jonathan: i'm jonathan ferro. "bloomberg real yield" starts right now. ♪ coming up, the mood music improving. china said to offer a path to eliminate the trade imbalance. the junk-bond market might be rocking but issuers are slowed when the party and the government shutdown entering uncharted waters with seemingly no end in sight. we begin with a big issue, the mood music looking a lot better. >> recession is not on the immediate horizon. >> recession probability is very low. >> we are expecting unemployment to remain low.

>> growth is good, the consumer strong. >> you don't see enough indicators of weakness. >> expectations. >> we are just at a good point for sort of pausing. let's look at the lay of the land. i'm not worried about inflation getting out of hand. >> the main thing about the shutdown, if we're going to be flying airplanes without instruments because we don't get the data as much, that could be a real concern. >> et al. think so. that it is a good way to give an excuse if something goes wrong but i think it's actually affecting the economy. >> i think the momentum doesn't change suddenly. >> recession probability is very low. jonathan: a full house around the table in new york joining me. tiff, kathy jones, and eric stein. great to have you with me. another interesting week. kathy, the mood music has improved and the economic agency

and the story around china is improving as well. not the data, but the trade story. is it conceivable we can have a deal where the united states roles back tariffs on china and the chinese pledge to get rid of the imbalance with the united states? ms. jones: executing on that might be hard. we could pull back tariffs pretty easily but ending up with china buying enough to eliminate the trade deficit in a really short period of time is a high order. but moving in that direction removes the negative. if you remove the tariffs, that improves sentiment amongst a lot of businesses and removes and impediment to trade and to gdp growth globally. it would be a positive to get something. mr. stein: in the short term there's a lot of incentive from the trump administration perspective and the chinese perspective to end the so-called trade war and get a deal and i think about the u.s. trade deal, it's also a tech war.

who is going to control technology going forward, made in china 2025, those issues will be with us for a lot longer. we could solve the trade war but longer-term and there's still big issues. jonathan: do you agree, robert? >> basically. the other aspect is the politics. trump wants to have something open, and open issue he can modulate down. right now the closed government is weighing on sentiment. all of a sudden you see the china tensions ease up all of a sudden. and there's a balance going on. jonathan: market sentiment has improved and we are positioning for stability in global markets. you've seen the re-price of asian high-yield. is that the right approach early in in 2019? underpinned by fundamentals? we think this is a

relief rally. if you find yourself overweight in riskier sectors, it might be a time to lighten up and give you a window of opportunity. the big selloff late last year, we bounce back a little bit but we are not really confident longer-term that this is a sustainable level of valuation. jonathan: are you confident? mr. stein: the biggest thing that's driving markets is the fed. the fed cause we saw was a coordinated response to some of the miscommunication of the december meeting and it was of a part of the rally we have seen. an area like emerging markets that really got hurt in 2018, we should be in for a lot better havethe fundamentals stabilized. they haven't gotten much better, they stabilized and valuations are compelling and the fed seems to be on hold for now. jonathan: you can make the argument that valuations are compelling. the problem i have looking at china at the moment is that the data i don't think has stabilized. i looking at the chinese data am and there's a real lack of stabilization at the moment. can you identify some stability in china right now?

mr. tipp: the only thing i can see is stable deceleration. what that really works for is fixed income at this point in the cycle. it is riskier for equities. the fed is trying to squeeze in his last couple of rate hikes. you've heard them say we are going to be more patient but you haven't heard them say we are really looking to go the other way or we are really done. i think that is going to make it kind of a ping-pong year for equities, depending on whether some of the tensions on trade are easing. whether the fed is looking more the hike. but the things going to bring them to wait as we saw last year is a tightening of financial conditions, falling stock rices. -- stock prices. the biggest going to be tougher to be proactive on the equity side. on the fixed income side, spreads have widened a lot of once things calm down the we've seen in the last week see the money starting to come back into the long-term fixed income. jonathan: what is your stance on treasuries and how do you see

