i'm in product development at comcast. we're working to make things simple, easy and awesome. >> from new york city, i am jonathan ferro. this is "bloomberg real yield." coming up, the federal reserve is not returning to read a fourth rate hike in december. even as global growth concerns are increasing, fueling a bit into treasuries and oil failed -- falling into a bear market. we begin with of the big issue, the fed staying the course. >> i would expect to the fed's projection of gradual increases in the target 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. he is talking policy. nobody in the world is because economies are getting crushed. >> there is no reason to keep tightening up this pace, especially since we're doing it twofold. i the week slowdown in terms of hiking or the balance sheet. >> slow down? it should be reversed. give me a break. four rate rises of a quarter-point per year? >> if they start to see the curve inverts or flattened toward zero, i think they are going to back away. i do not think they will play chicken with the market. jonathan: joining me around the table in new york city is henry peabody, mary bowers. plus, from london, portfolio manager.

mary i will begin with you to see if you disagree with your colleague. mary: we are thinking the fed will remain on pace with the rate hikes. the one thing from a high-yield perspective -- i have been cautiously optimistic on high yields from the fundamentals perspective. we were a little more cautious this summer from the valuation perspective. we repriced 50 basis points in october, but we are starting to see concerning things by the -- bubbling from bottom up in terms of supply chain disruption and cost chain increases. it feels like putting plugs in the portfolio. the sector seems to have issues. that is keeping us, despite the repricing, concerned. now more from the fundamentals perspective it -- perspective. henry: i think it is spot on. we are quite stimulative on the

front end. we are talking about moving up to neutral, 3%. we have a ways to go. what if it pushes into the high threes and productivity stays around 1%? you have even more expansionary policy. the yawning deficit at this point in the cycle is something to pay close attention to. the fed has its work cut out for it. it is a tough gig. jonathan: it is a really tough gig, but i thought it was interesting in their statement they barely eight knowledge anything that happened the past two months. what did you make of that? henry: i think they are trying to overlook the volatility of the market. i think the fed knows there is very little dry powder left if there is another slow down in the next three to five years. they have to build a policy buffer.

the fiscal policy ammunition will be limited because it is late in the cycle. they want to increase the potential for tightening -- sorry, for loosening policy in a slow down. having said that if you strip out the cost of housing for inflation, inflation is growing, but relatively muted. we do not have the pass-through you had in a normal recovery. you could see if the next year the momentum of the fiscal stimulus fades, he you could see the policy saying maybe we hiked too much. we are far from that moment. henry: building on what was said, early october we have the powell comment about being a far way from neutral. jonathan: we do not know what neutral is, but we are a long way from it. henry: we are building and a little bit of buffer and it adds to the fragility in equity markets. they said they will not bailout positioning. jonathan: perhaps they should

not. most people in this program will concern perhaps they should not. if you look outside, doggedly looking at unemployment and inflation, there are often things turning on in this economy beyond what many would say -- consider lagging indicators. are there things you need to be focusing on now? mary: where we are seeing it is autos, auto parts. homeowners have been underperforming sectors. we see 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? it still seems a way off from our perspective.

jonathan: it is not about having a conversation week after week on programs like this about what the federal reserve should and should not do. it is what they will do. they communicated they will continue hiking, aren't they? the conclusion is they will carry on hiking until something breaks. alberto: yes, this is the were you carry on hiking. at the same time, structurally the economy globally has been more fragile. there has been more leveraging. markets have been one way for 10 years. there is more liquidity mismatches. regulators have been focusing a lot on banks, which channels 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 about higher real yields, the 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 funding next year.

henry: i think the dollar funding issue is a real one. we saw a shift in late september when that became more of an issue. let's think about technicals next year. we could see capital flowing from the u.s. back to europe here it if you see a shift in the ecb policy, there could be a bit of a sucking sound into europe now that they have been priced out. jonathan: let's talk about fundamentals, growth across europe. i see it more clearly this week in china as well. how do you get the sucking sound when the momentum is not there in the united states? henry: everyone has been looking for china to slow and push as much as they can. we have to think about second derivatives. we had a push toward the deflationary mindset for a long time.

