jonathan: from new york city, i am jonathan ferro with 30 minutes dedicated to fixed income. this is "bloomberg real yield." ♪ jonathan: raising the bar ahead of the g20. the u.s. looking for successful talks with china. the growth outlook stumbles. repricing the rate outlook, leaving the fed looking to reclaim optionality. we begin with the big issue, the g2 in argentina. >> everything is at stake. >> hopefully we get some not bad news. >> nobody wins.

in the long-term we all lose out. >> we are all, in europe, worrying on this battle between china and the united states which has to stop after a certain moment. >> the whole trade issue has now become mixed up with strategic issues. >> trump wants to appear chart on china -- tough on china. the fact is this is actually starting to impact sentiment. >> if there was a trade deal with china, it would be better than what we currently have. i think the markets would be very excited. >> if that doesn't happen this weekend, the two sides are digging in for a trade war that run for the rest of this administration at least. jonathan: joining me is priya , ana, krishna memani coming to us from chicago is jim schaeffer.

.et's begin with you, priya how you define success over the weekend? priya: the minimum condition is a cease-fire. a real success would be we are dropping all the tariffs. we decided there is no trade issues. we are going to go back on any of the tariffs. this is much more than trade. is trade, geopolitics, ip. this is a slow burning issue. we will have to grapple with this for a while. the markets are treating this like an extremely binding event. after their dinner on saturday night, do we have a framework and foundation? $267 billion tax is on hold? jonathan: i have spent the week trying to understand for expectations are.

where our expectations for you? jim: i agree with my counterpart said. some level of a continuation of a dialogue. the markets would welcome that and we expect that. we expect discussion between the two parties. maybe not change with a have done to date by providing a framework for dialogue which gives markets and ultimate resolution that is positive. makesa: clearly it perfect sense. beyond that, as the economy slows down the pressure on the trump administration to find a resolution at some point increases meaningfully. even if we don't have a resolution, the market will continue to expect resolution. that is the key point. jonathan: this is worth exploring. we wake up monday morning with a cease-fire. how willing are you to reprice interest rates at the federal reserve based on happy talk?

krishna: our expectation with respect interest rates in 2019 are driven by one simple thing, the u.s. economy slowing down. as long as that is the case, buying rates is a good strategy. priya: i think the market is repriced hike significantly. longhat is when we went treasuries. i think we are well priced for growth potential. doesn't go below 2%? if potential growth is one point %,%, are we looking at -- 1.75 the fed has to stop before neutral. jonathan: the conversation we are having is whether we will trend towards something more sinister or growth? jim: we think we are below trend growth. one of the biggest things is uncertainty of what trump policy will be.

we know growth is slowing. its about the velocity of the pace of growth and what that means from the fed standpoint and how aligned the fed will be. jonathan: what does it mean for the federal reserve? this was chairman powell speaking about rates. powell: interest rates are low by historical standards and just below the range of estimates of that level that would be neutral for the economy. that is neither speeding up or slowing down growth. jonathan: was that a statement of fact or a dovish turn? krishna: it is a statement of fact. what is redeeming in that back fromis the walk all the stuff they were talking about in september and august. we will not stop at neutral and this artifact about neutral rates. know e hell nose? walk -- s?

this is reorienting things in the right way. jonathan: if that was the objective, perfect success. whether reclaiming optionality means a dovish outcome for the federal reserve. that could mean interest rates next year the no one expects. priya: a lot will depend on the actual data. if data continues to slow, it has to come from the inflation. spike in inflation and the fed uses that on the hawkish front. the overgrowth is not helping. trade tariffs are not helping. the optionality also assumes they are looking at financial conditions. what is the change from october 3 when he said we are far from neutral and we can go about mutual today, the data has not changed. for changed is the idea we don't have to go over neutral because financial conditions have tightened. icf as a little bit of a shift

in the fed reaction function. jonathan: let's talk about a shift in the price of the story. december, perhaps another through next year. you have inflation next vacations rolling over. i am trying to get my head around were inflation expectations are now and whether the price of the story has gone a little too far. are you willing to fade some of the repricing? priya: i have been long treasuries since mid-october. we took it off. i don't know about going short just yet. i think the market can get a little more spooked. i think they are cheap. rather than spending treasuries on the front end, some breakevens for that case that inflation does rise, the fed will hike more aggressively. jonathan: jim, what is your view? jim: along with where the market is.

