>> from new york city, i'm jonathan. starts right now. >> coming up, federal reserve officials hammering home a willingness to be increases.h rate into highing back yields, leading to a fall in market.ary we begin with a big issue. one word, dominating federal reserve communication. >> patience. >> patience. >> patience for pause. waiting and you're watching. >> patience, flexibility, data dependent.

they're trying to do is to best telegraph their intentions. >> the one thing that got is fed really nervous the financial market. >> none of us know because we're looking at the developments, not just economically, not just in markets, but geopolitically. thing is we're in a place where we can be patient and flexible and doesand see what evolve and in the meantime, we're waiting and watching. >> in new york city this week, joining me lisa, u.s. fixed income -- and portfolio manager at first pacific advisors. lisa i want to begin with you with the good news. the good news is i think the committee, we finally have a coherent message. >> i think it's semicoherent. it's funny because if you difference between the dots everybody says, the fed is trying to more patients message, in december powell had a completely different message. you look at the difference

the dots just for 2019, there's an 80 basis betweenpread members, so i think it tells you that they don't know what's going to happen. they're looking at markets the same way we are. they're looking at the data the same way we are and they given morehave credence to the fact that markets are concerned. point. a really good if you take the message of patience, that's a coherent message. the communication effort. the difference and you've pointed out, there is still they spread in what all expect in the coming 12 months. the do you listen to, communication or actual forecast? >> i think you have to listen to the communication. get -- when you think about tying the two get a person and i get their message. i can get more of a thought of where they think they are a dot plot that is more opaque and maybe more historic looking than forward looking. >> i agree. patience message

is being digested by the have tond we'll see, but i think that it's a er than we had year.g into the >> the good news is that the economic data we've had so far, the initial jobless solid.look rock it's a realtime indicator of the u.s. economy, looks totally fine. about're worried inflation, it doesn't look like that's happening, either. certainly if the federal reserve decides they want to wait around for the tension in the markets and the economic data between the two things just to clean out, they've got the time, the data is on their side. and think that's true certainly, they're paying attention to the fact that they're doing a two-variable experiment. i think that maybe before they thought the balancing in the background, they don't have to think about it, but the market has said actually we're kind of concerned about this tightening liquidity and, you know, that being said, when i look at what's discounted in the market today,

which is absolutely nothing so no hikes this year i think the market has taken patience message and extrapolated it a bit too much because i don't think the economy warrants in 2019. hikes >> do you agree with the idea that patience means more hikes for the time being? >> i think to a degree because you've got this two factor model. they've seemed pretty good figuring out how to raise short-term rates, they've things they can go talk about. ideareally have no that after they bought this dotrillion of assets how i get out of the room that i got into? it would appear that they're trying to use patience and to talk andng all these other things to i'm going to be getting out of the $3 trillion, some of the $3 trillion of securities i own.

and i'm going to try to do it without impacting anybody, which i find do,emely difficult to given your objective was to impact the markets when you entered into this purchasing program. so if you're going to exit, we sort of figure you know what you're probably going it.mpact i think this patience piece is a way of them trying to talk through it. reallything i struggle with, when the balance sheet became so important to the market. this happened in the background for quite a while. and then all of a sudden, december came around and really people started to pound the table about it. why? >> one of the things, if you just looked at their said okaynd they we're going to periodic auto pilot to use chairman word, of reinvestment it was just they don't have to reinvest things that were just maturing. but now, you've gotten towards the end of the year when you look at that stream that they have out there and what they're trying to accomplish. of timee periods where the maturities are not

to cover it, or the mortgages aren't going to fast as you thought. it's not as auto pilot or automatic. the's where i think market might be thinking of itself you're going to start impacting the markets a little bit if you're going to try to accomplish that objective. >> when we talk about packet the markets what are we actually talking about? i hear this word getting lot.n around a we're not talking about bank funding liquidity. of liquidity are we talking about that the has an impact. around the sentiment, if we think that the market is not open for asuers, that becomes problem. we've seen, obviously, high yields have a pretty strong sawt to the year and we the first new issue come into the market yesterday. look at investment grades, spreads there haven't really tightened in is aame way and there lot of that out there so you know, i do tend to agree probably when we think

about the fed, we think the market is probably at risk pricing themr a bit here and that can lead to continued volatility year. over this >> so we can talk about credit a little bit later in the program. i just want to really focus on that idea that the balance sheet matters, but trying to understand why it matters. what is it about the balance sheets? is it just a psychological issue or a direct channel that we will worry about? think it's the fact that we've had so much liquidity chasing few assets. we know that there's been tremendous amounts of issuance. if you look at the aggregate outstandingbt over the last decade, for a period of time it was contracting. and that was because the fed other central banks were taking that out of the market and so that pushed treasuries into i.g. credit to high yield, etc., and now, there's less that and the other thing that's happening is that front end rates in the compelling for the first time in a decade so two and a half percent, forher 100 basis points

