jonathan: from new york city, 30 minutes dedicated to fixed income. this is "real yield." ♪ jonathan: coming up, the reserve is now returning to a fourth rate hike in december. crude oil falling into a bear market, failing to reject much pai -- inject much pain into junk debt. >> i would expect the fed's continual gradual increases in the target fund rate to stay on

track. >> the economy is cooking, baby. you have fiscal policy going on, the lowest unemployment rate since the 1960's, and the economy is doing nicely. nobody in the world is talking policy because their economies are getting crushed. >> there is no reason to keep tightening at this pace. one has to slow down. either in terms of hiking or the balance sheet reduction. >> slow down? , on. give me up -- come one. a quarter-point each a year? that started in 2015. >> if they see the curve inverted or flattened towards zero, i think they will back away. they don't to play chicken with the market. jonathan: joining me in new york city is henry peabody, mary plus from london i am pleased to have alberto gallo.

mary, i want to see if you disagree with her colleague david bloom. mary: we are thinking the fed will remain on pace with the rate hikes. one thing from a high-yield have been fairly cautiously optimistic on high yield from a fundamental perspective. we are a little more cautious over the summer for the valuation perspective. we repriced by 50 basis points in october. we are seeing concerning things doubling from the bottom up in terms of supply chain disruption and cost increases while the top line is starting to slow. it feels like putting some plugs into the portfolio. every sector now seems to have a little bit of issues. that is keeping us despite the repricing concerned, now more for the fundamental perspective. jonathan: henry? henry: i think it is spot on.

the fact we are still quite stimulative in the front end. we have a ways to go. what happened if wage inflation pushes into the high three's? you have more expansionary policy. the yawning deficit in the cycle is something to pay very close attention to. the fed has its work cut out for it, especially with the leveraged economy. it is a tough gig. jonathan: although i thought it was interesting in the whole statement the gravity knowledged anything that has happened in the last two months. what did you make of that? alberto: i think they are trying to overlook the volatility in the market. there is little left if there is a slowdown in the next three to five years. they have to build a policy buffer. the fiscal policy ammunition will be limited because we knew this late in the cycle.

they want to increase the potential for loosening policy in a slowdown. if you striphat, out shelter, the cost of housing from inflation, yes, wages are growing. actual inflation is relatively muted. we don't have a pass-through you had in a normal recovery between wages and inflation. you could see that if next year the momentum of the fiscal stimulus fades, you can see a policy error. you can see the effect looking at itself and say maybe we hiked too much. we are too far from that moment. henry: building on what was said, in early october week of the comment about being a long way from neutral. yes, he walked it back. jonathan: we are a long way from it. and a we are building little buffer in that asked to fragility in credit and equity markets. they said it will not bailout

that positioning, and that is what we are learning in october. jonathan: perhaps they shouldn't. if you look outside at unemployment and inflation, there are some things turning in this economy. there are things going on beyond what many would consider a lagging indicator. there are things you need to be focusing on in the market. mary: where we are seeing it is auto, auto parts and home builders are underperforming sectors. in october we saw the basics selloff even more. we have seen cost pressures and supply chain disruption. everything we still have uncertainty around where the next wave of tariffs might come. are we going to reach an agreement? that still seems a ways off. jonathan: alberto, is not about having a conversation on programs like this about what the federal reserve should and should not do. it is about what they will do.

it is clear they will carry on hiking. the conclusion for some people is they will carry on hiking until something breaks. alberto: this is the worry. at the same time structurally the economy globally, and the u.s. economy has become fragile. there is more leveraging and private corporate balance sheets. for 10 have been one way years and there are more liquidity mismatches. they have been focusing a lot on banks. the channel of contagion for the last crisis. they are not necessarily the issues that are potentially going to be affected in the next crisis. the next crisis could be more about higher real yield, lack of liquidity in markets, high-yield balance sheets and so on. it could look like they are overdoing it, especially for emerging markets and other

economies that are dependent on dollar funding next year. henry: i think the dollar funding issue is a real one. we saw a shift in late september when it became more of an issue. let's think about technicals next year. we can see capital flowing from the u.s. back to europe. if you see a ship in ecb policy -- a shift in the ecb policy, there could be a sucking sound in europe. a lot of people are not talking about that. jonathan: let's talk about fundamentals. acceleration of growth across europe. i see it more clearly this week in china as well. how do you get that sucking sound when the momentum is outside the united states? henry: everyone has been looking for china to slow. china has been trying to avoid a rate cut. we have to think about the second derivatives. we have had a push towards a deflationary mindset for a long

