jonathan: from new york city for , i'miewers worldwide jonathan ferro with 30 minutes dedicated to fixed income. this is "bloomberg real yield." jonathan: coming up, the fed rate path crashes. investors reassessing what 2019 brings. abandoning hope for a year-end rally in credit, the worst year since 2008. looking ahead to the g20, the much-anticipated meeting between president trump and president xi. we begin with the big issue, investors drowning in downside risks. biggest risk i think to

markets is trade and it continues to be trade. >> the prospect of tariffs is still what frightens me the most. >> the u.s. economy will start slowing down in 2019. >> maybe jay powell backs up a bit. >> he is acknowledging the headwinds which lie ahead in 2019. >> the question is how hard should they be having a break? >> is the fed going to tighten more times? >> more than three. >> three. >> more than three. >> absolutely not. do they stop in 2019? absolutely. trained to think that rising rates are bad. they are bad for existing prices and really, really good for long-term returns and fixed income. >> my biggest concern for 2019 really is that this volatility will continue, and unfortunately the volatility in financial markets has the potential to be the proximate cause for the end of the economic cycle. >> in 2019, it will be about let's take some of that uncertainty off the table. jonathan: joining me is ira jersey, chief u.s. rates strategist at bloomberg

intelligence, noel corum, portfolio manager at invesco, hsbcas a roscoe from private bank. great to have you with us. noelle, breakevens have rolled over. normal yields have declined. i want to better understanding to what degree we are pricing in expectations? noelle: we think the market is beginning to price in moderating growth into year-end, and in 2019. q1 and q2 will be supported by fiscal policy and a healthy consumer tight labor market. but then we get into q3 and q4, where fiscal policy 2.0 isn't necessarily certain and then also you have a fed that continues to tighten into that. that's what the market is becoming more and more concerned about. jose: that makes sense to us. we think that growth will slow next year. 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. allegedly both sides of the aisle want it. where is the money coming from?

debt markets are already struggling with the fact that the deficit is going up to $1.3 trillion on a growing concern basis. i think we have a bit of an issue in terms of the sovereign market. ira: it does not seem like the treasury market really cares if there is another $1 trillion in infrastructure spending. i mean, the fact that we have rallied -- but most of this rally is important and the market has been pricing out inflationary pressures. that is really what has happened the last couple of weeks with this move. it has all been in breakevens. we were up 20 basis points year to date in breakevens, now we are at zero. so it is really not a real yield story or a growth story. because real yields and growth and expectations tend to be pretty good. it's an inflation story. jonathan: that is still pretty interesting, because many people thought they would be an accompanying pickup in inflation along with fiscal stimulus. we seem to have priced that all out. ira: i think oil has a big piece to do with that. so oil prices are obviously coming off their lofty levels. back down now below $60. yeah, i don't know where we are right now. but clearly that is one of the reasons why inflation

expectations have come down. so when you look at short end -- breakevens, what the market is expecting, it is well below 2%. it was 2% only a couple of weeks ago. jonathan: underpinning this conversation is what the fed does next. you will listen to that. do he get three, more than 3, 4? will the fed change the pace of the journey in 2019? relative to 2018? noelle: going back to inflation, 2019 is going to be very much about inflation. we think it is going to be an interesting story, because in q1 you will have these tariffs hit, which we think will add 30-50 re -- points into the cour the core on a month over month basis. and then we also have wages that are finally showing signs of life. we watch a rate that has been at levels -- it has been, but it's an indicator that we will start to see employers leave the company and get paid more elsewhere.

so these are persistent. you mentioned oil, but wages are persistent pressures. that will bring the fed into play. that said, we don't see a breakout inflation, 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 of it is going to be transitory and some not. we think the growth -- the fed is going to have some tough decisions to make in q3 or q4 next year. if we don't see fiscal policy, i i think that the fed is only going to go twice. jonathan: interesting. jose: we have the fed going twice next year and lowering rates twice in 2020. so we think growth will moderate more than most people. jonathan: that is a big call. a lot of people sitting here are thinking about, when do i reinitiate? you are thinking about a bull steamer on the back of next year? jose: our view is much more sanguine on inflation than yours.

