jonathan: from new york city, i have jonathan ferro. "bloomberg real yield" starts right now. ♪ jonathan: coming up, reserve officials observed willingness to the patient with rate increases. how to restore confidence in credit. money flowing back into high-yield. leading to a soar in the primary markets. they begin with a big issue. one word dominating federal reserve communication. >> patients. >> patients. >> you are waiting and watching. >> patients, flexible, data

dependent. >> they are trying to best telegraph their intentions. >> the one thing they got the fed nervous is the financial markets. >> none of us know because we are looking at the incremental development, not just economically, not just in markets, but geopolitically. >> we are in a place were we can be patient and flexible and wait and see what does evolve. we are waiting and watching. jonathan: a full house in the table in new york city today. joining me, lisa hornby, mary aters, and thomas atteberry first pacific advisors. lisa, the good news is from the committee we finally have a coherent message from the fomc. lisa: i guess it is semi-coherent at this point. if you look at the difference in decemberdots,

powell had a completely different message. if you look at the difference between the dots for 2019, there is an 80-basis point spread between the members of the fomc. they don't know what is going to happen. they are looking at markets the same way we are. i think they definitely have given more credence to the fact markets are concerned. jonathan: this is a really good point. if you take the message of patients, that is a coherent message. the difference you pointed out is in the dot plot. there is a difference between what they expect. who do you listen to? tom: you have to listen to the communication. when you think about time the two together, i get a person and i get their message. i can get more of a thought of where i think they are today that is moreplot opaque and historic looking. mary: i tend to agree.

-- patient's message patience message is being digested by the market. i think it is a bit clearer than we had maybe leading into the year. we have seen markets rally off of that. jonathan: the economic data so far, the jobless claims look rocksolid. the real-time indicator of the u.s. economy looks totally fine. if you're worried about inflation, it does not look like that is happening either. if they want to wait around for the tension in markets and economic data between the two to clean out, they have the time. lisa: i think that is true and they are paying attention to the fact they are doing it. they are doing the balance sheets and hiking rates. before they just thought the balance sheet was in the background. they don't have to think about it, but the markets that we are kind of concerned about this tightening liquidity provision. that being said, when i look at

what is being discounted today which is absolutely nothing, no hikes this year, the market has taken that patience message and extrapolated it a bit too much. i don't the economy florence zero rate hikes in 2019. jonathan: do you agree basically that patients means nothing? no more hikes for the time being? degree because a you have this two-factor model. they seemed good in cigarette header a short-term interest rates. have lots of history, lots of experience, lots of things to talk about. aftereally have no idea they bought this $3 trillion worth of assets how to get out of what they got into. it appears they are trying to these patients and trying to ease the fact that i'm going to be getting out of the $3 trillion, some of the

$3 trillion iphones without impacting anybody, which is extremely difficult to do when you're objective was to impact the market. you are probably going to impact it on the way out. is a way for them to struggle through it. jonathan: what the balance sheet became so important for the market, this happened in the background for quite a while. all of a sudden people started to pound the table about it. why? jonathan: when you look at their holdings and they said we are use a periodic autopilot, they did not have to reinvest things that were just maturing. now you have gotten 20 end of the year when we look at the maturity strength in what they are trying to accomplish is shrinking. there are periods of time for

the maturities are not going to cover it. they may have to do something risen. rates have it is not as automatic. that is why the market might be thinking he will start affecting the markets a little bit if you are going to try to accomplish that objective. jonathan: what are we actually talking about? we're not talking about bank funding liquidity. what kind of liquidity are we really talking about the balance sheet have a direct impact? mary: for high-yield it is much around the sentiment in the risk assets if we think the market is not open, that's a problem. we have seen high-yield have a pretty strong start to the year. we saw the first new issue come to the market yesterday. as we look at investment-grade, spreads have not tightened in the same way. there is a lot of debt out there. probably when we

think about the fed, we think the market is at risk of maybe underpricing a bit here. that can be to continued volatility over this year. jonathan: we can talk about credit a little later in the program. i want to focus on the fact that the balance sheet matters. what is it that really matters participants? is a psychological or indirect channel we all worry about? lisa: the fact that had so was liquidity chasing few assets. there has been tremendous amounts of issuance. if you look at the aggregate amount of debt outstanding over it last decade, for a time was contracting because the fed and other central banks were taking debt out of the market. that pushed people from treasuries into i.t. credit, to high-yield, to em, etc., etc. the other thing that is happening is the front end rates of u.s. are no compelling for the first time in a decade.

