lisa: from new york city, i am lisa abramowicz. with 30 minutes dedicated to fixed income. this is bloomberg "real yield." ♪ lisa: coming up, the trade war heats up. the question now becomes, is it time to buy bonds? plus, the leverage loan market is getting hotter but for how much longer? and china's junk market starting to crack as defaults pickup. we start with a big issue, the rising global trade tensions. >> that tale of risk is getting fatter and fatter as we go along.

so far, the chinese have shown no interest in backing down. and neither does donald trump. >> i don't think we need to be hitting the panic button quite yet, but we have moved a lot closer to it, no question. >> until we see some compromise on the chinese side but also the u.s. side, there is a real concern it will get worse from here. >> the whole situation with china and the u.s. is very critical, particularly for china. i believe the situation can get worse. trump is not going to give in. >> in our discussions, the biggest issue on the table was trade tensions. given the multiple channels through which protection measures affect economies, it should be clear that monetary policy is ill-suited to counteract all of their effects. >> if you are worried about this renewed volatility we have seen, because volatility has been reborn then you need to worry , about your underlying credit exposures as well. >> seems like a perfect storm, creating conditions where

recession is very likely, increased incidents of default and delinquencies are higher. lisa: some dire words of worry. joining me is oksana aronov of jpmorgan asset management, joe higgins of tiaa investments, and coming from atlanta, matt toms from voya investment management. oksana, how much are you paying attention to these trade tensions and actually making portfolio moves as a result? oksana: it is interesting the stock market has not shown much concern about the trade tensions. the s&p is up 5% year to date. which annualized is at 10%. we are not really seeing much panic around the markets in general. what i find fascinating about the reaction any time there is an escalation in the headlines related to trade wars, is that it becomes a risk-off and rally

and the 10-year goes lower, where in reality that is an inflationary pressure if anything. the 10-year will be higher as a result. lisa: this is the ultimate question at the moment. are trade tensions going to be inflationary or deflationary? joe, what do you make of that? what is your answer to that question? joe: the textbook explanation would say that trade tensions, traders are attacks and inflationary, we have seen that with select asset classes. washing machines up 20% since that tariff was put on. however, the ability to impact business and consumer sentiment is very high. in and of itself, it is inflationary, but the after effect would be a business slowdown. lisa: matt, a lot of people are looking at the yield curve, seeing the expectations of growth dropping as the likelihood of a trade war picks up. what is your view? is it time now to buy treasuries? matt: treasuries are not a terrible investment.

we see real difficulty at a 3.15 to 3.25, above that level. it is not an environment to be overly afraid of treasuries. probably a push higher. but the trade tensions are inflationary long-term. remember, the feedback loops are a stronger dollar and more active fed, which suppresses the market near-term. inflationary long-term but suppression near-term makes the 10-year not a terrible investment, particularly not at a 3.10 level. oksana: i'm always here to bring some dissonance. lisa: please bring it on. [laughter] oksana: i am going to kind of put this in a different light. we just went through a multi-year period of extraordinary accommodation from the fed. the mantra was, don't fight the fed. if you are trying to stay away from the risk you are fighting , the fed. the fed is not your friend anymore as a fixed income investor. all of the investors that were espousing that mantra should now start to believe it on the other

end of this because that is the biggest issue for fixed income markets, treasuries included, which is the reduction of the fed balance sheet. lisa: ok. taking that, let's take a look at a chart that i find fascinating that shows the massive divergence between the long and short positions in the treasury market. you can see the divergence between the real money long and the speculative shorts has reached the widest since leading back to the last financial crisis. joe, who is right here, the longs or the shorts? joe: i believe 2.85% on a 10-year is not a bad entry point. i think the longs are more correct. we heard the fed for the first time in recent weeks or days comment that they are hearing and local districts that businesses are slowing capex. we really need that to increase productivity and extend the cycle. the fact that certain fed