if you have a look at inflation, there is a trend of deflation from the tech sector that is just beginning. the wage story, i can't disagree with the numbers. we are above 3%. but if you look, we are at 3.7% on the unemployment rate. and i think if you look, the big story in this business cycle has been how tech is displacing jobs and the monster robots will take all our jobs, and jonathan ferro will be a robot in two years. jonathan: i hope not. [laughter] jonathan: some people watching this might. jose: i actually am a robot. ira: one of the other things we have to consider is the global environment here as well. 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 when we thought maybe in europe they would be going up, the fact we don't have 1% yields in germany today, i don't think many people had that in their forecast. even if they were bullish on the u.s. market compared to consensus like i have been. but i think 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 flattener we have seen. arising talked about this on your show and others, where 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. because of the strength and consistency of demand here relative to the inconsistency. the other thing, globalization. global. let's talk about globalization. you have a lot of nationalistic policies going on in the political movements and the globalization story is taking a backseat the national issues. that is another question on the wage side. if that continues, and we have more closed doors, do you see more wage pressure? we don't think so. trade volumes are picking up. jonathan: i was point is something i want to pick up on because i think it is important. if you ask people in the fixed income world what the most move this year actually was, they might say the front end of

the treasury curve. that repricing has reset everything else across asset. i would pick up on what you said about the 10-year bunds. for me, that is the most surprising part of 2018. the 10 year bund is 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 bringing about a lack of demand pressures in bringing down yields in europe. and in fact, what has happened is instead, you have the repricing in europe for slower growth, slower inflation than anyone thought of a year ago. and i think that is really what been going on in a lot of -- what has been going on in a lot of europe. markets don't like uncertainty. when there is a lot of uncertainty, people go to government bonds, particularly things like bunds and treasuries. jose: buying the risk-free rate. jonathan: just a final question, which i think is important. you call that the that will be -- the fed will be cutting rates at the end of

2019. 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 end of next year. what happens to sovereign corporate spreads in that environment? i think they blowout. ira: what happens to italy? 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. jose: and we've got greece, as usual. [laughter] ira: every year. i think greece is a much different story. jonathan: everyone is sticking with me. next up on the program, the auction block. a ballooning u.s. budget shortfall causing the treasury to set a refunding record. that is 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 and take a look at where we stand so far in 2018. first, we start with the rise of issuance from the u.s. treasury. in the calendar year, there has been $1.2 trillion raised in net new cash, this number dwarfing previous years. high-yield issuance was the opposite. year-to-date sales slowing to levels we have not seen since 2009. plus, we are on track for the slowest november since 2008. and in leveraged loans, the surge continues. more than $762 billion in new loans have been issued so far, with new money rising around 8% over a year ago. last year's huge volumes were largely driven by a wave of repricing. still with me to discuss the world of credit is i read the from bloomberg intelligence -- i were jersey from bloomberg intelligence, noelle corum and jose rasco. you i want to talk about what is happening in credit. high-yield investment grade, both in euros and in dollars set

for an annual loss for the first time since 2008. how significant is that? noelle: so kind of going back to my growth view for 2019, we expect growth to moderate. and we are guessing it will be around low two's by the end of the year. but that's still a relatively positive platform for credit. and we think it is going to -- as long as inflation, which we don't think it will, breaks out in a significant way, the fed will be able to respond to the moderating growth picture and kind of take a step back and only go twice. i think that paints a rosy picture for credit next year. and there have been some cracks in credit this year. there is no denying that. we think it just makes an analyst's job that much more important.

