jon: from new york city, i am jonathan ferro. this is "bloomberg real yield." ♪ jon: coming up up, junk debt a shelter from the storm. the fed indicating it will not be enough to shape policy. riskiest partthe of fixed income, a basket of stability in a volatile world. >> credit conditions and lending standards remain extremely generous. >> we have been saying it is too

extensive to buy but too early to short. >> highly leveraged equities are underperforming. the fixed income credit markets are not that worried about it. it is a really interesting disconnect and quite unique. >> high yields should be compared to equities. high yields are looking more attractive. >> if you see lending standards tightened and credit spreads widening on a sustained basis, you know you will create a feedback loop into equities and head into recession. we don't think that is a story for the next few quarters yet. >> the u.s. recession looks a long way away to meet. you would normally see credit ifrting to weaken and widen the underlying growth picture starts deteriorating. is rachelng me , andr, marilyn watson

robert tipp. rachel, i want to begin with you. over therkets all place. the junk used part of junk is doing ok. leveraged loans are doing ok. why? >> you could feel equity is the beginning of the and and credit would catch down with it or this is a flash in the pan and there will be a recovery with equity. we believe there will be a recovery. the fundamentals of the economy are strong. anddefault rate is benign likely to be so for years to come. one of our strongest convictions is the energy recession of 2015-16 hit the reset button for corporate behavior for how the market was addressed and gave the market a chance to heal. the quality of the market is not

as dire as a lot of people have suggested. jon: do you share that view? >> when you look at the high-yield market, there are strong technical reasons why it is doing well. with heard the lack of supply versus demand, still strong demand for yields. you continue to see that. we are seeing a shift. you are starting to see that ares in europe attractive in dollars. i think the markets are evolving. jon: robert? >> it has been a sleeper outperformer this year. it is a good environment. the u.s. economy is doing well. while europe has been having problems, emerging markets were getting hit, investment-grade has more downside, high-yield is the sweet spot. the equity market was racing away. , there is a steep

correction spilling over a bit. to the extent this expansion a recovery continues, they are likely to reemerge as a sweet spot. of: it would be disingenuous me to say credit has come out of this ok. the outperformance has been the worst part of high-yield. leveraged loans have remained resilient. if there are people watching right now worried about the equity market volatility and , is the message for credit that doom and gloom is not around the corner? >> that is the hot area where the value is not necessarily there. that is going to be the weak underbelly when we get to the next correction. in the meantime, technicals are strong. it has gone from a wholesale cheap fixed income market in

credit from a couple of years ago. it is more of a bond pickers market. you have to be very selective whether it is peripherals, high-yield, emerging markets. find that. jon: why is it technically strong? >> retail demand is very high. you have a fed rate hike environment. that has created a bulletproof technical for that market despite high issuance. jon: fundamental strong? >> fundamentals are strong. the technical we need to mention is the clo demand. clo's now represent over 50% of the holder base. it is important to look at this as a relatively stable pool of assets. they will not be forced sellers in the next recession. they came through the financial crisis in good shape. they generated good returns.

i see the cielo base as a stabilizer, but also the demand from the clo's has created a demand that is relatively unique. the market has changed materially. the percentage of the market that is loan only has doubled in size. i'm not saying we do not like loans. in the view that rates are continuing up for the next couple of quarters. they will still be a go to investment asset class. jon: your point about them being loan only is important. the problem is there will be nothing beneath them. what does this mean for recovery? a lot of people look at the historical analysis and say it is good. is it a different market compared to 10 years ago? >> we expect it will be. you have entire structures composed of loans.