the curve of evolving through the year? mr. tipp: i think it's going to be a range bound year. what we rally down to pessimistic levels we were at a couple weeks ago, that's probably going to be the middle of the range of the end of the year. we will make our way to a 2% to 3% range. right now maybe that range is still 2.25%. i don't know that it's going to go to 3.25% on the high side. may be capped at 3%. i think it's going to be a range bound year, you go between bouts of fear and greed. jonathan: just to be clear, the recessionary pricing we saw thursday where we saw treasury yields at the front end of the curve drive lower, you think that point could be the middle of the range by the end of this year? mr. tipp: yes. i think given the debt levels that are out there, the demographics, it's hard in the united states to wrap your mind around that because in the abstract, we can take this level of interest rates or higher but the world is under a lot of stress. china's slowing down, europe is doing lousy, they are going to

have brexit, trade, politics hanging over them all year. china is decelerating. this is a very moderate global environment where european rates are closer to zero. jonathan: but let's think about what happened in the market of the last couple of weeks. the market has been fading the likelihood of a rate cut. if you think that the midpoint of the range by year end, i would also assume you think that a rate cut debate is going to be back on the table by year-end . mr. tipp: yeah. there's an aspect of failure looming out there for the fed. they are still looking at a 1980 to 2000 world, phillips curve and inflation when they have only hit 2% on core pce one-month in the last seven years. 250 have already hiked

basis points preemptively, and that had a cost in terms of growth. the rest of the world is doing lousy, the latitude is probably there for them to stop if they -- stock, but they will try to squeeze a couple in. i think they get the signals from the market assuming they get those in. but it's time to stop and wait. ms. jones: we think treasuries are fairly valued based on what we look at. we are also expecting a range this year but i would say somewhat higher, 2.5% to 3% for most of the year, maybe bouncing about 3% at some stage of the game. although the fed has caused -- has paused and although some of economic data has been mixed, we don't have an indication that the economy is falling off a cliff yet. so the idea that they are poised to cut i think is a little too much. i see the curve steepening a little more. mr. stein: i think because the fed paused, gives them latitude hike at the end of the year. if they kept going, the market was pricing in a policy mistake

and that is why the market in 2018 was pricing in cut because inflation expectations were and treasury yields were falling. the fed looked completely blind to it up until the past couple of weeks when i had according to message. jonathan: blind to the market action, might as well be blind to the market as well. whether we next going to get a clean month of economic data in the united states? finishin: you have to the government shutdown. you have to collect the data. the fed market indicators and a great time for a pause. the whole debate about where is neutral, they are getting close to neutral. some people argue they have not tightened enough, they are close to the low end of neutral. now let's wait and see. that has been the moderate central bankers, first do no harm and see what they are doing. the fed cut rates up and let's take a wait-and-see approach. jonathan: the data still look

s strong. soft data at which is starting to see a little bit of a buy, the soft data in the hard data still looks good. claims this week look great, multi-decade lows, do you see the confidence numbers because of the partial government shutdown taking a little bit of a hit here? you see a transmission mechanism into the economy from the political story that's evolving right now? mr. stein: you are seeing the confidence numbers. there's an underlying strength in that corporate profits are coming in better than expected. the jobs numbers are good. your underpinnings are good but there has been a rotation and not just lately, it's been two years of deceleration on the interest rate sensitive sectors of the economy. they are in a spot, again, where i don't think they are really doing serious damage to the u.s. economy. what they are not doing is finding out how rapidly the economy can grow without creating above 2% inflation. they are still, it feels like

subconsciously, operating on feeling and they're really afraid to let inflation bounce around that level. jonathan: robert tipp, kathy jones and eric stein. coming up, the auction block. hba health care sweeping into the red-hot junk-bond market. that's next. this is "bloomberg real yield." ♪

