♪ jonathan: from new york city and our viewers worldwide, i'm jonathan ferro. bloomberg real yield starts right now. ♪ jonathan: coming up, risk assets mounting up higher, despite few signs of economic recovery worldwide. very little in the economic data, testing the fed's patience ahead of next week's meeting. and investors bullish europe. a contrarian trade finding even more friends. we begin with the big issues. there are signs the global economy is bottoming. >> goldilocks. >> goldilocks. >> i would almost call this a goldilocks moment. >> low inflation rate. >> low volatility. >> low volatility.

>> every central-bank involved in supporting the global economy. >> dovish ecb. >> dovish. >> dovish fed. >> the fed does not need to tighten. >> the fed will be very passive and on the sidelines. >> i would say it's time for investors to be more relaxed. >> there are reasons to be optimistic. jonathan: joining me, the fixed income head, a senior portfolio manager from blackrock, and from minneapolis great bishop from u.s. fixed income strategies at rbc wealth management. credit bishop, leave analysts at rc be -- rbc wealth management. let's start with craig, this goldilocks theme many people have become increasingly comfortable with. is it an argument that resonates with you? >> goldilocks is used a lot. i would like to maybe move on to something else. let's talk about a soft landing, the fact we believe the fed is done. the tightening cycle is over, and looking ahead, where we are now is a period similar to the late 1990's where the yield curve stayed flat for years.

the fed held rate steady. did eventually invert and reset. it was not an imminent event. rather than goldilocks, i would say we are in an environment where the economic growth is going to remain slow but steady. not tip into recession imminently, and the fed will stay on the sidelines permanently. jonathan: what do you think, jeff? jeff: it is remarkable how little the economy and the outlook for the economy between say, october and today has changed. what has changed is the fed's narrative. and the fed caused the financial crisis tightening, right? october, beginning, we were far away from neutral. then they caused the pullback. we are reacting to the fed , whereas the economy has been much, much steadier relative to the swings in financial condition and the swings in financial sentiment. so i think we have to take a step back and remember, pre-october we were talking

about four hikes, six hikes. now we are going to the other extreme and talking about no hikes. i said to you in the beginning, what is my answer going to be. it is going to be data dependent but also fed dependent on the data. so there is a risk that we are overshooting. jonathan: let me pick up on data dependent, something from the last couple of weeks pay we understand the fed is data dependent. do you understand how they are dependent on the data? increasingly they talk a lot about inflation and it is not clear to me what the federal reserve's reaction function actually is if we get inflation going higher the back half of this year. what do we actually do? jeff: that is part of it. over the course of the swing from far away from neutral to today where we are having this conversation where we are having the new philosophy regime for which monetary policy operates, and we are talking about average inflation targeting, we're talking about makeup strategies, we are talking about a fed that is much more willing to absorb higher inflation, yet the inflation data is going in the

opposite direction. that is part of what is fueling that. you could have a pivot, and a little bit of change is fueling the bullishness in the market, all the common sense you just collected there. because it is a fed that is worried about the downturn in long-term inflation expectations. so that says, even if the data turned stronger, inflation growth, the fed is more likely to defer. jonathan: the selloff in the back half of this year and the rebound. you think it is too little, too late from the federal reserve. how far will this go? >> i hope they figure it out and they go down and easing path as -- an easing path as soon as possible. jonathan: really? >> really. i am with craig and jeff, i think the fed caused these issues. i think they moved two times too many in 2018. september and december were both mistakes. where i would be with craig, i

not only think they are done, i think it is minus one with respect to hikes this year. i think they will ease later in the year. jonathan: what is the trigger? >> investors and data. the inflation will not pick up. the investors will put the fed in a corner by raising the expectations for a rate reduction. and the fed is going to be stuck because they don't control the narrative anymore. the investors control the narrative, and that was no better defined than in december. jonathan: i want to bring craig bishop. your thoughts, please. craig: it is great. if you ask what it will take for that, it will be something not necessarily domestically. i think the fed is focused on what is going on globally. the u.s. economy is ticking along. it is certainly showing some signs of stress. it is late cycle, not end of cycle. but really i think the fed is almost more focused on what is going on globally. if there is a thing that could tip them to ease this year, it