if historically the low recovery rate has been $.70 on the dollar, we would use the lower $.60 or below that. it depends on how stressed the balance sheets are. we would say overall leverage is not excessive. it is not terribly worrying. but then we would look at the nature of the underlying cash backsnd say a lot of add have been permitted to boost that number. if you look at a reliable cash flow number, these companies might be more leveraged. potentially more volatility. jon: if you're piling into the do youhow much homework need to be doing in leveraged loans at the moment? >> exactly. those are the points. the demand is strong. clo demand is strong. you need a good credit team to go into every deal. if you have that, by the time we

get to the next downturn and you have been selective, you may have similar downside experience to high-yield. notthose going in that are doing that homework, it is not going to be pretty. jon: spreads for high-yield have been wider. do you anticipate high-yield delivering performance relative to leveraged loans? >> i think it will be in high-yield. that is for a couple of reasons. the high-yield spreads are down 50 basis points on the index and rates are up. i think we are getting to the point where a few interest rate hikes down the road, the fed will be done and it will be some dropping of the long-term yields. the cycle is probably not over. the technical point on the high-yield will be that the loans get called away with the spreads tighten. they will not participate in the

interest rate rally. jon: you don't think we have seen post crisis heights in the united states? >> i.t. is different. there are opportunities. when you adjust for everything, the spreads were incredibly tight earlier in the yield. in high-yield, if the fed succeeds and we have a moderation in growth for a few more years, i think the technicals could move the market quite a bit. jon: do you share that view? >> as we move forward in the fed continues to raise rates, think one other aspect to be aware of is the change in the size of the i.g. market and how it has grown exponentially. as you get closer to recession or toward the end of the cycle, if you see downgrades into high yields it is a factor you need

to consider as well. jon: on credit? >> i'm drawing a blank. we have 7% yields in high yields. i think it is a threshold that matters to people. with the rate rise, we can see further spread compression. we would be buyers into the end of the year. technicals and fundamentals are looking good. jon: a bullish group today. up, netflix dangling high yields to investors in a $2 billion junk-bond offering. that is coming up next. this is "bloomberg real yield." ♪

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jon: i am jonathan ferro. this is "bloomberg real yield." netflix was the headliner for the week in high-yield. the company sold more than $2 billion. they had to offer yields at the high end of the price expectation. u.s. debt investors are helping to finance on the future of the wheat industry. it sold more than $2 billion of bonds to boost its stake in the canadian wheat grower. spacex is said to be working with goldman sachs. this week, janet yellen joining people concerned about the rise of leveraged loans. she said i am worried about the systemic risk associated with these loans. there has been a huge deterioration in standards. the big issue she has chimed in

on and many others have as well. golder,th me, rachel marilyn watson, and robert tipp. quote, i raised that wondering whether some current and former fed officials are trying to tell us something. the guiding light seems to be worries about financial wobbles. >> they are operating in a world of uncertainty. but they do know that what has ultimately cost the average downturns.e the big the crashes are caused by the bubbles. those are the ones where the slowly.society recovers it was probably five years ago she was warning on biotech, right? i think it behooves them to kick the tires and see if anything rattles. is what willhat

extend the expansion, not seeing the widespread rapid lending versus appreciated assets, the real estate bubble, or any gigantic sector bubble, you are not seeing that but they continue to raise rates. i think that will be helpful. jon: that is the former fed chair. current fed officials warned this week about the leveraged loan market in a sort of emphatic way. jay powell has talked about financial instabilities being the biggest risk. not so much inflation. i'm trying to get my head around this. on a week where fed officials have said the equity market volatility will force them to pull back, i'm wondering what the guiding light is for them now. >> that is the $1 million question. they made it clear they are not sure where the neutral rate is.

the economy continues to do incredibly well. we are seeing strong data from construction -- consumption data. we are starting to be impacted in the housing market and other rate sensitive sectors. whereare starting to see rate rises are having more of an impact now. next year with hikes, the question becomes, at what point do they start to go on a meeting by meeting basis rather than consistent, gradual increase in rates? jon: we are seeing tensions emerge between the market and where the fed is telling us the hikes will be. this week, we saw the pricing for december. i am wondering where the market

is and where the federal reserve is and how the spread reconciles in next 12 months. >> the fed and the market have gotten much more closely aligned in the last couple of months. now it looks as though powell is trying to dial down the reliance on the forward guidance, trying to paint a steady picture going forward. put isl think the fed there but it is deeply out of the money and you are seeing the strong economy with decent an immediate not threat of inflation breaking out to the upside. 2019, there are a number of other forces that will begin to push the fed's hand. we think the tax reform has been a tailwind for 12 months. that will begin to fade. trade is already beginning to cause supply-chain disruptions. as we look at the difference between the performance of the equity market and the credit

