>> from new york city for our viewers worldwide. bloomberg "real yield" starts right now. ♪ jon: coming up, from hawkish to dovish and totally compute. wall street grappling with communication. re, shutdownrket were politics weighing on sentiment. volatility. we will begin with a big issue, a market gripped by federal reserve confusion. message yesterday was so prophetic, it was taken badly by the market. >> it was a dovish hike.

>> not as dovish as the market had discounted 10 minutes ago. >> that is a fairly dovish signal from the fed. >> three months ago, he was quite hawkish, and then dovish,. >> dovish on interest rates but hawkish on the balance sheets. >> the fed seems quite bullish on gross. >> he did not deliver an early christmas present. >> to some extent, the point seems to be lost on the markets. >> to underscore the dovishness, the market reaction -- it is going to try to be more dovish. >> the rule should be, we pause. all he had to do was say that and markets would be at ease. jon: joining me around the table -- eorge: claves, and cohead of global fixed income strategy.

i want to begin with you. if the spread of interpretations are that slide, there is something wrong with the message. it is really difficult for the fed because we are approaching the end of their the neutral rate is a bit of a moving target, there is not consensus exactly where that is that, so it is going to be more difficult for the fed to clearly communicate -- when they are going to end this rate hike cycle. >> i would be hard-pressed to tell you that any of us really do. you used the word grappling to start the show and that is exactly what we are doing. the moving target of the neutral rate has clearly perplexed and caused a large dispersion and what investors expectations are. we were in the start of the year with a quote from chairman foul saying we are away from neutral to now saying, we are at the lower end of the neutral range.

confusion. clearly chair powell left us with a confusing message but i do not know how to appease the markets. i'd -- i do not think that chair powell knows. why the chairman struggling to connect with this market. -- market? back to theiring comfort zone and is getting to be really challenging for them and i think you got a little bit of a today with williams, throwing a bone at the balance sheet. but i think there is no consensus and that is hard for the chairs of the liver. jon: the premise of this conversation is that they need to settle the market down, do they? fed do not think the is as concerned about the mark as the market think they ought to be. the fed is going to look at the data and it is slow to come in

and slow to change and there is a risk of that the fed is behind the curve. i think that is a big risk given at the fed's focuses on the data. jon: what do you think the biggest issue in terms of policy, the spread between the markets on rates and the federal reserve or the spread between the federal reserve and a balance sheet, and many market participants who think it should not be? is by the rate policy far the most important. the market is fixated on that recently, but if you look at the balance sheet, it is still really, really big. we have only just seen a little bit of decrease if you look at the big picture. i'm not sure that $50 billion a month of rolloff is a big deal. i think the rate policy is a far bigger deal. jon: brian, this raises the question about the rates.

are we arguing over 25 basis points, because that is the spread right now but -- the right now next year? >>'if we take the fed's forecast, they are telling you to the point on rate policy that they are going to be done on whatever this policy is in whatever term rates will be in 2019. , they have to be careful not to over read things either. we have had a big market move, andave had bad positioning, to over do it, the fed has to be careful. jon: they have to be able to answer simple questions. chairman powell was asked the twice, inflation is going to undershoot again, what are you raising interest rates? he could not answer the question, george. it was not just average, terrible.

everything was lined up in the statement. you could've crafted a better answer into to that question the chairman of the federal reserve can. george: they are at the point where the outlook gets a little bit fuzzy. no one said it was going to be easy. they have got pretty far and i think we need to give them credit at this point. jon: are you ready to price a policy mistake and what does it mean to you? george: the policy mistake is more embedded in risk assets than the rates market. but the rates market has had a big adjustment. a massive inversion would be signals. jon: do anticipate that? scott: to use the word grappling to your point on the inflation, what the fed is grappling with is one of the most prolonged tightening cycles they have gone through. the fed loves their models. models saysf their

the inflation output numbers should be higher. jon: this was the federal reserve under chairman powell that should have been emphasized in the models. wire the models important again -- why are the models important again? areve the idea that they data dependent is totally useless if you do not understand the reaction function. when are they going to do a better job explained the reaction function? brian: i am not sure they are. i think they are focused on the arel and i think they deliberate and slow-moving body, and i do not think they are going to react to the markets like the markets would like to see the fed react. jon: after the performance of the federal reserve, are you more willing to add duration than you were before? brian: no, not yet. the yield curve, even though it at, it tells us that

there is more gross to the recovery. foruld be looking opportunities to extend duration, but i do not think that now is the right time with rates down when they are. you?george, what about is now the time to add duration? or did we miss the pocket? george: we miss the pocket, and that is what is going to really cap the level in the rise of rates. scott: we agree. the rates rally has been overcooked. the market expectation of the reaction function often needs to be realigned. the fed going from three hikes to two is a dovish outcome for reserve standards. jon: you're not going to go from three to one without the economy totally cratering.

