announcer: -- 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. slowly reserve officials sounding the alarm on dishonoring global growing and the warnings piling up on the investment rate credit market. we begin with a big issue. in any slowdown, you are going to have bombs dropped quickly when rates go up. it's going to happen with these highly indebted companies?

just because it's a powder keg, it does not have to explode. today areues we face significantly less economically speaking than we have paste at any point. >> corporate america has taken advantage of low rates for the last decade or if at some point, the debt comes due. about a third of the trading in a high-yield is from etfs. when those people decide time out, get out of that market, there's going to be a world of hurt. >> anytime you have rates on the rise you have to be concerned with any company that has debt refinancing and i don't necessarily think ge is a great proxy. >> if you want to scare yourself silly about the corporate market, you could have done that five times in this cycle and we have done that. it's no different this time. >> joining me around the table is the cohead of fixed income, director of diverse fixed income, and from london, city investment manager.

it's great to have you with me. kathleen, let's begin with you and talk about the size of the problem. >> we are just at the very beginning. i don't see it as something systemic, but i think we are going to get knocked about for quite some time. i'm so happy that this time this year. >> this is what happens late in the credits like a. i've been waiting for this. >> i have to answer the question. where are we in the credit cycle? i'm tired of saying seventh or eighth. i feel like game three of the world series. i agree, it's going to be idiosyncratic. we have the wildfires in california impacting things. have companies, specific companies or industries that have >> problems with behind ounce of leverage they have. >>do you take the same argument?

>> yes, to some degree. i would throw a few more macro factors into there. the biggest factor for me has been this change from the using periods of tightening and the impacts that has on liquidity, investor psychology. you have to choose anyway that you did not have to previously and having gone from a place of almost zero sensitivity to incoming information, you are now potentially in a period of heightened sensitivity. guys, i thinkhe this is going to be a market we get knocked around. underneath it all, there is definitely a common macro factor. >> let's talk about one of those idiosyncratic bonds and take a look at what has been happening with ge. theyll have a look where are currently trading. i think this is really interesting because a lot of people talking about this situation that essentially wait

for the agency to downgrade the company and then respond. history has shown time and time again that even though you have spreads widen for the downgrade, after the downgrade, you still get more selloff because of the vacuum. most investing rate sellers are forced to sell by the guidelines and it takes investors some time to get up to speed on the credit. the markets are separated somewhat. it creates a vacuum and his -- history has shown that they have underperformed and then they were huge buying opportunities. opportunity as long as you get the story straight. it's basically about, 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 the long-term story? >> just to be clear, i was not referring to ge. i'm talking genetically. >> on following. i mean, you talk about the

problems that this company has undergone. we knew about this a month ago, two months ago. why does this keep happening? why did the market suddenly wake up? >> investor psychology is important. something happened in october. fixed income indices have now gone negative. negative 2.5%. high yield is hanging on by a thread. negative returns does not sound like traditional fixed income. it's supposed to be safe. you are supposed to earn your coupon and maybe get some upside. it's not happening. >> it has been really interesting. slowly, nothing happened than quickly, all at once, credit like general electric. what do you make of that? an efficient discounting mechanism? if you look at the likes of toys "r" us over the last 24 months, i would say no. i don't think it's deficient

in that sense at all and i think specifically, the realities, the technicalities of the credit market is the secondary liquidity is more of a general quitend it really is questionable, especially considering the other market. you get is water behind the dam because they fear that they can't get back in but the comes a point where that cracks and you see the liquidity story play out with some really dramatic. >> what you think of this debate at the moment? this ticking time bomb that's about to go off? it's about half of the investment great universe, it's getting bigger. his companies have loaded up on debt and it's a problem brewing and some people think it might be here. >> i think that's an over similar location of what's going on. too dramatic. the credithe end of cycle, we start having

situations where companies get in trouble because they put so much leverage on the front. it is very systemic. you should not be fooled by what appears to be a rather tight spread. that does not necessarily mean we have a huge problem. to one like to add on thing kathleen said. it's true, bonds do not have negative returns very often but let's keep things in perspective. yes, mp is still off about 7%. number is somewhere to percent or 3%, investment grade probably less. it's important to remember, almost every time that credit selloff, we expect different things from bonds. >> we do expect different things, and what interesting is the correlation between stocks and bonds is starting to change. bonds have been the anchor. now, we are not seeing that. to think about your fixed income differently. it's got to work a lot harder.