market and the credit market, i think it relates to the expectation of slowing topline growth. you have slowing topline growth. as margins begin to erode, you will see it worsening. that will influence the fed's hand. it is just not immediate. jon: you mentioned inflation. inflation expectations, are they starting to roll over a little bit? you start to see signs of that happening? >> today, you are seeing it. it is surprising how little they have come down given how much energy has come off. the curve is flat which suggests the market is not a strong view about where it will be headed long-term. on the fed when you look out a year or two, and presumably energy prices will crash and go horizontally, when they are at a neutral rate and the economy is

doing well and there are not inflation pressures building, i think the onus will rise for them because they will be going into possibly restrictive territory and hurting the economy when they are not sure they need to do it. jon: is it hurting the economy right now? >> i don't think so. i think they have safely created room to cut so far. the economy has plowed through this. you are beginning to see in new home sales in particular a correction which has extended further. there have been waves the last handful of years. this one is beginning to be longer than the ones before. the interest rate sensitive the interest rate sensitive sectors are beginning to bite. they are thinking they have two or three more before they need to slow down. maybe they need to slow down sooner. jon: you are going to stick with me. in the markets this week, a check on where treasuries have been. treasury yields shaping up as

follows. down by 10 on a 10-year. still ahead, the week ahead featuring two major central bank decisions and payrolls around the corner. from new york, this is "bloomberg real yield." ♪

♪ jon: i'm jonathan ferro. this is "bloomberg real yield." time for the final spread. over the next week, we will have a pair of central bank rate decisions. we will get another round of , the election, and the jobs report to close out the week next friday. payroll friday around the corner. i'm sure rick greider is board

of talking about it but are we getting to the point where we could be close to the peak? >> we still like the front end of the curve. we think it might be well anchored. weyou continue to hold that, think it is reasonably priced now for the number of hikes you might have. the next movie could see is more of the steepening is the fed does indicate it will pull it three hiking cycle -- its rate hiking cycle. yields go up more, you are still cushioned. further up the curve, there is no cushion. us through why the next move could be a steep one. >> if the fed announces it will pull, the market is not prepared for that.

we have seen a few signs the market is concerned, but it is not yet priced in the fed might act sooner rather than later. i think next year the market will start to reassess its view of the rate hiking cycle. it will reassess its view of the u.s. relative to europe and japan. you have seen the curve flattening most of the year. now we are seeing it steepen a little bit. i think some of it has played through. the fx hedging cost is so expensive that now you can see foreign investors going elsewhere getting better yields. jon: it has been a big conviction trade for you. have you trade -- changed your view? >> the bond was a spectacular performer. part of that was the shift in

interest -- issuance. the fear with trump coming in his they might want to do ultralong spreads. they moved supply heavily to the front end of the curve. they have been introducing new maturities on the front into the curve. the bond has been a spectacular perform until lately. now the performance spot is between fives and 10's. it may be too early for 2's. if the last hike is going to be above 3%, 2's may have some downside. at that point, you will probably be inverted. jon: we have to wrap it up with the rapid fire round. will credit still lead equity going into the next downturn? yes or no? >> yes. >> yes. >> yes. posthave we seen the

crisis hike on high-yield? >> yes. >> no. jon: is the fed put a thing of the past? >> no. >> yes. >> no. jon: interesting stuff. thank you for joining me over the last 30 minutes. week.s it for us this we will be back in new york same time, same place. 1:00 in new york. this was "bloomberg real yield." this is bloomberg tv. ♪

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cesar sayoc. president trump said we must never allow political violence to take root in america. we have carried out a far-reaching federal, state, and local investigation to find the person or persons responsible for these events. these terrorizing ask our despicable and have no place in our country. mark: the justice department says it will provide more information at a news conference at 2:30 washington time. officials have intercepted at least 12 explosive devices addressed to democrats including former president obama, joe biden, and hillary clinton. german chancellor angela merkel says her country is not ready to export arms to saudi arabia until the killing of jamal khashoggi is properly investigated. speaking in product today, chancellor merkel set until that happens