time. that takes a lot to dislodge that. even if the ecb pushes up rates in q3, recaps the italian banks to integrate, brings them back into their camp, that's a big change in risk attitude. i don't think it takes a lot to shift from a zero to actually flows returning. jonathan: where from? what is vulnerable on the treasury curve for you? end isi think the long we saw the auction on tuesday. it was an ugly auction. the treasury curve -- the high debt spacet space -- seems a vulnerable to us between supply, refinancing, correlations. the fact that japan and china are now starting to get along a little better. that is business school 101.

that is something to pay very close attention to. certainly --it, not seen the have bid from overseas that is fueled inflows for this credit cycle. a lot of it is the dollar cost of hedging. high-yield at euro hedging back into dollars, it is almost doing better at this point given the don't have the same bottom-up issues from a sector perspective. i think it is a risk for both investment-grade and also high-yield. jonathan: i want to put the question to someone outside the united states. will he get that sucking sound, the outflows through 2019? what does it look like? alberto: in the emerging markets in the u.s., there has been some outflows. the area that is suffered has been europe, which has gone from euphoria last year with the

french election and president macron and the dream of a united europe to this year with the italian coalition coming back to the opposite extreme. the pendulum has swung towards europe with fears again. -- if aliens invade earth, they will attack europe and european banks. we are at the lows of 2016 and the record high in threat premium between high-yield bonds in europe and the u.s. bonds for the same rating since 2010. here you have to think about the european side. a lot of lower companies are still deleveraging. they have not done m&a. you were getting high spreads for medium or quality high-yield companies. if you don't have ever session,

which is what the market is telling you is going to happen, if you don't have a hard brexit, nothing happens. if you kick the can, you get paid very well. we are about 6% to 7% yielding euros. jonathan: have even increasing exposure to italian bank read it in the last month? alberto: we havejonathan: reduce andpean exports in q1, after the summer we have been buying. italy has long-term issues but you have the same spreads, the same return in spain or the u.k. as well. trading barclays' debt wider than a latin american country which has elections and an unsustainable debt burden. there is an extreme premium. that is potentially an opportunity. if you look at emerging markets or u.s., valuations are not as

wide in europe. jonathan: you are going to stick with me. alberto gallo, henry peabody and mary bowers. coming up, the auction block. changing arrangements for $750 million leverage loan. this is "bloomberg real yield." ♪

jonathan: i am jonathan ferro. this is "real yield." we start with more issuance from the u.s. treasury. the one that made a lot of news, the $19 billion and 30-year

bonds. they in the lowest level since 2009. it was awarded at a four-year high above the prevailing rate bid deadline. far worse posted their biggest supply total since early october. they led away with a seven-par deal -- seven-part deal. spacex is planning to launch a loan that will not be led by bank of america. still with me to discuss some of these issues is henry peabody, mary bowers and alberto gallo joining us from london. mary, many people might've missed it. loans -- it is the busiest month since may and october. that is when everybody was going crazy.

yet the market was still that busy. mary: i think they posted a small positive return in october and outperformed much of fixed income this year. over 4% year to date. we have had over $100 billion in issuance this year. all the new issue supply out of high-yield. the technical has been good despite the -- in the market. for now it seems like the leverage loan space will be able to print a lot of new issuance. jonathan: is this attractive for you? mary: we think it is getting a little frothy. there is a lot discussed around the light. there has been around for a long time. we are seeing top-heavy secure ca structures that c -- secure cap structures.

that arose values -- that you roads values -- that erodes values. while we have seen some choppiness in the third-quarter, i would say we are rolling over. it is certainly getting late in the cycle. jonathan: i'm trying to understand how it is attractive. is it attractive from a great perspective for a credit perspective? henry: we have a number of strategies that range from focus on loans to our strategies which are for a return. for us it is not a great spot. the attraction is the floating brake component, the secure component. let's also look at combined high-yield market as a whole. the composition is changing dramatically. now we are doing top-heavy capital structures. you have more in the lean space. it participation by the clo groups. you also have retail involved.

