jonathan: from new york city for our viewers worldwide, i'm jonathan ferro. "bloomberg real yield" 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? >> pause. >> pause. >> pause for the time being. >> i think in one hike next year.

>> a debate going on. two more. >> two next year. >> whether this is just 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 have obviously raise rates. it does not get as much air time, but the $15 billion a 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. jonathan: joining me around the feld, is gershon distant -- myd lou pick

first question to you, kathleen. is next week's decision really that much in the balance? kathleen: it is not much in the balance because the market is expecting it. there will be a hike but the comments will be dovish. will they be in 2019? >> i think that the markets completely misinterpret anything. we live in this black and white world. either they're hawkish or dovish. how about that growth has started to slow a little bit after years of being strong and now we are 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 somewhat data dependent. jonathan: so this is a market struggling to draw a distinction between a return to trend growth and recession. gershon: 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 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. luke: wages have really started o accelerate, haven't they? employment's continued to be really strong. i say we get one, two next year but it will feel like a stock-start fed. i think they will wait to see what the reaction is, to see if they need to do more through the rest of next year. i have a sneaking suspicion we might end up next year looking back and saying yeah, of course it was four interest rate rises. kathleen, my big struggle is reading the economist, and basically saying the same thing -- a dovish hike. what?ponse is relative to

right now, there is nothing priced in this market for 2019. how can you dovish lee price this market when we are priced for nothing anyway? you cannot dovish lee surprise, but you have 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 is all in the politicians' 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. jonathan: 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. a guest joined us last week and

had this to say. take a listen. >> even if the fed were to go two to three times, the fear is if the ecb was thinking it was going to be able to hike rates in the second half of 2019, 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 for the evp that ecb. -- for the ecb. jonathan: if the fed is going to struggle what does it mean for the ecb? luke: yeah, really difficult for them. i guess they would like a hike -- like to start hiking rates before the fed takes them down again, and the risk is that doesn't happen. by the time we get an 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. our view at the end of next year is many places -- i honestly cannot think we get anything from the ecb until we are well into 2020. jonathan: you have to talk about this where we are relative to

the market and price positions. we have cleaned out a ton in the treasury market. in the 10 year yield, we are on 2.19 on the u.s. ten-year. on the german ten-year we're around 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? kathleen: -- gershon: forecasting rates, as you know, is very, very difficult. jonathan: practically speaking. gershon: i think we're going to set up a lot of volatility. i think it's going to cause much more 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? 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 in right now. jonathan: are you seeing up tips? >> absolutely not. jonathan: might get an inflation surprise. how are you positioning for that? kathleen: total return. tips are relative. who wants to take a weaker return anyway? i would look away from the rates market for opportunities to increase returns. gershon: can i say something about draghi? jonathan: by all means. gershon: he's a magician. he somehow he gets away with being able to basically give us no information. you're right -- we have now -- we're parsing every word that chairman powell says in the u.s. yet when it comes to dragi we have absolutely no clue. and he's -- what i have found very interesting yesterday is in the q&a, when they asked, are you out of things in your toolbox, considering that we are late in the cycle and you have not started to raise rates yet? he was very adamant that they think she is now a permanent part of the toolbox -- they

think qe is now a permanent part of the toolbox, and in the next crisis they would be willing to go lower. 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. gershon: look at the markets. the markets -- every time we think it is ridiculous for toure bunds -- 10 year bunds trade at 25 basis points it seems to not move. kathleen: 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? luke: 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: guys, you will all stick with me. coming up on the program, the auction block. the drought in high level issue is continues, reaching a level we haven't seen in a decade. that conversation coming up. this is "bloomberg real yield." ♪

jonathan: i'm jonathan ferro. this is "bloomberg real yield." i want to head to the auction block now where more than $220 billion worth of treasury were auctioned off this week. i want to focus in on the 30 year sale of $16 billion. the offering received strong demand and had a primary dealer award of 22%, which is the second lowest on record. also tesla planning to offer 800 -- $800 million of bonds backed by auto leases. it found strong demand for its inaugural bond sale in february and it's said that the company plans to become a regular market.n the abs finally, over and u.s. high-yield issuance, there is a severe drought. as it fans now, december would be the first month of no issuance since november 2008. guests.th me, my kathleen, your thoughts?

where's the supply? kathleen: there is no supply and the high yield managers are feeling the pain and reaching for yields. there just aren't a lot of choices out there. that makes it for some not so great decisions in the long run. gershon: so i think the issuance in the past couple of years has gone two places. one is, anyone who has needed to issue, as yields were low, spreads were tight, issue. then a lot of people, a lot of companies issued in the loan market because financing was cheaper and you did not have to give the traditional coverage you had to. jonathan: here we are in the low market seeing outflows. what i would like to learn from you, just put this into perspective. in the headlines, a lot of hyperbolic language around all of this. the biggest outflows on record. how important are some of these etf's, some of these mutual funds we are tracking to the overall universe? gershon: i think it's so much more importance than loans --

important than loans or any other asset class because 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. -- alone, 2, 3, 4 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? luke: i've had a problem with that for a long time. this whole daily liquidity on a illiquid asset class looks really alluring. you think you can get in, get out, and 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 with liquidity further down the line. actually, the market can get very gappy in funding those. price that is going to be offered as we get further and further into that liquidity

crunch in etf's and loans could get pretty nasty. it is certainly one we are watching very, very carefully. jonathan: kathleen? kathleen: i couldn't agree more in terms of gappy. the etf's are important but you also have foreign investors. and you have the the clo machine has been most of the appetite. -- and you have the clo machine that 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. gershon: there's another factor at play here. for years i have heard about, high-yield 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 s good as it used to be. so we should expect more defaults.

