>> i am jonathan ferro, real yield is starting now. >> coming up, hopes are high as the trade rested -- goes up in washington. in the rally continues, stocks are mounting up. issue,n with the big it's time to start trading the rallies. >> this is a good time for investors, -- if we look at our portfolio we are running cash

balances. high-yield, on fewer companies. we are into more bonds right now. halting the portfolio towards high quality treasuries. the market is pricing and a lot of good news right now. table,ing me around the we have the fixed income chief strategist and portfolio manager -- in london, we have the standard investment. let's begin with you. this is a good question. rapidrnaround has been so and sharp and stark, i think

--s difficult to capture nothing has really changed. we are at the end of the cycle. know that the next big move for me is going to be a soft move. the behavior of the federal in mye is very much opinion -- it's not on hold for that. we have seen this already. -- we are at the end of last year.

you want to see this showing up on the fourth quarter, particularly with quality. it's probably a good opportunity just to look at what you are doing in terms of your yield. answer thiso question, we have to answer this question on how long we think this is going to be. this is a negative. --hink james hinted at this, >> what's interesting for me is this volatility. remarkable how suppressed volatility has been suppressing the market. keep on adding a little bit more risk.

-->> low volatility is driven by the fact that the macro is stable. anye is next to no signs of -- in terms of the term structure relative. this means there is not that much to fear. do you see any catalyst on the horizon whatsoever? anything more than then what would happen in the last couple of months? successfulhas been in getting us back into this environment. the markets are completely asymmetric. with the rising tide and what it -- with the rising tide, this feels like the wrong stage of the cycle. for exactly that reason. everyone is jumping back into

the fold. it doesn't take much to push it in the other direction. -- we are very unsure of this hold. tightening, and we don't fully know why. i don't think that means much in terms of the trigger. environment in this , without inflation or the threat of anything meaningful from central banks, i don't think that's going to last on the tactical horizon. this is quickly becoming the consensus view, and it makes me wonder what the pain strategy is. thatwrite very recently solid earning, minimal inflation

, this should be supportive of a continuation of the benign credit cycle for the last 2019. bonds, even with spreads are where they are now, what do you think of that? you look at what is being keeptively done, does that going through the economic cycles. we are looking at the fed on the hyatt -- on the stream. --essence, you have removed >> in essence you have removed this from the credit markets. this will continue. economic coverage is usually killed, if the fed is going to be more easy, then we need to have a different framework to try to boost inflation.

this cycle could continue for a while. 400 basis points is what we are over on high-yield. >> our messages, this is a risen rate environment, we have to get the credit risk with duration. off the rails this duration will help. >> when you look at the price of this story, you are looking at high-yield. >> in terms of the tools we have, probably the size of the

typical be market. the positives that we see economically and in terms of the balance sheet, and these problems we are looking at, this is horrible. this is for me a story about how many pennies you want to continue to pick up. i want to throw china in there as well. a some sort of unstable equilibrium. we are back in the qe type trade. and i'm not quite show sure that this is the case. i think this could be a shock for the period. >> we will discuss that later on in the program. what james is saying is, what

is the upside that i'm going to miss out on? what is the answer when you ask that question? beenagree with what has set earlier, we are transitioning to a lower potential return environment. we can't ease off the gas pedal too much and have the carries of the portfolio at the expense of getting into the credit cycle. it's proving to be costly. this is a soft landing for the credit market. >> coming up on the program, the auction block, inflation protection stepping up with record sanctions. that conversation around on the emerging markets. this is bloomberg real yield. ♪

jon: i want to start with the auction block in the united states, the treasury market, inflation protection at levels we have never seen before. 82% of the auction for 30 years, and the m&a bought sale and other side of high demand for new issuance, tapping the market to $5.5 billion and offering -- to find the largest takeover. selling over half a million dollars into your bonds, higher than initially expected and this is a sector that has been selling debt at its fastest pace in three years. the appetite for all things china and em quite remarkable. still with us, scott, and in london, james. so, let's pick up where we left off, james.

the situation in china and why we are still seeing such resilient demand for the chinese debt issues. james: it is remarkable, but it is very early in the process. i think that hard currency has about a trillion dollars worth of funding and financing to do in 2019. stage,this early continuing in january, this is not hugely surprising, but we have seen corporate globally take advantage and in china that is the case. for me, i do not want to make many judgments about how successful that process is going to be through the year, it might be a drip drip, so the economic environment will play a hard. but i have concerns, because just the size of issuance that needs to get printed. jon: let's get into those concerns. what you said is really important.

