jonathan: from new york city for our viewers worldwide, i'm jonathan ferro with 30 minutes dedicated to fixed income. this is "bloomberg real yield." coming up, global markets at the mercy of the next trade headline ahead of the g20. federal reserve officials slowly sounded the alarm on decelerating global growth and the warnings piling up 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. just because it is a powder keg does not mean it has to explode. >> the issues we face today are significantly less economically speaking than we have faced at any point. >> corporate america has taken advantage of low rates for the past decade, but at some point that comes due. >> about a third of the trading in high yield is from etf's so it is at the macro level. when those people decide time up, get out of that market, there is going to be a world of hurt. >> anytime you have rates on the rise, 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 wanted to scare yourself silly about the corporate credit market, you could have done at five times in this cycle and we have done that and it is no different this time. jonathan: joining us are gershon distenfeld, kathleen gaffney, and coming to us from london is james athey, senior investor from aberdeen investments. kathleen, let's begin with you. talk about the price of the story and the size of the

problem in investment grade. kathleen: 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 so happy this time is here. gershon: 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 very specific things wrong with it. we have the wildfires in california that are impacting things, but that is what you have late in the cycle. you start to have specific companies or industries with problems with the high amount of leverage they have. jonathan: do you take the same argument? james: 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 you did not have to previously. having gone from a place of almost zero sensitivity to incoming information, because 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, i think this will be a market that gets knocked around for some time and we will see these idiosyncratic bonds go off. underneath it, there is definitely a common macro factor which is helping to drive this. jonathan: let's talk about one of those idiosyncratic bombs and 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. this is interesting, because people are talking about the situation in triple b and essentially waiting for the credit rating agency to downgrade the company. the market is doing it with general electric.

gershon: history has shown time and time again, even though you have triple b spreads widen before the downgrade, after the downgrade, you still get more selloff because of this vacuum. most investment grade sellers are forced to sell by the client guidelines and it takes high-yield investors some time to get up to speed on the credit. markets are separated somewhat so it creates a vacuum and history has shown that they underperform, but then they are a huge buying opportunity. jonathan: kathleen? kathleen: they are and opportunity as long as you get the story straight, 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? gershon: just to be clear, i was not talking about ge specifically, i was beating generically in reference to downgrade. jonathan: you talk about the

problems this company has got. we know about them a month ago, two months ago. why does this keep happening? why does the market suddenly wake up without much of a catalyst out of nowhere? kathleen: i do think the investor psychology is important. something happened in october. the major indices, fixed income indices with credit and the ag have gone negative. -2.5%. high yield is hanging on by a thread. negative returns 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: james athney, 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 elsewhere? is the market and efficient -- market an efficient discounting mechanism? if you look at the likes of ge and toys "r" us, i would say no. james: i do not think it is specific in that sense at all. and the realities of the market is that secondary liquidity is pretty poor as a general rule, and relative liquidity is quite questionable, especially considering the size of the overall market.

you get this water behind the dam effect. investors are reluctant to be preempted in selling out of certain names because they fear they cannot get back in, but there comes a point where that crack and you see that liquidity story play out with some really dramatic price moves. jonathan: what do you think about the triple b debate at the moment? there is this ticking time bomb and it is about to go off, it is about half of the investment grade universe, it is getting bigger. companies have loaded up on debt and there is leverage and the problem that is brewing. some people think it might be here. gershon: i think 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 on their balance sheet and the top

line gets impacted. we see it time and again. that is what you should not be fooled by what appears to be a rather tight spread between triple b's and double b's. i want to add on to some the kathleen said, 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, probably a little bit less. it is important to remember that almost every time credit sells off, equity sells off more. we expect different things from bonds. kathleen: we do expect different things, and what is interesting is the correlation between stocks and bonds is starting to really change. bonds have been anchor to windward and now we are not seeing that. so you need to think about your fixed income differently, it has to work a lot harder.

it is not all about duration, it is credit, country, and currency. those are sources of return. jonathan: james, we did experience that through october. a big gap lower in the equity markets. i did not see that bid into treasuries on the long end and the 10 year and the 30 year. if i told you the size of the equity move and told you to guess the bond move, maybe 12 or 24 months ago you would have gotten it wrong, wouldn't you? james: in this environment now, i think it would have got it dead right. there is a common factor driving these markets, a change in stimulus coming from the federal reserve, first and foremost, but going to the central bank. essentially, bonds have gotten all the wrong risks for this stage in the cycle. inflation is rising. interest rates are rising. that's exactly the environment that will eat away at the fixed coupon you get from the market. and when the bond market is expensive across the piece as it has been over the last two years, you have little protection against capital moves. and investors are aware of that. therefore, once the buy every dip mentality is shown to not be working, 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 totally agree with kathleen, this is about being choosy and allocating carefully between individual names, countries, credits, firms, curves, etc. jonathan: you will forgive me for laughing. you would have got it right. other people would have gotten it wrong. let's be clear about that. gershon on, 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: i think inflation is -- we are seeing signs of inflation picking up. there are reasons for it and that is certainly 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

very, very cautious here. but one has to remember where returns 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, thinking more of a 3-5-year 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." i want to head to the auction block now, where italy offered more than $6 billion in bonds. amid its budget woes, it's treasury auction of 3, 7, and 20 year notes. they cleared the upper end of the auction amount. the 2025 and 2028 bonds saw the lowest bid to cover ratios since september and april respectively. meanwhile, 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. and finally, here in the united states, dow dupont has the sixth-largest deal of 2018. it sold more than $12 billion as it prepares to split into three new companies next year. still with me around the table, gershon distenfeld, kathleen gaffney and over in london, james athey. james, i want to begin with you and get to the recent comments

from rich clarida, 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. so i think data dependence makes sense right here." james, i think the market is taking this as the federal reserve is about to slow down the pace of rate hikes? what did you take it as? james: i will be opposing that to be honest. first and foremost, obviously, we are talking about a broader committee than one single-member. richard clarida does take up an important position in the overall federal reserve system here, but i'm looking to chairman powell for my signal. i have a different interpretation to that from his recent speech. of course he mentioned the fact there are global headwinds but i think he has been very clear since day one of his time as the chairman of the federal reserve.