2.5%. you had another 100 basis points for investment-grade credit, is a 3.5% yield for a two-year bond. that is not tragic and it's a nice place to park cash. jonathan: i want to talk with the various kinks in the market at the moment. you saw credit snapback in a massive way, high-yield leverage loans. i would've expected the money came out of the front end for yields to rise and that explains itself. to really take a fundamental, positive view on the u.s. economy, i would've seen some steepness come into the curve. why is the curve flatter than where it was last week even though things seem to have improved substantially in the fed has backed away? tom: what is a flat yield curve trying to tell you as an investor? it is saying investors in general -- i don't have a fear of inflation because of not demanding a higher return to tie up my money for a longer time. i don't require a higher yield

in the 10-year that i do with a two-year. if i think the fed away and some people put fingers on things they are not supposed to. if i further look at the curve, the concerning part is high yield curves are usually followed by a decline in rates. don't know when but a declining rates, and a decline in the economic activity. the client happens 12 to 24 months after the curve flattens to the levels we saw not only this year but the last year. is the curve trying to tell me the economy is slowing down and i'm not fearful of inflation? as you talked about the market nuances in the last couple of weeks is not impacting the picture you are looking at. lisa: i completely agree with that. there will be periods over the next 12 months or so where we will see steepening and some

flattening because i believe rate hikes will be free priced into the market and you will have the front end lifting. jonathan: lisa hornby will stick with us, along with mary bowers and tom atteberry. coming up, the auction block. the return of issuance. this is "bloomberg real yield." ♪

jonathan: this is "bloomberg real yield." we have seen a steep decline at treasury bond auctions over the last 12 months. the first auction of 2019 fell to a near decade low for the sale of three having your

bonds. elsewhere over in corporate issuance beginning to thaw. recently downgraded. it amassed $41 billion in order for a $50.5 billion jump in transactions. finally with a high-yield the drought is over. market resources was the first company to sell u.s. junk bonds in six weeks. if double the size of its deal to $1.5 billion. still with me lisa hornby, mary bowers and tom atteberry. we finally had a primary test for high-yield in a way we have not had in about six weeks. where do we go from here in terms of issuance? mary: the deal was well-received. it did come at a bit of a discount but compared to other discounts we are seeing for high-yield it is not too bad. it is traded well. that's a good sign for the market.

it is a higher quality issuer. the way we have seen spreads come back in from the wides at the end of december the market will be looking for quality more so than some of the lower tier issuers in the market. i don't think it is necessarily open to all, but at a price before the better capitalized names, yeah, the market will probably be open here. jonathan: where does this apply come from this year? high-yield was very dry in 2018. as a change in the upcoming quarters or is it a replay of last year? mary: for now it seems like we should see a kind of replay. the same refinancings we have seen in the last couple of years and high-yield, the new issue supply was going to leverage loans. if that market is still open and come back,and can

that is probably where we will see the supply coming. i don't see from a supplies perspective issues for high-yield. it is more in the overall credit quality of the broader credit market. you have to think about investing great leverage loan and high-yield, and really take that as a bigger picture when thinking about any part of these markets. tom: thinking through it to our way of thinking, the investment-grade space of the two things you mentioned in your opening of the segment is the more important. the triple be corporate -- the bbb corporate is where the pain point is greater than i look at the most high-yield markets. you are highly leveraged. you have been able to exist because her interest costs are low. can you turn this out why interest costs are so low and survive? if it is unable to, you have a higher propensity or probability

of slipping into a bb poor single b rating. now you have a cohort of analysts that looking you enter willing to own you. you as issuer, your world changes rather dramatically when that happens. jonathan: let's talk about what is performed so far in 2019. we have at the same in high-yield. why hasn't investment-grade participated in the same way? that concerns you were picking on right now? tom: we would say yes, it is the concern. bbb.in mind half of it is if we think back to the beginning of this economic cycle, only about 35% was bbb. at the same time that will segment of the market a little more than doubled in size. lisa: i agree with everything these guys have said. for high-yield in particular, a really rough fourth-quarter.