governors are talking about it tells me that the fed will be somewhat reactive should this go further. oksana: look at the supply and demand dynamics of the market. we are on track to issue roughly $2 trillion of fixed income in the u.s. this year across the board which is $400 billion , above the $1.6 trillion average over the last five years. most of that extra issuance is coming from treasuries given the significant deficit we have. the fed is on track, given the current guidance -- perhaps they change it -- to reduce their demand for the market by $200 billion through the second half of the year, as our largest sovereign buyers are buying less, as banks holding less because they are less regulated, etc. the supply/demand dynamic is what is going to continue pushing yields higher and much less so how many hikes the fed will do or not do. lisa: you think the speculative shorts are more accurate here? oksana: when we look at the longs and shorts, when you look

at the fixed income market in general, where is the exposure? there is trillions upon trillions of dollars that are long fixed income. i think comparing that to some speculative shorts, it pales by comparison. having said that, we are not short the 10-year treasury. we find it much more efficient to be short -40 basis points on the german midpoint. that is a completely artificially created price point by the ecb. lisa: matt, you are a real money manager, real investor, you have to put money into fixed income instruments. given oksana's point, the supply demand dynamic, and the fed is rolling up its balance sheet are you concerned about holding , a significant duration exposure? matt: we're not. we would prefer a trade in germany. we currently do. i would agree with the shorts in the near term. a near-term push after this push down to 2.85 make sense. the longer term, the fixed income markets are more

concerned about down side risks. equity markets can do well through a trade war but fixed income markets need to be concerned about the downside. that is why you see treasuries move lower, corporate bond spreads move wider. it is a quite logical move given the asymmetric payoffs. near-term is slightly higher in yields but not a prolonged move higher. no. lisa: when did we see the next recession? matt: today looks like 2020 odds are moving up above 25% but you still can't say if the majority outcome. we think it's beyond that but the odds have doubled of a 2020 pullback given the fiscal stimulus rolloff as you get through 2019. joe: we think it is likely h1 2020. lisa: do you agree? oksana: late 2019, early 2020. lisa: you think that's what the young gir -- the yield curve is trying to signal?

oksana: it is really hard to assume the yield curve is signaling much of anything given the amount of central-bank meddling. given the extraordinary amount of liability management, long-term liability management coming into place, with a population getting older. there is probably demand that will continue to anchor the long end of the curve, but 10 years and in is susceptible to the supply/demand dynamics and what the fed will do. nothing i'm hearing from the fed is particularly dovish. lisa: matt, when do we see a yield curve inversion? matt: we think we will not see the yield curve inversion. we think it will bottom near the end of this year. the ecb will be in play late this year, early 2019. that will allow the yield curve to invert. we would put that well into the future and call that a late 2019, early 2020 if it happens at all. joe: 2019 event, hard to say when given the technicals. oksana spoke about a lot of moving flows, u.s. inflation, wages, what the ecb chooses to do. the recession will follow the inversion possibly by nine to 15 months. could be a while. lisa: we will be talking about

the yield curve for a lot longer. anyone who is a skeptic, good luck. everyone is sticking with me. oksana aronov, matt toms, and joe higgins. coming up, the auction block. there is buzz in the bond market. greece is back. this is bloomberg "real yield." ♪

lisa: i am lisa abramowicz. this is bloomberg "real yield." i want to head to the auction block, where the u.s. treasury department auctioned off nearly $200 billion this week. first we focus on the $33 billion sale of three-year notes, which drew the smallest bid to cover ratio since 2009. primary dealers also took the greatest share since 2014.

in the 10-year sales, $22 billion were sold with a yield of 2.859% with a bid to cover ratio at the lowest level since may. primary dealers have the smallest share since january. over in greece, investors are warming up to the prospect of a return to debt markets. an example is the nation's biggest corporate borrower, attracting more than 1.8 billion euros of investor orders for its 400 million euros sale, of four-year notes. still with me is oksana aronov, of jpmorgan asset management. joe higgins, and matt toms. there does still seem to be very much a search for yield. it has been risk on. there was a story that caught my attention this week, a bloomberg story, looking at how at least 69 companies have increased in their debt loads by 50% or more in the past five years.