could be something not outside of the u.s. on the global front. jonathan: craig, how would you push that view, the one you have outlined, through the treasury market this year? craig: we like being long-duration here. our view is yields, upside to this market or yield at this point is capped. at most we are in a 252 to 80 280 280 -- 250 to trading range on the 10 year. we would actually be willing to -- we have been advocating for clients to add to duration portfolios here rather than stay bundled up or huddled up in the short end of the yield curve. we think rates go lower from here, so we like duration. jonathan: what do you think, jeff? jeff: i don't think rates going much lower from here, but i agree with craig and that the duration conversation for portfolio construction is fundamentally changed because of the fed's pivot. because they are more willing to

observe inflation and to cut interest rates, you have an asymmetry to the interest-rate outlook that favors duration positioning, and it restores the negative correlation -- the expectation that if stocks, something bad happens, one of the triggers that either of these gentlemen were thinking about, then rates are going to go lower. and that means you want to have some duration in your portfolio. jonathan: at the moment, what we have seen over the months in the last quarter is that the long end can perform well even when risk assets perform as well. how do we know for sure that the next move lower, say in credit for equities, the treasuries will give you that risk-mitigating characteristic that they typically offer when yields have been running lower through the years so far? jeff: because most likely that shock is a negative confidence shock and a negative growth shock. and if you have a negative confidence and a negative growth shock, then the expectation is the fed will have the ability -- because it is not inflationary. it is not an inflationary shock. the fed will have the ability to unleash the full arsenal of its unconventional policy, and the

expectation in the bond market of that arsenal being released, whether it is forward guidance, quantitative easing, negative interest rates, all the fed doesn't use that is, goes into -- use those, goes into the bond markets and flattens the long end of the curve rather than the short. jonathan: what we have seen increasingly the last number of months is the spread between tens and 30's start to break out a little bit. what is underpinning that? colin: i think that has to do with supply dynamics. i am more worried about the fact that the five-year treasury for example trades right on top of the effective funds rate right now. to me, that is a troubling point. with respect to the fed, where i would extend it a little bit further is i think they have identified that they made a mistake. at this point, they are just pausing. well, if i make a mistake, i correct it. i don't just sit there and do nothing. just saying we are going to leave rates where they are, that is doing nothing. jonathan: listening to the three of you, and craig, i want to

come to you on this point, the first three months of 2019 for treasuries has been quite boring. it has been very, very narrow in terms of the trading range. and treasury yields looked like they would break out high, then broke lower again. are you saying the path of least resistance -- and craig, we will begin with you -- the path of least resistance is for lower 260?s, even from here sub craig: that is our view, yes. jonathan: you share that, jeff? jeff: i don't. i don't see there is a path absent a shock event. if we are just extrapolating from what we have here, and what we are forecasting in terms of growth inflation and no outside shock event trade, being china, european automobile tariffs being implemented, all those things we kind of worry about, then the market has priced in the movement to zero cuts. the market has priced in a movement to average inflation targeting and a dovish fed. so to get to a lower rate -- and it is fine to have that view, but you are saying there is

something else untoward happening that is going to drive us toward pricing in cuts. jonathan: final word. colin: that is where you come back onto the global front, what is going on globally. interest rates moving toward zero in germany for example. and the u.s., growth there continuing to weaken. i think that is where you look to that catalyst. jonathan: we are going to do europe in the next segment. go on. colin: the treasury is heading to 2.30%. jonathan: by year-end? colin: before. and hopefully before it gets there, the fed will identify they need to reduce rates, because i don't want to see yield curve inversions all across the curve because we know that portends bad news. jonathan: really interesting views. they are all sticking with us. coming up on the program, the auction block, outside demand for italian bonds, rallying with yields threatening to break through the march lows. that conversation is coming up. this is bloomberg real yield. ♪

