jonathan: from new york city for our visitors worldwide, i'm jonathan ferro. bloomberg "real yield" starts right 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. 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 will depend on how the economic data unfolds. -- involves. >> we don't even know the data

yet because of the shutdown. >> i think what is 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. >> it is very possible that we continue to have strong growth in the u.s. >> i think we can have strong conviction one way or another at this point. jonathan: joining me around the table today 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. to end the week, manufacturing concerns. how hard is it to get a read on the u.s. economy right now? >> 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 we have had these had -- head fix 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 best a -- a recession anytime soon are going to be sorely disappointed. five more years. jonathan: what is interesting at the moment, someone from oregon university wrote about the -- about confirmation bias. if you look at the economy and you already have your own assumptions about where we are going, this confirms. which goes back to my previous question. it is a little bit more difficult not to get your hands -- now to get your hands around

the deceleration in the u.s. economy. >> 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 -- a trend level growth, so that there would not be inflationary pressures. probably the best data point we get, largely because we get it every week, is jobless claims. even 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? it is telling us that we should be on the lookout for a recession certainly within the next five years. jonathan: michael, what are your thoughts, doesn't this validate the federal reserve's current monetary policy 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 slower than people are

expecting. you see the divergence taking place once again, the fed going -- has moved to the sidelines. i think they are buying insurance. jonathan: you have to fold in the chinese data as well. soft ppi. -- ppi decelerating once again. the classic 2016 set up. 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 in the magnitude is going to be different, but at the end of the day, the global economy started slowing down the middle of 2018, 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. just as much. policy supported on a global basis. if it is not today, eventually

it will have to be. jonathan: we have had five cuts, the reserve requirement ratio, -- 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: before everything is said and done in this easing cycle, and i will classify it as an easing cycle in china, they are going to 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. to get it to where they need to -- need it 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 works the same as 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. president xi has realized that, and in many of his statements have come out and said we cannot -- 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 doesn't -- 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 right, china has a lot of leverage to pool. i don't think they -- leverage to pull. i don't think they are near the end of bringing down interest rates, 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 is it going to work. it hasn't worked in any meaningful way. are they going to get together -- togetherion around fiscal expansion? i doubt it. we know the ecb has talked about itro'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 cracks in the central bank. 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 at the -- it the last time i was here, specifically on this. the point there was ecb has no choice but to 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, 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 going on in the global economy. i would say the sovereign debt market has moved on that pretty well. the bond market is priced for recession in europe. what fascinates me is the tension in the sovereign space -- in fixed income right now. compared ton space high-yield and credit. not just talking about the u.s., but e.m., asia, and even european investment high-yield grade. i don't see cracks in the assets -- risk assets in the way that you think there should be given the growth act drop. >> the fourth quarter was pretty brutal. jonathan: i agree, but something happened in december, but everything is ok. >> you have charts at their 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 that 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. we have a yield curve that is essentially that close to an 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 is it going to 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 isn't 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 deliver. you 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 going to stick 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 up 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 begin with even more european sovereign debt issuance. demand for italian debt rising for three years now. the government receiving the most in that option since july. this comes one week after record bids for italy's thirty-year bonds. elsewhere in the u.s., investors jumped into the cash. indirect bidders to the largest portion of the $50 billion sale since july 2011. finally incorporates, 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 michael temple, doug peebles, and krishna memani. 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 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 volatility. 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. 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 everybody is doing their own form of praying. you talk about a debt diet. 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. it is crazy. 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 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 -- bad that outcomes outcomes arrive, triple b's are going to underperform far more than they have previously. jonathan: in the short-term, medium-term, what we have on the table, that line in the sand between investment-grade and high-yield, the tightest spread 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 this 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 along triple b's? doug: i don't think the spread was the double d's collapsing to but 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 was overdone. 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 were concerned about,

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. all kidding aside. the point that doug is making is an important one. it is not just the size of the cohort, it is really more about 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 were treasuries have been this week. drifting higher on the front end by about five basis points. no drama on the longer end. -- long and -- end. around 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." it's time now for the final spread. coming up over the next week, remember, the long weekend in the u.s. means markets are closed this monday for president -- presidents' day. later in the week, minutes from the fomc january meeting, existing home sales, and durable goods data. still with me is michael, doug

peebles, and krishna memani. krishna, i want to begin with you and the skipped call option on the 81 in santander in spain. how concerned are you? -- where you? -- were 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? 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. 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 are fiduciaries. jonathan: this is a market that is now maturing?

doug: one great analyst in london said exactly that. if you look, from an economic standpoint, were they supposed to do this? yes, they were. did they know it was going to surprise the market? they probably did. there were some hints to that. 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, you have to assume that -- do you have to assume that non-calls become more common? 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. 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 shrinking their leverage. the europeans have not done that in a meaningful way. they haven't gotten to that point. jonathan: we have to leave it there. rapidfire final 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's and double b's than -- the narrow west in almost 10 years. -- narrowest in almost 10 years. long triple b's or double b? michael: triple b. doug: triple b. krishna: long triple b. jonathan: most crowded trades

for the bank of america-merrill lynch fund manager survey. do 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 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. ♪

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