jonathan: from new york city, i am jonathan ferro. this is "bloomberg real yield." ♪ jonathan: investors reassessing what 2019 brings. abandoning hope for a year and rally, the worst year since 2008. looking ahead to the g20, the much-anticipated meeting between president trump and president xi. investors drowning in downside risk. >> the biggest risk is trade. it continues to be trade. >> the prospect of tariffs is still what frightens me the

most. >> the u.s. economy will start slowing down a 2019. >> maybe jay powell backs up a bit. >> chairman powell is a knology the headwinds in 2019. the question is how hard should they be having a break? >> is the fed going to tighten four times >> >> more than three. >> absolutely not. do they stop in 2019? absolutely not. >> everyone is trained to think that rising rates are bad. they are bad for existing prices and really good for long-term returns and fixed income. >> by biggest concern is volatility will continue. unfortunately the volatility in financial markets has potential to be the cause for the end of the economic cycle. >> 2019 it will be about let's take uncertainty off the table. jonathan: joining me is ira jersey, noelle corum and and jose rasco.

noelle, breakevens have rolled over. i want a better understanding what degree will three pricing change excitations? noelle: we think the market is beginning to price in moderate growth in 2019. q1 and q2 will be supported by fiscal policy and a healthy consumer tight labor market. then fiscal policy 2.0 isn't necessarily certain and also you have a fed that continues to tighten. jose: that makes sense to us. the other problem is on the government side you talk about fiscal expansion. where is the money coming from? there is talk of a $1 trillion infrastructure plan. where is the money coming from? the deficit is going up to $1.3 trillion.

i think we have a bit of an issue in terms of the sovereign market. ira: it does not seem like the treasury market will care. most of this rally is important and the market has been pricing out inflationary pressures. that is what has happened the last couple of weeks with this move. we were up 20 basis points year today, now we are at zero. it is not a real yields story or a growth story. real yields and expectations are pretty good. jonathan: many people thought they would be an accompanying pick up. we seem to have priced that all out. ira: i think oil has a big piece to do with that. they are coming off their lofty levels. back down now below $60.

clearly that is one of the reasons why inflation expectations have come down. when you look at short in breakevens, is well below 2%. it was 2% only a couple of weeks ago. jonathan: you will listen to that. do we get three, four? will the fed change the pace of the journey in 2019? noelle: going back to inflation, 2019 is going to be very much about inflation. we think it will be interesting story. q1, the tariffs will hit. and then we also have wages that are finally showing signs of life. one thing we watch is the rate. it's an indicator that we will start to see employers leave the company and get paid more elsewhere.

these are persistent. wages are persistent wage pressures. that will bring the fed into play. we don't see a breakout inflation, for a breakout in wages but it will make 2019 much trickier for the fed because growth will be moderating. inflation will be noisy with tariffs and wages. some will be transitory and some not. we think the growth -- the fed will have some tough decisions to make in q3 or q4 next year. jonathan: interesting. jose: we have the fed going twice next year and lowering rates twice in 2020. we think growth will moderate more than most people. jonathan: a lot of people are thinking about, when do i reinitiate? jose: our view is much more

sanguine than years. there is a trend of deflation from the tech sector that is just beginning. i can't disagree with the numbers. we are about 3%. we are at 3.7% on the unemployment rate. a big story in this business cycle has been how tech is displacing jobs and the monster robots will take our job and jonathan ferro will be a robot in two years. jonathan: i hope not. [laughter] jose: i actually am a robot. ira: we have to consider the global environment. you look at europe. you have brexit bringing up a lot of uncertainty. europe is not as robust as many of us thought. when you have yields globally coming down all we thought maybe they would be going up, the fact we don't have 1% yields in germany today, i don't think many people have it in their forecast. even if they were bullish on the u.s. market compared to consensus like i have been. that's an important thing we

have to notice. german yields are going to be helping u.s. treasury yields for at least the next 18 months. jose: that is the curve flattening we have seen. we continue to see tremendous demand. you look at the spread between bonds and bunds, you could drive a truck through that. 270 basis points and we think that is persistent. the consistency of demand for relative to the inconsistency. global. let's talk about globalization. you have a lot of nationalistic policies going on in the political movements and globalization story is taking a backseat the national issues. if that continues and persist and we have more closed doors, do you see more ways pressure? trade volumes are picking up. jonathan: i think it is important. if you ask people in the fixed income world what the most important move was, the repricing reset everything else.