jonathan: i am jonathan ferro. this is "bloomberg real yield." i want to go to the auction block where we begin right here in the united states with treasury auctions. demand continuing for the security of government that. -- government debt. the treasury department selling $24 billion of 10 year note at 2.615%. that is the lowest since january 2018 auction. elsewhere, corporate investors clamoring to get their hands on a debt deal. -- deal buying the johnson deal. as we put together this program, the package for about $7 billion of high-yield bonds and loans had already amassed almost $30 billion of orders. and finally, we head to the eurozone, where there is still enthusiasm for the italian debt,

italy selling $1.4 billion and investors offering to buy 1.6 times the amount of security sold. that brings us to our next story. doom and gloom still stalking the eurozone. you wouldn't be able to tell that looking at the price. this is the bull case. >> the call on europe is not on valuation. valuation is always cheap. it is about the potential for european growth. i see actually some positive signs coming from fiscal easing in germany. jonathan: want to bring you colin robertson of northern trust and two other guests still with us. it sounds like a contrary and -- contrarian trade to be long europe because so many people sound doom and gloomy on what is happening on the continent. but when you look the price action, craig, it is interesting that everything is going well. including italian bonds as well. is it that much of a contrarian call to say europe is going to do well this year?

>> at this point, we are past the contrarian call because of what the central banks have done. going into 2018, a central bank conversion story was that the fed would need central banks to move higher. that did not happen. now the convergent story is back on. i think it goes back to something that just said earlier. the banks pivot has caused or given the market the view that there is a support for risk assets out there. whether it be equities or high-yield credit. that is happening not just in the u.s., but globally. jonathan: is that the u.s.? jeff, what are your thoughts? >> it is the central bank pivot, the reach for yield. we are talking about fixed income. you were talking about equities in terms of the performance. it is unique. german bund yields are making new lows. pretty much a bearish signal if

we take it straight up textbook. and the equities are doing fine. it is really about everybody back in the pool because the fed cleared of the path away from the fears of normalization and the disruption that it had in 2018, the tightening of the conditions, the movement of cash, the return to cash. i call it the competition for capital theme. that story is completely changed 180 degrees where you are lowering rates, other central banks are lowering rates, so there is confidence to go back into risky assets and that is what is lifting the boat. jonathan: i want to get your view on this. you would only really know that europe was in a bad place if you look at a couple of things to. -- things, too. outside of that, looking at european assets, you wouldn't be able to tell that the economy was performing badly and politics were a mess. >> i think i have a different view on equities. i think the equities might be

more teetering outside the u.s. with respect to fixed income, the key to the puzzle is not only the dovishness of the central banks, but the supply-demand dynamic. you pointed it out. with this bond that just came out and the demand for the amount that they had including the italian debt, greater than a one ratio with respect to the issuance, so the fact that universally, the demand for fixed income does not go away is a big part of this puzzle. jonathan: craig, i would love your view on this. being short german bunds, are you willing to do that, craig? >> no. i don't think we have seen the low in german yields yet. jonathan: what do you think? jeff: i think that a lot of the bad news is in the price. if you are building a portfolio and you are holding bonds, why do you hold german bonds in a nds in a portfolio?

it is power to offset is becoming more limited. you are looking to other assets like treasuries and the dollar. it is a better place for that balance in your portfolio. jonathan: when i'm having the trade conversation with people on this program and elsewhere, they will say to me maybe the ultimate proxy is european risk. i am wondering if you get some kind of resolution to the trade story, could you get a backup in bund yields? would that be enough to drive it? >> yeah. i think the trade piece not only the resolution of the trade piece that this overhanging question about the trump pivot to u.s. european trade relations? if you alleviate that concern, which is a real tail risk to the european economy, that might help as well. jonathan: final word? 10 year bunds are going to go back below zero. jonathan: really? it sounds dramatic. you will stick with us.

