♪ jonathan: from new york city, for our viewers worldwide, i'm jonathan ferro. "bloomberg real yield" starts right now. ♪ jonathan: coming up, pessimism returning, stocks ended the week lower on growth concerns and trade doubts. as sentiment sours, the german yield curve drives deeper into negative territory. the strength of january after a big month of gains in risk assets. we begin with a big issue, is it time to fade the strength? >> we're looking at this big rally we had. >> we can't predict how this is going to shake out. >> we just keep seeing more uncertainty. >> it's time to sell or take chips off the table. >> that's what we're debating now. do we ride the technicals,

strong momentum, or start taking chips off the table, recognizing there is a cap on the upside? >> they sounded the alarm that it's all clear, the fed is not going to allow the expansion to come to an end. >> i'm not saying that we can't rally further, but this idea that volatility will be low and there will be no issues the rest of the year is crazy, especially when the same people saying that said the exact opposite a month ago. >> having the optionality to take advantage of these type of dislocations, that is fast and furious because of the liquidity in the market, it is very tenuous. >> have things gotten a little frothy? yes. but if you look at the underlying economy, it's still strong. credit spreads are tightening. if you look at what the fed is saying, we're on hold right now. this is not a market where you say, the wheels are falling off the cart. jonathan: joining me in new york is kathy jones, subadra rajappa,

and coming to us from london is diana amoa, fixed income portfolio manager at jpmorgan asset management. diana, i want to begin with you. it's a big debate on the buy side, whether now is the time to take chips off the table. what are your thoughts? diana: given the strength of the rally we saw in january taking back some risk here makes sense. we like the idea of having a barbell portfolio, where you do have some risk in the high-yielding sectors but with a tilt toward quality assets. then putting in some of that cash in durations like fixed income, whether you are looking at treasuries or e.m. markets that are very sensitive to treasury moves. jonathan: kathy, what do you think? kathy: yeah, i would agree with diana. we take money off the table here. this has been a fast and furious rally. jonathan: very quick. kathy: you have to be really nimble to play this in and out. we would take some risk off the table. i agree, we like duration as

well in risk-free. jonathan: i want to bring up the v-shaped charts we see in high-yield, credit, leverage loans, as well. what pockets of credit are you looking at right now that you think have gone too far too quickly? kathy: you know, high-yield, leverage loans, just about every area of the market in credit. particularly leverage loans and high-yield. it's been such a quick snap back. even though we are pretty positive on a domestic economy for this year, we are still late in the business cycle and there is still a lot of headwinds. jonathan: and diana, on this concept of dialing back risk, what about emerging markets? i heard a couple banks suggesting to people that now is the time to start back a bit. diana: in emerging markets, it depends on what part you're looking at. if you look at local currency, actually, it has rallied close to 11% since september. that's one area that never

really sold off in december. that's the idea that it is more linked to durations, treasury rally, you had some relief, central banks being able to cut rates, domestically supports this base. and i don't think that dynamic is going to change. when we look at other areas like sovereign credit, and even some of the corporate space, we have retraced most of the selloff we saw in q4 last year. so i think we're taking back some risk with a view of acknowledging that we're in a volatile period, you'll get sporadic dislocations which give us better opportunities to engage. jonathan: duration has come up multiple times in this conversation, and it's a concept that a lot of people are bringing up. now is the time to add duration. is it? subadra: treasury markets, risk on assets in general, we'll be relatively range bound. carry trade make sense. if you look at the market action over the last month, it's been basically the qe playbook.

which means treasuries are relatively range bound, general yields are low. people are going out the mixed spectrum and buying high-yield or corporate bonds. that's sort of what the fed wants the markets do in some respect. they want some stability in risky assets. jonathan: kathy? kathy: i think what's a little bit different, when they engaged in qe before, you saw treasury rates move up. and reverse when they ended it. this time around, you're getting both treasuries rallying and credit rallying. we have a lot more faith in the rally in long-term treasuries than we do in credit. jonathan: subadra? subadra: i agree with kathy. what drives the markets here is the fed. there's very little priced in for the fed, and we are probably going to remain on hold for the remainder of the year. more importantly, what the

market is looking at is the potential for rate hikes in the future. and there's not nearly as much room for the fed to hike. jonathan: diana, i want to pick up on this, the simultaneous rally we have seen in risk assets and the resiliency we have seen in haven assets, in the same time, it's coming with its own concerns. a lot of people raising the issue, goldman sachs has done so, that in the next selloff, the haven assets won't provide you with that buffer. it's very difficult to find the diversification. what are your views on that? diana: i think the reason correlation of risks and safe haven is more on the risk side, not save haven. risk assets, there was some undervaluation, but given where we are in the growth cycle, given the fact that we're seeing some slower data coming in, revisions from policymakers across the board. senior loan officers, somewhat concerning given that it's been a pretty reliable indicator of

where the u.s. cycle is, showing tightening credit conditions. it's hard to be playing it from a risk asset with convictions when fundamentals are not great. i still think duration will remain the better play on risk off. ultimately, we are in a low rate environment in the rest of the world and anything that offers yield in that safety, as long as it's not because of the fed balance sheet is moving, should be supported. jonathan: subadra? subadra: yeah, no, i agree with what kathy said. i think duration in general is where you want to be toward the end of the cycle. especially given the fact that we think we could go into recession in early 2020. ultimately, you'll see people flocking in to save haven assets. and there's plenty of that, no shortage of treasuries. people can always buy treasuries. i think bunds are starting to get too rich. jonathan: what is driving that in your mind?

is it just that the economic backdrop over the belief that the ecb is not going anywhere anytime soon? subadra: yeah, it's that, and there are not that many bunds and safe haven assets. if there is any flight to quality, everyone tries to buy bunds. there's only so much for the market to take down. kathy: yeah, i think safe haven assets will continue to be safe haven assets when things happen. but i would agree, just a limited universe of things with positive yields that you can buy. jonathan: there seems to be a bit of a consensus emerging through the week. add some duration risk. the fed is out of the game. growth won't be good. go to treasuries on the long end. we see the moves in bunds and treasuries. diana, we remember last year where it was just one payroll report, and inflationary surprise, and the whole story got repriced. do you think we're vulnerable to that playing out again? diana: yes, i do think so but ultimately i don't think that will be something for this

quarter. when we look at things that were sort of leading indicators for 2015, when you had that big rebound on growth, you have signs of green shoots coming in places like korea, which tends to lead chinese data by a couple quarters. we started to see that pick up, but it will be a couple quarters before we're talking a strong growth story. ultimately, we need to get brexit out of the way, the u.s. funding discussion to be out of the way. all the headwinds that central banks are alluding to are happening this quarter. jonathan: subadra, final word on the inflationary tail risk that is still there. what are your thoughts? subadra: the fed being on hold is something that will be positive for inflation and inflation expectations. we saw a pop in inflation expectations right after the fomc meeting last week. in the big scheme of things, it will be hard to see sustained rise in inflation, as well as inflation expectations,

especially given the global environment. if you look at the revisions you saw from the european commission on growth and inflation, they are really bringing down their inflation forecasts for 2019. i think that's what will weigh on u.s. inflation. jonathan: we're going to talk about that in just a moment. subadra rajappa, kathy jones, and diana amoa, staying with us. coming up, the auction block. a global first for bonds has investors scooping up italian debt. that conversation'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 you'll find another sign that the u.s. junk-bond market is alive and well. clear channel sold $2 billion of bonds in the largest triple c rated deal since september. it's spinning off of its parent company, i heart media. elsewhere over in asia, and auction of 10-year japanese bonds, the highest since 2005, the sale came just one day before the central banks regular purchases. traders typically buying debt at auction to resell for a profit. and finally, italy surprising the market a little bit with this one, raising 8 billion euros in a sale that attracted him orders in excess of more than 41 billion. it's the second impressive order book for the country this year. still with me is kathy jones, subadra rajappa from socgen, and diana amoa from jpmorgan asset management. diana, let's begin with italy.

the monster demand for eurozone debt. what's behind it? diana: that particular issue was interesting because they came to market with a pretty decent concession. they added about 25 to 30 basis points to the 30-year bond, which the market saw as an opportunity to get some duration at relatively attractive levels. but what we've seen since then actually is the curve has underperformed, and we saw the secondary pricing up to where this bond was issued, rather than the bond rallying back. ultimately it comes down to the dynamics we have been discussing. for italy, specifically, it's seen as a duration. european rates are very low. the prospect of ecb hiking is off the cards. in terms of the high-yield space investment grade, we had very little issuance in december last year. investors were de-risking portfolios. so, people have come in here lighter risk than they wanted

to, starting the year, at the same time where we see money coming out of leveraged loans. that is supporting some of these more duration type fixed income markets. jonathan: you mentioned the performance in the secondary market from that 30-year issue in italy. what do you make of the unpredictability of the treasury bringing something to , market like that, a bit of a surprise to a lot of people. they have a 250 billion dollar euro funding target for the year. is that something you think is weighing on btp's? diana: i think it's somewhat weighing, especially with the outlook not great for italy. it's only a matter of time before investors start talking about the probability of them being able to achieve their fiscal targets when growth looks so poor there. markets were caught off, although they still managed to get away with it. the italian government, to be fair to them, they played this well. they saw an opportunity in the market where sentiment was positive. i expect we'll see more of that

from them. jonathan: you have the fundamentals and then the price and the story. diana has walked us through the fundamentals in italy. but the price of the story, a huge concession for a 30-year issue. then you also have the fact that it's 300 basis points over germany. is that something that's attractive to you? kathy: well, it's more a trade than a long-term hold, but this has been true over the years with italy. you can buy it when the spreads are wide versus bunds and make money. in this environment, when there's almost no yield anywhere around the world, people will take advantage of that, even if it is a trade. jonathan: against a backdrop where the growth forecast this week from the european commission were cut drastically for italy by 100 basis points. the growth story for the continent just is not looking good, is it? subadra: no, it's not. that's where i struggle to see why there is so much demand for peripheries, for instance. there is still a serious amount of risk.

italy came out of some sort of recession -- is in one, i should say. still there is a lot of demand. why? investors are seeking yield. especially if the ecb will be on hold, it will make sense to put some risk on margin. jonathan: diana, you mentioned something important. it's not the growth forecast that's of interest to people alone. it's the politics that are emerging because of the cuts to the forecast. because we're likely to see another clash between the commission and italians. is that something that people are not paying enough attention to as they clamor for duration on the periphery? diana: i think for italy's case, particularly, it is something

the markets probably need to pay more attention to, as we approach the may elections. during the course of the week, we had some speculation that there was discussion around a supplementary budget to help boost growth being discussed in italy. i don't think the markets would see that as a positive, and that would take us back to where we were in q3, q4 last year. for us in terms of italy, we agree it's more of a trade that a strategic long-term play for now, until we get some clarity on how the fiscal dynamics are likely to evolve. jonathan: the german yields have plunged ever lower. we mentioned earlier in the program, the yield curve is negative out to nine years. the 10 year yield, south of 10 basis points in germany. what are your thoughts on what is happening with the bund curve and how this is set to evolve in 2019? kathy: it's going to be a tough environment if you're trying to invest in core europe. one thing we haven't mentioned is the slowdown in china and the

trade conflict and how that's had a negative impact on europe, particularly germany, because of their strong trade ties to asia. as long as that plays out and we don't get any relief in that environment, it will be really tough to be an investor in core europe. jonathan: are you convinced, subadra, that we will get an effective response from the ecb any time soon? subadra: we already did in some respects. they acknowledge risks are to the downside. to me, what's to doubt in his recent projections from the imf and ec was the magnitude to which they brought down the growth forecast for germany. .6 to .8. it's tracking close to 1% growth. that is a huge concern. i'm not sure -- clearly, the trade uncertainties are having a much more impact on china, germany, but those dynamics is what is driving the markets. jonathan: the commission

forecast for germany actually lower than that, the u.k., which is drowning in brexit. luckily, we don't have to talk about it. i know you're all happy about that. kathy jones, subadra rajappa, diana amoa will be sticking with us. i want to get a market check on where treasuries have been through the week. two, tens, 30's. yields coming lower by four basis points on the front end. five on the 10 and a 30-year. still ahead on the program, the final spread. the week ahead, featuring a fresh reading on u.s. inflation and another round of u.s. china trade talks. that's ahead. 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 the next week, u.s. treasury secretary steven mnuchin heading over to china for another round of trade talks, approaching that deadline at the beginning of march. plus, we will have a eurozone finance ministers meeting. more debate in the u.k. parliament over brexit. a u.s. inflation report and the

potential u.s. government shutdown on the cards, as well, so a lot to look forward next week. still with me are kathy jones, subadra rajappa, and diane amoa. i want to wrap things up with something, kathy, i know you want to talk about. we breached this level in 10-year treasuries and some big names came out and said at the beginning of the bear market, the 30 year downtrend is done. and we're back to those levels again. what's your takeaway? kathy: to me, a bear market is price over time or yield over time and you can't pick a moment in time and declare we started a bear market. we just don't see the potential for inflation on the horizon to push us into a bear market. we think it's more of a range trade than anything else. jonathan: subadra? subadra: i agree with kathy. i think it's really hard, especially after seeing 30 years of one-way yields, i just cannot imagine a sustained selloff in

yields, treasuries that will lead to a bear market in bonds. jonathan: diana, what do you think? diana: while i get the argument on why inflation has been lowered, etc., you can't discount the fact that we are seeing a modest pickup in wage growth across most economies, whether in the u.s., in europe, certainly in the u.k., and even japan. the other small thing is in the last small business survey in the u.s., a number of businesses were reporting supply chain pressures. so some sort of issues around supply-side pressures, which might then potentially down the road cause them to raise prices. now that's not the core scenario, but i would not write off core inflation just yet. jonathan: diana, i get the feeling that you think maybe people might have gone to one side of the boat and there are too many people there now? diana: yes, that's exactly the

way i'd put it, maybe a pendulum. we swung one way in december and now have swung too far the other way. i think markets are very much overpricing perhaps the fundamental improvement, or the impact the policy response will have on the actual economic growth. the truth is somewhere in the middle. the fact that we have had policymakers starting to be more accommodative, tilting toward a more dovish stance is positive for risk assets. but you know that in the past, policy responses have intended to inflate asset prices and have done very little for the underlying economy. and that's what the issue is right now. jonathan: that's a really good point. you know what time it is? it's the end of the show and we have to wrap it up with a rapid fire round. negative german 10-year yield before the month is over? only eight basis points away. yes or no? kathy: yes. subadra: possible. jonathan: oh, come on, subadra. diana: yes.

jonathan: is it time to feed the 2019 strength in risk assets? yes or no? kathy: yes. subadra: yes. diana: would have been time a couple days ago, but even now. jonathan: i just want to get a feeling for the balance is shifting. the next move from the fed, a hike or a cut? kathy: hike. subadra: a cut. diana: hike. jonathan: fantastic to catch up with the three of you over the last 30 minutes. that does it for us on "bloomberg real yield." for our audience worldwide, this is bloomberg tv. ♪

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alix: big oil rakes in the cash. what about the u.s. independents? brazil takes on vale. the country forces the company to declare force majeure. how tight are the physical markets? and gold and m&a. big gold miners consolidate while the midtier producers resist the trend. i speak with sean boyd, ceo of agnico eagle, on his commitment to staying independent. ♪ alix: i'm alix steel. and welcome to "bloomberg commodities edge," 30 minutes focused on the companies, physical assets, and trading behind the hottest commodities with the smartest voices in t