: totally agree. there is an opportunity there. i am not sure you will get a lot of love out of it over the near-term, but i think there is real opportunity. they do have this pull to maturity. jim: i think what you are also

talking about if you look at the , rally this year, and certainly in january, if you look at the aggregate levels of risk, when where the spreads were in credit 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 kind of protect yourself and get some return profile, the front-end is a very good risk adjustment to play. jonathan: they are sticking with me, greg peters, jim keenan, and kathleen gaffney, thank you very much. coming up on the program 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." i want to head to the auction block now where the united states, the treasury auctioned almost $300 billion of debt notes and bills through the week. it is the largest supply ever. the $30 billion 2-year note sale is the largest sale since january 2014 with a five-year offering. each matching the largest sale since january looking closer at 2016. the two-year option, that sale had a yield of 2.13%. the highest since august 2008. over in europe, high-grade corporate sales fell about 30% compared to a year ago. sales way down by a plunge in february issuance. -- wade down by a plunge in february issuance. elsewhere, we get to a flashing warning sign from tesla. back in august, investors lined up for a chance to finance the company's 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. jim keenan, in august of last year, for this maturity, for this credit rating, that tesla issue was a record low yield of 5.3%. and it has fallen out of bed. is it a tesla issue specifically, or does it speak to something broader in credit markets? jim: in general, you have seen volatility increased dramatically since you had that issue. it is a combination of aggregate volatility built in the equities, and what that has meant in spread volatility. so there is -- the credit market is certainly in the high-yield market has been weaker. on top of that, you have seen the yield curve move. there has been a duration component to that aspect. obviously, you have seen some issues with tesla with the unfortunate events of the crash and regulation between that and uber.

there are a combination of events that have weighed on that credit. when you look at the issuing itself, it is obviously a very significant probably around $44 million market cap kind of 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, it has been burning through cash. for some reason last investors august were willing to fund the dreamlike returns they would be rewarded with, except you are a debt holder. you are not going to see the fruits of that dream, are you? so what on earth is going on? greg: that is exactly right. it is a free cash flow, negative company that is highly levered. but i think it speaks to the penalty for missteps. so maybe this time last year there was not the same kind of penalty. the benefit of the doubt, maybe perhaps. and what we're seeing broadly in credit is dispersion. we are seeing a separation of winners and losers. i actually think that is a good thing.

it is not just a single beta trade where you will get rewarded for selecting the right corporate's and the right companies, and you'll be punished for making mistakes. that is how it is supposed be done. jonathan: let's be clear for this tesla issue, $.87 on the dollar with an implied yield of $7.50. we have come from 5.3% coupon to 7%. if they have to come back, it is going to be pretty expensive. kathleen, when you compare this to the other triple c's, this is trading rich to some of their peers in the market. that issue, kathleen, spoke to have tight things got in the credit. do you see the dispersion or the discrimination in this market that greg peters sees? 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 and if the companies are highly leveraged. so there is some discernment

coming into the primary market. but high-yield spreads more broadly have not really widened out. so tesla is very much facing the pressures, as greg and jim have already mentioned. that the company faces. but 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. and 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 a longer runway if they have to grow into their capital structure. and tesla is a good example of potentially not having enough runway to grow into their capital structure. jonathan: so jim, talk to me about that, the opportunities that you might see in high-yield at the moment. triple c, that is where the outperformance was. can that continue?

jim: it can continue, but i would not necessarily say it is sustainable. obviously some of that has been because of the yield curve move, the association with sort of a double d's when spreads are supertight. if you just take a step back, things that we talked about, growth, there is certainly an uncertainty of volatility on a go-forward basis. growth is still pretty healthy. corporate earnings are pretty strong. there is a regime shift in regard to the structural volatility is going to be increased with where we are in policy, where we are with regards to the apple cap in the cycle. that is going to have more volatility. but when you look at the underlying, credit fundamentals are still strong, which is why even though you have seen some backups, spreads are still pretty tight. the underlying fundamentals of, can you pay back the debt, are still pretty good. and we are debating the level of growth, not debating a recession at this point in time. jonathan: we had a conversation with someone from jpmorgan last week on this show. he said what you want this year