which is to say that he is not going to be buffeted around by the short-term gyrations. he sees risks in either side, of course, and from an economic perspective there are risks of going too fast and you would possibly know about those risks a little sooner than the other risk. the other risk is the one that concerned me more, given where we have been for the past 10-12 years. you 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 federal reserve is going to be hiking rates. the economic picture, broadly speaking, supports that and when you have low unemployment, you have inflation above target, above potential gdp growth, wages that are not only rising but at an increasing pace, that is a clear signal. and clear, clear, clear signal that they need to be hiking. jonathan: would you say the that that came into the front end up the back of those comments? james: that is something we have been looking at this afternoon. we have some positions on that have benefited and potentially things we can do, taking chips off the table. i would look at headlines for the euro-dollar, which was

trading at nearly 3.30 a couple of weeks ago. that is down at 3.09, and 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: i think that you are seeing jerome powell be quite a swashbuckler. i would not really describe a central banker in ways like that what he is really 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. the trade war issues are weighing on the market. end the -- and the dollar has been impacting u.s. companies. strong dollar, not good for earnings. he just talked the dollar down. that is a big one and allows the fed to keep on its mission. jonathan: whenever there is a bull steamer, it gets my

attention. gershon: i hate to disagree with my friends over here, but i think we are being very inconsistent here. when the fed kept rates very, very low, the mantra was we 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 keep on going on this path, not pay attention to short-term and get to the mid-3% level. hike three or four times next year. jonathan: many people out there have pitched this battle between the federal reserve and the market. i'm trying to understand what the federal reserve actually is in that scenario. because we use the median dot for 2019 versus the market. but if you look at what the federal reserve really is doing, they are over the shock to 2019.

they could quite easily meet the market by just a couple of individuals shifting lower. the median dot is a little bit of an illusion and distraction for the confusion of the fed from what 2019 will bring. gershon: i think that is right. the fed has been more opinionated than it has been for a long, long time, which means we should have volatility in the markets. whether we agree or not with the bull steepening happening today, we will move a lot with sentiment because people really are not sure. i am not sure either. i think i know what the fed should do. if i was the fed, i would be on a higher rate today. jonathan: we could have 60 minutes talking about should or shouldn't. will that lose you money, 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. but they've got to move higher, that's where they're going. you're going to get selloffs, this will be a great buying opportunity for a long time.

jonathan: guys, you will be sticking with me. it is great to catch up with you all. gershon distenfeld, kathleen gaffney and james athey. the market through the week. two's tens, and 30's in the treasury market. 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 on the program, 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. this is "bloomberg real yield." time for the final spread. coming up over the next week, we might get some drama surrounding brexit. the bank of england's mark carney will be speaking, and we get information on the u.s.

housing and durable goods. the european commission publishing its opinions on euros on budgets, including italy, so look out for that. we have the u.s. markets closed on thursday for the thanksgiving holiday. with me for a final discussion is gershon distenfeld, kathleen gaffney and james athey. gershon, on the trade story we have been whipsawed the whole weak, from trade headline to trade headline. if we get a truce at the end of this month, 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. i am talking about our president in the u.s. he is more unpredictable than most. we will continue to be volatile. what's important to remember and i think part of the reason the u.s. economy is outperforming the global economy is the u.s. remains a relatively closed market. imports and exports of gdp 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. so that, in my mind, 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. and i think you have seen some of the pain that's happened in the chip industry of late. china in the long-term wants to be a leader as well. it will be made in china by 2025. so 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 are going to start to see. it is going to impact supply and demand for the chip companies because the growth rate we have

experienced, the demand will not be sustained. jonathan: james athey? i want to bring you into the conversation. your thoughts? james: to be realistic, i am pretty sanguine about the whole trade war thing. i agree with gershon. the u.s. is really able to withstand this because it is a closed economy. actually, when i look at china and the decline in the growth rate over there, to me that very much tallies more tightly with the deleveraging effort, the consolidation of power of president xi and his stepping down on excess capacity, some of the old china heavy manufacturing and the leverage that has driven the infrastructure, etc. to me, the growth really has been flowing in a line with the domestic policy. the trade is laterally more

doubling down on some of the negativity. i do not think that is the proximate or primary cause for the slowdown we have seen in germany and sectors across 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, but the underlying fundamentals -- 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, we have to talk to a lot of clients about downside volatility and how to hold your hand through it, but everyone is trained to think when they purchase fixed income 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: i want to go through some final questions. it is the rapidfire around. you know what happens, so let me get this hard and get it moving for you. do you buy the investment grade 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? three options -- three, more than three, or less than three. gershon: more than three. kathleen: three. james: more than three. jonathan: have we seen the high for the u.s. 10 year yield in this cycle? have we seen the high? yes or no? gershon: ask me next year. kathleen: no. james: no. jonathan: really interesting stuff in a fascinating week for global fixed income. 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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>> oil in crisis. u.s. farmers are storing soybeans rather than selling them after prices fall in june. jeff miller is confident pricing power will return. ♪ alix: welcome to "bloomberg commodities edge." 30 minutes behidn the hottest commodities with the smartest voices in the business. let's kick it off with spot on, our take on the big