>> 30 minutes dedicated to fixed income. this is bloomberg real yields. ♪ jonathan: global markets at the mercy of the next trade headline head of the g20. officials sounded the alarm on decelerating global growth and warnings on the prospects of the investment grade credit market. we begin with a big issue, a big crack appearing in credit. >> in any slow down your going to have bonds drop pretty quickly. when rates go up, what will happen with these highly indebted companies? >> it is a slow-moving train wreck.

>> the issues we face today are significantly less economically speaking and we have faced at any point. >> corporate america has the advantage of -- at some point that comes due. >> a third of the trading in high yield is from etf's so it is at the macro level. when those decide time-out, get out of the market. there will be a world of hurt. >> you have to be concerned about any company that has a lot of debt refinancing and i do not think ge is a great roxy for the overall market. >> if you wanted to score -- and scare yourself silly, you could have done at five times and we have done that and it is no different this time. jonathan: joining us, our guests.

it is great to have you with me. let's begin with you and talk about the price of the story and the size of the problem in investment grade. >> we are at the beginning. i do not see it as something systemic but we are going to get knocked about for quite some time. i am happy that this time is here. >> this is what happens late in the credit cycle. i have been waiting for this. where are we in the credit cycle, i'm tired of saying seven threes, it feels a game three of the world series. i agree with kathleen. it will be idiosyncratic, ge has some specific things, we have that wildfires in california that is impacting things. you have companies or industries that have problems with the high amount of leverage they have. jonathan: do you take the same argument? >> yeah, to some degree.

i think what is happened is a confluence of things. the biggest factor has been this change from the quantitative easing to tightening and the impact it has on the quiddity and on investor psychology. you have to choose between asset classes in a way that you did not have to previously and having gone from a place of almost zero cents the rising tide is floating all boats, you are in a time of heightened sensitivity because investor psychology has been shocked. i agree with the guys. the market will get knocked around for a period of time. i think underneath it all there is a common macro factor helping to drive this. jonathan: let's talk about one of those idiosyncratic bombs with ge. bbb curve and ge is trading. a lot of people are talking about the situation, you wait for the credit rating agency to downgrade the company and then respond.

the market is already kind of doing it with general electric. gershon: history has shown that even though you have bbb spreads widening, you still get more selloff because of the vacuum. most sellers are forced to sell by the guidelines. it takes investors some time to get up to speed on the credit. markets are separated somewhat. to create a vacuum and time and time again they are a huge buying opportunity. kathleen: they are an opportunity as long as you get the story straight. ge has a lot of problems. it is basically about the future of the company and are they going to have to give up good assets and notes to meet short-term needs. gershon: i was not referring to ge. i was talking generically. jonathan: we will keep you out of trouble, gershon. you talk about the problems the

company has got. we knew about them. why does this keep happening? why is the market suddenly wake up out of nowhere? kathleen: i think the investor psychology is important. something happened in october. the major indices, the gov credit and the ag have gone negative. high-yield is hanging on by a thread. later returned is not so much traditional fixed income. it is supposed to be safe. you were supposed to get some upside and it is not happening. jonathan: what you make of that, james? just a microcosm of a bigger problem elsewhere? if you look at ge and the likes of toys "r" us, i would say at the moment no. james: i would agree. nothing specifically.

the technicalities of the credit mark, the liquidity is poor as a general rule. it really is quite poor considering the size of the overall market. investors are reluctant to be preempted in selling out of certain names because they fear they can't get back in and there comes a point for that liquidity story to play out in a dramatic way. jonathan: what do you think about this bbb debate? there is a ticking time bomb about to go off. it is getting bigger. companies have loaded up on debt. it is a problem brewing and some people think it might be here. gershon: i think it's an oversimplification and probably too dramatic. at the end of the credit cycle we start having situations where companies get in trouble because

they put too much leverage and a top line gets impacted. is it very systemic? you shouldn't be fooled and it appears to be a rather tight spread to say that bbb's are cheap. i would like to add one thing. bonds don't have negative returns very often, but let's keep things in perspective. the s&p is still off by about 7% from its highs. ideals are down 2% or 3%. investment grade probably a little less. almost every time the credit sells off, equities selloff more and we expect it from things from bonds. kathleen: we can expect different things. what is interesting is the correlation between stocks and bonds starting to change. bonds have been anchored to windward. now we are not seeing that. you need to think about your fixed-income differently. it has to work harder. it is not about duration. it is credit, country and currency.