♪ jonathan: i'm jonathan ferro. this is "bloomberg real yield." to the auction block, the first major u.s. high-yield bond sale of the year. the primary market finally start ing to open a little more. care was able to

increase the offer and why 50% and lower the yield on a borrowed $1.5 billion of senior unsecured bonds in two parts. elsewhere in investment-grade it saw foxconn down $37 billion, it will be spun off from 21st century fox and will pay a one-time special dividend to its former parent of $8.5 billion. in sovereigns, italy showing record demand of more than $41 billion for the first syndicated debt offering this year. the offering was $11.3 billion of march 2035 notes. still with me to talk about some of the issuance and what's happening in credit and fixed income more broadly is robert tipp, kathy jones, and eric stein. what do you think of that demand and the duration on the periphery? ms. jones: it's remarkable. i know things have settled down a bit politically in italy and

there's a tremendous demand for yield and i think there's a belief that at the end of the day, draghi will do whatever it takes as long as he is still in office, to smooth things over. i think the timing was pretty good. jonathan: i'm not here to say what's a good trait or a bad trait, but i always feel like when there is bad investment in europe, someone follows up with draghi and whatever it takes. mr. stein: his term ends in the fall of this year. jonathan: these mature in 2025. mr. stein: was helping italy is france, we like to be short french sovereign debt but what helped with the protest in france, macron is getting pressure to expand the budget deficit and not do some of his reforms. that makes it easier for italy and brexit also helps italy. how many battles does the eu want to fight at once?

jonathan: it doesn't spell a great macro story for europe. i caught up with your colleague michael collins, and he said to me, if italy is going to perform in terms of duration of the long ends, then bunds are going nowhere. if you think italy is going to do well, it's because balloons will be pinned to the ground. they are going to repent to the ground because the ecb is not going to go anywhere. what do you think of that argument? mr. tipp: bunds, you can barely find them. they have a surplus in a low debt level and they trade like a very tight commodity. i think in europe at any given point in time, people are focusing on the weak link which right now is italy. what they are missing is that these sovereigns have been in a seven-year trend of ratings upgrades. and ireland, portugal, cyprus, greece, their growth is doing well, there deficit numbers are low and have been getting ratings upgrades. they've gone from trading cheap to corporate bonds with

comparable ratings, now they are trading at or through and that trend is going to continue. well that focus is on italy and all these different problems in europe, it's a great system where they have rules and there is just enough tension between the economies where they do not want to underwrite each other's downside risks, so the italians wanted to come in with a 4%, 5% deficit and then it was 3% and it ended up being 2%. they completely caved, their debt to gdp ratio will be relatively stable they will be rolling down into a -40 basis points. jonathan: to you look at referral debt in a place like itty -- like italy as a credit or a sovereign? mr. tipp: it's a sovereign credit. [laughter] mr. tipp: when you are looking at a corporate bond, high-yield is very attractive here. there's nobody there to save you when you go down. there is somebody that wants to go eat your lunch.

on the sovereign side, it is so much easier for the entire system if they can keep you in the fold and get you to do the right thing. it is definitely a credit, you have to make a good call on have -- call and have an idea of which way it's going. but we've been very positive on average on all these peripherals for several years now. and we still are. jonathan: it's a sovereign credit credit. is that what you are going with? mr. tipp: sometimes it's more credit than sovereign. ms. jones: i think we will always have italy. i think this will always be something you want to trade in and out of based on where the spread is and what the current political movement is. i would agree, i don't think they are leaving the eu and therefore, when it gets really dicey is probably a buying opportunity, and when it gets tight, you probably want to be out. jonathan: do you think this is a judgment on europe and italy or a broader reallocation to risk at the start of the new year? mr. stein: it's a lot of things.