i want to get you a market check on where bonds have been this week. two scum attends, 30's -- -- -- yieldss, 30's shaping up as follows. through the week beginning with the two-year down a couple of basis points. the 10 year yield near 3%. just north of 3% on a 30-year government bond in the united states. still ahead, the final spread. the week ahead, featuring and fomc rate decision and another appearance from jay powell. that conversation up next. this is bloomberg real yield. ♪

jonathan: this is "bloomberg real yield." we have an fomc rate decision coming up. it is expected to remain unchanged. the federal reserve is also delivering a conference with us. a boe rate decision thursday. and then the chinese president

will be catching up with the italians of the end of the week. through the weekend you will get an opec meeting. lots going on through the weekend and next week. some final thoughts from my guests. teeing up the fed meeting next week, what are you looking for? craig: we are looking for the fed to change the dots. the bold move would be to go to zero. no rate hikes at all. i think that could be supported by the strong dovish pivot. given they are bent to stay gradualist, maybe they go to one. but certainly they will ratchet lower the hikes. just as important if not more important is the clarification on their plan for the balance sheet. they have signaled it will stay larger than projected. and, when do they end the shrinking process? sooner rather than later is our bet, but that will be important as a rate decision.

jonathan: what about you, jeff? jeff: i think he hit the highlights. it is in the market price that the dots are going to move to zero or one. the surprising issue is anything that comes out that moves the markets is going to be more information on the balance sheet. markets don't expect details on size, composition, maturity. if we get any of that, that will be surprising. the other important thing is how does he handle the questions in the q&a around the pivot. you can take a lot of criticism because it is a big pivot. then, the movement toward inflation. jonathan: just after the soft patch in q1 in the united states, it will be interesting to what degree they downgraded their growth forecast. colin, how dramatic do think it will be? collin: i think it will be dramatic certainly below two. the issue with jay powell is i want to hear what he has to say, but that has been more problematic versus the past. the fact that he is going to talk much more is going to be an issue. i think they are going to come down to one.

that will validate that they continue to be behind the curve on where they should be. we will see where it goes from here. i wish he would speak less rather than more. jonathan: do you agree with that on the jay powell communication? it was about 12 months ago when powell came into the job. everyone was excited about him when he first came in. what are your thoughts on his communication? >> i think he has been tone deaf at the very least. you usually accept a mistake -- expect a mistake from a new fed chair when they come in from communicating. i think he has had a few mistakes now. i think with this dovish pivot and the comments he has made after the first of the year, it certainly signals that he is listening. i think that tone deafness that we have seen should go to the wayside. jonathan: craig, do you find this public debate about the target is achieved is helpful? credit: -- craig: you know, i

think it is. i think certainly the market is paying attention to inflation, even though it is not an issue. from the fed with regard to i think that discussion inflation is one more spec of transparency. i think it is helpful to markets. jonathan: final word on that point, jeff? jeff: it is much more fundamental than that. the fed are trying to affect inflation expectations. the way in which you do that is not by having this debate in an academic corner. it is by telling people this is how we are going to behave. jonathan: good point. jeff: so you build those expectations and it is critical to their achievement on that goal. jonathan: we are going to wrap up the program with the rapidfire round. you know how this works. three questions, three short answers. the federal dot plot, two, one, or none. how many hikes? >> one. and that is a mistake. >> zero. >> zero. jonathan: german ten-year yield, higher or lower by year end? higher or lower by year end? >> lower. >> tough one. i want to go lower. >> lower as well. jonathan: interesting.

final question. european or u.s. high-yield credit from here through year-end? where is your performance? which one? >> u.s. high-yield. >> u.s. >> yeah, u.s. high-yield will follow equities higher. jonathan: fantastic to catch up with all three of you. from new york city, that does it for us. we will see you next friday. 1:00 p.m. new york time, 5:00 p.m. in london. this was "bloomberg real yield." this is bloomberg tv. ♪ this isn't just any moving day.

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