jonathan: this is bloomberg real yield. ♪ coming up, trying to stabilize following a week of --. federal reserve taking a presidential beating. still looking deliver more rate hikes. living most strategists committed the planning going into 2019. we begin with a big issue. a messy week on wall street. >> we will, undoubtedly, seymour talk about u.s. treasury's --

see more talk about u.s. treasuries. >> we are going to watch more credit than treasury because if we still continue to see rates rising, what we may see is people bail out of certain sectors of credit. we think that means you ought to be conscious in fixed income, particularly high-yield, high-grade. >> there is no information that came out. i think that's the market issue. it starts point when biting really hard and we see these corrections, you see the implications of these corrections in real economic data. the fed probably has to back off. but that's not today. it's probably in the first year. jonathan: joining the around the table, the head of global rate strategy, chief investment officer of fixed income. plus from london, fixed income

portfolio manager at jpmorgan asset management. i want to begin with you on risk assets and fixed income. high-yield finally started the fracture. what do you see on that? >> the move in the treasury market really caused that. the market was happy with the yield curve. at 320 plus puts fear in the system that rates could move higher. that leak into equities. not rally immediately which put a further spook into the market because that risk offset wasn't there. we think it was rate-led. jonathan: given that risk offset, treasury is doing well .do you take some comfort from that ? >> i do, i also take comfort from a significant amount of auctions. hard to draw ay line in the sand. action, not very

comforting. we did not have a great reporting rate. this week, we've actually seen rates managed to rally. the front end is very interesting. it has a lot of value. tightening,nditions a bit less excited about raising significantly above neutral. want your view on what is happening in credit. there seems to be little room for error. we are still pretty close to post crisis times. investment rate, you have seen the effort being put i a lot of companies in that segment of a fixed income market. i you concerned about what is happening at the moment? would you take any comfort from what we have seen so far? >> when you look at it, you had the spread on the high-yield mark which bounced up around about the 320 level a couple of times. we are in the middle of that range at the moment but i think

interestingly, it's the highest that we have seen since the beginning of 2016. i think that could well entice some people back in. we have seen fundamentals pretty strong and we do think actually this could create a buying opportunity. jonathan: is there buying opportunity for you and have you been doing that? >> yeah, we definitely think it is. definitely i think if we get up towards 7%, that would be a line in the sand where you come in. the reality is that people got a little bit too excited. i think everyone was amazed last week that high-yield managed to absorb all of the rate backup but as we said earlier, we have seen yields push up over the course of this week. jonathan: a look at the equity market situation, really struggling to stabilize in new york. guys, do you say i'm looking at fixed income, i

don't see a credit quality problem? could you say that with conviction? >> you can. you have to remember that equities did extend the run-up. a quality perspective, you struggle to see meaningful problems that could really manifest over the next year or two. credit quality still looks decent. that said, the closer you get to the consumer, and further away from e.m. and corporate, that's one key distinction. >> we had a pretty big bond outflow week last week and fixed income, i am nervous that in these relatively less -- as you continue to see outlook, does that hurt credit a lot more than --? this is bloomberg. >> i think that's a good question. it is acutely more important in the more liquid segments. in the broader market, we think it is actually the speed of inflow as that yield curve

increases from the institutions. high-yield, yes. jonathan: let's talk about loans. everybody has discussed how resilient high-yield is through 2018. loans have been rocksolid through this week. why, how, and can that continue? >> really interesting that the flow into the senior bank loan has continued while high-yield has been punished. that's not a sign of a credit concern, that's a sign of a rate concern. people are still looking for that instrument. importantly, the clo machine is driving a lot of that creation. that's controlled by institutional asset bases that we think are quite rational. we are not as concerned about the sb is facing. jonathan: the really important point. as you look at fixed income and for any market brackets at the moment, is this a rate story that dominates the income that defines much of the sanction and credit? i completely agree with that. it still actually help it was. obviously we have to come through earnings but earnings

are likely to be reasonable. we see a fairly favorable growth for the remainder of this year and into next year. for us, it's really being driven by what happens on the treasury market. people felt that withhold, a lot of people have been buyers at that level and were forced to stop and that really manifested around the rest of the pitch the. jonathan: you seem to be pretty bullish on credit. do you put it back up, perhaps more so? are you going to balance fixed income, you need to know that the other side is going to do its thick. do you take some comfort that it will continue to do so? >> yes. the fact that the auctions came in, that's a good sign. i think the fed is going to be interesting. we are at a bit of an inflection point. for us to continue to feel confident, we have to have the fed not talk about going significantly above neutral. it could then build or continue to rise. i think if you dissect the