but at the end of the day, these companies remain healthy. leverage and defaults remain low. and we think 2019 paints a good picture for credit. ira: i think credit probably has more to go here in terms of risk repricing. but on some level the fundamentals have not turned, not significantly. so slowing profitability does not mean lower profitability. so companies that are profitable don't tend to default. so for investment grade in particular, you are not looking at necessarily is significant repricing. i think the risk is you continue to have more m&a deals or debt finance. a lot of corporate issuance has to be out there. and balance sheets are more levered today than they were five or six years ago. so 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 about investment grade. in dwarfs high-yield in and of itself. some people would come on this

program and say they are idiosyncratic risks. i have been talking to wells fargo recently and exploring the idea -- at what point does the surge in idiosyncratic risk become systemic? it reminds me of emerging markets earlier this year, idiosyncratic, idiosyncratic, and then it quickly becomes widespread and systemic. are we going to see that in investment-grade? jose: we are more interested in investment-grade because we see the dispersion in terms of cash versus debt. so if you look at the s&p 500, for example, cash is more heavily skewed towards the top end of the scale and debt is more evenly distributed. the problem you've got there, you could see some more repricing of credit as we go to next year, no question. ira: i think one of the really interesting things is during the recent movements in credit spreads and treasury yields, corporate yields have not moved very much. so you have corporate yields basically staying flat, treasury market rallying. so lower yields for treasury. that is what is causing the spread widening. it is not like the cost of capital, the actual cost of capital has gone up a lot for

these companies. so when you look at the bloomberg barclays corporate index, the yield is still 4.3%. ago? was it a month 4.3%. even though credit spreads are much wider, the actual funding has not done a very much. noelle: i was hoping you would come to me. i have one more point to add. that growth is going to do well in 2019. and credit is going to perform well unless we see a recession hit. we see no evidence in that, can -- in that, in the underlying growth data, the indicators, we see no indicators that we will see a recession in 2019. and until we see that, that is a turning point you were talking about. that is where it would turn systemic. that is where we would start to be concerned. jonathan: i want to bring up

leveraged loans, because if you truly believe the fed is going to slow down, you think there is a rate cut on the horizon, i want to understand why leveraged loans will remain attractive at -- attractive from a floating rate angle. there are two reasons to buy them, there is the credit risk appetite and the rate aspect to it as well. fed willieve that slow down. why would i want leveraged loans over, say, high-yield? jose: we don't have the fed slowing down until the middle of next year. we are still on the short end of the curve more than anything else in terms of duration, in terms of leverage as well. we are more interested in the investment-grade part of the business on credit, and more toward the short end of the curve. i think as you go forward, the concern we have is that it's , butbout the recession about the weighted average cost of capital. we have the moment we see the weighted average cost of capital going up to a point where it is concerning at the lower end, the bbb's, etc. even on investment-grade scale. noelle: something unique to leveraged loans is the institutional demand.

we still see that is there. the demand we expect to continue into 2019. that tends to be stickier money, that's 80% of the market. and we still think there is relative value with the loans. ira: i don't have much to add about the loan market. i do think that loans are used a lot for m&a activity. a lot of what will happen in 2019 are how many deals will get done, and will they be done with supply from leveraged loans and can the institutional market absorb the supply? some deals we have seen, there were a lot of cash deals used 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. so i think it depends on how the m&a activity shapes up. jonathan: the supply story has really been a lot more prominent in investment-grade in leveraged loans 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.