we may want to reconcile down to where the market is. gonclaves, scott brian rehling. this is "bloomberg really yield." ♪

♪ jon: i am jonathan ferro. this is bloomberg "real yield." i want to take a look at the numbers. issuance for 2018. we start with the u.s. treasury, in the calendar year, one point $3 trillion raised in net new cash.

over incorporates, high-yield issuance drying up completely. and massive outflows and high-yield funds. loans, a surge of roughly $800 billion in new loans even as the price index tumbled to close the year. still with me george gonclaves, scott kimball, brian rehling. let's start with where the issuance is come from and what it has meant to the broader market. what does it mean for cro wding out other asset classes? george: you took the words right out of my mouth. -- 2019, a similar story. equal rollovers but less overall issuance and the treasury market is not picking up a lot of that space. jon: we had a yen central bank governors complaining about the

prospect of that extra issuance sucking up dollar liquidity, do you still see that being a big problem? sure, it is going to continue to grow. meetreasury has to fund to the deficit, so the crowding out is a real issue. it is not want to manifest itself in terms of higher treasury yields, but it is going to manifest itself in terms of less liquidity elsewhere in the bond market. scott: i have to agree with that. it is occupying space that could otherwise be making its way into other risk assets. jon: at the turn of the year, we had all of the conditions and we had the supply that came with it. we end the year with a lot of people in fixed income questioning that universe. thatutflows from etf's track leverage loans, the cash is flowing out.

typically, we talk about flows concerning a trend. is there any signal in this? brian: we have seen several pe riods where high-yield spreads have lightened out. in the energy names and lower credit quality, we are seeing retail move out of a lot of these yielding assets that they have purchased earlier in the cycle and rates were much lower. the question is whether this is the beginning of the end or is just another event and a series that have impacted credit. i am not sure we know the answer. scott: there is a confluence of events. a lot of money came into leverage loans to be defensive on interest rates and using it

as a surrogate for shortening duration overall. if you look at the big perspective of what is going on in the markets, people forget about do i want stocks and bonds. it is just cash and risk. the event is everything that is risk is going to be equally affected, but those who have seen the unusual flows down the stretch are going to be outsized. whenthe turn of the year pretty much everyone hated cash, it was the moment we are about to get the real rate of change. cash was going to start increasingly returning more and more. at the end of the year, people are starting to fall in love with cash at a time that we are talking about the federal reserve pausing and the rate of return on cash ultimately leveling out. george: that is perhaps what is motivating some of the outflows, too. any floating rate products, you would have to get much further yield pickup. jon: you will get a continual adjustment if you believe the

rate of return on cash of going to carry on increasing. we can probably paint a picture where we say the rate of return on cash is going to stabilize through 2019. whether we have seen that adjustment now in the back end of this year is my question. is this still going to be a significant story next year? brian: that is a good question. i think you are right, the cash returns are going to start to level out, but i do not think you can overlook the massive risk off move we have seen from investors in general and to the extent that this was a product that they were really piling into earlier this year, they were over allocated and of course, needing to read -- needed to adjust that. jon: let's talk about the fundamentals, what did the7

look--- what do they look like? they say that most trends look positive through 2019. good: i'm sure they look for 2019 so i do not think we will see significant falloff for the fundamentals. the question is markets discount forward,'s are we going to see a falloff in 2020 and beyond and are investors preparing. i think the market is overshooting. they were a little too optimistic and i think they have moved to being tube estimates -- moved to being too pessimistic. timing and that financial conditions that it mean something to the fundamentals of the economy. the ability of course comes to this market and raised cash. does perception become reality? >> the economy still looks pretty good. pres. trump: a very busy to or three days. positive,n very

things are happening that have not happened in our government for a long time. know, we night, as you had a vote on border security, and i want to discuss this for just a second. the house of representatives -185 approving strong border security. to takemoney necessary care of a barrier wall or steel slabs, whatever you want to call them, it is all the same. it was a tremendous evening for the republicans to be honest, ,ecause the level of the spirit the level of happiness -- a lot of people came out and said they have never seen, one man in particular, he said i've never seen the spirit of enthusiasm like this. they came from all parts of the country, a couple of them from outside to vote.