selloff, we had a cpi report. we have been saying that for a few months, it's a one-off thing. like makingne-offs a trend that inflation is not picking up, which is, i think, what is going to give us together. the fed next week, do they really push on this? jonathan: 2018 has been tremendous and one of the things you have done is dry line in the sand. you think that's where we cap because we advanced off at 1% real rate? >> i think so. what i would look for, is productivity moving higher? labor force participation moving higher? if they move higher, then there is nothing about that 1% level except all the data we have seen where someone has a sugar high growth. it is all temporary, you are not seeing this pickup in long-term growth, than i would say that real rate 1% level, i would stick by that. jonathan: agree? >> i completely agree.

looks like decent support. the on that, it moves too quickly. here in new york and from jpmorgan asset management, coming up on the program, the auction block. amid the market volatility, the u.s. and china selling billions in bonds. that conversation coming up. this is bloomberg real yield. ♪

♪ jonathan: i'm jonathan ferro, this is bloomberg real yield. i want to head to the auction block or $230 billion in treasuries were auctioned through the week. i want to focus on the 30 year sale at $15 billion which

actually went ok into a yield of 3.34% with some healthy demand. the ratio at the highest level since january. we then turn to china, the trade war with the united states has $3 billion of bonds which received totals more than four times the issue in size. u.s. participation, notably lower compared to last year. on the corporate side this week, bloomberg is said to have gathered enough orders to cover its plan private placement of junk bonds. all of that displayed -- despite some of the volatility displayed. the president of the united states, once again, taking on the fed chair jay powell. take a listen. trump: i think the fed is far too stringent and they are making a mistake. and it's not right. and despite that, we are doing very well. it's not necessary, in my opinion. and i think i know about it better than they do. believe me. me.than: still with

i won't ask if it's going to make a difference because i assume every single one of you think this will not make a difference. hasll ask if the president a point that the fed might be setting us up to go to quickly. different want financial conditions. if financial conditions are tightening, it's intended consequence. i think the problem is the speed of that tightening does not did overdone, and when you have the fed, they are actually deemphasizing. i think jay powell has been saying we will move based on the data. they will be responsive. i would argue it financial conditions deep tightening, the fed is going to slow trajectory so they are trying not to make a policy mistake. they are not ready to fund models that they have to keep hiking. i don't think he has a point. i wish he did not talk about the fed because we do need the dollar.

we have a lot of treasuries to sell, we needed the dollar to remain independent as a key part of that. jonathan: matt? >> completely agree. it pauses near a 3% level. but we think it's a very important to realize we have escaped from zero. this has not been done a lot. to get away from zero and get further away, provides a cushion. the fed is playing the long-term gain, one much longer than the election cycle. they need 3 -- two to three years ahead. the president probably underestimates the importance of that. jonathan: there a huge amount of people that came out. central bank officials, finance ministers, all supporting the chair jay powell in the face of his criticism. i just wonder whether you think the president might have a point, maybe they are going to quickly? even if inflation forces are capped at the moment in the united states. >> i think the reality -- everyone has an opinion. but what powell will be looking

at, he will say to himself, we got a mandate. the mandate, the economy is growth. on the other side, it's inflation. the economy looks great, the data looks fantastic. growth looks good. the cpr this week was a little below expectation, but we are hovering around that mark. average earnings because of base effect last -- next month are lightening. they have every right to continue going. i also want to remand the they are going at such a gradual pace compared to other cycles. they are still taking their time and making sure they are disruptive. i agree, they start to see the data well over, they will be happy to change course. jonathan: what i understand from the way you see the yield curve going, there is one high-profile capitulation. morgan stanley throwing in the towel. i will catch up on monday. for the most part, a lot of people have stuck with it. i am going to stay with that position through 29. do you stay with that view?

>> i think if you take the long-term view, yes, ultimately tes, youed raises ra will see the curve flattened off down to zero. and as it always does, slightly invert. in the near term, you could well see the curve have a little bit more of an impact as the rate move continues. as pension reforms move, pension demand, there is a lot of issue that the u.s. has to do. it could lead to the obits -- little bits of capitulation which has served so many people so well. jonathan: pretty much on that side of the trade, expecting that process to come from the long and. do you subscribe to that view as well? >> i do like the short term. lower rates in the front-end. given this risk of bond. if i want to hide out somewhere, the front end is finally giving the positive rates. why don't i stay in the front