lower recoveries than history and loans. that is why the drawdown is about 2% in high-yield, 3% in loans. we think loans will continue to underperform. jonathan: i speak to a lot of institutional money at the moment and they are not too worried about what is going on. they haven't actually done a lot. they're looking at 2019 saying in best case we'll see performance. not just performance, but outperformance relative to real yield. i haven't seen the capitulation yet. gershon: not in institutions, but institutions are much heavier in bonds than general. remember, we've been through a partial cycle already. we have a late cycle, not in the commodities space. look what's happened in the energy and this trip down in oil. very unlike 2015. 2014 and 2015, you have 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 at the moment that credit's finding a flaw and leverage loans are continuing to roll over. and some people might say it's the rate story.

a lot of people are pricing out the federal reserve. but loans are priced off of libor and libor is still climbing higher. what does that mean, kathleen, if it is climbing higher and rolling lower? kathleen: 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 that 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 that it won't be just -- 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 that are showing up and the outflows showing up in the last couple of weeks are basically the tourists. people that 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? luke: 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. in a illiquid asset classes -- 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 -- what is an illiquid 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 them 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. gershon: i think there is nothing wrong with that tradition. jonathan: 2018, much happened with loans. gershon: absolutely -- if i can clarify a point you made. you are technically correct that they price off libor. but in reality they don't.

libor has gone up 200 basis points in the past few years, 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. this don't happen on the downside. verbal complexity. you don't get the increase on the upside. jonathan: it's a really good point. thanks for bringing that up. our guests sticking with us. i want to get a market check. 'tis, tens, and 30's -- -- two's, tens, and yields up just 30's. a couple of basis points on a two-year. pretty muted price on the long end. still ahead, the final spread a . finalll ahead, the spread. a busy week ahead featuring central-bank decisions around the world. this is "bloomberg real yield." ♪

jonathan: i'm jonathan ferro. this is "bloomberg real yield." it's time now for the final spread. coming up 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. still with me are our guests. guys, a lot of people talking about liquidity, even liquidity, liquidity, illiquidity, and making sure you have some liquidity. talk me through about why that is so significant at this stage of the cycle. gershon: i think we overemphasize liquidity in the short run as it relates to the end invester. we talked in the previous segment about having continuous liquidity in etf's. most investors shouldn't have daily liquidity. it actually hurts them. but 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. so we have to pay attention to it. jonathan: size matters here? kathleen: size definitely matters here. being nimble is a great advantage. when you are large, it's very difficult to make meaningful moves. jonathan: luke, your thoughts on the subject? luke: i think it depends what instruments you've got available to you. there are more liquid instruments than fiscal cash for sure. so it doesn't always cause you a problem when that's the case. it depends on the makeup of your funds and your mandate and so many different factors. we've not really suffered too much from a liquidity problem in 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 -- last 25 minutes, with the exception of leverage loans, the constructive you of 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 brings. when you communicate with them, when you pick up the phone what do you say? gershon: well, we point out that with the exception of trade we were saying all the same things at the end of 2015. we are due for a recession, we are late 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. and it would take probably a recession to end up having the kinds of negative returns we've seen. -- we've seen in fixed income over the past 12 months. jonathan: kathleen? 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. we've seen the ge's, pac gas, and have these specific companies that have issues and that's where the liquidity plays into long-term investors hands. -- long-term investors' hands.

luke: 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 going into 2019 for sure. jonathan: a very sensible, constructive tone. let's get some final thoughts in the rapidfire round. we look ahead to the federal reserve decisions next week. can powell deliver a dovish surprise? gershon: no. kathleen: no. luke: not a surprise. no. jonathan: here's one for you. can the ecb under mario draghi deliver a high before he leaves? no?hom, yes or gershon: he could but i'll say maybe. kathleen: no.

luke: he leaves in october so definitely no. jonathan: i 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. gershon: not even close. high yields could have potentially double digit returns. jonathan: really? gershon: yes. jonathan: kathleen? kathleen: high yield. luke: 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. ♪

alix: it's 30 minutes of andy hall. opec cuts volatile prices, more hedge fund closures, higher capex budgets. we sit down with legendary oil investor, andy hall. why it is so hard to be a trader now, and how to fix it. ♪ alix: i'm alix steel. welcome to a special edition of "bloomberg commodities edge." it is 30 minutes focused on the hottest commodities with the smartest voices in the business. our topic today is crude. it has gotten a lot harder for traditional market participants to trade oil. just ask one of my guests, andy hall.