is the most equity like products, equity like securities and fixed income. the performance will come. the capital returns will come. but actually this is a week where the high bed of securities really got smashed around. some people might be screaming at the tv and saying, that is a deutsche bank story. but you did see that start to move the other way this week. so tell me why that is still going to be the story. the most equity like securities, fixed income convertibles, etc. ,where do you want to be and 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 that you are going to be at a period of time where you will see more volatility and likely see 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 when you look at relative equities, it doesn't have the upsides as you said before. but in this environment, you do have the ability to get some income that is now mid-single digits. and you are protecting against

that throw down risk that you saw in equities say 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? which pieces are you picking up? greg: we too are interested in the short end of the investment market. what i think is interesting and notable is that you have seen real stress and strain in investment grade corporate's probably on the front-end and not in high-yield. it has outperformed or underperformed its data. on the high-yield side, we have actually been more involved c'than double d's. the part of the market that confuses me the most in high-yield is the short double d paper. i think it is well over owned. and no upside it all. nothing but downsides. so you know, i think the rotation there is something to look at. jonathan: greg peters sticking with me alongside jim keenan from blackrock and kathleen

gaffney. coming up, we're going to run you through some of the markets. a big move in the long end of the treasury curve. 30-year notes down by 90 basis points, upine basis 3% on the u.s. 10 year. down on the two-year. a very small bit of the front end leaves us with a much flatter curve. still ahead, 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 over the next week, it will be a shortened trading wake in some areas of the world, mainly due to easter monday. here in the united states we will get you estimated balanced numbers and the march jobs report in the u.s. the debut of the secured overnight financing rate which is being called america's libor

replacement. still with me, greg peters, jim keenan from blackrock and kathleen gaffney from the docks management. i want to wrap things up with a conversation about what has been happening with libor. kathleen, the conversation continues because the grind high continues for -- i've lost count of how many days. three months 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 for. i think there is a market consensus that when we reach april 15, and we start getting revenues in 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 to be precise, that three-month libor has drifted higher. >> i agree. i think it is about persistence.

it is not a single factor, so it is not simply just bill issuance. there are other factors at play. it is hard to disentangle what the true diver is. there is a big debate around it. if it continues to widen and it continues to remain at these high levels, it is a de facto tightening. i estimate that is already happening. it is not filtering it through those indices, but it is causing credit spreads to widen. if it persists, that is something to really worry about. jonathan: jim, i don't think we should waste too much time talking about whether it is a flashing sign regarding credit stresses. when i talk to any of you, you say no it is not. , but it could have real consequences in terms of the timing of financial conditions. have you seen it start to bite at all? jim: not at all. they both nailed it. it is the persistence of it and the expense. it is not an expense directly related to the household, but when you think about how people find their positions, 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. and so you are seeing some of that play in. i think that is some of the reason you see the front end of the investment rate market start -- grade market start to weaken out. it has an impact when you think about some of the foreign buyers of u.s. credit or u.s. assets on the front end. you have seen some selling on that 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 put you all in the boxes and we do a quick round of quick questions for you. i want to begin with the low end of the treasury yields, 240 for have we seen the low for 2018? 2018. greg? 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? buy the two-year note, or get out of the way, the fed is still coming? greg? greg: get out of the way. jim: no. jonathan: kathleen. kathleen: get out of the way.

jonathan: tesla 2025, or netflix with a similar maturity through to year end. both companies have burned through cash both companies had , to raise a lot of capital to fund that growth. would you hold the tesla 2025 or netflix of a similar maturity to year end? greg: netflix. jonathan: jim. jim: post selloff tesla. kathleen: don't make me choose. netflix. jonathan: there we go. kathleen. thank you very much for your time. that does it for us. greg peters, jim keenan from blackrock. 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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♪ haidi: manufacturing remains robust in china as factories shrug off fears of a trade war, beijing prepare a to answer the u.s. tariffs. betty: president trump delivering and easter message to abandon the dreamers and dump nafta. fori: australia's plans russian expulsion say moscow's decision is completely unjustified. betty: we enter a new quarter with volatility on the rise. the s&p and the dow saw their