it is not all about duration. its credit, country, currency. those are sources of return. >> we did experience after october, big gap in the equity market. way, if iy material asked you to guess the bond move 12 months or 24 months ago, you would have got it wrong? environment, i think i've got it dead right because the common factor -- exactly, sorry. the common factor driving these markets is the change in stimulus coming from the federal reserve. essentially, bonds have got all the wrong risks in this type of stage cycle. when inflation is rising, when interest rates are rising, that's exactly the environment that is going to leech away at that bond market and when the , youmarket was expanded really have very little protection against capital moves and investors are aware of that

and therefore, once the mentality is shown to not be working, they will be that much more flighty. at least they have the right risks and it's that battle, it's that conversation which is going on amongst investors as they start to deal with a divergent global growth environment, the central bank tightening. i totally agree with kathleen, choosy andut being allocating carefully between individual names and credit. >> you will forgive me for laughing, i'm sure you got it right. other people would have got it wrong, let's be clear about that. [laughter] the risk is in the risk-free asset? is that what some people really think? >> talking about treasuries in general? >> i'm talking about treasuries in general, yes. >> we always see signs of inflation and there are reasons for it and we will be talking a

lot more about that over the next few months and years. i agree mostly with the short-term perspective that one has to be very cautious, but one also has to remember where returns come from. yields across the board in the u.s., whether you are talking treasuries or corporate bonds, are higher than they have been in a long time. which means that there is more room to absorb that news, more room to absorb yields going up. i think one investors look back at this time, in three or five years, the opportunity for returns for fixed income, the risk may be high, but the opportunity has not been as high. >> you will all be sticking with me. coming up on the program, the auction block. issuing one of the biggest offerings of 2018, that conversation coming up next. this is bloomberg real yield. ♪

♪ >> i'm jonathan ferro, this is bloomberg real yield. i want to enter the auction block were italy offered more than $6 billion worth of bonds. the treasury auction, three 720. and 2038 bonds showed the lowest ratios in september and april respectively. meanwhile, china's biggest in thewith an offering united states, adding to concern that american investor demand for china's offering is falling amid the trade war. marketing three-year and five-year rates. finally in the united states down across the sixth largest deal of 2018. to billion as it prepares three new companies in a here. still with me around the table.

yous, i want to begin with and get to the recent comments from the vice-chairman of these federal reserve's speaking to cnbc, saying the following. room, are in a dark especially without your shoes on, you want to go slow see you don't stop your toe. but i think it makes sense right here. think the market is taking this is a federal reserve a slowdown the pace of rate hikes. what did you take it as? >> i'm going to be opposing that, to be honest. first and foremost we will be talking about a broader commitment than just one single member which takes up an important position in the federal reserve system. i'm certainly still looking for jerome powell and i have a different interpretation to the upper market from his recent speech where, of course, he mentioned global headwind but i think he's been very clear is the chairman of the federal reserve.

he is not going to be buffeted around by these short-term. he sees risks on either side. of course from an economic perspective, there are risks of going too far, and you possibly would know about those risks sooner than the other risks. the other risk is the one that concerns me more, given where we have been for the last 10 to 12 years. if you go to banks fully, you allow imbalances to build up and that creates a problem that you don't see coming. i think jerome powell is on the right path and the federal reserve is going to be hiking rates, broadly speaking. , inflation atnt or above target, above potential gdp growth. rates not only rising but rising at an increasing pace. that's a clear signal they need to be hiking. that's something we've been looking at this afternoon. we have some positions that have benefited from this.

thatg chips off the table, was trading nearly 3:30 a couple weeks ago. around 1.5 atg basis pointonstant spread. i think the risks are aggressively in the other direction. that's definitely something i will be looking at. >> kathleen? >> you are seeing jerome powell be quite a swashbuckler. i would not describe a central banker in ways such as that, but he is really finessing it. they are on a mission. they need to get to normal in a fair amount of time. oute's a lot of noise there. trade war issues are weighing on the market. in the dollar has actually been impacting u.s. companies. he just talked to the dollar down. that allows boon the fed to keep on its mission.