investment grade credit, you're talking about a three and a half percent field for a two year bond. not tragic, and it's certainly a nice play to park cash. up thist to wrap segment by talking about the kinks in the yield curve. it's really interesting, appetite improved over the last week you saw credits snap back in a massive way, high yield. i would have expected that the money came out of the front end for yields to rise. that sort of explains itself. but to really take a fundamental positive view on the u.s. economy, i would seen some statements come into the curve. why did the statements come into the curve? the yield curve flatter than where it was last week, even though things approved substantially? >> if i think about what is a flat yield curve trying to you as an investor, it's saying to you that investors in general okay, i have a fear of inflation because i'm not demanding a higher return to money for a longer period of time so i don't require a higher yield in the 10-year than i do in the

year. it's somewhat inflation driven if i take fed away and sort of some people fingers on things that they're not supposed to. thatfurther look at curve, the concerning part even with the snap back in credit, yield curves are usually followed, usually inlowed by a decline rates, a decline in rates and a decline in the activity. a decline in economic activity tends to happen 12 months after the curve flattens to the levels that we saw not only this year, but last year so i look at that, is that curve really trying to tell me this economy is slowing down and of inflationul markett's why, the nuances, it's not impacting the picture you're looking at. think lisa?ou >> i completely agree with that. i think there will be next 12over the months or so where we'll see steepening, and then some because at some

point, i believe rate hikes will be repriced into the market and you'll have the end lifting. >> coming up on the program, the auction block. we raise our glass to the issuance. already it is back. this is bloomberg.

>> this is bloomberg real yield. i want to head to the auction block where we have seen a steep decline in at treasury bond auctions over the last 12 months. the first auction of 2019 demand fall to a near decade low for the $38 billion sale of three year the 30 year sale hosted a ratio well below

average. beginning to thaw. the investment grade market passed the week. downgraded. able to amass more than $41 allion in orders for $15.5 billion transaction. and finally, finally within ish yield the drought over. in six weeks. it doubled the size of its deal to $1.5 billion with initial $750 million. mary andh me lisa, tom. we finally had a primary high yields in a way that we haven't had in six weeks mary. your thoughts on that test and where we go from here in of issuance? >> i think, you know, the deal is very well received. did come at a bit of a discount but compared to the discounts we're seeing on issuancet grade for high yields it's not too bad, and it's traded well so that's a pretty good sign market. it is a higher quality

rated so that will be and i think the way that we've seen spreads come back in at the end of december the market is going to be quality more so than some of the lower tier issuers in our markets. it'sdon't think necessarily open to all but, price, butt a for the better capitalized names i think the market over here.ly be >> where do you think the supply comes from this year? from of it came leveraged loans last year. does that change over the coming months or is it a of last year? >> is for now, it seems like we should see a kind of a because we won't see the same refinancing that we've seen over the past highe of years in yield. loans, if that market is still open and the coo demand can come back, probably where we'll continue to see the supply

coming. don't think from a supply perspective, issues for high yield. more overall in the credit quality that you to think about. and really take that as a bigger picture when thinking about any parts of these markets. >> tom? >> thinking through, to our way of thinking, the isestment grade space probably the two things you mentioned in your opening of this segment, it's the more important, which was -- the thele b. corporate is place where the pain point appears to be greater than if i look into most of the markets.d what i mean by main point is to existen able because your interest costs are. turn this out while interest costs are low and survive? it's unable to, then you have a higher propensity of

orpping into a double b. a single b. rating. now, you've got a whole different cohort of analysts to look ating you and a whole different cohort of people who are willing to own you and you worldissuer your changes rather dramatically when that happens. >> let's talk about what's in 2019. so far we've had an aggressive highack, the same in yield. why hasn't invest grade samecipated in the way? >> we would say it's the concern and thinking back, and puttingrade it in a big asset class, b.f of it is triple and if we think back to the beginning of this economic about 35% was triple b. and at the same time that whole segment of market is a little more than double in size. >> lisa? agreeh, i mean, i with everything these guys have said. you know, for high yield in a really, had really rough fourth quarter. i think there was

