♪ jonathan: from new york city, i for our viewers worldwide, i am jonathan ferro, with 30 minutes dedicated to fixed income. this is "bloomberg real yield." ♪ jonathan: coming up, raising the bar ahead of the g20. the u.s. looking for successful talks with china. as the growth outlook stumbles, traders reprice the rate outlook, leaving the fed looking to reclaim optionality. in a world of uncertainty. we begin with a big issue, let us call it the g2 in argentina. >> everything is at stake. >> hopefully we get some not bad news.

>> the thing about a trade war is that nobody wins. in a long-term, we all those 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 is now becoming mixed up with strategic issues. >> trump wants to appear tough on china. so we are not counting on a major breakthrough. but the fact is, this is actually starting to impact sentiment. >> if there was a trade deal definitely it would be better than what we currently have, and i think the market is be very excited. >> if that doesn't happen this weekend, the two sides are digging in for a trade war that will run for the rest of this administration, at least. jonathan: joining me is priya misra, krishna memani, and coming to us from chicago is jim schaeffer.

let's begin with you, priya. minimum condition of success, how do you define success over the weekend? priya: the minimum condition is a cease-fire. i think real success would be -- we are dropping all the tariffs. we have decided that there are no trade issues. we are going to go back on any of the tariffs. but i really think this is much more than trade. it is trade, geopolitics, ip. so i think this is actually a pretty slow burn issue. we are going to have to grapple with this for a while. i don't think we will get a lot out of g20, but the markets are treating this as an extremely binary event. all we are looking for after the we will have aer framework, some foundation that they are going to work on. the remaining $267 billion tax is on hold? the 10% or 20%, is that pushed off the table for a little while? jonathan: i have spent the week trying to understand where

expectations are, going into this much anticipated dinner. what is our best case? jim: i agree with my counterpart . i think best case is some level of a continuation of dialogue. the markets would welcome that , and we expect about. we expect discussion between the two parties. maybe not changing what they've done to date, but providing a framework for continuation of dialogue, which gives markets the idea that there will be an ultimate resolution that is . that is positive. krishna: clearly it makes perfect sense. a cease-fire would be good. beyond that, i think 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 an important point worth exploring. let us say 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 to interest rates in 2019 are driven by one simple thing. the u.s. economy slowing down from 3.5% on the way to 2%. as long as that is the case, buying rates is a good strategy. priya: i think the market is -- has repriced hike significantly. jonathan: massively. priya: we were pricing in 3%, that is when we went long treasuries. i think we are well priced for growth remaining above potential. i think the question is, does it go below 2%? if potential growth is 1.75%, are we looking at 1% gdp in the fourth quarter of 2020? then the fed has to stop before neutral. but we are pricing in essentially neutral. witches, i think come out what the fed was trying to message. jonathan: the conversation we are having is whether we will trend towards something more sinister, or below trend growth? jim: we think we are below trend growth. a lot is weighing on the economy. one of the biggest things is uncertainty of what trump policy will mean, what trade will mean.

the resolution of that. we know growth is slowing. it is about the velocity of the pace of growth and what that means from the fed standpoint , and how aligned the fed will be in their decisions in relation to how growth slows. jonathan what does it mean for : the federal reserve? this was chairman powell this week speaking about rates. take a listen. chairman powell: interest rates are still low by historical standards, and remain 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 statement is the walk back from all the stuff they were talking about in september and august. which is, we will not stop at neutral and this artifact about neutral rates. who knows? i think walking back from all of that makes perfect sense. i think if they have continued

down that path, i would have been a policy mistake. so they are we are renting things in the right way. jonathan: if that was the objective, optionality, perfect success. whether reclaiming optionality means a dovish outcome for the federal reserve. because reclaiming optionality could mean a series of interest rates next year that no one expects. priya: a lot will depend on the actual data. if data continues to slow, it has to come from the inflation. if you are at a hockey stick approach for the phillips curve, then you see a big spike in inflation and the fed uses that optionality on the hawkish front. global growth is not helping. trade tariffs are not helping. the optionality are most a seems that the fed is not looking at financial conditions. what is the change? from october 3 when chairman powell said we are far from neutral, and today, we can go above neutral, the data has not really changed. the changes the idea that we do have to go over neutral. because financial conditions

have tightened. i see it as a little bit of a shift in the fed reaction function. apart from growth, i think they're looking at financials. jonathan: let's talk about a shift in the price of the story. rate expectations recalibrated before the powell speech. one hike for december, perhaps another hike next year. tips of rolled over. you have inflation expectations rolling over, as well. i am trying to get my head around where 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 we have seen the last couple of months? priya: i have been long treasuries since mid-october. we actually 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 selling treasuries on the front end, some breakevens for that case that inflation does rise, the fed , if they were to hike more aggressively, i think breakevens have to be higher. jonathan: jim, what is your view? our expectation for the fed is basically in line of where the market is now.

