jonathan: from new york city for our audience worldwide, i'm jonathan ferro. "bloomberg real yield" starts now. ♪ jonathan: coming up, very little in the u.s. economic data to test fed chair jay powell's newly found patience. looking at china and focusing on the silver lining. junk bonds off to the best year since 2001, the lowest weighted to debt. we begin with a big issue, space in the global economic turnaround. >> the consensus is the u.s. is about to slow and slow and it doesn't. >> we are at a bottoming phase. a lot of it is in the rearview mirror.

>> we gone through a process in the equity market up pricing in material weakness. >> a reversal and sentiment of the dark days of december. >> which is maybe why the market ignore the negative data. >> the market is confirming we are getting good macro data. >> we can get the chinese wheel spinning. >> china will stabilize. >> you're seeing shreds of this in some of the data we just got. >> the little drip, drip, of positive data is telling a story that it is not getting significantly worse. jonathan: joining me around the table is portfolio manager of hsbc global management. greg peters with us. in london, aviva investors' fixed income manager. greg very much a glass half full , week, even though the data has not been great. >> hope springs eternal. you saw it on the conference call.

ceos were talking about a difficult operating environment but they are optimistic about future. i think that is what investors are feeling and seeing as well, but i don't think it is about the data right now. i think it is about the comfort around the fed not moving, ecb backing away, it is all central bank i've been driven. --t bank central-bank-driven. the real question we have to ask ourselves is at what point will the slowing macro data rear its head? jonathan: through the week my china has been rough, european data not great. the bottom of the chart and the rollover in the surprise index in the global economic data, and then this happened. 10-year government bonds in germany are higher on the week. u.s. treasury yields start to take up. what is happening, and what does that tell you about investor prices at the moment? even though the data has been soft, yields are kicking higher? >> i think markets tried to be as forward-looking as possible

and they are responding not only to the stimulus in china but the fact that the fed seems to be on hold for the foreseeable future. the very early signs of this stimulus from china may be starting to come through, credit data is the key thing that fixed income investors were watching and that ticked higher in january. there are heavy seasonals in january that we need to be conscious of and one data point doesn't make a trend, but these are early signs investors are looking for to get comfortable. the other key thing to remember is where we have come from in q4. markets were in panic mode. sentiment was deeply pessimistic. the price action so far this year has been getting prices -- getting investors closer to neutral. jonathan: through the week, the data has been bad, but there are little signs the pmi is starting

to kick higher. is at a glass half-full silver lining or is at the market trying to get ahead for the rest of the year? mary: it is too early to tell. we do not have a significant amount of data points out. i do tend to agree that right now, the market is coming off that panic from what we saw at year-end. jonathan: has data changed or just the way we have responded to the change? i am trying to explore that with you. has the investor bias changed because we are more supportive from the central bank story than we were five months ago? jub: i think that's right. it is the rate of change that matters and throughout 2018, not just in q4, investors were battling against the steady grind of weaker data, china kept

flowing throughout the year and we had capitulation in 2018. even those these are early green chutes of positive sentiment, markets will react in a major way. jonathan: greg? greg: i think so, too but valuations have changed. there was a much cheaper proposition then today. i know this is a fixed-income show, but you look at s&p ratios and you have seen a rise in pe multiples of four pe points. that changes the dynamic when the economy is slowing and earnings are slowing. i think it makes it a more difficult path going forward. jonathan: a lot of people have looked at v-shaped recoveries, whether it is in credit, high yield, investment-grade. s&p 500 is one. what is quite interesting is that in foreign exchange and in treasuries the range has been really tight. do you see any reason to break out of the range bound trading we have seen in the treasury through much of this year? mary: it depends on what happens with inflation and the data

coming out, but for risk assets, yeah, we have seen a v-shaped. for the 10 year, there are other factors that continue to hold its lower from outside of the u.s. jonathan: jub, what do you think about that? jub: i think the fact we traded in such a tight range is one of the reasons risk assets have traded so well. post the fed, we've had a collapse in volatility across most assets. that is one of the primary factors driving people have been these carry trades, into credit, emerging markets and giving them comfort in a world where vol stays low, we have to look for coupons. i think that is by design, with the fed is trying to do, particularly as it relates to fixed income volatility, treasury volatility. the fed needs to stay low. the signal we are on hold for the foreseeable future, we're not worried about inflation and that pushes people into risk assets. jonathan: that has been the story for the first of the year,

do you think that story pleats through to the rest of 2019? jub: growth data is on a declining trend, it is difficult to where we would see sharp inflationary impulse. that is the primary factor that would cause a central banks to switch to a hawkish stance. welfare inspiration is quite low. i think it's difficult to formulate a case of what the fed return hawkish. i do think that we see this opportunity and risk assets as being a window that will not be open forever. for the next three to six months we do have blue skies risk assets. jonathan: i asked you if you liked jay powell, and you said you did because he makes mistakes. there are opportunities to seize on those mistakes. he has corrected his path radically in the last couple of months. do you see him carving out a new path in the next couple of months? greg: that is a nice way of saying it, jonathan. yeah, it is a constant struggle