potentially a bit of a dislocation from some of the underlying fundamentals where it was very sentiment driven so we saw an aggressive snapback but the technicals were supportive of that market and, as you mentioned, it's the first issuance in six weeks, that 2008, happened since not a high yield person, but it's the first months of having no issuance whatsoever in december since 2008, yeah. >> so i think cash balances low forlly got many. and, you know, there was some -- there was some appetite there. i think the other -- i think the other point that i would is my high yield colleagues have mentioned default rates are well in excess of what expectations are, something more like four, four and a half percent when expectations are more like a 2% to fall rate, and i think it, as well.f >> it's interesting for me, the base case for 2019. year end,eople by in the first couple of weeks, does that make things

a bit complicated for you in you look ahead to the rest of the year? >> it's going to be a really long year, that's appreciate. we thinknk when back to december and the fourth quarter for high that spreadof widening happened in the last two weeks of december. there was no liquidity in the market and that was a lot of what drove what we felt was overdone in terms of spreads, but we're not surprised to see the snapback but 450 in spread not wide. 550 isn't that wide, either. were going to have a year where spreads the stay right around 550 level at the start of the year, half-year returns are already done because in spread and we think that granted when growth at potentially flowing in the worldwide and some of the liquidity coming out of the market, that should lead to wider spreads. so we're actually still kite

anythingand if right now we're de-risking a the reallyto crazy rallies. >> just to take the other side of the trade and really about this. they've been waiting for a time, and -- and last year, he said if you wait for that kind of level, you're being greedy. it's not coming. you're going to miss the out. and i just wonder why is any different to that? just to try to think about it? >> so we wrote a piece at of 2018 when fixedked about how do income markets act once you get into a flat yield curve? and one of the things you know is they don't do too terribly well. the volatility tends to go tookhe returns tend down. oh, we're a little flatter on the yield curve now than ago.re a year and so thinking out to '19 shouldn'tprobably expect that much difference than what i saw in '18.

waite comment about for 600 or wait for some other number, when you look high yields, especially more than investment, you look at high yields and say ituy this bond, if i buy with a yield, the index today is seven and a half.r, seven and a the best that's going to happen to me if i own that and it pays me back interest dividends i'm going to make seven and a half. if something goes awry, i'm less thanake that. so you're looking at this and you realize that you're equity like investment because it's a very levered entity and going i really should get returns. that's why to us you sit and 600 because the you're always worried more about all the things that could grow wrong versus the things that could go right. you prepare for the worst and hope for the best. high yield the hope for the best is they pay your interest payments. good thoughts. and tom from

spa. we want to go to market check. yields, up high. points on asis 30 year. and marginally high on the 10 year, as well. 2.7%. still ahead, the final stretch, the week ahead, big u.s.from the bank and political deadlock in the united kingdom and the united states. is bloomberg.

>> it's time for the final spread. coming up over the next week, earning season begins here in the united states as major u.s. banks like jp bank ofnd then america report. the expected vote in the u.k. parliament. comments coming up, too. and we hit record territory

the united states shutdown.vernment stay with me. i want to pick up there just quickly and briefly if we well.s if the bloomberg terminal -- mean anything at all to market participants or would that be noise? >> so i think you have to at it from are you an investor or are you a trader? traders and i'll be honest even if i was a have no would go i way of understanding is it going to go this direction? as an investor, someone out three to five is prudentob steward of capital. you sort of have a ignore go okay what's the best for the capital we're deployinge for and you have to compartmentalize it and push

it aside. >> your thoughts? >> i agree. i think if anything if that means the government over because it's a state of emergency and congress can now pass a budget, then that's good actually because people are back to work, getting their is back., the data we're missing data because of this. removes some of the noise in the background. >> i have heard a few people make that bullish argument. we're going to wrap up the program. you know how we do it, the rapid fire round right here yield.mberg real the first question to you guys, the next move from the fed, i'm going to keep coming back to this question year.h the the next move from the fed a rate hike or rate cut? >> hike. >> hike. >> cut. >> interesting. positioning.e flat?or a lisa? >> initially a steepner, flattener. >> i agree with lisa. >> tom.

>> steepenner. >> high yield or the -- [inaudible] we retest the wides of 2019 in december? or is it worst passed? >> retest. >> retest and then possibly even more. >> retest. >> interesting stuff guys. thank you very much for lastng me through the 30 minutes from schroder's. assetmary from global management and tom from spa. from new york that's it for us. see you next friday at 1:00 p.m. new york time, 6:00 p.m. in london. worldwidedience this was bloomberg real yield. this is bloomberg tv.

carol: welcome to "bloomberg businessweek." i'm carol massar. jason: and i'm jason kelly. we're here at bloomberg headquarters in new york. carol: in this week's issue u.s.-china trade talks front and center. jason: the magazine has several stories enter into a relationship with big tech and its impact on the digital economy. carol: on the cover the technology zinet president trump spared,