we thought they would hike in december. one or maybe two next year. now he has to take advantage of the market data. whatink he is aligned with the markets expect in the markets will react favorably. jonathan: krishna? krishna: a lot of what was getting priced in in terms of not going to stop the visual has been priced out. therefore if the tips are rolling over and expectations are trending lower, from an optionality standpoint buying that option may not be such a bad thing. jonathan: let's talk about how this has been priced in to the treasury curve. something a little bit differently recently. flattener maybe a policy mistake. the balance sheet runoff is another form of policy. the fed is saying that's not an active formal policy. it is creating that

-- president trump: a fantastic relationship with australia. -- you have done a fantastic job in a short period of time. we will be with australia and you all the way. >> thank you very much. >> we are friends. president trump: thank you very much, everybody. appreciate it. [questions being shouted] >> thank you.

a meeting between president trump and the us trillion prime minister, who has been -- the australian prime minister, to has been on the job for 3.5 months. now back to "bloomberg real yield" in progress.

jonathan: in this is "bloomberg real yield." i want to head to the auction block now.

u.s. treasury sold $280 billion this week. we want to talk about two-year notes. the lowest amount since january. over in u.s. investment-grade, there was a bit of a bounce back. wednesday saw the most since november 7 with more than $13.5 billion sold. leverage loans, offerings are getting pulled at the fastest rate since july. ,till with me is priya misra krishna memani and jim schaeffer . what is going on with leverage loans right now? the market is getting a little concerned about what we saw from the earlier issuance. when you think about leverage loans, generally it is logical there is a bit of demand for the asset class. is defensive to the concerns of the market going into the year. rising rates. if we are wrong fundamentally,

to get higher recoveries. that led to a lot of exuberance and issuance. he saw aggressive structures and pricing. the loans issued a few months ago were prized aggressively. they had a lot of flexibility for the underlying borrowers. you see a little volatility because of the demand pulling back. you will then see an impact. the secondary issues will reprice. with all the volatility we are seeing in the markets and concerns about growth in trade, that meets the volatility. it is something we frankly expected. jonathan: is this something you would buy into? the average price of the secondary market is below par. is that something you find attractive? jim: we are not concerned about the underlying fundamental credit risk. there are pockets of risk, pockets of concern and research is important.

we see the loan market reprice and think it is a buying opportunity. i will tell you you have to focus on bottoms of research and analysis of each underlying credit and make sure the structures you are buying into, one of the most important things, you understand because there is risk inherent in the structure as the deal has challenges. krishna: we have had this discussion many times. we continue to like the loan market. the driver is relatively simple. the spreads are not that wide. it is a choice between high-yield and loans. still, the risk reward is significantly better in loans than high-yield. jonathan: even though the fed might be pausing or slowing down on interest rates, at least 50% was not just the credit story. it was the floating-rate aspect of leveraged loans. difference are not continuing going up, wide-eyed loans -- why

buy loans over high-yield? krishna: the slowdown may be more significant than we expect. you don't want to own loans either but you are better off owning loans in that environment because the prices are going to go to unless. jonathan: something i'm trying to explore is credit issues or slow inflection points? is that what we are witnessing here? priya: i think so and i think it is a general repricing. we had zeroent, rates in the u.s. globally you had negative rates on the front end. all of that is repressing every asset class. we were in quantitative tightening mode. those three months treasury ds, it on getting that for

risk, a credit, duration you want to pay me a little bit more to take any of the risk. that is getting repriced. krishna: that's an important point. you can get cash at 2.5% is a direct competitor to any income-producing asset. if you are retired or an endowment trying to fund things were pension plan, 2.5% is like it either -- does not get you there. 2010 they werer extraordinary attractors. but now they are tied. gjtht. the need for infamous perennial. you have to take risks. the question is what risk do you like that will hurt you the lease in the long run? jonathan: krishna likes loans.