i would pick up on what you said data set to finish the year where it started, at about 40 basis points. i'm not sure how many people saw that coming. ira: we were talking about the end of quantitative easing in europe ringing a lack of demand pressures in bringing down yields in europe. what is happening is you have the repricing in europe for slower growth, slower inflation than anyone thought of a year ago. that is what has been going on in a lot of europe. markets don't like uncertainty. jose: buying the risk-free rate. jonathan: what is the ecb doing in the back end of 2019? jose: put those two together. the ecb is talking about letting bonds rolloff at the next year,

what happens to sovereign corporate spreads in that environment? i think they blowout. ira: italy still has a lot of fiscal problems they have to contend with. we don't know what will go on in other peripheral nations like portugal. i think greece is a much different story. jonathan: everyone is taking with me. next up, the auction block. a ballooning u.s. budget shortfall causing the treasury to set a record. that is next. this is "bloomberg real yield." ♪ jonathan: i am jonathan ferro.

this is "bloomberg real yield." i want to look at where we stand in 2018. we start with the rise of issuance from the u.s. treasury. there has been $1.2 trillion raised in net new cash, dwarfing previous years. high-yield issuance was the opposite. sales slowing to levels we have not seen since 2009. we are on track for the slowest november since 2008. the search continues. more than $762 billion in new loans issued, with new money rising around 8% over a year ago. we are largely driven by a wave of repricing. joining me is ira jersey, noelle corum and jose rasco. high-yield investment great, those in euros and in dollars set for an annual loss for the first and since 2008.

how significant is that? noelle: killing back to my growth you for 2019, we expect growth to moderate. we are guessing it will be around low two's by the end of the year. that's a relatively positive platform for credit. we think it is going to -- as long as inflation, which we don't they get well, breaks out in a significant way, the fed will be able to respond to the moderating growth picture and take a step back and only go twice. that paints a rosy picture for credit next year. there have been some cracks in credit this year. there is no denying that. we think it just makes and analyst's job that much more important.

these companies remain healthy. leverage and defaults remain low. we think 2019 paints a good picture for credit. ira: i think credit probably has more to go in terms of risk repricing. on some level the fundamentals have not turned, not significantly. slowing profitability does not mean lower profitability. you are not looking at necessarily is significant repricing. the risk is you continue to have more m&a deals or debt financing. balance sheets are more levered today than they were five or six years ago. that risk is rising but it is not at a tipping point quite yet. that is probably not a 2019 story. jonathan: a lot of people are concerned about the bbb component. some would say they are idiosyncratic risks.

exploring the idea of at what point does a surgeon idiosyncratic risk become systemic? then he quickly becomes widespread and systemic. are we going to see that in investment-grade? jose: we see the dispersion in terms of cash versus debt. s&p 500, caches more's view towards the top end of the scale and debt is more evenly disturbing. you could see some more repricing of credit as we go to next year, no question. ira: one interesting thing is during the recent movement in credit spreads and interest yield, corporate deals have not moved very much. you have corporate yields basically staying flat, treasury market rallying. lower yields for treasury. that is what is causing the

spread widening. the actual cost of capital has gone up for these companies. when you look at the bloomberg barclays corporate index, the yield is still 4.3%. a month ago it was at 4.3%. the actual funding is not going up very much. noelle: i was hoping you would come to me. i have one more point to add. credit -- growth is going to do well in 2019. credit is going to perform well unless we see a recession hit. we see no evidence in that, can the underlying growth data, the indicators, we have no indicators of a recession in 2019. until we see that, that is a turning point you were talking about where we returned to systemic. that is when the wizard to be concerned. jonathan: if you believe the

federal slowdown, a rate cut on the horizon, i want to understand why leveraged loans will remain attractive from a floating right angle. there is the credit risk appetite and the rate aspect to it, but i believe the federal slowdown. why would i want leveraged loans? jose: we don't have the fed slowing down until the middle of next year. we are on the short end of the curve in terms of duration, in terms of leverage as well. we are more interested in the investment-great part of the business -- investment-grade part of the business. it's about the way of the average cost of capital. we have the moment we see the capital going up to a point where it is concerning at the lower end, the bbb's, etc. noelle: something unique is institutional demand. that is still there.