they voted and it was an incredible vote. we were told that you are never getting the house to vote, but we were able. they did it and they were incredible. i want to thank house republicans because what they did was rather incredible. now, the senate is looking at it. we just had a meeting with some of our great senator republicans , and it lasted for a long time. tremendous enthusiasm for border security. i think i can speak for them strongly when i say they want to see something happen on border security. they want the security of safety, they want safety for our country. and we haveuring in done an incredible job considering we have no barrier. drugs are pouring into our country, human trafficking as at an all-time worse because of the internet, and the human

trafficking problem is a problem that has gone on through the ages, but it has never been worse because of the internet. all over the world. security,rder and the republicans in the senate are taking it up today, and it is really up to the democrats. totally up to the democrats as to whether or not we have a shutdown. it is possible we will have a shutdown, the chances are probably very good because i do not think that democrats care so much about this issue, but this is a very big issue. it is an issue of crime, safety, of least importantly, dollars. spend $285 billion a year on illegal immigration, we have to finally do it. the log for itself on a monthly basis. we are talking about small amounts of money. think of it.

we have good democrat support. military last year, $700 billion. recently, $716 billion for the military, and we're talking about $5 million. buts a tiny fraction, unfortunately, they have devoted their lives to making sure does not happen, and that is not what should happen, that was for political reasons. we are going to be working very hard to get something passed in the senate. there is a very good chance it will not get past. it is up to the democrats, so it is really good democrat shutdown. we have done our thing. wouldancy pelosi said we never get the boats in the house, we got them by a big margin. 217-185. now it is up to the democrats as to whether or not you have a shutdown tonight. i hope that we do not. this is our only chance that we

will ever have, in our opinion, because of the world and the way it breaks out, to get great border security. ronald reagan tried many years ago. got a note from a member of his ago, triedany years to get a wall and he thought for a long time during his entire term. he was never able to get a wall. i consider him to be a great president. he knew what he was doing. one way or another, we are going to get a wall, a barrier -- you can name it anything you want. has beennnot let what going on in this country over the last 10 years, we cannot let it happen. now to a positive note, criminal justice reform. everybody said it could not be done. they said the conservatives will not approve it, they said the liberals will not approve it, they said that nobody is going

to approve it, everybody is going to be against it. it has been many, many years, numerous decades, and nobody came close. i just want to thank all of the people standing behind me. ivanka,to thank jared kushner. [applause] and i have to say, i want to mitch,aul and ke vin, nancy and chuck, as i say, affectionately, actually. [laughter] but i do, i want to thank everybody. this was incredible bipartisan support. michael, you are great. mike pence.

everybody. everybody worked so hard on this. this is a cross-section of everybody in our country. we have everybody here. i will not going to details, but we have everybody wanting this. we had a few people that did not. and that is ok. it is impossible to get 100%. but we passed at this in the senate 87-12. the one person that missed the vote was actually in afghanistan doing a great job, lindsay graham. i think i can honestly say he would have voted in favor. >> you been listening to president donald trump about a number of things. at the end, whose was talking about criminal justice reform which was the main event. voteg precedence was the

that is taking place in the senate and we are waiting on results to see if there'll be another vote. a shutdown depends on this vote, will he see a shutdown or partial shutdown tonight at midnight? it is an ongoing question because the procedural vote has to take place first. of theker is one deciding votes and he has not voted yet. president trump sent that to build to the senate and this is where it is now stuck. he said, there was tremendous enthusiasm to border security. he said, i do not think that democrats care so much about this issue. he also said the wall will pay for itself on a monthly basis. it is an ongoing situation. let's take a look at markets, they are lower now and there are a lot of things going on today, but the dow is down i have percent. -- down a half a percent.

at its lowest of the session, down 1.6%. the s&p 500, there are some positive movers including nike. norrigo moving off of a ther news, it is down. several stocks are moving on related to this issue, but the sentiment is negative across markets. we are going to continue to follow this story and you can watch the live at vote on the senate floor. it is a procedural vote for the moment at the live go. this is bloomberg.

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leave no room behind with xfi pods. simple. easy. awesome. click or visit a retail store today. ♪ there's no place likargh!e ♪ i'm trying... ♪ yippiekiyay. ♪ mom. ♪ ♪ >> i with bloomberg's first word news. the senate is voting on a bill passed by the house to pay for president trump's border wall and avert a partial government

shutdown. mitch mcconnell urged approval of the bill that approves $5 billion the president wants. >> in my view, this legislation would be quite uncontroversial. and a more normal political moment. in a moment when both parties put the obvious national interest ahead of any personal spite for the president. >> leader mcconnell met with the president at the white house. after the meeting, the mr. trump "totallys quote, prepared for a very long the government shutdown." hadice ruth bader ginsburg two malignant nodules removed from her lung. no further treatment is planned. the 85-year-old is resting