where do you stand? jim: i like loans of are high-yield as well. the price volatility is much lower in high-yield. i don't mind the high-yield asset class. i think the false will remain thinkat defaults -- i defaults will remain low. the question of relative value. they arere yields are, comparative to the high-yield market place right now. you have lower volatility. from a price standpoint that helps for a return profile. jonathan: jim: it is a big driver of the returns. and the psychology of the high-yield market. oil has been a driver of growth. we have seen oil prices come off. even with the rally in equities post howell comments --

post-powell comments, commodity oil -- it might be driven by oil. you might see loans more because it oil is a small part of the leverage loan markets. jonathan: you will stick with me. jim schaeffer, krishna memani and priya misra. let's get a market check. up just a single basis point on a two-year. deal stand unattended in europe by a couple. on a 10-year by a couple. we look at the week ahead featuring chairman powell and the u.s. jobs report. this is "bloomberg real yield." ♪

jonathan: i am jonathan ferro. this is "bloomberg real yield." we have the g20 dinner between president trump and resident -- president xi. jay powell testifying before congress. anducial opec meeting, wrapping of the week with the u.s. jobs report. joining me is priya misra and krishna memani and jim schaeffer . it is like the g20 has suffocated the whole agenda. there is a lot going on its week. priya: the uncertainty around trade is dwarfing it. one would've thought the report should of been a big deal, but we know it is doing ok. know if you see the slowing in the economy we are expecting showing up in payrolls. trade, opec, all of that will dominate. jonathan: one piece of five

frequency data is the initial jobless claims. anything to worry about? krishna: these are highly volatile theories. i will not jump into it except the market is expecting a downward trending growth expectations. if you see a supporting deal, you grab onto it and do things with it. nowu.s. economy right continues to do well. it will slow in the next year and the fed will react accordingly. jonathan:, we all suffering from confirmation bias? krishna: of course we do. jonathan: what you looking for? jim: i would not undersell the importance of the opec meeting. trade is important. employment numbers are important. the opec meeting is important to understand with the direction is from a supply and demand imbalance we have seen. we have seen the rhetoric of the

trump administration about wanting lower oil prices. i think is a pretty important thing for the market going forward. once we get through the g20. jonathan: we are straight into the politics. where is it going? opec and the outcome of the meeting. priya: it is very hard. there is not a lot of conviction. our view is this is mostly a supply issue enough to much demand. it should start heading higher but there is not a lot of conviction. jonathan: no one is talking about the ecb either. krishna: i think ecb is in a far worse situation than the fed. the underlying strength in the european economy with emerging markets doing far worse than they were fears ago. the strains are quite significant. is still that at some point the have no choice but to stop and rates are

remaining lower for an extended period. jonathan: can i get a positive rate above zero? priya: i think they would love to what they have to have a lot of things going in their favor. we have had a one-off issue. mistake, is make a don't buy the one-off argument. is how systemic is the issue. i think it will stop qe. they are running out of bonds and we have to stop qe. summer, fall come into winter, we are trying to normalize rates but i don't know if they can do that. jonathan: this is the rapidfire around. some questions really quickly for you. have we seen the high on the 10-year yield for the cycle? priya: know. krishna: yes. jim: yes. jonathan: have a seen the tights on high-yield spreads?

krishna: absolutely. priya: yes. jim: no. jonathan: deal or no deal in argentina? priya: no deal. krishna: framework. jim: i will go framework. jonathan: it is great to have you with me. priya misra, krishna memani, and jim schaeffer. great to catch up with you. from new york city, we will see you next friday. this is "bloomberg real yield." ♪

mark: i am mark crumpton. president trump joined the leaders of canada and mexico on the sidelines of the g20 summit in argentina today the senate revised trade pact he calls groundbreaking.

the agreement is meant to replace the 24-year-old north american free trade agreement, push the president is called a disaster. each country's legislature must improve the new deal. >> i look forward to working with members of congress and the has been so well reviewed i don't affect to have much of a problem. to ensure the complete implementation of our agreement. mark: the president praised the trade pact. justin trudeau was more measured. he used the ceremony to: president trump to remove the steel and aluminum tariffs the u.s. slapped on canada and mexico. -- theht again president mexican president said he was honored to be at the signing on the last day of his a administration. paul manafort will be sentenced 5