>> from new york city, i'm jonathan ferro. ♪ coming up, federal reserve officials with rate increases. having tourist or confidence in credit, leveraged loans were covering. money flowing back into high yields. the first junk-bond issuance in six weeks. one word dominating federal reserve communications. >> patience. >> you are waiting in you are watching. >> patient, flexible. areltimately what they

trying to do his best telegraph their intentions. >> none of us know because we are looking at the incremental , not justt economically or an market, but geopolitically. . >> we are in a place where we can be patient and flexible and in the meantime we are waiting and watching. joining me, u.s. fixed income . i want to begin with you, the good news is i think from the committee we finally have a coherent message. >> i think it's semi-coherent at this point. if you look at the difference between the fed trying to telegraph is more patient in december, powell had

a completely different message. you look at the difference just for 2019, there is an 80 basis point spread between members of that. i think it tells you they don't know what going to happen, they are looking at markets same way we are and i think they definitely have given more credence to the fact that markets are concerned. >> thomas has a good point, if you take the message of patients, it's a coherent message, the communication message. there is still a big spread between what they all expect in the coming 12 months. what do you listen to? the communication or the forecast? >> i think you listen to the communication. when you think about tying them together, i get a person and i get their message. i can get more of a thought of where i think they are today versus a dot plot that is more opaque and maybe more historic. >> what do you think? >> i tend to agree. the patient message is now being

digested by the market and we will have to see, but i think that it's a bit clearer. certainly, we have seen markets rally off that. >> the initial jobs claims look rocksolid. looks totally fun. if you are worried about inflation, doesn't look like that's happening either. certainly of the federal reserve decides they want to wait around for the intention of economic data just to clean out, they've got the time. >> i think that's true. they are doing a two variable experiment. justnk maybe before, they got the balance sheets in the background, but the market has said actually, we are kind of concerned about this provision. that being said, when i look at

what does count it today, which is absolutely nothing, i think the market has taken that patient message and maybe because i don't think the economy at this juncture words zero rate heights. i think to a degree, you got the does cofactor model. they seem pretty good at figuring out how to raise short-term interest rates. they've got lots of history, lots of experience. they have no -- i shouldn't say it that way. , how do i getdea out of the room that i got into? it would appear they are trying to talk and other things to try to ease you into the fact that i out someto be giving

of the $3 trillion i own. i am going to try to do it without impacting anybody which i find extremely difficult to do given your objective was to impact the markets when you entered into this purchasing program. so as you are going to exit, we figure you are probably going to impacted. i think the patient's pieces are them trying to talk their way through it. sheet beginbalance so important, it happened in the background for quite a while and all of a sudden people started to pound the table about it. why? if you just look at their holdings and they said they are going to periodic autopilot, they did not have to reinvest things that were maturing. but now, you gotten toward the end of the year when you look at that maturity stream that they have out there and what they are trying to a college, there are periods of time where the maturities are not going to

cover it, they may have to do something else. it's not as autopilot or automatic. you're going to start impacting the markets a little bit if you are going to try to accomplish that objective. >> when we talk about impacting the markets, what are we actually talking about? i hear the word liquidity thrown around a lot, what kind of liquidity are we talking about the balance sheets seem to have a direct impact? >> for high-yield it's very much around the sentiment for risk assets. if we think that the market is , thaten for issuers becomes a problem. we saw the first new issue come into the market yesterday. but as we look at investment-grade spreads, there is a lot of debt out there. probably to agree that

only think about the fed, we think the market is probably at risk of underpricing them a bit and that could lead to continued volatility for spread product. inwe talk about credit later the program, i want to focus on the idea that the balance sheet matters. what is it about the balance sheet that will matters, is it just a psychological issue or some kind of direct channel that we worry about? >> the fact that we've had so much liquidity chasing few assets. we know that there have been tremendous amounts of issuance but if you look at the aggregate amount of debt outstanding last decade, it was contracting. that's because the fed and other central banks were taking debt out of the market. now, there's less need for that. the other thing that's happening is that front end rates in the u.s. are now compelling for the first time in a decade.