some of the attraction is everything else is expensive. it is very easy to go or comfortable to go to a place with a floating rate aspect to it. what happens when something becomes less expensive? equities are up in the flows reverse? i believe that as an open question. we will see how the market responds and how we can absorb liquidity. jonathan: and how much is left in the leverage. how would you manage your exposure to u.s. leveraged loans right now? alberto: we think there is more attractive parts of the market. is an asset class that is done really well this year. also benefiting from inflows from demand from international investors for u.s. assets. like you said earlier, if you have a repricing of yields across short-term interest rates from the fed, longer-term interest rates going up in real terms, other asset classes will

be attractive. and interesting point is a lot of investors think leveraged loans are good because they have if floating-rate components of them get hurt by duration. however from a credit point if you, some companies will get hurt from higher financing costs. if rates go up, guess, you don't have the immediate mark to market from the duration component, but you can have higher financing costs for companies which get hurt from their balance sheet weakness. it is not immune from increasing real yield. jonathan: it's a straightforward but important point, isn't it? mary: forward costs are going up -- foreign costs are going up. the receipt m&a coming into the market with real levered -- re r loans, it is part of the --

it is a fixed rate bond. can get aimproves it lower rate. you have a lot of floating-rate debt. as yields move higher, your cost of debt is moving higher at the wrong time. when we look at our own positioning, we are very mindful of some of these top-heavy security cap structures. jonathan: you guys are staying with me. henry peabody, mary bowers and alberto gallo. let's give you a market check unresponsive been this week. yields shaping up as follows. up by two basis points. even with the ugly auction earlier this week's, yields up by six basis points to 340. the final spread. the week ahead featuring a fresh read and comments from draghi and powell. this is "bloomberg real yield."

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jonathan: i am jonathan ferro. this is "bloomberg real yield." it is time for the final spread. we will have speeches from both jay powell and mario draghi. we have been opec meeting, key economic data from the u.s. and china, and italy will show its new budget to the european union. the list bond market is closed on monday for veterans day -- the u.s. bond market is closed on monday for veterans day. henry peabody, mary bowers and alberto gallo. can high-yield stay as it has done with this move lower? mary: as we have seen with the workings of the oil market, we cycle. mini defrost

that flushed out a lot of the quality in energy. yes, there is a couple of bad actors but by and large credit quality is much higher. they can withstand lower prices of oil. jonathan: we've had the stress test and discoveries are better? henry: for the most part. it washed out a good deal of the market. on oil, one of the interesting things is this iranian situation and how trump has given outs to several nations ahead of the midterms. he knew he could not have $3.75 gas going into the midterms. he now has a year or so before he worries about his midterm. he can put the boot to iran a little bit more. water higher prices. -- watch for higher prices. jonathan: you need it to be constructive on high-yield. possessed were not of a factor?

henry: i don't think you need to have accrued story for high-yield. it is frankly a technical story. watch those technicals to potentially unwind and give you the opportunity to buy duration and the ability to have credits improve, which they can't even the loan market. jonathan: you will get put into the box and asked questions and the rapidfire round. i want to begin with the federal reserve. when the fed funds rate will peak. how many hikes before the fed pauses? more than three or less? henry: more. mary: more. alberto: more. jonathan: yields are lower. some people may be considering to add duration. is at the time to increase duration? henry: no. mary: no. alberto: not yet.

jonathan: getting a consensus from you guys. with the oil route catch up with high-yield? henry: high-yield will be softer but not because of oil. mary: i agree. alberto: i think high-yield is a little bit weaker but not too weak. jonathan: clear consensus this week. henry peabody, mary bowers and alberto gallo. that does it for us. we will see you next friday at the same time. this was "bloomberg real yield." this is bloomberg tv. ♪

kailey: let's get the first word news. in northern california, officials say there has been casualties of the major wildfire. about 150,000 people have fled

their homes. the flames have destroyed hundreds of structures. the town of paradise has been completely wiped out. mitch mcconnell says there has been no indication that president trump will put an end to the investigation by special counsel robert mueller. he spoke to reporters in kentucky. >> it is not necessary. the mueller investigation is not under threat. the president said he will not dismiss the mueller investigation. he said repeatedly it will be allowed to finish. that also happens to be my view. kailey: mcconnell said he does not question president trump's authority to replace jeff sessions. u.s. national security advisor john bolton is countering the notion the united states is isolationist. saying the president's rt