the market has moved ahead of the economy. the market and to the believe that the data will validate the price action, because the chinese to millis will work -- the chinese stimulus will work. james: we saw the data and a huge spike in something like 5% of gdp in terms of new loans, just in a single month. that is a massive number and it looks like this is serious stimulus going on. but in a historic view, we have lunar new year, this is where there is no access, so at the fx markets, there is a need to pre-fund. you look at these spikes, compared to the chinese pmi, you see the bigger the drop in the pmi around january, the bigger the spike in this etf's. i think this is a sign of lack of confidence, this is people

over funding and making sure that corporate's have enough cash to take them over the chinese new year, because the economy does not look strong. instead of extrapolating this for the rest of the year, this is rejecting possibly reduced confidence and a weaker economy. i want to see more data before i move forward, but i would not want to jump to the conclusion that market participants think that this is really the first in a step of real improvement and increase in lending for the real economy. jon: what do you think, scott? scott: our position has been that there are two separate things going on. one, there is a high degree of confidence you will see with affirmation of stability and the chinese economy through stimulus. markets are pricing that in, there will be tools used effectively. the other is when we are more concerned with, sometimes we see sentiment shift, and em that is where we have seen interest pick

up. you are looking at resurgence in buying into em assets that can be confused with confidence on the policy side. rob: when we talk about china, we need to be clear, it is a big market. it has a large financial market, they control their own destiny. what we have been doing is adding stimulus to the economy, bond yields have dropped. there has been tightening. on the short end, the chinese interest rates are below american interest rates. this tells me that the policymakers in china are very aggressively trying to support the economy. that will eventually lead offshore. ties through the financial markets by a little bit hindered by these capital controls. and it is not as direct as in the old days when you had

exports and imports, the economic activity being the transition mechanism. this is going offshore, that is why they are selling so many bonds. jon: what is the transmission mechanism -- that is the fear for a few people. the diminishing marginal return of each additional dollar of debt is so great now that the chinese are pushing stimulus into the economy, and it is not biting. they have been doing this for a while. there are not real signs of the economy stabilizing, so why will this work? rob: has been rebalancing toward consumption. we have to get away from the idea that it will be japan by investment. in the past, china was driven by investment. you saw stimulus, then you saw proven investment. consumption changes much slower. you put that stimulus into the economy and it will support consumption. and we think that that is happening. jon: what do you think, james?

james: it is an interesting argument. i agree with what they are attempting to do, and i think that is healthy, but to a large degree they could not go on investing the way that they were. my concern here is that the type of fiscal stimulus that we are seeing, consumer related, may have come a bit late. all the information we are getting from offshore is there has been a massive, negative shock to confidence, private enterprises and employees, the consumers of china, are feeling very concerned. and so when you have a savings rate, 25%, and you add fiscal stimulus on top of this, on some of a consumer who is nervous about keeping their job and growth prospects in the economy, that means probably a high propensity to save. that becomes another drag on the economy, unless it is recycled back. so you have a situation where yes, yes stimulus is going in,

but it is pushing in on both sides, the consumption side and business side. you may be giving people a debt. jon: what i am hearing is, just in terms of the market, there is a believe that the pbi trend at the moment we are seeing, it will continue with export prices coming down, but palace of what happens with the trade deal. the second largest economy in the world will be dealing with the inflation. and this is not going anywhere anytime soon with treasuries? james: pretty much.. if there is stabilization, it will be different. and this is going to be having a less impact on the global economy. deficite become a country and consumption will continue to push there.

my favorite expression of nervousness around china is through australia. short the aussie dollar. it is very attractive still. scott: we have to largely agree on that. our position has been the transition where you are investing on the producer side, into a conception-based market, look at our own data that we have, looking at consumer sentiment and whether it is consumer sentiment driven, there is a lot of that it and that is some than the market has to look at. jon: these guys are sticking with me. let's take a look at treasuries through the week. we close out the week with a decent bid. the 10 year yield is lower by a couple basis points on the week. down a few more on the 2-year note. at 2.40%. still ahead, the final spread. and we have a slew of fed speakers with a spotlight on

chairman jay powell. that is next. this is bloomberg. ♪

♪ lisa: i am jonathan pharaoh. time for the final spread. president donald trump and kim jong-un beating in vietnam and plenty of it speak this meeting in vietnam with plenty of fed speak. chairman powell delivering a semiannual report. we will hear from mr. bostic and another from the north your -- the new york fed. what are you looking for from the fed? >> we go back to the fourth quarter, new risk assets climbed to a higher interest rate regime [indiscernible] he might have shipped that when a little bit. signalinghe market is

a environment of 2% gdp growth. complacency in the bond side, confidence. he needs to be something more down fiddle and more concrete. he has got to build more sentiment what financial markets are telling. jonathan: when you stand up to the ball and go to hit, pretty much street in front of you. it is not pretty. let's get away from the gulf. .- golf have we cleaned up the communication or have we directed to much at the federal reserve? >> bloomberg headquarters looking after me well known -- well. i have a slice of pumpkin pie on the other side. last in my came on this show i was bearish.

i was hawkish with respect to the fed. i don't think they have cleaned up the communication at all. it is even worse. i cannot rationalize economically the dramatic change in politics. it is concerning for the median relationship between the economy , federal reserve and the markets because you are rewarding bad behavior. markets have been buoyed by stimulus that is not active. -- sin financial system financial system is not finding its way to the economy. it will not encourage good volume in the future. a lot of words from the fed. continue to see a lot of speeches where there is very strange and uneasy dovishness. jonathan: i know a lot of people that are thinking that way.

final round of rapidfire, wrapping up quickly, questions. long? elds, rates stay >> stay long. >> stay long. >> race. jonathan: 10 year treasury yield, 10 year higher or lower? >> higher. >> higher. >> lower. jonathan: fed speak through next week, are we on hold for the rest of this year, yes or no? >> yes. >> yes. >> yes. jonathan: very insightful. that does it for us. this was the real yield. ♪

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