♪ i'm jonathan ferro, this 30 minute set against fixed income, this is bloomberg real yield. coming up, ahead of the g20, the u.s. looking for successful talks with china. traders everywhere reprice the rate outlook, leaving the federal reserve looking to retain a world of uncertainty. let's call it the g2 in argentina. >> everything's at stake, as it were. thing about a trade war

is that nobody wins. we all lose out. >> we are all, i would say in europe, worrying between china and the united states which has to stop. >> the whole trade issue is now becoming mixed up with strategic issues, i think trump wants to appear tough on china, so we are not counting out a major breakthrough, but the fact is that this is actually starting to impact sentiment. deal there was a trade with china which were definitely be better than what we currently have, i think the markets would be very, very excited. happen theesn't weekend, the two sides are digging in for a trade war that will run for the rest of this administration at least. >> turning around the table is head of global rate strategy, cio.

let's begin with you. how do you define success over the weekend? >> i think the minimum condition would be a cease-fire. i think real success would be dropping all the tariffs, we had decided there's no trade issue, but i really think this is much more than trade, there's geopolitics, and so i think this is actually -- we're going to have to grapple with this for a while. all we are looking for saturday night is, do we have a framework, a foundation that they are going to work on? which means that it's put on is that just push off the table for a little while? >> i spent the week trying to understand where expectations are going into this.

where our expectations for you, what is the base case? >> i agree with my counterpart said, on some level the continuation of a dialogue. frankly, we expect that. we expect there to be some discussion. maybe not the change with a have done today, but there will be an ultimate resolution is positive. >> i think clearly what he was articulate it makes perfect sense. a cease-fire would be good but i think it's girly on. as the economy slows down, the pressure on the trump administration to find a resolution, at some point increases. don't have a resolution, the markets will continue to expect resolution and i think that's really the key point. >> let's say we wake up monday morning with a cease-fire. how willing are you to repress interest rates at a federal

reserve based on some happy talk over the weekend? expectations would reflect the interest rate in 2019, they 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. >> i think the market reprice -- reprice will hike significantly. we were very well priced for growth and potential. i think the question, does it go below 2%? if potential is one and three quarters, are we looking at 1% gdp for fourth quarter or 2020, stop.he fed has to but we are pricing at essentially neutral which i think is what the fed is trying for. >> the conversation we're having is whether we are trending for group or something more sinister. which one is it? >> we think we are going below trend growth. one of the biggest things is uncertainty of what trump policy mean;ing to rea

it's all about the velocity of the pace of growth and what that means from a fed standpoint. what does it mean for the federal reserve biggest charm and this week speaking about rates, taking it -- still lowt rates are by historical standards. and they remain just below the range of estimates for that level that would be neutral for the economy that is neither speeding up nor slowing down. >> was that a statement of fact or was that a dovish term? >> i think it's a statement of fact. what is redeeming about this statement is that the walk back from all the stuff that they were talking about in september which is we are not going to stop at neutral rates, who knows. walking back from all of that makes perfect sense and if they had continued down that path, that would have been a positive

thing. this is reorienting things in the right way. >> my conclusion is that we claimed optionality. >> yes. >> whether reclining optionality has to mean a dovish out, because reclining optionality can also mean a series of interest rate as well in a number of respects. >> but i think a lot will depend on the actual data. it has to come from the inflation front. if you are at some hockey stick approach, then the fed uses their optionality on the hawkish runs. happening,fs are not the optionality almost assumes that the fed now is looking at financial conditions because from far frome neutral and above neutral to today? the data really has not changed. what has changed his maybe we don't have to go about neutral because financial conditions have tightens. i actually think there's a limit

of a shift in the federal reaction. >> with talk about a shift. rate expectations. one hike for december, perhaps another for next year. you got inflation expectations rolling over as well and i'm trying to get my head around whether inflation expectations, whether the price has maybe gone a little too far. i've been long treasuries, we actually took it off. i don't know about going short just yet. level. that's the for that case that inflation doesn't write, if the fed is going to hike more aggressively. >> was your view on that? >> our expectation is where the market is.