you add another hundred basis points for investment-grade credit, 3.5% yield for a two-year bond. that's not tragic and certainly given the risk reward, it's a nice place to park cash. >> i want to wrap up talking about the various things we see in the yield curve. you saw a credit snapback in a massive way, high-yield, leveraged loans. to really take a fundamental positive view on the u.s. economy i would have thought to see something that has come to the curve. why does the yield curve essentially flatten than where it was last week even though things seem to have improved substantially? >> if i think about what is a flight yield curve trying to tell you as an investor, it's saying to you that investors in general, i don't have a fear of inflation because i'm not demanding a higher return. so i don't require a higher yield in the 10 year than i do

in the two year. it's somewhat inflation driven. if i take that away and short of some people putting fingers on think they're not supposed to, if i further look at that curve , yieldncerning part curves are usually followed. usually followed by a decline in rates. we don't know when, but a decline in rates, and a decline in economic activity. activityne in economic tends to help and 12 to 24 months after the curve flattens. to the levels that we saw not only this year, but last year. is the curve really trying to tell may come this economy is slowing down in a not fearful of an asian, and that's why even if you talked about the market nuances the last couple of weeks, it's not impacting the picture you are looking at. >> i completely agree. i think there will be periods over the next 12 months or so

where we will see steepening and then flattening. and then you will have the front end left. >> coming up on the program, the auction block. the return of issuance. already, it is back. this is bloomberg real yield.

♪ >> i'm jonathan ferro this is bloomberg real yield. i want to head to the auction block were we have seen a steep decline i treasury bond auctions over the last 12 month. to inrst auction of 2019 your decade low for the 30th billion dollars sales bonds but

they cover ratio well below average. elsewhere in corporate issuance beginning to thaw, the investment-grade market has recently downgraded, able to --ss more than $41 billion finally, finally with an high-yield, the drought is over. the first company to sell u.s. junk bonds in six weeks. it doubled the size of its deal to $1.5 billion from the initial $750 million. we finally had a primary test. in a way that we have not had in about six weeks. your thoughts on that test and where we go from here in terms of issuance? does very the deal well received, it did come at a bit of a discount but compared to the discounts we are seeing for high-yield, not bad. it has traded well, that's a pretty good sign for the market.

it is a higher-quality issuer so that would be rated and i think the way that we've seen spreads come back in from the wide at the end of december, the market is going to be looking for quality more so than some of the lower tier issuers in our markets. i don't think it's necessarily for to all, but at a price the better capitalized names, i think the market will probably be open here. >> and a lot of it came from leveraged loans last year, high yields was very dry for much of 2018. is that change over the upcoming quarters or is it a reply from last year? >> for now, it seems like we should see kind of a replay. the supply was all going to leverage loans and if the demand can come back, that's probably

where we will continue to see the supply coming. but i don't see from a supply perspective, issues for high-yield. i think it's more in the overall credit quality of those broader credit markets. you have to think about investment-grade leverage loan an high-yield and really take that as a bigger picture when thinking about any parts of these markets. through, the investment-grade space is probably of the two things you mentioned in euro bring segment, it's more important. the triple corporate is the place for the pain point of kings to be greater than if i look at the most high-yield markets. levered, you have been able to exist because your interests costs are low, can you turn this out while interests costs are still reasonably low and survive? if it's unable, you have a

higher propensity of slipping into a double b or single b rating, now you've got a whole different cohort of analysts and people who are willing to own you and you as an issuer, your world changes dramatically when that happened area >> let's talk about what has performed so far. loansback and leveraged off the december loan, the same and high-heeled. why hasn't investment grade participated in the same way? is it the concern you are picking on right now? >> we would say yes, and it's putting it in a big asset class. keep in mind, half of it is triple b. and if we think back to the beginning of this economic cycle, only about 35% was triple time, that'llame segment of market is a little more than doubled in size. everything these guys of said. for high-yield in particular, had a really rough fourth

quarter. i think that there was potentially a bit of a dislocation from some of the underlying fundamentals certainly in some of the companies were it was very sentiment driven and so we saw an aggressive snapback. but they were ultimately supportive of that market. as you mentioned, it's the first issuance in six weeks. that hasn't happened since 2008. i'm >> not a high-yield person specifically. the first months of having no months whatsoever. >> cash balances potentially got low for many. there was some appetite there. i think the other point that i would make is my high-yield colleagues have mentioned that the rates being discounted are well in excess of what our expectations are. expectations are more for a 2% rate. i think that's part of it as well. >> the base case of 2019, a lot , and the by year-end