we thought they would hike in december. one hike, maybe two next year. we think he is aligned with what the markets expect and the markets will react favorably. jonathan: krishna? krishna: i think it is really a story of what is priced in. a lot of what was getting priced in in terms of -- we will not stop at neutral, has been priced out. therefore, if tips are rolling over, inflation expectations are actually 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. we have gone from a flatness driven by the front end, to something of a bit differently, you thought. priya: the bull flattener maybe -- may be a policy mistake. it might not be on the hike front. i think the balance sheet runoff is another form of policy. is not is saying that it an active form of policy and they're letting it run off every

single month it is creating . demand. they are going to make another technical adjustment. what if we are at the steep part of the curve? the bullt is where flattening of the curve, which means lower rates at the front and come i think it is telling you that the fed might be a little late in acknowledging that policy might be tight on the balance sheets and hikes. krishna: i think that's driven far more by the fact that the pace of slowing has picked up in a meaningful way. i think it is that driver that has gotten the 10 year rates up 3%. the market was a was afraid of fed mistakes, but i think given the economic momentum, they were more willing to give the fed the benefit of the doubt to riyadh i think they are pricing that out. at some point, they are saying is that effectively, they will stop and go down the easing path. jonathan: are you willing to get on board with the flattening we have seen come through? priya: i'm almost more for that they with the view that we are still seeing easing in the system. as much as we're looking at the

bash for the slowdown in growth, we actually don't see the u.s. economy rolling over. we see the fed hiking in december and another in march. the frontlly think and can selloff, and the long end of the curve stays flat. bull flattener, but i do like a flattener. jonathan: guys, you going to stick with me. coming up, we get to the auction block. the u.s. leverage loan market showing signs of sputtering. that is coming up next. this is "bloomberg real yield." ♪

♪ jonathan: i'm jonathan ferro. this is "bloomberg real yield." i want to head to the auction block now. u.s. treasury sold $28 billion

-- more than $280 billion this week. i want to focus on the $39 billion auction of two-year notes. director bidders came out and forced demand. dealers received the lowest amount of notes since january. elsewhere, in u.s. investment-grade, there was a bit of a bounce back. wednesday saw the most pricing since november 7 with 10 borrowers, and a total of more than $13.5 billion sold. leverage loans, offerings are getting pulled at the fastest rate since july. including deals from sorenson communications and perimeter solutions. still with me is priya misra, krishna memani and jim schaeffer. jim, what is going on with leverage loans right now? jim: i think the market is getting a little concerned about what we saw from the earlier issuance this year. if you think about leveraged loans, generally, it is logical that there is a bit of demand for the asset class. the two concerns of

the market going into the year. rising rates. it is up in capital structure and leverage credit. if we are wrong fundamentally, you get higher recoveries. that led to a lot of exuberance in issuance. you saw pretty aggressive structures in pricing. loans issuedat the a few months ago were priced aggressively. they had a lot of flexibility for the underlying borrowers. you get forward into the market, you see a little volatility because of the demand that had been so strong, pulling back. you will then see an impact. the secondary issues will reprice. the primary will have more challenges. combine that with all the volatility we are seeing in the markets and concerns about growth, trade and everything else, that leads to volatility. and it is something we frankly expected. jonathan: is this something you would buy into? i believe the average price of loans in the secondary market is below par. is that something you find attractive? jim: we are not concerned about the underlying fundamental credit risk across the loan market. there are pockets of risk, pockets of concern and research -- and discipline amongst

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

krishna: again, risk-reward. that slowdown may be more significant than we expect. in that environment, you don't want to own high-yield. 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 down less. jonathan: something i'm trying to explore is whether we have some credit issue, or if we're slowgoing through this inflection point where the focus shifts from the seller, to the buyer. is that what we are witnessing here? priya: i think so and i think it is a general repricing across asset classes. the environment where we had qe, have a zero nominal rates in the u.s.. globally, you had a three rates on the front end. all of that compression went across every asset class. we were in quantitative tightening mode. you have positive real rates on the front end. you know, the three-month

treasury bills are actually giving you on almost 2.5% rate. if i am getting that for taking no credit risk, no duration risk, you want to -- you have to pay me a little more to take any other risks. think that across asset classes, is getting repriced. krishna: that's an important point. the fact that you can get cash at 2.5% is a direct competitor to any income-producing asset. having said that, if you are retired or an endowment trying to find things, or a pension plan, 2.5% does not get you there. so that has been the story with credit in the entire cycle. maybe in 2009 or 2010 they were extraordinarily attractive. but off -- but of late, they have been really tight. they have been very the reason for that, if you are looking for income, the need for income is perennial, you have to take risks. and it is really a question of what rescue like that will hurt you the least in the long run. krishna is clear, he

