jonathan: from new york city. bloomberg real yields starts right now. coming up, fueling global growth fears. trouble in paradise, leverage loaned funds suffering their biggest flows on record. we begin with a big issue. what does the fed do when 2019 looks increasingly uncertain? >> posit. >> cause. >> pause for the time being. >> i think in one hike next year.

>> a debate going on. two more. >> two next year. >> whether one more hike or three more hikes. >> i would be pausing until we had clear sequence of inflation numbers above 2%. >> we have a situation where the fed has reversed course. they've raised rates. it doesn't get as much air time but the 50 billion a month in shrinking of the balance sheet is important. >> neutrals aren't 2.5. one person believes it's 2.5. we are not just below neutral. we're where neutral might be. >> i'm waiting for validation from the fed that they have changed direction. at the moment it's not clear. >> joining me around the table. great to have you with me.

is next week's decision really that much in the balance? >> it's not much in the balance against the market is expecting it. there's going to be a hike but the comments will be dovish. the question is how department -- dovish will they be? >> i think that the markets completely misinterpret anything. we live in this black and white world. either they're hawkish or dovish. how about the market's started to slow and now going back to trend line. we're not going to hike at all or hike five times. the fed shouldn't commit because it should be data dependent. >> so this is a market struggling to draw a distinction between a return to trend growth and recession. >> 100%. the yield curve is looking , saying the fed's already gone too far. something we've spoken about many times in the past. if you drop your buys, came down from mars after the past 20

years and you saw where growth is, you saw unemployment is through what most economists is saying full employment. you say we should be above normal but we're still below. >> why this market can't tolerate a 1% real rate. whenever we've reached that level things start to fall out of bed. >> wages have started to accelerate. they've gone up a little bit. employment's continued to be really strong. i say we get one, two next year but it will feel like a stop-start. i say we wait and see what the reaction is. i have a sneaking suspicion we may well end up look back and say, of course it was four interest rate rises. >> for me my big struggle is reading it into next week that basically all saying the same thing. a doveish hike. my response is relative to what? right now there is nothing priced in this market for 2019.

how can you doveish the market when we're priced for nothing anyway? >> you can't surprise but you've got to maintain a dovish commentary because they are transitioning away from the central bankers being in control, he just said good-bye to bond buying. that means it's all in the politician's hands. so i continue to believe that what they're really doing is talking the dollar down. a lot of the problems are hitting companies right now. it's more about the dollar and the more dovish they are as they say good-bye to controlling the markets, they're going to continue to weigh on currency. >> you mentioned the ecb, i think it's really interesting to think about whether they can hike interest rates through 2019 when the federal reserve in the minds of many people isn't going to be doing much at all. >> even if the fed were to go

two to three times, the fear is if it was thinking it was going to be able to hike rates in the second, it would be a difficult proposition given the fact that the u.s. economy is slowing down. now there's a chance the fed might pause after the december meeting. that really complicates policy down. for the evp that ecb. >> if the fed is going to struggle what does it mean for the ecb? >> really difficult for them. i guess they would like a hike in rates before the fed start taking them down again. the risk is that doesn't happen. by the time we get -- well a n ecb rate hike, mario draghi will be gone, growth will be gone in europe, this doesn't feel like an environment where you get a rate hike at all next year. i don't think we get anything from the ecb until we're well into 2020. >> you've got to talk about all this relative to where we were in the market and priced where

we are positioned. we've cleaned out in the treasury market. on the 10 year yield right now we are just at 290. on the german ten-year we're around ten basis points. -- 25 basis points. looking pretty rich. pricing out a lot of inflation, a lot of rate action. does that mean we're sort of primed to move the other way? >> forecasting rates as you know is very, very difficult. jonathan: >> practically speaking. >> i think we're going to set up a lot of volatility. i think it's going to cause much more what happens in the equity market than anything else. core rate, for a long time you know with nominal growth above 5% why does it make sense to have a 10-year yield at 3%? if you think that you're going to get nominal growth of 25 basis points a year in europe, you're going to have really big problems. jonathan: kathleen? >> i think that what's weighing on the market is uncertainty. and you could move in to 2019

and see either an inflation surprise or something that really moves the market. that is not factored this right -- in right now. jonathan: are you seeing up tips? >> absolutely not. jonathan: might get an inflation surprise. >> tips are relative. who wants to take a weaker return anyway? i would look away from the rates market for opportunities to increase returns. >> can i say something about draghi? jonathan: by all means. >> he's a magician. he somehow he gets away with being able to basically give us no information. we have no -- we're parsing every word that chairman powell says in the u.s. yet when it comes to dragi we have absolutely no clue. what i found interesting, are you out of things in your tool box considering we're late in the cycle you haven't even started the rates yet? he was very adamant that they think qe is now a permanent part of the tool box and that in the