jonathan: we did experience that through october. i did not see that bid into the 10-year, 30-year in a material way. if i told you to guess the bond move 24 months ago, you would have gotten dead wrong. james: i think i would've got it did right now. the common factor driving markets is the change in stimulus coming from the federal reserve and the central banks. on said got all the wrong risks at this stage in the cycle when inflation is rising in interest rates are rising. it's the environment that will eat away at the fixed coupon you get from the market. when the market is expensive as it has been over the last two years, you have little protection against capital moves. investors are aware that.

their mentality is shown at the working and they will be that much more flighty. equities, conversely, they have the right kind of cyclical risks. it is that battle in conversation going on as they start to deal with a decent growth environment, a divergent global growth environment and central-bank tightening mixed together. this is about choosing and allocating carefully between individual names, countries, firms, etc. jonathan: other people would have gotten it wrong. are we seeing the risk in the risk-free asset? is that what people really think? gershon: are you talking about treasuries? jonathan: in general. gershon: we are seeing signs of inflation picking up. that is something we will be talking about more over the next few months and years. i agree mostly with a short-term

perspective that one has to be cautious here. one has to remember where they come from. there is more room to absorb bad news. when investors look back at this time period, the opportunity for returns in fixed income -- the risk of the opportunity has not been as high in a long time. jonathan: you will all be sticking with me. coming up, the auction block. dow dupont issuing one of the biggest offerings of 2018. this is "bloomberg real yield." ♪ ♪

jonathan: i am jonathan ferro. this is "bloomberg real yield." italy offered more than $6 billion in bonds. they cleared the upper end of the auction amount. the 2025 and 2028 bonds saw the lowest ratios respectively. china's biggest lender pulled dollars in the united states, concerned about the trade war. here in the united states, dow dupont has the sixth-largest deal of 2018. they sold more than $12 billion as they prepare to split into three new companies next year. still with me, gershon distenfeld, kathleen gaffney and over in london, james athey.

james, i want to get to the recent comments from the vice-chairman of the federal reserve speaking to cnbc. he said the following. "if you're in a dark room without your shoes on, the want to go slow so you don't stub your toe. data dependence makes sense right here." is the market taking this as they are about to slow down the pace of rate hikes? james: i will be opposing that to be honest. obviously we are about a broader committee than one single-member. he does take up an important position, but i'm looking to chairman powell for my signal. i have a different interpretation to that from his speech. commissioned the fact there are global headwinds but he has been very clear since day one of his time as the chairman of the federal reserve. he is not going to be buffeted around by the short-term gyrations.

from an economic perspective there are risks of going to fast. you would possibly know about those risks sooner than the other risks. the one that concerns me more is he go to slowly, you allow imbalances and bubbles to build up. that creates a problem you don't see coming until it slaps you in the face. i think jerome powell is on the right path. i think the fed will be hiking rates. when you have low unemployment, you have inflation above target, of the potential gdp growth, wages that are not only rising but at an increasing pace, that is a clear signal. jonathan: would you say the front end up the back of those comments? james: that is something we have been looking at. potentially things we can do, taking chips off the table.

the euro-dollar was trading at nearly 3.30 a couple of weeks ago. that is around 1.5 hikes for 2019. i think the risks are aggressive in the other direction and that's what instrument. jonathan: kathleen? kathleen: you are seeing jerome powell be quite a swashbuckler. i would not describe essential banker in ways like that but he is finessing it. they are on a mission. they need to get to normal in a fair amount of time. there is a lot of noise out there. that trade war issues are weighing on the market. the dollar has been impacting u.s. companies. strong dollar not good for earnings. he just tossed the dollar down. that allows the fed to keep on its mission. jonathan: whenever there is a