he gets mywhenever attention, a gets yours. >> as much as i would like to disagree with my esteemed friends over here, i think it would be very inconsistent. when the fed is very low, the mantra was "we would rather air on the side of caution. we do not want to upset the recovery." now, we are all concerned that 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. they are not supposed to pay attention to short-term things. supposed to get to the mid-3% level. out there many people have pitched this battle between the federal reserve and the market. understand what the federal reserve actually is in that scenario because we used the median dots for 2019 and the median dots versus the market.

but if you look at what the federal reserve is doing right now, they are all over the shots through 2019. they could quite easily meet the market just buy a couple of individuals shipping lower through 2019. the median dots are a little bit of a distraction, and a lot of confusion as to what 2019 will bring. probably mores dispersion than there has been a long time, which means that you should have a volatility in markets. wither we agree or not what happening today, we're going to move a lot because people really aren't sure. i'm not sure, either. i think i know what the fed should do. if i was the fed, i be a lot higher in today. >> we could spend 60 minutes talking about should and shouldn't, it's would and wouldn't that will lose your money. >> they are going to go higher, that's what i know for certain. forget all the other noise. it's a waste of time. it's a guessing game. but they've got to move higher, that's where they are going. you're going to get selloffs.

this is going to be a great buying opportunity for a long time. >> guys, you are going to be sticking with me. in the market, through the week, and the treasury market, two-year yields, coming in big-time over the last weeks. likewise on a 10 year and 30 year. program, thee final spread, the week ahead featuring u.s. economic data and the bank of england. this is bloomberg real yield. ♪

♪ >> i'm jonathan ferro, this is bloomberg real yield. time for the final spread. coming up, besides the drama, we might get brexit.

john williams and mark carney will be speaking and we get danger on the u.s. housing in the european commission publishing its opinions on budgets including italy. look out for that and we have u.s. markets quote on thursday due to the thanks giving holiday. with me for a final discussion, kathleen and james. gershon, i want to come to you. headlights to trade headline, if we get a truth at the end of this month, will have market sentiment. does it address the economic issues we see and experience globally right now? >> i think it's impossible to say. we can't predict what this president is going to do. i think we will continue to be volatile based on that. what important to remember, and part of the reason the u.s. economy is outperforming the global economy, is that the u.s. remains a relatively close

market. our imports and exports, about 25%. much, much higher than many countries in europe or emerging markets in china. >> i think that is going to be a truth. becausethere has to be, everyone has to bank much to lose if the economy slows down. that, in my mind, is a given. but the really interesting thing that's 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 industry. and i think you have seen some of the pain that has happened in the industry of light. china, and the long-term, wants to be a leader as well. it's going to be made in china by 2025. it is really important that 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 kinds of actions

that we are going to start to see, and it's going to impact supply and demand for the companies because the growth rate that we've experienced, the demand is not going to be the same. >> i want to bring you into the conversation. your thoughts? prettyhe honest, i'm sanguine about the old trade war thing. completely -- i agree with gershon completely. when i look over at china and i see the decline in the growth rate over there, to me, that very much tallies more tightly with the deleveraging effort, the consolidation of president and some of the leverage which is driven that's going to be with the structure investment. really hasgrowth been slowing in line with those domestic policies and the trade is laterally more doubling down, if you like. that's because

with a slowdown that we see in europe andacross certainly in china. i think trade is a bit of a sideshow. both sides want to know whether that can be done as soon as the g20, i'm not so sure. the underlying fundamentals are pretty sanguine about that. >> it often happens that we obsess over the downside risk. you two are actually quite excited about was about to happen. what are you looking forward to in the next 12 months? >> looking forward might be a strong term, but we have talked about the downside of volatility. thinkne is trained to that rising rates are bad. they're bad for existing prices and they are really, really good for long-term turns of fixed income as you get a higher yields. >> some final questions, the rapidfire around. let me get this started and get moving. do you buy the investment grade weakness, or is there more weakness to come? do you buy, or is there more to come? >> more to come. courtney: >> lots more to come.

>> lots more to come, i'm up for it. >> rate hikes in 2019. three options. >> more than three. >> three. . >> more than three. >> have we seen the high for the u.s. 10 year yield in this cycle? yes or no? >> ask me next year. >> no. >> i'm afraid not. >> really interesting stuff and a fascinating week for global fixed-income. for new york city, that does it for us. this was bloomberg real yield. ♪

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