end and just wait to see if bond markets slow down, does the equity markets stabilize? does credit stabilize? see the curve steepen longer-term. if we really need the risk conflict to stabilize. jonathan: steepening typically scares people because it could mean something else. that the federal reserve is about to make a turn and go into cuts he does things aren't looking so good. can we get a steepener in the environment is not risk off? >> we don't believe so. i agree the short-term bias is toward steepening however, the issue is in the front end and to ramp over the next 12 months. that pressure is going to keep the front end from rallying while the back end can steepen. we have encountered steepeners for a few months. it's nice to see. is as far as level it can go until you generally get that push up. jonathan: when you go with that in the short term, about 50 basis points? >> i think that's a very reasonable level. it's a level we have been discussing. we had a similar view over the

last few months or so finally coming to fruition. i do think you would it a f -- you will get a flattening curve. jonathan: pretty interesting stuff. i want to get a market check for you because treasuries last week , then this we cap and. in, theying back retained of those characteristics once more in the base a big debate as to whether they would. 10 year yields at 314. still ahead, the week ahead featuring minutes and another round of earnings from the big u.s. banks. this is bloomberg real yield. ♪

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jonathan: i'm jonathan ferro, this is bloomberg real yield. next week, ar the data point to look out for, u.s. retail sales and housing data coming out. plus, minutes from the federal reserve coming up during the week on wednesday. we have more bank earnings that will come to you on monday. plus the governor speaks in new york city. brexit talks ongoing in brussels. and we get the official treasury currency report. will china be labeled a currency manipulator? that is one to discuss of the weekend. still with me. some final thoughts as we go through the weekend into next week. what are you looking for? >> i think it is going to be pretty critical. stability around the six point nine level, we are going to get to that seven. it's a psychological level. i think the market was very happy to see it all the china data overnight. theknow, that does not help

entire trade record. china would be imported and then i'm going to look at the housing data. mortgage rate reached the highest since 2011. affordability is not that great. we start seeing the first signs of this impacting housing. jonathan: interesting you mentioned china, we are going to get that report and the reports ahead of this indicate the treasury could be leaving because they are no they are not a currency manipulator. if they were labeled one, what would that mean for you? >> it's extremely difficult because then you wonder what does that mean for risk assets? does it mean more sanctions? they don'ty are not, actually satisfy any of the criteria. if they are not labeled, it's still interesting. they continue to underperform, china is weakening before any of the data has affected.

we are looking into 2019, how much can the u.s. continue? jonathan:= what are you looking for? >> back over to europe, i would like to see what's going on in italy over the next week. we've obviously got budgets and we know we've got concerns regarding the levels likely to be announced next year. that will be very interesting to see how that plays out over the next week. thathan: are you confident we won't cross that 400 basis point line in the sand? >> i am. i think from where we are today, we are around 300. 400 is a long way away. let's talk about that when we get there. i think it takes something big to get us up to that sort of level. when we look at italy, when we look at the rest of the periphery, there is a starting to be levels that look attractive to us. china is important.

the narrowing of the trade focus to china is important. this more can become a bit more dangerous because you have a levered entity. we also think dissecting the earnings tea leaves for signs of inflation is critically important. we will be really focused. any signs of more inflationary push, look out. jonathan: i actually have this discussion multiple times through the week. corporate are identifying price pressure. the official data is not. why are there different stories from corporate america and the official economic data? >> because there's a potential let earnings could be squeezed. you need productivity to offset that pressure. the risk is that that gets passed through. jonathan: what do you make of that? >> until you have significant rate inflation, they are not going to have price pressure. if i'm not getting paid more, it harder for me to pay more. and on wage inflation, the big component, amazon is a big component. you could have a radar -- robot

here next time talking about rates. jonathan: i hope not. >> that's the issue. if we could have robots doing things, does that keep rate inflation low? that's going to effectively mean that cbi itself stays. jonathan: productivity in america russian mark >> long-term, yes. we need all the big data. all of that has to seep through into the process and producing's. that to be a pretty long cycle. jonathan: i mentioned to some people -- time for some rapidfire questions. one question, one short answer if you can. will jay powell serve a second term? i just want to get a feel. will jay powell get a second term? >> and a third. >> yes. >> yes. jonathan: there we go. moving on. would you buy the spread widening in u.s. high-yield, yes or no? >> yes, doing it.

>> no. >> definitely. jonathan: governing to year end, flattening -- >> steepening. >> steepening. >> steepening. jonathan: interesting that's becoming the consensus. great to catch up with you. from new york city, that does it for us. what a weekend it has been. we will see you next friday. for our audience worldwide, this was bloomberg real yield. this is bloomberg tv. ♪

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