there was potentially a bit of a dislocation from some of the underlying fundamentals. we saw an aggressive snapback. the technicals ultimately were supportive of that market. as you mentioned, the first issuance in six weeks, that hasn't happened since 2008. i am not a high-yield person specifically. jonathan: the first month of having no issuance whatsoever in december since 2008. lisa: cash balances potentially got low for many. some appetitive -- appetite there. the high-yield colleagues have mentioned the default rate being discounted in the market well in access of an expectations are. something like 4% or 4.5%, next rotations are for a 2% default rate. jonathan: the interesting part for me is the base case for 2019. -- does thatle

make things a bit complicated for you? mary: it will be a long year, that's for sure. when we think back to december and the fourth quarter for high-yield, half of that spread widening happened in the last two weeks of december. there was physically no liquidity in the market and that was a lot of what drove that what we saw was overdone in terms of spreads. we are not surprised to see the snapback. 450 in spreads is not wide. 550 is not that white either. if we had a year where spreads half your around 550, returns are already done. we are at 450. granted, when we look at growth potentially slowing in the u.s. and worldwide and some of the liquidity coming out of the market, that should lead to wider spreads.

we are still quite cautious. if anything right now we are probably the risking -- de-risking into this. jonathan: it is a tough time to think about this. the people have it waiting for 600 have been waiting for a long time. at some point last year, or even later than that, he said if you wait for that kind of level, it is not coming. you will miss out. why is 2019 any different to that? tom: we wrote a piece of the beginning of 2018 and talked about how markets, fixed-income markets act when you get into a flat yield curve. one of the things historically you notice if they do not do too terribly well. volatility tends tends to go up and returns go down. we are flattered now than we were a year ago. so, thinking after 2019, probably should not expect that

much difference the what i saw in 2018. to a comment about waiting for 600 or some other number, when you look at high-yields especially, ok, if i buy it with the yield index today at 7.25 or 7.5, the best that will happen to me if i am that and he pays me back in interest and dividends, i will make 7.5%. if something goes awry, i will make less than that. you are looking at this and realize you are making an equity-like investment. i really should get equity returns. that is why at times to us you sit and wait for the 600, because you are worried more about all the things they could go wrong versus the handful of things that could go right. prepare for the worst and hope for the best. in high-yield, the hope for the best is to pay your interest payments and then pay your principle back.

jonathan: lisa hornby, mary bowers and tom atteberry. where treasuries have been through the week. 4 basisf high just points on a 30-year. still ahead, the final spread. big u.s. banks and political deadlock in united kingdom and the united states. this is "bloomberg real yield." ♪

jonathan: this is "bloomberg real yield." time for the final spread. coming up, earnings season begins in united states. major u.s. banks like citi, jpmorgan and bank of america report. and the expected brexit vote in the u k parliament. comments from mario draghi, and

we hit record territory in the united states as we have the government shutdown to the weekend. and hornby, mary bowers david lafferty --tom atteberry. if the bloomberg terminal had a life the president declared a state of emergency, would that mean anything all to market participants or just be noise? tom: you have to look at it from are you an investor or a trader? i would look at that using go wow, i have no way of understanding it will go this direction or the other. job --nvestor, might those sorts of things you sort of have to ignore them and go what is the best for the capital we are responsible for

deploying and push it aside. lisa: i agree. if anything that is the government shutdown is over because they declared a state of emergency in congress can now pass a budget that is good. people are back to work, getting their paychecks. we are missing data prince because of this. -- data because of this. jonathan: i have heard a few people make that bullish argument. you know how we do it in the rapidfire around right here on "bloomberg real yield." , a next move from the fed rate hike or rate cut? lisa: hike. mary: hike. tom: cut. jonathan: treasury curve positioning. what is your position? initially steepener, later flattening. mary: i agree with lisa. tom: steepener.

jonathan: retest the wides of december, or is the worst passes for 2019? retest. mary: retest and then possibly more. tom: pretest. jonathan: interesting stuff. take you for joining me for the last 30 minutes from schroders, tom atteberry. --lisa hornby, mary bowers and tom atteberry. we will see you ask friday at 1:00 p.m. new york time. for our audience worldwide, this was "bloomberg real yield." this is bloomberg tv. ♪

mark: i am mark crumpton. if the government shutdown is not resolved by midnight washington time, which seems virtually impossible now, it will be the longest government

shutdown in u.s. history. is now in day 21. 800,000 federal workers have missed their first paychecks. no negotiations have been scheduled. senators have already left for the weekend. the shutdown is having an impact on at least one large airport. more federal security screeners are refusing to work without pay. miami international will close off a terminal over the weekend. the transportation security administration workers will be sent to busier checkpoints. tsa screeners are calling in sick at twice the normal rate for miami. a united nations rights investigation says negotiations on north korea's denuclearization was also included human rights situation. reporters he wants north korea to accept his call for a dialogue. he says the north has not allowed him to visit despite requests over the past three years or cooperation.