taylor: from new york city, i'm taylor riggs in for jonathan ferro. "bloomberg real yield" starts right now. ♪ taylor: coming up, the bottom line at davos. the global economy is not on the brink of going bust but the risks are mounting. plus, the warning from guggenheim's scott minerd. the leverage loan market is likely to get worse. an economic slowdown in credit. concerns for jay powell heading into next week's fomc meeting. we start with the big issue, uncertainty in the air at davos. >> people have certainly diminished their growth

expectations and you are hearing all about that at davos. we don't think they have done it enough. >> i think the u.s. economy will grow at a lower rate than last year, and china will grow at a lower rate. >> although we have downgraded our forecast, the two countries that we have not downgraded are the u.s. and china. >> you have a growth that kicked up to a higher level and is coming down a little bit. that makes people nervous. >> we see an economy that is absolutely slowing in terms of growth but not stalling by any means. >> uncertainty is the greatest enemy of growth. >> the shutdown will ultimately start to affect economic activity. >> political uncertainty certainly doesn't make our job as business leaders easier. >> there is no question there has been an economic cost paid by the u.k. consumer and industry because of this uncertainty going on so long. >> all eyes are on the trade talks, and hopefully in 90 days we hear some good news. i hope something positive comes

out of the latest round. >> now you have all of this uncertainty and the possibility that the world is a lot slower than people expected last year. to see a weakly first and fourth quarter. i think the fed will pause. whether they resume will depend on better data coming through. taylor: joining me in new york is noelle corum, the portfolio manager at invesco, and jose rasco, strategist at hsbc private bank americas. plus, coming to us from london is iain steely, international cio of fixed income, jpmorgan. iain, you are bringing us the global european perspective here. in that soundbite we just had, a lot of concerns from davos about slowing growth. are those fears overdone? iain: definitely a concern because growth momentum across the world has come down, whether you look at europe, japan downgrading their forecast, we see the slowing growth out of china.

people are concerned about it and it's a big difference from where we were a year ago. but i would agree with a lot of the comments we heard from davos, it's a slow down, we are not going into contraction, we are not stalling, but just at a lower level of growth. taylor: jose, where do you see the biggest pockets of slowing growth? >> in the u.s. and the government shutdown does not help. some of the advisers said first-quarter could be zero. we have had weak first quarters the whole business cycle. it could be abysmally weak in the first quarter here but that would mean we see a pickup in q2. definitely slower growth in the u.s., risk of slowing in china. we need to see a policy response out of the chinese government. taylor: what do you make of slowing growth concerns, here in the u.s. as well, how are you playing that? noelle: we are thinking that the u.s. will continue to stabilize in q1 and q2 for the first half of the year.

if you look at europe, a lot of europe, what is weighing on growth is the external sectors. with china being such a big trading partner, we are focusing on china and what policymakers are doing there. that is the big question of 2019, whether or not the policy is going to be effective enough to turn growth around and bailout global growth altogether. we think it will. taylor: we just turned we may get some slowing growth in china, but as we are in the middle of earnings season in the u.s., everyone is pricing and -- pricing in slowing growth in china, but people are ignoring the slowing growth warnings we heard over in europe, even with, for example, mario draghi coming out pretty dovish after week pmi's. are you preparing in your portfolio for a weaker than expected slowing growth in europe? iain: i think most people are expecting and are ready for slowing growth in europe eared -- europe. when you look at where we have come since the late stage of 2017 when we are in this very brilliant environment, when

europe was growing faster than the u.s., we have come off track pretty quickly. a lot of it is down to china, slowing of emerging markets, europe is a big export engine, but the reality is, it means we get the slower growth but you get the ecb unlikely to do anything in the form of tightening. if anything, we expect further easing for additional financing for the banks. in that sense, there is a grab for yield going on in europe. even with weaker pmi's we saw yesterday, we saw peripheral spreads tighten. that might be against expectations, but if you are in the lower for longer environment, then the yield, the pickup you can get in those markets is attractive. taylor: we have a chart showing the divergence in central bank action, with the u.s. has been pretty aggressive in raising, where the ecb and boj have been mostly unchanged. are there concerns now about peripheral europe, if mario draghi cannot get off the

bottom, and there is a slowdown, what else can he do? noelle: we kind of agree with iain's view that he will come out dovish in march. the gdp numbers, expectations will have to be revised down. at the most recent meeting, he kind of kicked the can to march. we think they will continue to be dovish, european growth will stabilize, and that will stabilize chinese growth. that will be a good environment for credit. taylor: we talked about slowing chinese growth, you're also looking at a slowdown in the u.s. perhaps. what is the impact on emerging markets? jose: in terms of markets, we have seen rates have stabilized. a slowdown has been priced into the bond market pretty well, especially at the long end. we have seen a very flat curve. that lowers interest rates. from our perspective, emerging markets look pretty compelling on a debt and equity side. we like them. more importantly, we see pretty stable growth, as you alluded