it raised the question, are we getting to the end of the cycle, and will there be a reckoning? joe, what do you think? joe: at the end of the cycle you always get distortions, not just in the high-yield market, or in the loan market, the investment grade market. the bbb component of that index has roughly doubled. for investors in passive vehicles, they may want to think, is the passive vehicles necessarily safer? we don't think indexes are necessarily safer. active management can move you away from some of these issuer concentrations. lisa: matt, where do you see the biggest distortion right now? matt: the corporate space. debt to gdp just from corporate issuance in the u.s. continues to rise and is beyond precrisis levels. that is different from the consumer-oriented space where debt to gdp in the consumer oriented space continues to fall. the consumer has grown the prior debt load. we would point to the ig credit

space, bbb's and em's, where we would see potential dollar funding issues. those are the potential seeds of concern in the future. lisa: i want to get to leveraged loans. a lot of people have been raising this as a hotspot of concern. you see the near record pace of issuance so far this year after a record year last year. covenants are eroding. do you think that leveraged loans are going to see much lower recoveries in the next downturn than perhaps even high-yield bonds? oksana: not surprising we are seeing a tremendous appetite for loans because they are one of the few pockets of fixed income this year that have delivered positive returns as everything else in fixed income struggles. there has been deterioration in the quality of the issuance. therefore, in our portfolios, we were very bullish on loans, we are selective holders but not very active adders. it will continue to benefit from flows, and technicals matter in this market. it has been dominated by etf's,

etc. loans likely have some room to run here but fundamentals are becoming a higher concern because as more deals come to market, this idea of loans being senior and there is seniority in the capital structure is starting to matter less as you have more second lien issuance and there is often no one behind you in the capital structure. this whole seniority argument sort of starts to deteriorate. lisa: joe, what is your perspective? leveraged loans? pro or anti? joe: pro. certainly. to oksana's point, there is more risk now historically, leverages higher. one thing about the high-yield bond market, of course a collection of individual stories. many of the leverage loan issuers that get covenant like status are high quality. you have to differentiate between what you can tolerate as a covenant light and what you can't. lisa: matt, you did bring up the emerging markets. you seem to suggest that could

be an area where we see stress. right now, given the selloff we saw last month, are you starting to experiment, trickle in, or staying away from the area? matt: we think it is a time where you can find winners versus losers. it has been a play that was overexposed to global trade, dollar strength and the like. it has been the right place to avoid. but there are countries doing the right things. raising rates to defend their currencies. mexico, indonesia. those can play out differently than the turkeys of the world, which has an array of trouble from a political and financial crisis standpoint, and argentina. there are going to be winners and losers. it is time to look in the em markets for opportunities. but it is not yet time to just blindly by. lisa: i feel like everyone says this. there could be opportunities but don't go near turkey or argentina. is that your opinion? oksana: very different from what we were hearing at the end of last year and this year, where most of the voices were saying em is a great opportunity.

emergent market debt. all you hear now is stronger dollar, rising rates in the developed world. if you look at the amount of defaults that we have had in sovereign em over the past 20 years, 25% occurred in 2017. there has not been that many, there have been like 20, but five of them happened last year. certainly there is some deterioration in fundamentals. my final point is it is very hard to imagine em strength in a world where developed world's rates are going up and the dollar is strengthening and there are various inflationary pressures. finally, technicals have not started to hit that market. when people start to pull out their money through etf's, that is what can create a significant selloff. that will be the time to buy. lisa: but not yet. oksana: not yet. lisa: time to buy? joe: there are select opportunities and a lot of flows have left the market. we think it is not a bad time. lisa: everyone is sticking with me. oksana aronov, joe higgins, and

matt toms. let's get a market check on where bonds have been this week. the two-year yield climbing a bit, certainly after that three-year auction that was disappointing. 10-year yields creeping up one basis point. 30-year staying pretty flat, considering what oksana was highlighting, the runoff of the fed balance sheet. still ahead, the final spread. the week ahead features the fed's jay powell, and the release of china gdp. this is "real yield." ♪

lisa: i am lisa abramowicz. this is bloomberg "real yield." time for the final spread. coming up over the next week, we will get fresh readings on china's gdp and president trump and russian president vladimir putin will meet.