jonathan: do you think he got away with it yesterday? because i've spoken to a few people who walked away from yesterday quite worried. >> look at the markets. the markets -- every time we think it's ridiculous, 25, trade, it seems to not move. >> what will be really interesting that we haven't talked about is what is china going to do? part of the uncertainty is the trade tensions. the u.s. has the leverage in the short term and china is worried about slowing. they're going to open up the stimulus spigot again in a targeted way and that will change everything. jonathan: do you see that happening? because at the moment there haven't been big signs of it. subtle signs they're leaning towards an easy. do you think they get bigger? >> i think they've got a few things they need to sort out on the agenda next year, and it doesn't feel like an environment where they need to tighten up. so we need another trade o for -- trade for italy or you could

run into a credit crunch by 2020 in italy into a tough economic environment for italy as it exists today anyway. the data out of france today didn't point exactly to an economy that could really live within much in the way of tightening. the ecb moving to more of a doveish stance seems like a pretty easy call from here. jonathan: you will stick with me. coming up on the program, the auction block. the drought in high level issuance continues. reaching a level we haven't seen in a decade. that conversation coming up. yield." bloomberg real

♪ this is "bloomberg real yield." i want to head to the auction block now where more than 220 billion dollars worth of treasury were auctioned off this week. i want to focus in on the 30-year sale offering received strong demand 22% which is the second lowest on record. also tesla planning to offer 800 million of bonds. backed by auto leases. it found strong demand for its inaugural bond sale in february and the company plans to become a regular issuer. finally, high yield, there is a severe drought. as it stands now december would be the first month of no issuance since november 2008. still with me. my guests. kathleen, your thoughts?

where's the supply? >> there is no supply and the high yield managers are feeling the pain and reaching for yields. they're just aren't a lot of just aren't a lot of choices out there. that makes it for some not so great decisions in the long run. >> the issuance in the past couple of years has gone two places. yields were low, spreads were tight. then a lot of people, a lot of companies, financing was much cheaper and you didn't get the traditional coverage. jonathan: here we are in the low market seeing outflows. what i would like to learn from you, just put this into perspective. a lot of hyperbolic language around all of this. the biggest outflows on record. how important are some of these etf's, mutual funds to the overall universe? >> i think it's so much more important than loans. but it still takes three or four weeks to settle a loan.

so having outflows that are 2%, 3% of the market is scary. what happens if you get 10%, 15%? remember most bonds trade -- do a trade get your money in two or three days. a loan, two three four weeks. so i'm worried if this continues we'll start hearing liquidity funds issues. jonathan: let's talk about that, luke. a lot of retailers have been able to get access to things that aren't liquid but give the illusion of liquidity. because you can buy the etf. what are your thoughts? >> i've had a problem with that for a long time. this whole daily liquidity on a illiquid asset class looks really alluring. looks like you can get in, get out. most of the time you can but the investors are a little late to the trend. i agree with your other guest. you can run into problems further down the line. the market can get very gappy in funding those. so the price that's going to be offered as we get further and further into that crunch for loans could get pretty nasty.

certainly one we are watching very, very carefully. jonathan: kathleen? >> i couldn't agree more in terms of gappy. the etf's are important but you have foreign investors. the clo machine has been most of the appetite. when that changes and you're seeing that supply/demand come out of balance, who are you going to attract? there are a lot of new investors in and the ones that are going to come in are probably more like me, total return, that are looking for much bigger discounts than that market has seen since 2008. >> there's another factor at play here. after years i've heard about, high yields have done better than loans on the upside. just wait until the downside. they are senior secured. we're seeing now is part of the reason investors are fleeing is because the credit quality is not nearly as good as it used to be, the asset coverage is not a as good. so we should expect more defaults. lower recoveries than history

and loans. started 2%, 3% in loans. we think loans will continue to underperform. jonathan: i speak to a lot of institutional money at the moment. they are not too worried. they haven't actually done a lot. they're looking at 2019 saying in best case we'll see performance. or outperformance. i haven't seen the capitulation yet. >> institutions are much heavier in bonds than general. remember, we've been through a partial cycle. we have a late cycle, not in the commodities space. look what's happened in the energy space. very unlike 2015. 2014 and 2015 you had companies that had tremendous amount of debt, couldn't survive even at $50 oil. those companies overstructured in the past two years. what's left is much more able to withstand lower commodity prices in general. jonathan: it's intriguing to me that credit's finding a flaw and leverage loans are continuing to roll over. some might say it's the right story.