and we really don't see much in the pipeline. so i think that will be a positive technical, both end of year and 2019. jonathan: you guys are very constructive on credit given the moves we have seen. ira: it is relative. because one of the issues is that when credit crack's, it tends to crack quickly. it usually has to do with things like slowing revenue, a much slower economy. we are seeing a modest slowdown in the economy maybe, but we have not rolled over. so if we are going to roll over in 2020, it is the second half of next year to see those cracks in credit. but if we don't, we are in noelle's camp and credit will do just fine. so it really depends on what is your outlook for the next 18 months before you worry about credit? jonathan: it was great to have you with me. you will stick with me. still ahead, the final spread. the week ahead featuring the g20 meeting the market has been waiting for. president trump and china's xi

jinping. this is "bloomberg real yield." ♪

jonathan: i am jonathan ferro. this is "bloomberg real yield." it is time for the final spread. coming up next week, we hear from federal reserve chairman jay powell and get minutes from the latest fomc meeting. plus there will be a new round of data on the u.s. economy, and theg gdp and pce, highly anticipated g20 meeting that features trade talks president donald trump and china's xi jinping. final thoughts from ira jersey, noelle corun from invesco and jose rasco. let's wrap it up with a look ahead to next week. ira, what are you looking from the talks? ira: we would like some closure. i think markets hate more than anything uncertainty.

having some closure, knowing what any kind of trade deal might be would be great. are we going to get it? no. the likelihood of getting something definitive at of the g20 meeting is low in my opinion. jonathan: i think the markets at this have settled on the idea of point no fundamental change. but a cease-fire might be enough to get sentiment lifted for a year-end rally. is that what you are looking for next week? noelle: i don't think we get a cease-fire. i agree with ira that we would love some closure, but i don't think we will get that. these things take time. and history tells us they take time, especially the strategy related to trade goals that the administration has. and that is going -- there will continue to be highs and lows within that. we will have to continue to watch them very closely. jose: i am slightly more optimistic. we want closure as well, but if you look at the feedback the president has gotten on trade policy, it has been go fight the good fight. but to your point on inflation, it is killing certain sectors of the economy. there are winners and losers,

but there are a lot of complaints in terms of some of the inflationary potential. jonathan: something i have come back to a lot in the last year or so since this really started picking up in the spring is whether this is a convenient blame a lot of things that are happening worldwide at the moment, specifically global deceleration and economic growth. there is a deceleration taking place, and i think a lot of it may not be because of the trade story. something else is happening. in china there is a domestic story. a slowdown there that is kind of separate. jose: let's be honest about tariffs. tariffs, when somebody raises prices 25%, you don't buy their products. you buy another product that is comparable. consumers can switch. supply chains can switch. we have seen huge shifts in terms of supply chains in the last six months. we will continue to see that play out over the coming months. but at the end of the day, there is a fundamental story going on in terms of a global slowdown, in particular in europe. if you look at the european numbers, the pmi's look like a ski slope downward. europe continues to struggle in

terms of growth momentum in particular. jonathan: there is a market sentiment issue, and that is trade, and then there are economic fundamentals. there is something else. ira: that's right. when you look at the underlying -- we thought there was an output gap and it was much higher than it is. you know i think that we really have since 2009, we have lower potential growth. we basically hit up against that number. so the thing is, could you get back there and wind up having growth of 3% persistently? maybe, but probably not. 2.5% is closer to where growth will be for the long-term. so we have to have a little bit of an adjustment. thethan: i want to wrap up program the way we always do, with the rapid fire round. you know how this works. quick questions, quick answers. have we seen the high for the 10-year yield? yes or no? ira: yes. noelle: yes. jose: yes. jonathan: that was quick. i keep coming to back -- coming

back to this question -- leveraged loans or high-yield next year? leveraged loans or high-yield through 2019? ira: leveraged loans. noelle: loans. jose: loans. jonathan: i don't even need to say your names. cease-fire or escalation at next week's g20? cease-fire or escalation? ira: escalation. noelle: i will have to go with escalation. jonathan: this took some more thought. jose: i will be the optimist. cease-fire. jonathan: there we go. guys, it has been great to catch up with you. thank you very much for joining me. ira jersey, noelle corun and jose rasco. from new york city, that does it for me. we will see you next friday at 1:00 p.m. new york time -- new york time, 6:00 p.m. in london. this is "bloomberg real yield." this is bloomberg tv. ♪

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