it takes a lot to dislodge that. even if the ecb pushes up rates 23 basis points, recaps the italian banks to a degree, brings him back into their camp, that is a big change in risk attitude. i do not think it takes a lot to shift from the zero to flows returning. jonathan: if you get outflows, where from? where is vulnerable on the treasury curve it for you? henry: you saw that auction tuesday. it was a real ugly auction. the treasury curve -- the high-quality debt space, whether it is u.s. high greater treasuries come are very vulnerable to us. between supply, refinancing, correlations. the fact that japan in china, the two largest buyers of treasuries are starting to get along better. bargaining power and buyers. that is something to pay close attention to.

mary: for credit, all year we have seen -- not seen the bid from overseas that is fueled inflows over this credit cycle. a lot of it is the dollar cost of hedging. if you look at euro hedge yield into dollars, it is almost doing better at this point, given we do not have some of the same bottom-up issues from a sector perspective. that is a risk like you said for both investment-grade and high-yield. jonathan: i want to put that question to someone in london, someone outside the u.s.. will he get those outflows through 2019? from where you are sitting, what does it look like? alberto: in the emerging markets in the u.s. there have been some outflows, that the area which really has suffered this year has been europe, which is gone from last year with the french elections then-president macron,

dream of united europe, this year with the italian coalition, we have come back to the opposite extreme. the pendulum has swung to europe breakup fears again. we think the market is priced for extreme risk. if aliens go back to invade earth of the first thing they will do is attack europe and european banks. what are the lows of 2016, the record high in spread premium between high-yield bonds in europe since 2010. you have to think about the european the cycle has been a lot slower. companies are still deleveraging. you are getting pretty high spreads for medium or good quality companies. if you do not have a recession, which really the market is telling you is going to happen,

if you do not have a hard brexit, if nothing happens, you just kick the can, you get paid very well. we are talking about 6%, 7% yields in euros. jonathan: have you been increased and exposure to italian banks credit over the last month? alberto: we have reduce some european exposure in q1. after the summer we have been buying. italy has long-term issues, but you have the same spreads, the same returns in spain or the u.k. you have barclays' debt trading and latin american countries which have elections and an unsustainable debt burden. there is an extreme premium. that is potentially an opportunity. if you look at emerging markets or ask, valuations are not is wide in europe.

jonathan: guys, great to have you with me. coming up, the auction block. spacex is said to change its $750 million leverage loan. this is bloomberg. ♪ jonathan: i am jonathan ferro.

this is "bloomberg real yield." i want to head to the auction block where we look at more issuance from the u.s. treasury. $19 billion of 30 year bonds with a ratio that it does -- that hit the lowest level since 2009.

3.42% above the bidding rate. on the corporate side, investment-grade bar was hosted their biggest supply total since early october. volkswagen led the way within a billion dollar, seven part deal, just shy of $60 billion. in leveraged loans spacex will launch a $16 million loan which will now be led by bank of america. a smaller, $500 million financing. joining me to discuss is henry peabody, mary bowers, and alberto gallo. mary, many people might have missed it. for leveraged loans it was the busiest month since may in october. that was october where everyone is going crazy, get the market was that busy. how? mary: they posted a small

positive return in october. it outperform much of fixed income this year. clo demand has been enormous. we had over $100 billion of clo issuance and it is sucking the newest supply yield out. the technicals for high-yield have been good, despite massive outflows from the market. for now it looks like the leveraged loan space is still going to be able to have a lot of new issuance. we think it is getting frothy. it is not just the terms. there is a lot being discussed around the covenant light. frankly, we are seeing top-heavy secured cap structures. what ends up happening in the next cycle is it will erode the recovery values that typically have been high for leverage loans.