as he communicates and changes quite often and is trying to regulate the markets. i think what is different today versus several months ago is it seems increasingly so that he wants to support the markets. he's almost explicitly saying that, but the testimony this week was uneventful. which is what you want. maybe he is learning along the way but i think he will be a source of volatility this year. jonathan: what are your thoughts? mary: i agree, there is less opportunity. in high-yield, spreads have tightened and there is no major catalyst for sprint tightening from here. spread tightening from here. if anything, we risk seeing things reverse a bit. jonathan: as you say, spreads are tight a model 400 basis points on high-yield. a lot of people are trying to wonder what brings the fed back in. as markets a key element to all of this, as well.

i asked is the price of the s&p 500 a factor in all of this, as well? jub: we've seen in recent years whenever the fed feels like markets are getting to frothy, they will try to talk down asset valuations slightly. i think if high yield spreads were approaching the 300 level, which is broadly where we got to in 2017, they will want to take a little air out of that rally. currently where they sit, around long-term averages, we are far away from the fed feeling that they need to deflate asset bubbles. jonathan: jub hurren alongside greg peters and mary bowers. coming up on the program, the auction block off to the best start of the year since 2001. the lowest rate debt leading the charge very much. that conversation coming up next. this is "bloomberg real yield." ♪

jonathan: i'm jonathan ferro. this is "bloomberg real yield." it is time now to head to the in russia where we did a banner month for bonds sales. $2.5 billion worth of debt, and -- in february, three times more than the recent average. back in the united states, the seven-year treasury auction are the biggest amount since august. their largest share since 2014. wrapping up the month, junk-bond supply picking up with $21 billion priced in, the busiest month since march of last year. still with us to discuss is mary bowers, greg peters, jub hurren.

mary, high yield debt issuance up. leveraged loan issuance was down dramatic. is that a thing for the rest of the year or just for q1? mary: you have to follow the fund flows. they have been strong for high-yield this year while leveraged loans have continued to have outflows. that has come down in the last couple of weeks, but the demand that was there for leverage loans that was sucking the supply out of high-yield and that is now bringing the supply back to high-yield. we expect to see a large amount of secured issuance coming back to the high-yield market. jonathan: what do you think greg? greg: on the margin, i think but it is about clo's coming back. they are on the verge of coming back. and a trained this year versus previous years is that it seems like we desire for flooding right assets is not what it once was. it seems like with the fed on hold, talking about a hike in the marketplace, you are not seeing the same demand for floating rate product and there

is not the same demand for loans. jonathan: jub, this makes a lot of sense with the federal reserve backing away big-time and we have seen what rates have done on the back of it. jub: that is absolutely right. leverage issuers typically follow where the flow is. last year, investors were worried about rates going higher with the fed hiking. this year, that is not there and the flow comes back to the fixed coupon product. that technical has been such a key driver in credit markets over the last couple of years, and we are seeing it play out in the investment grade issuance is down 25% this year versus last year. the market, and we speak about liquidity a lot in this topic, it can be very one way. at the moment, it is very squeezy for the type of spreads, but supply dynamics will be key to watch in the coming months. jonathan: i want to get your appetites for high-yield versus loans at the moment. a lot of people are positioned to trade. morgan stanley was doing that.

there was a caution and we shift back into loans relative to high-yield while we remain more concerned about some of the technical and fundamental challenges specific to the loan market. the selloff should have reminded investors that high-yield is still the high market. let's start with the premise of that. is it still the high data market? mary: it still does have more retail investors than the loan market, which is more supported by clo's. when you look at the fundamentals, the higher market is as good a shape as loans. there is deterioration across those markets, so you have to be careful at this point in the cycle on credit selection. jonathan: i spoke to my colleague, mark collins, and he is behind this too. are you? greg: yes. hopefully, we run the same portfolios. i would agree with that, but it's not about the beta, but valuation on loans that were hit hard.

the issue we have had around loans is that if you were right on your credit call, it was called away and if you're wrong you owned it down to zero. now trading at a discount, it is attractive. we see value in the bb space. loans versus bonds. it is valuation driven and not so much beta driven. the durations are different. jonathan: can you compare the credit quality of bb and loans to bb in credit? is that an apples to apples comparison? gerg: there are nuances. you have loan only cap structures -- it gets complicated, but you can ultimately do it. it is a zero sum game. for the capital structure and all the complaints around loans, it forces you down the capital structure on the bond side. these are all considerations. i think doing that relative value is something we should be doing. jonathan: is there a liquidity consideration?

