jonathan: from new york city for our viewers worldwide, 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 to join 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

is strong, employment is good. >> you don't see enough indicators of weakness. >> 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 really 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. >> i don't think so. i think it is a good way to give an excuse if something goes wrong, but i think it's actually -- i don't think it is actually affecting the economy. >> i think we have enough data and i think the momentum doesn't change suddenly. >> recession probability is very low. jonathan: a full house around the table here in new york today. joining me robert tipp, kathy , jones, and eric stein. guys, great to have you with me. what another interesting week we have for 2019. kathy, the mood music has improved.

the economic data is still ok, and the story around china is improving as well. not the data, but the trade story. some of the news you have heard this week, is it inconceivable we could have a deal where the united states rolls 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. obviously we could pull back the tariffs pretty easily, but actually 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 -- removes an implement to trade and to gdp growth globally. so it would be a positive to get something. jonathan: eric? 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 -- and we see that

markets like it. but i think about the u.s. trade deal, it's not just trade of goods. it's also a tech war. to me it's who is going to control technology going forward, made in china 2025, those issues will be with us for a lot longer. in the short term i think we could solve the so-called trade war. longer-term there's still big issues between the u.s. and china. jonathan: do you agree, robert? mr. tipp: basically. the other aspect is the politics. trump wants to have something open, an open issue there he can modulate up, modulate down, and right now, the closed government is weighing on sentiment. all of a sudden you see the china tensions ease up all of a sudden. i think there's a balance going on. jonathan: market sentiment has improved and we seem to be positioning increasingly so for stability globally, in global markets. you've seen the re-price of asian high-yield. is that the right approach early in 2019? and am i seeing anything more than a relief rally? is it underpinned by fundamentals? ms. jones: our view is that this is a relief rally. if you find yourself overweight in some of these riskier

sectors, it might be a time to lighten up and give you a window of opportunity. we had that big selloff late last year. we bounced 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: right now, the biggest thing that's driving markets is the fed. the fed pause we saw was at the beginning of the year was a coordinated response to some of the miscommunication of the december meeting and it was of a -- it was leading to a big 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 2019. the fundamentals have stabilized. they haven't gotten much better, but they stabilized and valuations are compelling and the fed seems to be on hold for now. later in the year is a different story. jonathan: you can make the argument that valuations are compelling. you have been able to make that argument here. the problem i have looking at china at the moment is that the data i don't think has stabilized. in fact, i am looking at the chinese data and there's a real lack of stabilization at the moment. can you identify some stability in china right now? mr. tipp: no. i think the only stability i can

flow --table comedies stable, slow deceleration. what that really works for is fixed income at this point in the cycle. i think it is riskier for equities. the fed is trying to squeeze in these 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. and so i think that that is going to make it kind of a ping-pong year for equities. it depends on whether some of the tensions on trade art easing, whether the fed is looking to hike, but what will bring them to wait, as we saw last year, is a tightening of financial conditions, like falling stock prices. i think it will be tougher to be productive on the equity side. on the fixed income side, spreads have widened a lot. once things calm down like we have seen in the past week, all of a sudden you 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 evolving through the year? mr. tipp: i think it's going to be a range bound year. when we rallied 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 that 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: i agree with all those things, but let's think about what happened in the market of the last couple of weeks. the market has been fading the recession risk. it 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. i think the fed, if they are able to squeeze in a couple of rate hikes this year, that's great, but 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.

right, so they have already hiked 250 basis points preemptively, and that has had a cost in terms of growth. meanwhile, the rest of the world is doing lousy. the latitude is probably there for them to stop, 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. jonathan: what do you think, kathy? ms. jones: we think treasuries , 2.80 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 above 3% at some stage of the game. although the fed 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 actually see the curve steepening a little more. jonathan: what do you think, eric? mr. stein: i think because the fed pause or signaled a pause,

that 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 28 he was pricing in cuts, because inflation expectations and treasury yields were falling. credit spreads were widening and 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. when are we next going to get a clean month of economic data in the united states? it's going to be a while, eric? mr. stein: you have to finish the government shutdown. then you actually have to have the month and collect the data. it will take some time, so i think the fed will be thinking about some market indicators, but it is also a great time for a pause. let's wait and see. the whole debate about where is neutral, they are getting close to neutral. some people argue they have not tightened enough, they are close kind of to the low end of neutral. now let's wait and see. that has been the motto of the central banker. first, do no harm, and then see what they are doing. the fed cut rates up and let's take a wait-and-see approach. jonathan: the economy is still

strong. the data still looks strong. soft data at which is starting to see a little bit of a buy, and 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? do you see a transmission mechanism into the real economy from the political story that's evolving right now? mr. stein: i think you are seeing that now. 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. so 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. jonathan: yeah. and so -- jonathan: yeah. mr. stein: and so they are in a spot, again, where i don't think they are really doing serious damage to the u.s. economy. but 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 as if