to. i think this year, good growth in em. the question for us is the currency play. at some point when the dollar peaks -- we saw it in december 2016, the dollar peaked in december and the next two years we saw emerging markets do well . noelle: hitting that point home with stable growth, a fed that will remain cautious, at least in the near-term. that is a good environment for credit, especially assets that are higher-yielding. valuations, especially high-yield leveraged loans have come in a lot. we still think they are very attractive yields. taylor: that is our next segment. we will talk about leveraged loans. you will throw everyone off. jose: the market is telling you we have already seen $5 billion flow into em in the first two weeks of the year, so the market is pricing in a better environment for em relative to the developed world. taylor: iain, i just got off the phone with the pimco portfolio

perhaps he is liking local currency debt versus dollar-denominated. what do you like as you talk about em? iain: i would agree with that. when you think over the course of last year, we had is exceptional data out of the u.s. relative to the rest of the world, the dollar continuing to strengthen. em got pretty well hit through the first half of the year. now we are in an environment patient, fed is more hearing rumors about them slowing down the balance sheet reduction. that is likely to put a cap on the dollar. some of that underperformance we saw in em over the last year can be reversed, and those yields still look pretty attractive out there. if you look at the em index at the moment, 6.5%. that looks good. i think people will start buying into that. the flows are showing that for early this year. taylor: bringing a full circle and coming back to the fed, which is where we started with global growth and the fed. where in the u.s. bond markets,

corporate, is your sweet spot as we look at a flattening yield curve? iain: i would go with a high-yield market. the spreads have come in a long way this year but obviously they widen significantly at the back end of last year. when we talk to our analysts, expectations default somewhere in the 2% region. if you have a 4.5% spread, we think on a default adjusted basis, you are compensated to take that risk. maybe you will not double-digit returns but high single-digit returns in that environment this year. taylor: with a flattening yield curve, where is your sweet spot? in terms of duration. noelle: mainly in the front end. ig, we like the asia ig, and that is largely on china over growth in the long-term.

inre is room for high-yield loans in our portfolio but right now we like ig. taylor: perfect tease for the next segment. everyone is staying with me. noelle corum, iain stealey, and jose rasco. coming up, the auction block. high-yield is heating up in spain. record orders for its offerings. this is "bloomberg real yield." ♪

♪ taylor: i'm taylor riggs. this is "bloomberg real yield." let's head over to the auction block, where that drought in high-yield is over.

a week that saw the most u.s. junk-bond issuance since early august sold bonds to refinance some of its money $1 billion debt load in an upside deal. meanwhile in europe, ibm helped to wake europe's slumbering corporate bond market. the company sold its largest eurobond deal ever. spain got record orders, about $53 billion in the 10-year sovereign bond sale. investors clamoring for that extra yield offered by prefer euro area debt. while i'm at the desk, of course, jonathan ferro, he was out with tom keene at the world economic forum in davos, switzerland. they caught up with guggenheim's ceo to ask him about the leveraged loan market in 2019. >> i think it gets even worse. when you look at last year and the incremental issuance of new leveraged loans versus the

's,remental issuance of clo they basically, all the new incremental supply of loans, those people in many cases have sold the risk away. so all they are looking for it is to get the assets so they can charge -- tom: you said there was a 2007 memory, selling the risk away. are you suggesting we will find ourselves into another set of events, nonsequential, nonlinear events, like we did then? >> i think so. hopefully it will not be as extreme, but let's be careful. relative to the subprime market, the clo market is much smaller, largely held -- tom: there is no aig out there. >> that's right. i do think the price gaps are going to be just as nauseating as they were in a 2008 experience. taylor: still with me is noelle

corum from invesco, jose rasco from hsbc, and iain stealey from jpmorgan asset management. jose, you heard it, leverage d loans may be expected to get worse but nothing like what we saw in 2008. do you agree? jose: you are basically seeing a rising rate environment in the u.s. that said, we think the fed will be on paul's through the first -- on pause through the half of first the year. this is a year of corporate deleveraging in the u.s., that is one point. don't forget the other big better run the world, one of them is china. we are seeing a great deal of deleveraging there as well. we like high-yield because we think the yields are attractive relative to the risk. we think it a risk on year because growth will pick up through the year. taylor: noelle, you are the high-yield queen. jump in here. what do you think of leveraged loans? like leveraged loans relative to high-yield.

leveraged loans in december, you saw them get hit so hard, the spread levels were actually consistent with defaults of over 6%. when really, defaults we are seeing are 1.5%, 1.6%. we think the moves were too far and markets are waking up in 2019 to fundamentals that are relatively healthy. we also expect stabilizing growth in the u.s. and globally as we move through the year. that will support loans. taylor: iain, so much of the concern about leveraged loans is that they took a big downturn in december and then run up. they are up about 2.6% year to date. has the recovery of leveraged loans been too far, too fast? iain: i don't think so. you saw all assets. there was an oversold environment through december, we got through the liquidity cap in the holiday period.