european investors the don't have mandates, one of the countries you just mentioned, cyprus and greece has rallied a lot making italian debt look relatively attractive. those investors, pro-risk helps. italy shares rallied. the assets in the month of the summer, while everything else was selling off italy was , rallying from 300 basis points over bunds. the question is a good since the one. european debt crisis, the market for european sovereign debt crisis, the market traded all these bonds with a little bit of liquidity premium. a small amount. now they are massive credit spreads. at eaton vance, they always had sovereign credit risk in them despite the fact the market and -- market did not think about that. certainly there can be opportunities there but there certainly are sovereign credit risks. jonathan: eric stein and robert tipp and kathy jones. sticking with us.

coming up on the program, the market share on where bonds have been to this week. tuesday on the tens, and 30 years. yields up, eight points on the 10 year. next, the week ahead featuring the world economic forum and decisions from the ecb and the boj. this is "bloomberg real yield." ♪

♪ jonathan: i'm jonathan ferro. this is "bloomberg real yield." time for the final spread. over a shortened trading week in the u.s., the u.k. prime minister theresa may presenting plan b for brexit, maybe one -- maybe monday. we also get earnings reports, gdp rates from china and rate decisions from both the ecb and the boj. plus my colleagues and i will be at the world economic forum in davos, switzerland. still with me is robert tipp, stein.ones, and eric

on credit, a lot of people look at this big rebound in high-yield. not much issuance coming through, the primary market starting to heat up little bit. a real lack of participation in investment-grade. why isn't investment-grade running with the rest of the market? is wayes: i think it weighed down by the preponderance of triple b. the widening and spread is still there and the profit growth is slowing down. we have economic growth but it's slowing down. we have high debt levels of the corporate balance sheets. and we still have this -- don't wear -- we don't know where trade is going for some is bigger global companies. all those factors are still very much in play. if the economy does pretty well in the first half, the fed is back in play. we don't have a driver there.

jonathan: ubs says it's premature to short triple b's. there are some people nervous about investment-grade. should they be? mr. tipp: the problem is the answer is no. if you are in, you are in good shape and a good point in the cycle. the economy looks good. if you're in the right names. the problem is, if you are not in, and the range is not that wide and the transactions costs are high, then you are not going to be that eager to get in. so what you're seeing is the new issues have very good demand and then the derivatives that you can trade inside have already retraced more than half of their widening from last year. the issues that can really trade, you've seen that motion and we've seen this attack market wise, you're going to see a lot of tightening in those spreads. mr. stein: i like to break things down the risk factors. it's really treasury bond plus the credit spreads. the credit spread component has

rallied somewhat significantly to start 2019 and there's obviously that duration component in investment-grade. if the economy really ticks up, you might win on spread to break even on spreads but lose on duration. jonathan: you know how we in, the rapidfire around. quick final questions to get your thoughts on this market is -- market and some of the broader issues as well. let's begin with the first question. china, deal or no deal between china and the united states. mr. tipp: no big deal. ms. jones: some sort of a deal. mr. stein: deal. jonathan: have we seen the high for the u.s. two-year yield for the cycle, yes or no? mr. tipp: yes. mr. stein: no. >> no. jonathan: the partial government shutdown goes into its record winning streak -- i don't even know i can call it that. who blinks first? congress or the president? mr. tipp: congress.

ms. jones: the president. mr. stein: congress. jonathan: great to catch up with you all. interesting stuff with the last 30 minutes to wrap up really interesting price action through 2019. andrt tipp, kathy jones, eric stein, thank you very much. from new york, that does it for us. we will see you next friday at the same time, 1:00 p.m. in new york, 6:00 p.m. in london. for our audience worldwide, this was "bloomberg real yield." this is bloomberg tv. ♪

you're watching the best of bloomberg daybreak middle east. the saudi energy ministers expressed confidence in bringing balance to the oil markets. stop the standoff. u.s. secretary of state mike pompeo tells saudi arabia that isolation of qatar has gone on too long. zimbabwe has no currency of its own. that hasn't stopped a currency crisis from taking hold. we explain why. ♪ manus: