>> bloomberg real yield starts now. coming up, trade talks wrapping up in beijing. president xi hailing great progress. looking to stabilize further signs of slowing growth. chinese credit surges, and struggling to get a read on the u.s. economy. small cracks begin to emerge. we begin with a big issue, struggling to get a clear read on the u.s. economy. >> i wouldn't take too much based on one data point. >> it is one month of data. >> it will depend on how the economic data evolves. >> we don't even know the data

yet because of the shutdown. >> what's interesting about the u.s. economy -- >> given the bad news. >> there was no silver lining. >> the first time we are starting to see a fading from the tax cut boost. >> i count this as an anomalous data point and i don't think it is consistent. >> it is very possible that we continue to have strong growth in the u.s. >> we are bringing in people from the sidelines in terms of the labor market. >> i think we cannot have strong conviction one way or another at this point. jonathan: joining me around the table today in new york is michael temple, doug peebles, and krishna memani. krishna, i want to begin with you. doesn't take much to shake confidence and conviction. this week it was the soft retail sales number. really soft retail sales number. to in the week, industrial production, manufacturing concerns. how hard is it to get a read on the u.s. economy right now? krishna: i don't think it is really that hard. the u.s. economy coming into 2019 had a great deal of

momentum. things were slowing down. things cannot slow down so rapidly in such a short period of time. i think these are -- we've had these in the past as well, we will get through it. u.s. growth probably stabilizes around 2%. our point in all of this is people who are expecting the recession anytime soon are going to be sorely disappointed. five more years. jonathan: you say five more years. it's a key thing for you. what is interesting at the moment, ken dooley from morgan university wrote about the confirmation bias. if you look at the economy and you already have your own assumptions on where we are going, this confirms the direction of travel. back to recession. which goes back to my previous question. it is a little bit more difficult to get your hands around the deceleration in the u.s. economy, from above trend,

back to potential. >> i don't think we should be surprised if that happens. that was the whole idea of the fed tightening policy in order to bring the economy back to trend level of growth, so that in their minds there would not be inflationary pressures. probably the best data point we get, largely because we get it every week, is jobless claims. if you take the employment report instead of the claims, these numbers are really good. we should not expect any recession. i think the tricky part is what is the yield curve telling us? the yield curve is telling us that we should be on the look at out for a recession certainly before the next five years. jonathan: michael, what are your thoughts on this? doesn't this validate the federal reserve's current monetary stance? michael: i don't think we have five years until the next recession but i certainly think the fed was concerned things were happening to the u.s. economy that began to alarm it. clearly, overseas growth is a lot slower than people are expecting.

you see the divergence taking place once again, the fed going to the sidelines. i think they are buying insurance. jonathan: you have to fold in the chinese data as well. soft ppi. decelerating once again. the classic 2016 set up. the classic growth fear. the concerns grow about exporting, disinflation to the rest of the world. is that overplayed? krishna: i don't think so. i think the magnitude is different but the setup is reasonably close. the drivers are different and the magnitude is going to be different, but at the end of the day, the global economy started slowing down the middle of 2018, and continues to slow down. that is probably going to be the case. our thesis for the year has been relatively simple. softer growth, better policy. that is how things are playing out. growth on a global basis is softer, much worse in europe and china perhaps, but slowing down in the u.s. as much. policy supported on a global basis. if it is not today, eventually it will have to be.

jonathan: let's get to the better policy issue. we have had five cuts, the reserve requirement ratio in china, since 2018. not a single rate cut on the main mechanism, many would consider the one year lending rate to be the big one. no cuts since 2015. is that coming? krishna: i think that is coming. before everything is said and done in this easing cycle, and i will classify it as an easing cycle in china, they will throw the kitchen sink in. we have talked about this in the past. the structural nature of the chinese economy, expects the chinese economy to slow down. the way you kind of get it to where you need to be, providing stimulus at various points in the cycle. jonathan: yet, the economy still has not stabilized. doug: let's not kid ourselves. i don't think the price mechanism on credit or interest rates in china works the same as the price mechanism works in other places. if you look on the bloomberg and check out the chinese credit

impulse indicator, it's been going down for a long time. i agree with krishna. our team out of hong kong was on this pretty early. they are going to change their stance and we are going to see some policy reaction in typical chinese fashion. i personally think we don't have to worry that that is coming. what we have to worry about is will it work this time? we have gone through a period where chinese credit growth was growing at 25% in order to get 6%, 7%, 8% gdp growth. that is not a good model. i think president xi has realized that, and in many of his statements has come out and said we cannot keep doing it that way. the real question will be do they try to stimulate the old-fashioned way, and does it work? jonathan: will it work, michael? michael: i'm almost thinking we are looking in the wrong place. jonathan: where should we be looking? michael: europe. these guys are both right, china has a lot of levers to pull, i

don't think they are near the end ringing interest rates down, providing inflation, can do more fiscal spending. you can argue the marginal benefits have declined, to doug's point, because they cannot just build another superhighway or high-speed train. what is europe going to do to stimulate its economy? more negative interest rates? that will not work. it has not worked in any meaningful way. are they going to get together and kumbaya around fiscal expansion? i doubt it. that will be the day. we know the ecb has talked about further ltro's, and we will see more credit buying likely, but i'm wondering where this goes. can you stimulate growth in europe in a meaningful way? jonathan: that is what was interesting this week, krishna, finally some crags in the resolve of the european central bank. the essentially came out and said the path to inflation will be shallower. the ecb will need to adapt.

that is the most acknowledgment i've heard of the slowdown in europe from an ecb official for months and months. is it too late, do they have enough to do enough? krishna: we talked about it the last time i was here, specifically on this. the point was ecb has no choice but to ease, and ease as aggressively as they can. they will kind of move away from that as long as they can, but from a structural standpoint, michael is absolutely right. europe has a far bigger problem than the u.s., for sure, and has less tools than china. being on the wrong side of policy is risky for europe. having said that, they will do an ltro, other things. fiscal expansion, we are at a better place there than we have been at any point in a while. that helps. at the end of the day, the potential for europe is 1%. if we get close to 1%, we are

high-fiving. jonathan: we have talked about the structure of the economy in the u.s., europe, asia. we have painted a pretty dreadful picture of what is happening in the global economy. i think the sovereign debt market has picked up on that story quite well. the bond market is priced for recession in europe. what fascinates me is the tension in six income right now. the sovereign space is priced for global slowdown, but then i look at high-yield and credit. not just talking about the u.s., but e.m., asia, and even european investment grade and high-yield as well. i don't see crexendo risk assets in the way that you think there should be given the growth act drop. doug: the fourth quarter was pretty brutal. jonathan: i agree, but if you won out 40,000 feet, happened in december, but everything is ok. doug: you have towards up there of the u.s. high-yield market. the chinese market does not look quite as promising, so to speak.

the selloff was more advanced, there has been less of a rally. financial markets, as much as we want them to reflect the real economy, they care about what the fed is likely to do. in the fourth quarter -- i was going to say when they thought -- i'm going to change that to, when the chair said the other -- said they were going to continue to raise rates, that is when the market came apart. as soon as he reversed course and backtracked, that is when the market started to rally. jonathan: final word, michael. michael: i call it the bond conundrum right now. it's exactly as you painted. we have a yield curve that is essentially that close to inversion in the u.s., and everywhere else in the world will be lowering rates. i agree with krishna, that that will ultimately be stimulative. the problem is how stimulative will it be, are we at the limits of our ability to stimulate in

the traditional way? why isn't credit reflecting it? i think the reason credit is not reflecting it right now is you still have reasonable earnings growth, and you now have balance sheet religion on the part of corporations. dividend cuts to delever. have not heard that in a long time. now we are in a positive feedback loop for credit, taking cues from the market. from that standpoint, credit risk will probably be fading into the mind of the typical investor. jonathan: we will be talking about that next on the program. everyone is staying with me. coming up, it is the auction block, including italy returning to the bond market after attracting record bids for its debt offering last week. that is next. this is bloomberg "real yield." ♪

jonathan: i'm jonathan ferro. this is bloomberg "real yield." i want to head to the auction block where we begin with even more european sovereign debt issuance. demand for italian debt rising for three-year notes. this comes out week after record bids for italy's 30 year bonds. elsewhere in the u.s., investors jumped into the cash. indirect bidders took the largest portion of the $50 billion sale since july 2011. finally in corporate, at&t sold $5 billion of triple b bonds to help to refinance its debt. 4.1% notes due 2028, the fourth most active in the investment grade market. that is where i want to begin. at&t, the largest nonfinancial

issuer of corporate debt making debt reduction a top priority for this year. with us to discuss is our guests. let's start with michael. has at&t caught what you consider the new religion for the c-suite? michael: absolutely, telecom is the poster child right now for balance sheet religion. they are clearly focused on deleveraging. at&t being one of the largest issuers, it's been given the mandate. ratings agencies are hovering over everybody as we speak and saying, get it down. jonathan: i have heard this is the year of the debt diet. someone on my show said that. why is this the year of the debt diet? krishna: i think part of it was volatility in 2018. interest-rate volatility and stock market lability. michael is right, some people got religion, but they have only gotten the first commandment. we are waiting on the other nine to come through. the point is, that volatility

put a pause on the expansion of balance sheet that they were down the path of. tax reform was a bit of a driver as well. at the end of the day, if the liquidity is available, if the market pricing of risk is relatively low, money is cheap, corporations will continue to de-lever. probably not at the pace they were doing before, but leverage is going up. doug: i think everybody gets religion. you look around the plane during turbulence and everyone is doing their own form of praying. you talk about a debt diet. let's not forget, if you look around the world, since the first quarter of 2009, and we came into this with $110 trillion of global debt outstanding, we increased it by $60 trillion. $60 trillion. that is a crazy number. by the way, within that $60 trillion, about half of it is from china.

so yes, we all need a debt diet. jonathan: let's talk about a part of the market where people have been concerned over the last year, the expanding side of triple b, the line between investment grade and high-yield. are those concerns overdone? walk me through and frame the triple b universe and how concerned we should be. krishna: the fact that the triple b sector is the largest component of the investment grade market is something to worry about. at the end of the day, the driver of catastrophic outcome with that sector really will depend on the economic cycle and the credit cycle far more than anything else. i think the right way to think about it is, when a bad outcomes arrive, triple b's are going to underperform far more than they have previously. that's the right way to think about it. jonathan: in the short-term, medium-term, what we have on the table, the line between investment-grade and high-yield, the spread tightest in almost 10

years. you are telling me this is the year of the debt diet. we have double b spreads coming in to narrow that gap. there is still existing concern in triple b. i think the big concern for a lot of people, the trade that people are starting to think about, is now the time to go long triple b's? doug: i don't think the spread was the double b's collapsing to the triple b's, i think it was the triple b's backing up to the double b's, which is a sign of a healthy market. if krishna is right and we don't have a recession or five years, you are definitely supposed to be long. michael: i think it is overdone. to a certain extent, and markets are sort of self reflecting and have feedback loops, the reality is, as soon as the market started to worry about the triple b part of the investment grade corporate market was the time to go in and own it. our observation was there were certain areas in the triple b

market we are concerned about, certain sectors, certain segments, certain large issuers, but i don't think it is this mass wave of companies going down into high-yield. that should not be what is worrying people. doug: when i talk to fixed income people, they are not crazy worried about this. when you talk about other commentators, other investors -- i'm just stating my observation, jonathan. i think that there are others that are really worried. krishna: we are just smart. [laughter] krishna: all kidding aside. i think the point doug is making is an important one. it is not just the size of the cohort, it is -- there are far larger companies in triple b's. the coverage ratios are good. looking at a specific number and freaking out is probably not the right thing to do. jonathan: krishna memani, doug peebles, michael temple sticking with me.

a check on the markets, where treasuries have been this week, twos, hans, 30-year-old -- 30 year yields as follows. drifting higher on the front end by about five basis points. no drama on the longer end. up about 3% on a 30 year yield. coming up, the final spread. the week ahead featuring the fed minutes from the january meeting. that is next. this is bloomberg "real yield." ♪

jonathan: i'm jonathan ferro. this is bloomberg "real yield." coming up over the next week, remember, the long weekend in the u.s. means markets are closed this monday for presidents's day. later in the week, minutes from the fomc january meeting, existing home sales, and durable goods data. still with me is michael temple, doug peebles, and krishna

memani. krishna, i want to begin with you and the skipped call option on the 81 at santander in spain. how concerned are you? krishna: it is the first, so if you are a typical european investor and got into the market with certain expectations, you are disappointed, flustered. how could they do this? but if you are a long-term investor in credit markets, have been doing this for a long time, this sort of thing happens all the time. we have had this with tier one's, lbo's, a company would promise all sorts of things. the third day after that -- as an analyst, you have to expect what is the most economic thing for the issuer to do? this was, indeed, the most economic thing for the issuer to do. they did it. they are fiduciaries. jonathan: are you basically saying the same thing, this is a market that is now maturing?

doug: one great analyst in london said exactly that. if you look and say, from an economic standpoint, were they supposed to do this? yes, they were. did they probably know it was going to surprise the market? they probably did. but there were some hints and i think it is a sign of a market that is maturing. not only the action but the reaction. jonathan: we had a little bit of a move after the event but we have come back since then. michael, do we have to assume that non-calls become more common occurrence for contingent convertibles? michael: the market is maturing, investors are now on the look, so there will be some differentiation, further spread widening between the ones that will and won't.

one of the questions is, is there something underlying that we should be worried about? so the big concern -- we talked about it with slowing europe -- we have never seen a revival of the credit channel in europe. banks have struggled to make money. they have struggled to de-lever. banks in the u.s. did a good job shrugging their leverage. the europeans have not done that in a meaningful way. they have not gotten to that point. jonathan: we have to leave it there. were going to do the rapidfire round. we begin with the chinese rate cut before the end of the quarter. yes or no. michael: yes. doug: yes. krishna: yes. jonathan: the spread between triple b and double b the narrowest in 10 years. long triple b's or double b? michael: triple b. doug: triple b. krishna: long triple b. jonathan: most crowded trades in the bank of america merrill lynch fund manager survey.

it was number one -- you continue to stick with it or do you fade it? michael: our expectation is em is very attractive right now. doug: it doesn't trade like it is long. it doesn't. it had for a while. i don't believe the survey. krishna: just to be clear to doug's point, it was more about em. long em. jonathan: great to catch up with you all. that does it for us. this was bloomberg "real yield." this is bloomberg tv. ♪ this isn't just any moving day.

this is moving day with the best in-home wifi experience and millions of wifi hotspots to help you stay connected. and this is moving day with reliable service appointments in a two-hour window so you're up and running in no time. show me decorating shows. this is staying connected with xfinity to make moving... simple. easy. awesome. stay connected while you move with the best wifi experience and two-hour appointment windows. click, call or visit a store today.

alix: chevron commits to venezuela. the ceo tells bloomberg the company attempts to stay on the ground in the country, in an interview. the battle for nigeria. presidential elections could throw the country into chaos. we assess the supply risks. clarity in diamonds. the launch of a program that can track diamonds all the way to their sale. ♪ alix: i'm alix steel, welcome to "commodities edge," 30 minutes focused on the asset classes, and companies with the smartest voices in the business.