gerg: they are both terrible and loans are worse than bonds and clearly tied to flows. much more so than bonds, but i think you ultimately have to start with fundamentals and get the call right and then liquidity is secondary. jonathan: what did you think about that trade, jub? jub: we are actually quite defensive on u.s. credit, particularly leveraged part of the u.s. credit market at this point. we don't own loans for high-yield bonds in a multi-strategy portfolio. we think it is more advanced and other markets. the fact that cash is an investable asset in the u.s., which it isn't in europe, makes us lean towards european high-yield rather than the leveraged part of the u.s. market. jonathan: greg? greg: we actually see more in europe than the u.s. as well. mary: not as much.

euro high-yield spreads take a plea -- typically traded inside the u.s. at even. it is lower duration and higher quality market, but we have seen deterioration in the credit metrics across european high yields. it has a larger component of autos, which has been suffering. in europe, in particular and the data in europe continues to be weak. we would prefer for credit to be where the growth is. mary bowers, greg peters, and jub hurren. two's, tens, and 30 year yields. the 10-year yields are up. 3.12% on the 30 year yield. the final spread, the week ahead including a rate decision from the ecb. focus shifting to mario draghi. this is "bloomberg real yield." ♪

jonathan: this is "bloomberg real yield." it is time for the final spread. coming up over the next week, china's national people's congress beginning in beijing alongside that is the central bank decisions on interest-rate with a spotlight on the ecb. we will hear from mario draghi and governor carney. plenty of fed speakers and capping it off, the main event. the u.s. jobs report. still with me, greg peters, mary bowers, and jub hurren. jub, what are you expecting from frankfurt next week? jub: the key thing for us to watch will be any revisions to the staff projections on growth and inflation. they look high in terms of expectations for 2019, given the

recent growth weakness we have seen. they have projections of around 1.7% for 2019 versus a consensus of roughly 1.3%. the market will we watching that to see how far that number is revised down to see how the ecb is thinking about normalization of policy going forward. there is expectation about an announcement or further news on supporting the banking sector. it is a big meeting. ultimately, the ecb are unlikely -- are likely to maintain a more dovish bias. there is uncertainty in the external environment. our take on the european domestic economy, we have seen strength, particularly in the consumer sector with unemployment almost at precrisis lows and wages heading higher. this photo has been an external factor that largely points back to china. the ecb will have to make and extends to which they think are transitory or longer-lasting. jonathan: it has been going on

for a while. hard to call it transitory. mary: it has been going on for a while. in terms of how the ecb will come our next week, they continue to be patient like the fed. what tools they have additionally i am not sure. i tend to agree that we need to look at what the revisions look like for growth. jonathan: the ecb has tried to be patient for the last several meetings and that patients has been paying off. but they've got to do something, unlike the fed, the growth is decent in the united states, it is terrible in europe. greg: this is true and they do not have a lot of tools left other than the bank program. what they do have is china stimulus. that has a much bigger impact on europe than the u.s., so that is a wildcard for europe. the one thing we learned last year is the trade war and a slowdown in china had a bigger

impact on europe than it did the u.s. jonathan: you think draghi's mission next week is to ultimately sit there and wait for the stimulus out of china to start working? does he have that option next thursday? greg: no, but he can hope for it. the point is there is positive optionality they can hope for. hope is not a strategy, but i do think it is all around advising the forecast lower to give them more room elsewhere to do more policy. jonathan: jub, on the policy option they have, the bank funding tool, if they reach for a tltro next week, do the optics help this market in europe? jub: it would if it wasn't for the fact that there is optimism baked into some further rltro news. the upside for europe stems from china.

if you remember back to 2017, the eurozone was going at 2.5% gdp. that was helped by the export sector as china was inflating. then we had deleveraging from china and europe suffered significantly. you need to look east for upside the eurozone growth going forward and the ecb will be patient in terms of exercising further policy tools until they get more clarity. jonathan: let's get to the final round. it is the rapidfire round and we start with europe. quick answers for these quick questions. does the ecb pull the trigger on next week on tltros? greg: yes. mary: yes. jub: yes. jonathan: have you seen the lows on german 10-year yields? greg: no. mary: no. jub: yes. jonathan: supertight range for 10-year treasuries through 2019. really tight, especially over the last couple of months, as well. are we going to break out, and

are we breaking out yields higher or breaking out of the range with yield lower? yields higher or lower? greg: lower. mary: higher. jub: higher. jonathan: interesting stuff and great to have you with me. greg peters, mary bowers, and jub hurren. from new york city, that does it for us. we will see you next 1:00 p.m. friday, new york time and 6:00 p.m. in london. for our audience worldwide, this was "bloomberg real yield." this is bloomberg tv. ♪ . .

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