likes loans over high-yield. what kind of risk do you like, jim? jim: i like loans over high-yield as well. the price volatility is much lower in high-yield. now, i don't mind the high-yield asset class, because again, i'm not concerned about fundamental credit risks in the market. i think defaults will remain low. at the end of the day, it is defaults that drive returns on leveraged credit. i feel good about the floating-rate component. to the question of relative value, given where libor is, yields are in loan products, yields are actually comparable to the high-yield market right now. and again, you have lower volatility. from a price standpoint that helps you from a return profile. jonathan: does the high-yield sector should be view on high-yield sector at all? jim: it is a big driver of the returns. and the psychology of the high-yield market. of has always been a driver global growth, and we see oil prices come off. it really ways on the high-yield s onet -- it really weigh

the high-yield market. even with the rally in equities host the powell comments, he saw it weigh on that. it might be driven by oil. you might see loans more because it is a small part of the leverage loan markets. jonathan: great to catch up with you. you will stick with me. jim schaeffer, krishna memani, and priya misra. let's get a market check. where treasuries have been this week. twos, tens, and 30 year yields in the treasury market. yields up just a single basis point on a two-year, to yields 2.81. down on a 10-year by a couple. really muted price action going into a big weekend. from chairmank powell, we look ahead to the week. and the u.s. jobs report. 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 have the g20 dinner between president trump and president xi. chair jay powell testifying before congress. not many people talking about that. a crucial opec meeting, and to wrap up the week, the u.s. jobs report. still with me, priya misra, krishna memani, and jim schaeffer. priya, it is a must like the g20 suffocated the whole agenda. there is a lot going on next week. priya: it is. but i think the uncertainty around trade is dwarfing it. the report should been a big deal, but we know the u.s. economy is doing ok. is a coincidental or lagging indicator. i don't even know if you see the slowing in the economy we are expecting showing up in payrolls. it has to be forward-looking expectations, talk around trade, opec, i think all of that will

dominate jonathan: all of the high-frequency data. piece of high-frequency data everyone is jumping all over is initial jobless claims. anything to worry about? krishna: these are highly volatile theories. i will not jump into it except for the fact that the market is expecting a downward trending growth expectations. if you see a supporting deal, -- if you see supporting data, you grab onto it and do things with it. at the end of the day, i think priya is right. the u.s. economy right now continues to do well. it will slow in the next year and the fed will react accordingly. jonathan: do you think we are all suffering from a bit of confirmation bias? krishna: of course we do. [laughter] jonathan: who would've thought? jim, what you looking for? jim: i would not undersell the importance of the opec meeting. obviously, trade is important. employment numbers are always important, but i think the opec meeting is important to understand what the direction is from a supply and demand imbalance we have seen.

the rhetoric from the trump administration wanting lower oil prices. how that moves between saudi arabia and russia. i think is a pretty important thing for the market going forward. once we get through the g20. jonathan: it is really hard to get your hand around, because we are into the realm of geopolitics. take a guess, where is it going? for opec and the outcome of the meeting. priya: it is very hard. think itwhy i breakevens are showing you not a lot of conviction. our view is this is mostly a supply issue, not so much much demand. it should start heading higher at some point, but there is not a lot of conviction. jonathan: no one is talking about the ecb either. in a couple of weeks, a big , big meeting, i think, for president draghi. 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 a few years ago. i think the strains of -- i think the strains there are quite significant. my expectation is still that at some point, they have no choice but to stop, and rates will

remain lower for an extended period of time. jonathan: can i get a positive rate above zero at the ecb? priya: i think they would love to, but a lot goes into that. they need a lot of things to go in their favor. every quarter, we have a one-off issue that the markets attributed a weakness to growth. that is a little suspect, right? when my kids make a mistake again and again, i don't buy the one-off argument. how systemic is the issue? as opposed to just a one-off issue? they are running out of bonds and have to stop qe. but then i think we will see the extension from may be summer to fall, then winter. are perpetually trying to normalize rates, but i don't think they can actually get there. jonathan: this is the rapidfire around. let me whipped through some questions really quickly for you. have we seen the high on the 10-year yield for the cycle? priya: no. krishna: yes. jim: yes. jonathan: have we 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. jonathan: there we go. jim: i will go framework. jonathan: that was an easy one. i am sure priya would say it, too. it was great to have you all 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. 1:00 p.m. new york time, 6:00 p.m. in london. this is "bloomberg real yield." ♪ alix: three men decide oil's

fate. oil's next move in their hands. the $50 affect. goldman sachs warns that oil below $50 will have consequences. exxons expansion dream. we sit down with the exxon ceo to talk about his push in the permian basin and m&a plans. ♪ alix: i'm alix steel. welcome to "bloomberg commodities edge." 30 minutes focused on the companies, physical assets, and physical trading with the