first couple of weeks, does that make things of the complicated for you when you look ahead to the rest of the year? >> it's going to be a really long year and when we think back to december and the fourth quarter for high-yield, half of that spread widening happened in the last weeks of december. there was basically no liquidity in the market and that was a lot of what drove that, maybe what we thought was overdone in terms of spreads. we are not surprised to see the snapback but 450 in spreads is not wide, 550 is not that white either. even if we were going to have a year where spreads stay right around the 550 level at the start of the year, half the returns are done and we think growthen we look at potentially slowing in the u.s. and worldwide, and some of the liquidity coming out of the market, that should lead to wider spreads.

actually still quite cautious and of anything right now, we are probably de-risking a bit more into this really crazy route. >> just to take the other side is really think about this, the people who have been waiting for 600, they've been waiting a long time. maybe it was even late may, if you wait for the kind of level, you are being greedy. you're going to miss out. i just wonder why is 2019 any different to that? >> we wrote a piece of the beginning of 2018 where we talked about how do markets, fixed income markets act once you get into a flat yield curve? and one of the things historically you notice is you don't do terribly well. quality tends to go up, returns tend to go down. we are flatter and the yield curve now than we were a year ago. out to 2019 and going, we probably should not

expect that much difference than what i saw in 2018. to the comment about waiting for 600 or some other number, when you look at high-yield, especially investment, i buy this bond. if i buy it with the index today, it's seven and a half. the best that's going to happen to me if i own that and he pays me back his interest and i'm going to make seven and a half. if something goes awry, i'm going to make less than that. and youlooking at this realize that if you are making an equity investment because it is a very levered entity and you're going i should really get equity returns, that's why to us use it and you wait for the 600. because you are always worried more about all the things that could go wrong versus the handful of things that can go right. issue for the worst but hope for the best, they pay the interest and they pay the principal back.

>> we want to get a marked check on where treasuries have been through the week. up high, just four basis points on the 30 year and marginally high on the tenure as well. spreadsead, the final for the week ahead featuring earning from the big u.s. banks and the united kingdom and the united states. this is bloomberg real yield.

♪ >> i'm jonathan ferro, this is bloomberg real yield. it's time for final spread over the next week. earning season begins in the united states. plus, we have the expected brexit vote in the u.k. parliament, so look out for that.

we hit record territory here in the united states, the length of the government shutdown through the weekend. i want to pick up there quickly and briefly if we can as well. had a bloomberg terminal headline that the president just declared a state of emergency, would that mean anything to markets or that just be noise? >> you have to look at it from an investment or a traitor. we are not traders and i will be honest, even if i was a trader of a look at that news and go well, i have no way of understanding if it's going to go one direction or the other. my job is toward the things is sort of have to ignore and go ok, let's the best for the capital we are responsible for deploying? you have to compartmentalize it

and push it aside. >> i agree. if anything, that means the government shutdown is over because they declared state of emergency and congress can help pass a budget, that's good because people are back to work getting their paychecks. we are missing data prince because of this. if anything, it removes some of the noise in the background. >> we are going to wrap up the program. rapid fire right here on bloomberg real yield. the first question to you guys, the next move from the fed, i'm going to keep coming back to this question, for next move from the fed, rate hike or rate cut? >> hike. >> hike. >> cut. >> treasury curve positioning, what your position for a steepening or a flattening? initially steepening, later flattening. >> i agree. >> steepener. >> we test december for

high-yield, is the worst pass us for 4019? do we retest december or is the worst past? >> pretest. >> retest and then possibly more. >> retest. >> thank you so much for joining me through the last 30 minutes. from new york, we will see you next friday at 1 p.m. in new york time, 6 p.m. in london. her already and's, this was bloomberg real yield, this is bloomberg tv.

e.g. and 80 potential demise. the utility forces bankruptcy to natural gas supplies limit shipments and tell gas provider builds customers directly avoiding doing business with the companies. the oil trading. blockchain platform. ing's anthony ben. >> i'm alix steel p looking to bloomberg commodities edge. 30 minutes focused on the