bull steamer, gets my attention. gershon: i hate to disagree with my friends but it's very inconsistent here. when the fed cap rates low, they would rather err on the side of caution. now we are concerned the fed is going to go the other way and be much more aggressive than they should be. they are supposed to be attention to the inflation numbers. they are supposed to give going on this path, not pay attention to short-term and get to the mid-3% level. jonathan: many people out there have pitched this battle between the federal reserve in the market. i'm trying to understand with the federal reserve actually is in that scenario. we use the median dot for 2019 versus the market. for the federal reserve is

doing, they are over the shot to 2019. they could meet the market just a couple of individuals shifting lower. the median dot is a little bit of a distraction for the confusion of the fed from a 2019 will bring. gershon: i think that is right. there are more dispersions that there have been in a long time which means we should have volatility in the markets. whether we agree or not with the meeting happening today, we will move a lot but sentiment. people really are not sure. i think i know what the fed should do. if i was the fed, i would be on a higher rate today. jonathan: kathleen? kathleen: they will go higher. that is what i know for certain. forget the other noise. it is a waste of time. it is a guessing game. they have to move higher, that's where they're going. this will be a great buying

opportunity for a long time. jonathan: it is great to catch up with you all. gershon distenfeld, kathleen gaffney and james athey. the market through the week. two-year yields coming in big-time over the last week. likewise for the 10-year. up next the final spread. the week ahead featuring economic data and the bank of england's mark carney will be speaking. this is "bloomberg real yield." ♪ jonathan: i am jonathan ferro.

it is time for the final spread. coming up over the next week, we might get brexit.

we get information on the u.s. housing and durable goods. opinions on the eurozone budgets, including italy. we have the u.s. markets closed on thursday for the thanksgiving holiday. joining me is gershon distenfeld, kathleen gaffney and james athey. gershon, on the trade story we have been whipsawed the whole week. if we get a truce, it will help market sentiment. does it address economic issues we see and experience globally right now? gershon: it is impossible to say. we can't predict with this president is going to do. he is more unpredictable than most. we will continue to be volatile. what's important to remember and part of the reason the u.s. economies outperforming the global economy is the u.s. remains relatively closed marketed.

kathleen: i think that there will be a truce. i think there has to be because everyone has to too much to lose if the economy slows down. in my mind that is a given. the really interesting thing that is going on is the tension between the u.s. and china is only just starting to build. we have short-term leverage. we are the leaders in technology and innovation in the chip industry. i think you have seen some of the pain that's happened in the chip industry of late. china was to be a leader as well. it will be made in china by 2025. it is really important we make that difficult for them to do. export controls. that is a real signal that will damage china but not hurt the overall economy. these are the kind of actions we will start to see. it is going to impact supply and

demand for the chip companies because the growth rate we experience, the demand will not be the same. jonathan: james athey? james: i am pretty sanguine about the whole trade war thing. i agree with gershon. the u.s. is able to withstand this because it is a closed economy. when i look at china and the decline in the growth rate over there, to me that tallies more tightly with the deleveraging, the consolidation of power of president xi and his stepping down on heavy manufacturing and the leverage that is driven the infrastructure, etc. to me the growth has been flowing in a line with the domestic policy. the trade is laterally more doubling down on some of the negativity. i don't think that is the primary cause for the slowdown we have seen in germany and

sectors across europe in china. trade is a bit of a sideshow. whether that can be done as soon as the g20, i'm not sure. i'm pretty sanguine about that. jonathan: you two are actually excited about what is going to happen in the market. what you looking forward to? gershon: looking forward, up and downside volatility. everyone is trained to think that rising rates are bad. they are bad for existing prices and really good for long-term returns in fixed income because you get to reinvest cash flows at those higher yields. jonathan: the rapidfire around. let's get it moving. do you buy the weakness or is there more to come? gershon: more to come. kathleen: lots more to come.

james: lots more to come, i'm afraid. jonathan: rate hikes in 2019? gershon: more than three. kathleen: three. james: more than three. jonathan: cap we see in the high for the u.s. and-year yield in the cycle? gershon: ask me next year. kathleen: no. james: no. jonathan: really interesting stuff in a fascinatingly for global fixed-income. kathleen gaffney, james athey and gershon distenfeld. that does it for us. we will see you next friday at 1:00 p.m. new york time. this was "bloomberg real yield." ♪ >> oil in crisis.

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