>> 30 minutes dedicated to fixed income. this is bloomberg real yield. ♪ jonathan: global markets at the mercy of the next trade headline ahead of the g20. federal reserve 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 slowdown you are 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. >> it does not have to explode. >> the issues we face today are significantly less economically speaking and we have faced at -- then we have faced at any point. >> corporate america has the -- has taken advantage but 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 people decide to get out 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 proxy for the overall market. >> if you want to 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 kathleen. 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 innings. it feels a game three of the world series. i agree with kathleen. it will be idiosyncratic, ge has some specific things, we have the wildfires in california that is impacting things. late cycle 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 would throw macro factors in. 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 liquidity and 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 sensitivity because the rising tide is floating all boats, you are in a time of heightened sensitivity because investor psychology has been shocked. i agree, it will be a market that gets knocked around for some time and we will see these idiosyncratic bonds go up. there is a common macro factor which is helping to drive this. jonathan: let's take a look at what has been happening with ge. i can put a chart up for you and have a get the triple b curve and where ge is trading. people are talking about the situation in triple b and waiting for the downgrade.

the market is doing it with general electric. >> history has shown that even though you have triple b spreads widen before the downgrade, after the downgrade, you still get more selloff because of this vacuum. most sellers are forced to sell by the guidelines and it takes investors some time to get up to speed. markets are separated somewhat so it creates a vacuum and history has shown that they underperform but they are a huge buying opportunity. >> they are an opportunity and ge has a lot of problems. what is the future of the company and are they going to have to give up good assets in order to meet short-term needs? what is the long-term story? >> i was talking generically. i was not referring to ge. jonathan: you talk about the problems this company has got.

we know about them a month ago, two months ago. why does the market wake up with -- without much of a catalyst out of nowhere? >> investor psychology is important. something happened in october. fixed income indices have gone negative. -2.5%. high yield is hanging on by a thread. negative return does not sound like traditional fixed income. it is supposed to be safe. you're supposed to earn your coupon and maybe get some upside. it is not happening. jonathan: slowly, nothing happened and then quickly all at once you start pricing in doom into a credit like general electric, is this a microcosm for bigger problems, is the market and efficient discounting mechanism? if you look at the likes of toys "r" us, i would say no. >> there is nothing specific.

secondary liquidity is pretty poor. especially considering the size of the market and you get this water behind the dam effect. investors are reluctant to be preemptive but they fear they cannot get back in but there comes a point where that crack puts you into the liquidity story with dramatic price moves. jonathan: there is this ticking time bomb and it is about to go off, it is about half of the investment grade universe, companies have loaded up on debt and there is leverage and the problem that is brewing. some people think it might be here. >> that is an oversimplification and probably too dramatic. are we going to start having this -- at the end of the credit cycle we have situations where

companies get in trouble because they put too much leverage and the top line gets impacted. we see it time and again. that is why you should not be full by a tight spread. that does not mean we have this problem. i would like to add on, bonds do not have negative returns very often. let's keep things in perspective. the s&p is off 7%, i did not calculate the exact numbers. high yields down 2%. investment grade a little bit less. almost every time, equity sells off more. we expect different things from bonds. >> what is interesting is the correlation between stocks and bonds is changing. bonds have been anchor to windward and now we are not seeing that. you need to think about your fixed income differently, it has to work harder. it is not all about duration, it

is credit, country, and currency. those are sources of return. jonathan: we did experience that through october. i did not see that bid into treasuries and the 10 year and the 30 year. if i told you the size of the equity move, maybe 12 or 24 months ago you would have gotten it wrong, wouldn't you? >> now i think it would be dead right. there is a common factor driving these markets, a change in stimulus coming from the federal reserve. bonds have gotten all the wrong risks for this stage in the cycle. inflation is rising. interest rates are rising. it's the environment that will eat away at the fixed coupon you get from the market. when the bond market is expensive as it has been over the last two years, you have little protection against capital moves. investors are aware of that.