a lot of people are pricing out the federal reserve. signal?s that >> it's still climbing higher and that is also end of year liquidity to some extent. but it's not expected to move that much higher. so the interest in capturing spread may not be sustainable to early 2019. i think what we're seeing is convergence in the long term defining high yield differently that it won't be just asset classes anymore. jonathan: i'm trying to take the other side. i'm thinking about this from the following perspective. there will be people who say the flows showing up and the outflows showing up in the last couple of weeks are basically the tourists. the people who don't really know the asset class. the institutional money is staying calm and this will play out for a couple of weeks, maybe a couple of months then it will settle down.

is there anything in that? >> i think you could make an argument that's the case. the problem is, it's about the flow as it always is in these instances. who's going to step in to support the market when it starts looking cheap? i think if you continue to see the retail or tourist flows out of what is in the liquid asset class, there's large risk. it will be a little -- well, quite a bit lower before you see the institutions stepping in. the settlement, the legal issues about owning are difficult. these are not easy instruments and they tend to be issued because it's cheaper for the issuer rather than good for the person who is lending the money. >> nothing wrong with tradition. jonathan: 2018, much happened with loans. >> absolutely. if i can clarify a point you made. you are technically correct that they price out libor.

but in reality they don't. the average loan has gone up less than 100 because they're callable at any time. when people are throwing so much money -- we made a that point a lot of times. it won't happen on the diets done -- downside. horrible convection. jonathan: it's a really good point. thanks for bringing that up. our guests sticking with us. i want to get a market check. yields up just a couple of basis points on a two-year. pretty muted price on the long end. so still ahead the final spread. a really busy week ahead featuring central bank. that conversation just around the corner. this is "bloomberg real yield." ♪

jonathan: this is bloomberg -- "bloomberg really yield." -- really yield." it's time now for the final spread. over the next week we'll get interest rate decisions from around the world including the federal reserve the bank of england and the bank of japan. plus an eye on the potential for a partial u.s. government shutdown. stay with me. a lot of people talking about liquidity, and making sure you have some liquidity. talk me through about why that is so significant at this stage of the cycle. >> i think we overemphasize liquidity in the short run. as it relates to the end invester. we talked in the previous segment about having continues -- continuous liquidity in etf's. most investors shouldn't have daily liquidity. it actually hurts them. professional managers that want to move their portfolio around , if there isn't the proper liquidity it's going to be very

difficult or costly. we have to pay attention. jonathan: size matters here? >> size definitely matters here. being nimble is a great advantage. subject? >> i think it depends what instruments you've got available to you. there's more than fiscal cash for sure. so it doesn't always cause you a problem when that's the case. it depends on the makeup and your mandate and so many different factors. we've not really suffered too much from a liquidity problem in our fiscal funds this year but we've built up the amount of liquidity we have for sure. jonathan: talking to you guys over the last 25 minutes, talk about what comes out of 2019. i want to get an idea how

difficult it is to manage money when i imagine a lot of clients are very, very nervous about what 2019 bridges and what you -- brings. what you communicate to them when you pick up the phone what do you say? >> well, we point out that with the exception of trade we were saying all the same things at the end of 2015. we're due for a recession we're lated in the credit cycle the fed is going to screw things up, et cetera. the reality is that price matters. maybe we are closer to all those things but we also have yields higher almost across the board. it would take probably a recession to end up having the kinds of negative returns we've seen. jonathan: kathleen? >> i think that's a very valid point. the fundamentals are positive so it's going to be tough to get a systemic credit event in the market away from loans. but it does give active managers a real opportunity with specific risks. with we've seen the ge's, pac gas, have these specific companies that have issues and that's where the liquidity plays into long-term investors hands. >> i guess.

you've got to be careful. there's not many times when credit gives you a negative return for two years in a row. you have to look really hard for that to happen in history. yet event risk is going to be important but very hard to play from the long side. we would be cautious about that. jonathan: a very sensible , constructive time. let's get some final thoughts in the rapidfire round. we look ahead to the federal reserve tee sigs next week. can powell deliver a dovish surprise? >> no. >> no. >> not a surprise. no. jonathan: here's one for you. can ecb deliver a high performing lease? yes or no? >> he could but i'll say maybe. >> no. >> he leaves in october so definitely no. jonathan: have an idea of where you stand on the following

question. the outperformance in 2019, does it come from leverage loans or high yield? through 2019. >> not even close. could have potentially double digit returns. jonathan: really? >> yes. jonathan: kathleen? >> high yield. >> high yield for sure. jonathan: got an idea where the consensus is. great to catch up with you. from new york, that does it for me. this was "bloomberg real yield." this is bloomberg. ♪

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