would do oneey hike or maybe two next year to take advantage of all the market data. it's in line with what the markets expect. i think it's really a story of what is priced in. that is, a lot of what was getting priced in, in terms of not going to stop at neutral has been priced out. inflation expectations are actually trending over. i think from the optionality standpoint, buying that option may not be such a bad thing. >> let's talk about how this has been priced of the treasury curve. we have gone from a flattening curve to something a little bit differently. >> the market is pricing a policy state. this might not be on the hike front. the fed saying that's not an active foreign policy, they are letting that run off every single month.

they are going to make another technical adjustment. why lower rates led by the long end, the fed might be a little bit late in technology that policy may be too tight. i that's entirely true, but think it's driven far more by the fact that the pace of slowing has picked up in a meaningful way. it's that driver that has gotten the rates up 3%. market was always afraid of the federal state, but i think he given the economic movement, they were willing to give the fed a little bit of benefit. at some point what they are saying is effectively, they will stop and will run the easy path. >> are you willing to get on board with that we see come through? on,e do have a flat in her -- flattener on.

as much as we are looking for the slowdown, in the next couple months we actually don't see the u.s. economy moving. we see the fed hiking in december and another in march. anchored by were global rates are. flattening. on, we get to the auction block. show me some signs. that conversation coming up next. this is bloomberg real yield. ♪

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>> i'm jonathan ferro come of this is bloomberg real yield. i want to head to the auction block for the treasuries are more than $280 billion this week. i want to focus on the $39 billion auction that came out in force. the lowest amount of notes since january elsewhere over in u.s. investment, there was a bit of a bounce back once they saw the most pricing with 10 borrowers and a total of more than 13 point $5 billion sold. in leveraged loans, a very different tone. the rates since july including deals from communications and perimeter solutions. jim, what is going on with leveraged loans right now? gettingnk the market is a little bit concerned about what we saw from the earlier issuance this year. about leveraged loans generally, it's logical there is a bit of demand for the asset class. in the marketns going into the year, rising rates and it's up and capital structure. if we are wrong fundamentally,

you get higher recoveries. oft that led to his a lot exuberance and issuance. you saw pretty aggressive structures in pricing and what that meant was the priced with the loans and the market issue a few months ago were priced pretty aggressively and they had a lot of flexibility for them. you see a little volatility because it's a band that's so strong and false back, you are then going to see it impact the new issue marketing because the secondary issues are going to reprice. combine that with all the volatility in the markets and the concerns about growth and trade, that leads to volatility. >> it's something you like and something you buy into. market, is that something you like and find attractive? >> we are not concerned about the underlying fundamental credit risk. there are certain pockets of risk that you are going to see, pockets of concern amongst research is really important.

but we see the low market price, we think is a buying opportunity. we think there's value there. i will just tell you, you got to really focus on research and analysis and each one of those underlying credits and make sure that the structures, which i think is one of the most important things, you understand. because there could be a risk inherent in structure as the deal comes under some challenges. >> we have had this discussion many, many times. we continue to like the long market. i think the driver of that is relatively simple. spreads are not that wide, they are decent, but they are not that wide. it's that choice between high-yield and low. and i think still, but the risk reward is a significantly better in high-yield. >> even though the fed might be pausing or at least slowing down interest rates? story,not just a credit it was also the floating rate aspect of leveraged loans as well. if rates are going to continue going up, why by loans over

high-yield? >> again, risk-reward. that slowdown may be far more significant, and in that environment, you don't want loans either, but you are better off with loans in that environment because the price of that going forward is less. >> something i've been trying to explore is whether we got some credit issue or whether we -- leverage hits from the seller to the investor. is that what we are witnessing? >> i do think so in a think is a general repressing. we can talk about relative value between high and leveraged loans, but the environment where we had qe, we had fewer nominal rates in the u.s. globally, you had negative real rate. that, i think you got a couple of things happening. positive real rate on the front end. actuallyury bills are