at the same time we have been saying throughout the year the fundamentals look at a good for credit. while we have [indiscernible] i would not say we are rolling over, but it is getting close in the cycle. jonathan: is it attractive from a floating rate perspective or a credit perspective? henry: we have a number of strategies which focus on loans to our strategies with very little return. for us it is not a great spot. there is the floating rate component. let's look at combined high-yield loan market. the composition is changing dramatically. they participation by the clo groups and you also have retail involved. i think some of the attraction

is everything else is expensive. it is comfortable to go to someplace with a floating rate. what happens when something becomes less expensive? when equities have 20% down and the flow is reversed? i would leave that is an open question because we will see how the market responds. jonathan: i would see how much liquidity is in the leveraged loan space as well. alberto, how would you manage exposure? alberto: we think there are more attractive parts of the market. it is always an asset class that is done really well. like you said earlier, if you have a repricing of yields across short-term interest rates, longer-term going up in real terms, one interesting point is that a lot of investors

think leveraged loans are good because they have a floating rate component. however, from a credit point of view some are heard by higher financing costs. if rates go up, there is the duration component. you could have higher refinancing costs which could hurt balance sheet weakness. jonathan: it is a straightforward points, but an important one. borrowing costs are going up. mary: borrowing costs are going up. where we are seeing m&a frosts in the market, pre-leveraged -- it is a small park him but something to keep in mind, particularly for top-heavy cap structures. you will see where you have a

high-yield bonds, a fixed rate on and. as credit improves, it can refi at a lower rate. as yields move higher, the cost of debt is moving higher at the wrong time. we look at our own positioning, very mindful of these top-heavy security cap structures. jonathan: guys, you will stay with me, will let's -- let's do a market check. yield shaping up as follows. up on the front end by two basis points. even with of the ugly auction this week, 340 on a u.s. 30 year. the week ahead, featuring a fresh read on u.s. inflation and comments from draghi and powell. this is "bloomberg real yield." ♪ jonathan: i am jonathan ferro.

this is "bloomberg real yield." it is time for the final spread. over the next week we will have speeches from jay powell and mario draghi. opec meeting, key data from the united states and china. italy will show its new 2019 budget to the european union. the u.s. bond market is closed monday for veterans day. still with me to discuss is henry peabody from eaton vance, mary bowers, and alberto gallo. mary, we have to get you on the oil market. there is an oil meeting through the weekend and we see a move lower in crude. can high-yield stay as resilient as it has done? mary: what we see now through the workings of the oil market and a high-yield cycle, we saw high yields.

that really fleshed out a lot of the lowest credit quality and energy. what we have left, yes, a couple bad actors, but by and large, credit quality is much higher and they can withstand lower prices of oil here. jonathan: henry, is that your stress test? henry: you washed out a good deal of the market. on oil, one of the interesting things about it is this iranian situation and how trump has given out to several nations ahead of the midterms. i think he knew he could not have 375 gas going into the midterms. he has a year or so before he needs to worry about his reelection. he can put the boot to iran a little bit more. watch for higher prices. he has the ability to do this now. jonathan: you are more constructive on crude, do you need that to be higher on crude? henry: no, i do not think you need the crude story for high-yield.

it is a technical story. watch for those technicals to potentially unwind and give you an opportunity to buy duration and have them improve into their balance sheets, which they cannot do in the crude market. jonathan: you know how we ended the program, you get asked of quick rapid fire question. want to get to the federal reserve. a lot of people wondering where the -- when the fed fund rates more than three or less than three? henry, more or less? henry: more. mary: more. alberto: more. jonathan: the 30 year through the week, yields are lower. some may be considering adding duration. is this a time to increase duration, yes or no? henry: no, not in the least bit. mary: no, no yet. alberto: not yet. jonathan: getting a consensus

from you guys. final question. will the oil route catch-up with high yields? yes or no? henry: high yield is going to be softer, but not because of oil. mary: agree, yes. jonathan: alberto? alberto: i think high-yield is weaker, but not too weak. jonathan: great to catch up with you, henry peabody, mary bowers and alberto gallo from algebris. we will see you next friday at the same time, 1:00 p.m. new york, 6:00 london. this was "bloomberg real yield." this is bloomberg. ♪ [ phone rings ] what?!

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