the demand we expect to continue into 2019. that is 80% of the market. we still think there is relative value with the loans. ira: i don't have much to add about the loan market. loans are used a lot for m&a activity. a lot of what will happen in 2019 are how many deals will get done with the supplied from leveraged loans and can the institutional market absorbs the supply? some deals we have seen, they were done with cash. it is the big technology companies like amazon earlier this week saying they will bid on other assets. that is not necessarily going to be finance. it depends on how the m&a activity shapes up. jonathan: the supply story has been a lot more prominent relative to high-yield. do you see that changing next year? noelle: no, because you have this m&a market that has a lot

of supply. we really don't see much in the pipeline. i think that will be a positive technical. jonathan: you guys are very constructive on credit given the moves we have seen. ira: it is relative. one issue is credit tends to crack quickly. it has to do with things like slowing revenue, a much lower economy. we are seeing a modest slowdown but we have not rolled over. if we are going to roll over in 2020, it is the second half of next year to see those cracks in credit. if we don't, we are in noelle's camp and credit will do just fine. what is your outlook for the next 18 months before you worry about credit? jonathan: you guys will stick with me. still ahead, the final spread. the week ahead featuring the g20 meeting the market is waiting for.

president trump and china's xi jinping. this is "bloomberg real yield." ♪ ♪

jonathan: i am jonathan ferro. it is time for the final spread. coming up next week, we hear from jay powell and get minutes from the latest fomc meeting. a new round of data on the u.s. economy, and the highly anticipated g20 meeting their features trade talks between the was president donald trump and china's xi jinping. her final thoughts is ira jersey, noelle corun from invesco and jose rasco. ira, what are you looking forward to from the talks? ira: we would like some closure. markets hate uncertainty. cap enclosure, illiquid any kind of trade deal may be would be great.

are we going to get it? no. the likelihood of something definitive is low in my opinion. jonathan: the markets have settled on no fundamental change. is that what you are looking for next week? don't think we will get that. these things take time. history tells us they take time, especially the strategy related to trade goals that the

administration has. they will continue to be highs and lows. jose: i have slightly more optimistic. we want closure but if you look at the feedback the president has gotten on trade policy, it has been go fight the good fight. to your point on inflation, it is killing certain sectors of the economy. there are a lot of complaints in terms of inflationary potential. jonathan: something i have come back to a lot is whether this is a convenient scapegoat for global deceleration. i think a lot of it may not be because of the trade story. in china there is a domestic story. it is separate from what is happening. jose: let's be honest about tariffs. when somebody raises prices 25%, you don't buy their products. consumers can switch. we have seen huge shifts in terms of supply chains in the last six months. we will see that play out over the next coming months. there is a fundamental story going on in terms of a global slowdown, in particular in europe. the pmi's look like a ski slope downward. jonathan: there is a market issue and that is trade, and then there are economic

fundamentals. there is something else. ira: when you look at the underlying -- we thought there was an output gap and it was much higher than it is. i think we really have since 2009 -- we have lower potential growth. we basically hit up against that number. could you get back there in light of having growth of 3% persistently? maybe, but probably not. 2.5% is closer to where growth will be for the long-term. we have to have a little bit of an adjustment. jonathan: i will wrap up with the rapid fire round. quick questions, quick answers. cap we see the high for the 10-year yield? ira: yes. noelle: yes. jose: yes. jonathan: that was quick. leveraged loans or high-yield next year?

ira: leveraged loans. noelle: loans. jose: loans. jonathan: i don't even need to say your names. cease-fire or escalation of the g20? ira: escalation. noelle: i will have to go with escalation. jose: i will be the optimist. cease-fire. jonathan: thank you very much for joining me. ira jersey, noelle corun and jose rasco. that does it for me. we will see you next friday at 1:00 p.m. new york time this is "bloomberg real yield." this is bloomberg tv. ♪ ♪

x he went from farming maple syrup to philosophy at oxford and became silicon valley's most famous investors. he's always been fascinated by the intersection between silicon valley and networking. he went on to found paypal, then made biginkedin, and bets on facebook. now some of the same questions that drove him through his life are front and center.