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

jonathan: i'm jonathan ferro. this is "bloomberg real yield." i want to head to the auction block now, where we had the first major u.s. high-yield bond sale of the year. the primary market finally starting to open a little more. hca health care was able to

increase the offering by 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, a $37 billion in orders, 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. and in sovereigns, this one got my attention. 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 around the table 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. if you think this is a relief rally, kathy jones, what do you think of that demand for 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 trade, but i always feel like when there is bad investment in europe, someone follows up with draghi and whatever it takes. i'm not sure if that's the situation in italy this time around. is it? mr. stein: his term ends in the fall of this year. jonathan: these mature in 2025. mr. stein: exactly. i think what is actually helping italy is france, we like to be short french sovereign debt but what has helped with all of the protests in france, macron is getting pressure to expand the budget deficit and spend more money and not do some of his reforms. that makes it easier for italy. brexit also probably 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 end, then bunds are going nowhere. that is your basic assumption. if you think italy is going to do well, it's because bunds will be pinned to the ground, because the ecb is not going 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 the 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 they 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. so while 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: do you look at peripheral debt in a place like italy as a credit or a sovereign? mr. tipp: it's a sovereign credit. [laughter] when you are looking at a corporate bond, and we love a lot of corporate bonds. 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. so it is definitely a credit, you have to make a good 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. jonathan: what do you think, kathy? 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 part of a broader reallocation to risk at the start of the new year? mr. stein, look, i would say it's a lot of things. european investors the don't

have flexible mandates, where are they going to get those yields? 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. if you look at italy, italy spreads rallied. best performing assets in the month of december. while everything was selling off, italy was rallying from 300 basis points over bunds. the question is a good one. it really suits the european debt crisis. pre-european sovereign debt crisis, the market traded all these bonds with a little bit of liquidity premium. just 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 did not think about that. so certainly there can be opportunities there, but there certainly are sovereign credit risks in these instruments. jonathan: eric stein and robert tipp and kathy jones sticking with us. coming up on the program, the market check on where bonds have

been through this week, to's, tens, and 30 years. yields up, eight points on the 10 year. up 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." it's time now for the final spread. coming up, over a shortened trading holiday week here in the united states, u.k. prime minister theresa may presenting plan b for brexit, maybe monday. that's what's scheduled. 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. so look out for some great interviews coming up throughout the week. still with me around the table in new york is robert tipp, kathy jones, and eric stein.

final thoughts from you guys. 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. but a real lack of participation in investment-grade. why isn't investment-grade running with the rest of the market? ms. jones: i think it is weighed down by the preponderance of triple b's in the universe. and we have had some issuance that had to be absorbed, a little bit of duration there, but the widening in spreads is still there. we have profit growth, but it is slowing down. we have a high debt levels at the corporate balance sheets, and we still have those -- we don't know where trade is going for some of these bigger global companies. so all those factors are still very much in play. and actually if the economy does pretty well in the first half, the fed is back in play. so we just don't have a driver there to make --

jonathan: what do you think? ubs says it's premature to short triple b's on the fallen angel concerns. there are some people nervous about investment-grade. should they be? mr. tipp: i think 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. so the issues that can really trade, you've seen that motion and we say in this kind of attack market wise, you're going to see a lot of tightening in those spreads. jonathan: eric? mr. stein: i like to break things down to risk factors. people talk about ig -- it's really a 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. so if the economy really ticks up, you might win on spread to -- win on spreads or break even on spreads but lose on duration. jonathan: you know how we finish the program, the rapidfire round. quick final questions to get your thoughts on this 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 this cycle, yes or no? robert? mr. tipp: yes. ms. jones: no. mr. stein: no. jonathan: interesting. third and final question -- the partial government shutdown goes into its record winning streak -- is it a winning streak? i don't even know if i can call it that. who blinks first?

does congress blank first or the president? who blinks first? robert? mr. tipp: congress. ms. jones: the president. mr. stein: congress. 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 so far. robert tipp, kathy jones, and eric stein, thank you very much. from new york, that does it for us. we will of course 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. ♪

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