fed chair jay powell testifies before congress. and we have a bunch of earnings, including goldman sachs. still with me is oksana aronov, joe higgins, and matt toms. i want to start out with china's gdp. we have seen a bit of deterioration in chinese corporate bonds, particularly denominated in dollars. i am wondering, joe, are you concerned at all about some of the weakness we have seen, or are you starting to see the time to buy? joe: certainly weakness in china has implications for em, and risk sentiment globally. it is very important. we remain generally somewhat concerned about the weakness in the renminbi. what happens with further dollar strength? it is something to incorporate in your asia play. lisa: matt, how much are you paying attention to chinese gdp and the efficacy of the controlled slow down in that country?

matt: the controlled slow down is the key. they are trying to slow it down. the good news is the markets are assuming u.s. strength will offset that. it is happening in an environment where the market sees a safety net. that is good news. that said, we don't think it's time to look at chinese corporate specifically. generally foreign funders in u.s. dollars space is something to be avoided in the coming years. lisa: one thing i was struck by, the growing number of u.s. investors have been purchasing chinese corporate debt, chinese bonds in general, even though european and asian investors have been withdrawing. who do you think is right? oksana: that is the chase for yield. lisa: where do you fall? oksana: china certainly is another reason why it is really hard to be extraordinarily bullish on em given all the issues that they have. china has the largest number of bad loans across a lot of these corporations that have been kept up by the government. more so than in 2008. china has a significant bad loan

problem. and credit issue that the government is trying to figure out how to work through this. the tariff rhetoric is not helpful there. it is not unreasonable to expect china to slow down in the next 18 months or so, and that we will have significant ramifications for em. another reason why this is not yet the time to get into em. lisa: matt, what about you, are you buying chinese bonds right now? matt: generally, no. the good news is that the severity will not be terribly strong. the chinese government is trying to slow things down, so they want some of this pain to come through the system. if it goes too far, we think there will be fiscal measures that china would deploy. that would be the sign for a bounce. wait for things to potentially get worse before china will protect the downside. that is when you buy. lisa: one thing i'm struck by is south korea may end up feeling the brunt of some of the slowdown in china and any of the

trade skirmishes. what about the other asian nations? oksana: what is interesting in about the market today in general, and it is not specific to em, but we saw this in high-yield a few years ago. when one sector of the market struggles, investors flee en masse, and that is when you have this broad-based selloff. think about high-yield in 2015. yes, there were significant fundamental issues in energy but energy was not the entire market. there were no issues in gaming, telecom, health, but investors dumped $16 billion in the matter of a few months through etf's, mutual funds and other fast vehicles. the entire market dislocated 1000 basis points. certainly, stress in china can have the same affect on em. lisa: really interesting. time for the rapid fire round, where we try to make one-word answers. em local currency debt, buy or sell? oksana: definitely not buy. joe: emfx down 6%, buy

selectively. matt: sell. lisa: come 2020, will the fed is hiking or lowering? oksana: hiking. joe: down. matt: lowering. lisa: 10-year treasuries? buy or sell? oksana: sell. joe: buy. matt: sell. lisa: wow. really interesting divergence there. my thanks to oksana aronov, joe higgins, matt toms. from new york, that does it for us. we will see you next friday. this is bloomberg "real yield." ♪

alix: metals meltdown. ramped up battles drag down commodities in the eye of the storms. more supply from saudi arabia, and confusion about supply disruption. "i care about soybeans." president trump's tweet about helping soybean farmers as prices continue to fall. ♪ alix: i'm alix steel, and this is bloomberg "commodities edge," 30 minutes focused on companies, their physical assets, and trading behind the hottest commodities with the smartest voices in the business. i want to kick it off with spot