giving you almost 2.5% rate. if you are getting that for taking no credit risk, no wouldn't hurt it me more to take a little of the risk. i think that is getting reprice. >> i think that's an important point. the fact that you can get cash at 2.5% is a direct comparator producing asset. having said that, if you have an endowment trying to fund things, 2.5% just does not get you there. that has been the story with credit in the entire cycle. maybe in 2009, 2010 that was a factor. have been very tight. and the reason for that is if you are looking for income, and the need for income is perennial, you have to take risk. and it's really a question of what risk do you like that is going to hurt you the least in the long run? >> but stock about the risk in the long run. where do you stand on that debate? >> i like loans over high-yield

as well. , i price volatility of loans don't mind the high-yield asset class because i'm not concerned about the market. i think that fault will remain low and really at the end of the day it's the fault the drive returns. loans are up in quality, i feel good about the component. so the question is of relative value. are, it's yields actually pretty comparable to the high-yield marketplace right now and you have lower volatility which from a price standpoint helps your returns. --is the high-yield sector >> it's a big driver, certainly, of the returns. been kind of a driver of u.s. global growth and we see oil prices come off and even really wave on the high-yield marketing. ,ven with the rally in equities

you saw it on high-yield. you did not quite to the usual bounce and the concerns about direction and's being part of the high-yield market. and thus it would imply that you should like loans a little bit more because it's not as take -- it's a pretty small part of the leveraged loan market, frank with. >> great to catch up with you. let's get a market check on where treasury comes in this week. up a single basis point and yields down on the 10 year by just a couple. .oing into a big weekend we will hear from him again next week. we will look ahead to the week ahead. this is bloomberg real yield. ♪

♪ >> on jonathan ferro, this is

bloomberg real yield. it's time for the final spread. meetinge, we have the between president trump and president xi. a crucial opec meeting in vienna and to wrap up the week, we get the u.s. jobs report. it's almost like the g20 has just suffocated our agenda. there's a lot going on. >> there is. but the uncertainty, i think that's warping it. the real report, one would have thought should be a very big deal. coincident orre lacking. i don't even know if you see the slowing in the economy that we are all expecting. to be forward-looking expectations which is talk around trade, opec. data. the high-frequency

and one piece of high-frequency data that everyone is jumping on his initial claims. anything to worry about? >> i think these highly volatile i wouldn't jump into it except for the fact that the market is expecting downward trend in growth expectations. and if you see it supported, you grab onto it and do things with it. at the end of the day, the u.s. .conomy right now continues it's going to slow, it's going to slow in the next year and the fed is going to react accordingly >> and you think we are suffering from confirmation bias question mark >> of course we do. for?at are you looking of the opectance meeting. obviously trade is important, the employment numbers are always important, but i think the opec meeting is very important to understand what the direction is from a supply and demand balance. the rhetoric from the trump administration about wanting lower oil prices, how that moves

between the saudi's in russia. i think is a pretty important data point for the markets going forward. >> it's hard to get your hands around. take a guess, where is it going? >> oil prices specifically? >> is very difficult. >> it is very hard. they are showing that there's not a lot of conviction. our view is that this is mostly a supply issue, not so much demand. each and start heading higher at some point. >> again, nobody is talking >> i think it is in a far worse situation than the fed. the underlying european economy with the emerging markets to them far worth and what they were doing a few years ago, i think it's quite significant and my expectation internally about it, my expectation is still that at some point, they have no choice but to stop and rates

remaining low for an extended time. >> at the ecb? >> i think they would love to come up at they need a lot of things to go in their favor. every quarter we have had a one-off issue that the markets have a had a weakness to growth. when my kids make the mistake again and again, i don't buy the one-off argument. how systemic is this issue as opposed to a one-off issue? they are running out of bonds. but i think we'll see the extension from maybe summer and winter and so to be a perpetual, we are trying to normalize rates. we are going to wrap up the program. let me go through some questions really quickly. have we seen the high on the 10 year yield for the cycle? >> no. >> yes. >> yes. >> have we seen the title high-yield spreads.

>> absolutely. yes. >> no. >> argentina? >> no deal. >> framework. >> i will go framework. >> great to have you with me. catch up with the. from new york city, that's it for us, we will see you next friday, 1:00 p.m. p.m. new york time, 6 p.m. in london. this is bloomberg real yield. ♪

♪ >> on alix steel and welcome to bloomberg commodities edge. 30 minutes of trading the