whether you looked at the stock market, high yield, leverage loan, everything oversold too much. we are seeing a recovery that is also being buoyed by what is being said by the fed, stimulus out of china. you can understand why we have seen the bounce back we have seen this year. taylor: within high-yield, i wonder what is your sweet spot? you talked a lot about the bbb's, which are investment grade. can you differentiate between a bb and ccc? iain: i think you can. ccc are the weaker credits. if we do go through a slow down, that is where you will likely see the defaults occur. i would agree with what we have been saying, as growth stabilizes with the fed on pause, you have default rates, the forward expectation is they will be ok and you'll be compensated to own the high-yield market. at the moment. i think as we get toward the end

of the cycle -- we don't think we are late cycle -- but as you get toward the end of the cycle, you want to avoid the real lowest quality parts of the market. taylor: do you agree with that, avoiding the ccc in the late cycle part of the market? noelle: we do still like bbb's. the performance has recovered some of the weakness in december. but at the end of the day, interest covered ratios are over five and ebita margins are supportive. we think there are companies that are showing that they are determined and willing to pay down debt, if growth slows, or if the fed continues to hike. that is where we are positioning. taylor: we have been talking about high-yield but it's actually been the bbb's , investment grade, outperforming everyone. jose: one thing i wanted to say, , energyook at sectors

sold off a lot in december due to lower oil prices. i think that is a sector that could surprise to the upside because we could see some better performance of oil prices. taylor: everyone is sticking with me. noelle corum, jose rasco, and iain stealey. let's get a check on where the bond markets have been this week. yields coming down across the curve on a weekly basis. two-year, 2.59. 10 year, 2.75. 30-year at 3.06. still ahead, the final spread, the week ahead. u.s.-china trade talks, fomc meeting, and the u.s. jobs report. this is "bloomberg real yield." ♪

♪ taylor: i'm taylor riggs. this is "bloomberg real yield."

time for the final spread. coming up over the next week, there will be another round of earnings and comments from jay powell and ecb's mario draghi. don't forget there will be u.s.-china trade talks, a brexit vote in the u k, and the u.s. jobs report. the shutdown is also looming over the economy. still with me is noelle corum, jose rasco, and iain stealey . we mentioned that that coming up next week and the u.s. jobs report and the shutdown. does any of that change the scenario for jay powell? jose: no. we think he is on hold until september. one thing the market should be vigilant of is the seasonal factors are askew in this business cycle. minimum wages went up in a lot of states this year, just like last year. don't be surprised by a bit of a jump in wages on the employment report. it may not hold, but don't be shocked by that. i think the market would not take it well but i don't think it holds.

taylor: noelle, jobs report, the fed, anything change? noelle: i think the fed goes in june, largely on the growth and inflation picture. in terms of next week, not much will change from the rhetoric we have seen earlier this month. as we get into march, that will be more interesting. barely anything is priced in for 2019 in terms of hikes. we will get to the scenario where growth and inflation is supported but the market is not. the fed will have to start to shift their rhetoric a little bit. that will be interesting. taylor: iain, jump in here. does anything change for you? are we on pause again with the fed until march, nothing about the employment report can move the timeline until march. iain: there is a meeting and then we have a press conference. i think that will make things interesting. all eyes will be on that. if you think back to december and the uncertainty markets had, it was when jay powell came out and stopped any thoughts of

balance sheet reduction. the market didn't like that. they wanted more flexibility. since then we have had a change in tone, it looks like the fed are debating balance sheet reductions. in a noise around that, any discussions around that can be positive for markets. taylor: we mentioned it is earnings season here as well. i wanted your thoughts on corporate profits. are companies still helping in terms of paying down debt, any commentary around earnings that has changed your view on the health of companies? iain: i don't think so. earnings are looking ok at the moment. the u.s. economy is going to slow, but as we said earlier, it will not go into contraction, just a trend like growth. we had a sugar rush from the tax reform last year, now coming down to normal growth and stabilize. the u.s. economy will just move forward. taylor: how are you able to play that in your portfolio? noelle: we like banks. that is the only major sector in

terms of what has been announced so far in terms of earnings. that has really come through. we think so far, there has been surprise to the upside relative to what was expected. banks are well-positioned for growth slowdown from here. taylor: time for our rapid fire round. this is my first, i'm excited. first one, u.s. shutdown or brexit. what matters more? iain: brexit. jose: u.s. shutdown. noelle: brexit. taylor: leveraged loan performance, the big run-up we had in january, a predictor for the rest of the year? iain: yes. jose: yes. noelle: yes. taylor: do bbb's continue to be the outperform or in the investment grade market? iain: yes. jose: no.

noelle: yes. taylor: two out of three. thank you. noelle corum from invesco, jose rasco from hsbc, and iain stealey from jpmorgan. from new york, that does it for us. we will see you next friday at 1:00 p.m. new york time, 6:00 in london. this is bloomberg. ♪ amazon prime video is now on xfinity x1.

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"best of bloomberg: middle east." these are the major stories driving our headlines. it is davos week and trade tensions are dominating. the boj governor warns amid temp nations. the head of the qatar investment authority says he is talking to solve the gcc crisis. aramco is gearing up for its takeover of the region's biggest company, sabic. ♪