once the mentality is shown to not be working and they will be that much more flighty. equities, conversely, they have more liquidity. they have the procyclical risks. it is that battle and conversation going on as they start to deal with a decent growth environment, a divergent global growth environment and central-bank tightening mixed together. what that means for a portfolio. i agree, this is about being choosy and allocating carefully between individual names, countries, firms, etc. jonathan: you will forgive me for laughing. you would have got it right. other people would have gotten it wrong. i sure you would have gotten it right. 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. there are reasons for it and 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. yields across the board in the u.s. whether you're talking about treasuries or corporate bonds are higher than they have been in a long time which means there is more room to absorb bad news. there is more room to absorb yields going up and 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. that conversation coming up next. this is "bloomberg real yield." ♪

jonathan: i am jonathan ferro. this is "bloomberg real yield." italy offered more than $6 billion in bonds. the treasury auction, they cleared the upper end of the auction amount. the 2025 and 2028 bonds saw the lowest ratios respectively. china's biggest lender pulled an offering of dollar bonds in the united states, concerned about the trade war. icbc has marked to three-year and a five-year floating-rate. 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, you 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? what did you take it as? james: i will be opposing that to be honest. obviously we are about a broader committee than one single-member. richard clarida 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. he mentioned 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.

he sees risks on other side, of course, from an economic perspective there are risks of going too fast and you would possibly know about those risks sooner than the other risks. the one that concerns me more is you go too 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. the picture broadly speaking supports that and when you have low unemployment, you have inflation above target, of the -- above potential gdp growth, wages that are not only rising but at an increasing pace, that is a clear signal. that they need to be hiking. jonathan: would you say the front end up the back of those comments? james: that is something we have been looking at. we have some positions on that have benefited and potentially things we can do, taking chips off the table.

euro-dollar was trading at nearly 3.30 a couple of weeks ago. that is around 1.5 hikes for 2019. it has a constant spread. i think the risks are aggressive in the other direction and that is what i will be looking at. jonathan: kathleen? kathleen: you are seeing jerome powell be quite a swashbuckler. i would not describe a central 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. trade war issues are weighing on the market. 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. we don't want to upset the recovery. and now, we are all concerned the fed is going to go the other way and be much more aggressive than they should be. they are supposed to pay attention to the inflation numbers. they are supposed to give going -- keep on going on this path, not pay attention to short-term and get to the mid-3% level. and hike three or four times next year. jonathan: many people out there have pitched this battle between the federal reserve in the -- and the market. i'm trying to understand with -- what the federal reserve actually is in that scenario. we use the median dot for 2019 versus the market.

if you look at what the federal reserve is doing, they are over the shock 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 bring. gershon: i think that is right. there are more dispersions that means we should have volatility in the markets. whether we agree or not with the bull steepening happening today, we will move a lot but 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. you will get selloffs, 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. the 30 year with a subtle bid. up next the final spread. the week ahead featuring u.s. 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. the european commission publishing its opinions on eurozone budgets including italy. so look out for that. 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. from trade headline to trade headline. 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 cannot predict what 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. economy is outperforming the global economy is the u.s. remains relatively closed

marketed. imports and exports are 25%, much higher in many countries and europe and emerging markets in china. 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 wants to be a long-term 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? i want to bring you into the conversation. your thoughts? 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 excess capacity and the leverage that has 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. -- europe and china. trade is a bit of a sideshow. both sides want a deal. whether that can be done as soon as the g20, i'm not sure. it will continue to bug markets and it will underline markets. i'm pretty sanguine about that. jonathan: you two are actually excited about what is going to happen in the market. what are 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. rapid fire. 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: have we seen the u.s. 10 year yield in the cycle? gershon: ask me next year. kathleen: no. james: no. jonathan: really interesting stuff in a vaccinating week for global fixed-income. -- fascinating week. kathleen gaffney, james athey and gershon distenfeld. from new york city, that does it for us. we will see you next friday at 1:00 p.m. new york time. 6:00 p.m. in london. this was "bloomberg real yield." ♪

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