jonathan: from new york city for our audience worldwide, i'm jonathan ferro. "bloomberg real yield" starts right now. ♪ jonathan: coming up, growth concerns lingering. the u.s. yield curve inverts for the first time since 2007. fueling a big bid for bonds, more ugly european data, the german 10-year yield dropping below zero. helping to take the pull of negative yield assets worldwide toward $10 trillion.

we begin with the big issue, curve inversion for the first time since 2007. >> potentially cautious. >> inversion is to the followed by a slowdown. >> it's a wait and see. >> investors are trying to calibrate what this fed move means. >> interest rates are going up. >> interest rates will be lower for longer. >> lower for longer. >> the fed coming off more dovish than the markets expected. >> very dovish from the fed. >> yields in the u.s. coming up. >> boj, ecb, signaling they will stay on hold for much longer. >> yields in europe have come off. >> it will be hard to see a meaningful rise in yields. >> weakness in foreign economies that have kept foreign bond yields lowered of slowing growth. >> the mood music of slowing growth. >> a lot has to do with i need yield somewhere and i'm getting it in the u.s. jonathan: joining me is a fixed income group portfolio manager, hsbc chief investment strategist, and from edinburgh, luke hickmore, aberdeen standard standard investment senior investment manager. let's try to drain the drama a little bit from this conversation.

i want to begin with you, luke hickmore. looking across the treasury curve, why is the three months out for the 10 year so important if it's at all in your mind? luke: people are claiming this is a problem about the transmission of monetary policy, that the banks are finding it very difficult to make money lending out the curve, back cuts of supply to the rest of the economy and you run into recession. frankly, i think it's a load of hocus-pocus. jonathan: what do you think? >> you have to look at the whole market. you've seen an expansion of debt in other parts of the market. we've talked about different forms of liquidity. no question the curve is telling you why go long if i don't get paid for the risk? so banks, yeah, it's a problem. >> we have to pay attention

because these things can be self-fulfilling. we were talking about this earlier. will the fed be bullied into cutting short-term rates to keep the curve inverted and allow the banks -- definitely more problem for europe, or the banks are weaker and there's definitely problems with the monetary transmission in those economies. jonathan: you said it's hocus-pocus. let's explore why. luke? luke: there's a number of things in play here. if we look at where interest rates are, we don't run into a real question -- if you want to look at three months, 10 year, and inversion in this space, that causes recessions. look at that as well. there are other things going on. your other guests talk about how people are accessing capital markets. in other ways, loans, for example, it's dis-intermediate in the market. let alone the increasing balance sheet strength that's happened at a dramatic pace over the last 10 years, leaving the banks in a good place. i don't see them as the next nexus of any crisis. jonathan: do you see this as a false signal? is that what you're trying to say?

luke: it's exactly what i'm trying to say. we're a turning point for yields again. we're near or at the bottom of what we're likely to see. jonathan: more broadly, outside the inversion, yield is lower. german 10-year below 0, 10 year in the u.s. has dropped lower. a lot of people would say this is happened because central banks have pivoted and become more dovish. i'd say it happened despite that. there's a belief that the retreats by the fed and ecb won't be effective. because it's not effective, that's one reason why yields have gone lower. would you agree with that? matt: i would agree. starting the end of last year, the market was already pricing a rate cut before we came in here today and now they're pricing two rate cuts. i happen to think that's a mistake. i think the market is overreacting here. but nonetheless, that's what the market is saying, fed policy is not -- jonathan: you think the fed has another hike in it. why?

matt: we were talking before the show, and i think it's to do with the fact that this is a center of manufacturing cycle, inventory cycle running through starting with the tariffs and caused all sorts of distortions through the inventory channels. we're getting weakness hitting right now. if people worry about recession, we've got it. it's bottoming now and will lift off. the underlying consumer is strong, particularly in the united states, and we'll see lift off. i don't think inflation is really dead here. jonathan: your thoughts, jose? jose: i agree completely. looking into q2 -- q1 was affected by the trade wars and the government shutdown, weaker data that we thought, below 1%, maybe half a percent in gdp. that accelerates into q2. what will bond yield look at that point? i don't think inflation will pick up but we could see a modest pickup in inflation. wages are certainly doing well.

and on the equity side, we're looking at consumer discretionary stocks. we see a pickup in the economy. jonathan: let's talk about the objective of the fed. according to chairman powell, the priority is this. >> my colleagues and i have one overarching goal, to sustain the economic expansion with a strong job market for the benefit of the american people. the u.s. economy is in a good place, and we will use monetary policy tools to help keep it there. jonathan: luke hickmore, it wouldn't be the first time we've had a false signal with curve inversion. can i assume you think the federal reserve can engineer a soft landing and extend this cycle? jake: i certainly hope so, jonathan, and really what jay powell is doing is taking the work off of him, talking dovish and hoping to get a response. he has had that in spades. i think we could easily get to the point later this year where rates go back up again. maybe we should be watching mortgage applications in the

next few weeks to see if the rates do stimulate consumer activity. jonathan: let's talk about the dilemma that the bond market confronts. depending on your objective, let's just say i'm looking at two, with the yield of 232, and looking all the way out to 10 year for a similar yield of a longer maturity. why would anyone want to take that duration risk for the same yield? luke: you wouldn't, and in fact, the duration we've taken is more in the five-year space. you've got a little bit of a pickup over the 10 year. you can slice and dice this up a little bit more and get a pickup in yields or go and chase yield and credit because that's much, much better trade than chasing around the treasury markets. jonathan: what do you think, jose? jose: i think credit's a way to look. i'd also look at the belly of the curve.

then two or three year duration and we're short because of what you mentioned, not getting paid, what about corporate credit? what about e.m.? we are seeing better numbers. jonathan: do you agree, matt? matt: i agree. to take the duration risk, you need to have a pessimistic view, and i think basically central banks around the world being easier on hold basically is giving the green light to take risks. jonathan: i hear that from the three of you. some people watching this program are scared about what you're saying, it's a reason to pick up yield and take risk elsewhere. luke: yeah, i think that's right. and you know, whether it's the high-yield, credit, or even equities, really pulling yourself out of the u.s. treasury curve at the moment seems like a pretty good plan. i'm finding it really hard to buy into the fed knows more than we do and therefore the whole economy is going to hell in a handbasket in the u.s., which these yield levels are implying. jonathan: let's talk about that, that the federal reserve knows

something the market doesn't. maybe the market knows something the federal reserve doesn't. the market is leading into a rate cut, not leading to a rate hike. luke: yeah, it does feel that way, doesn't it? this is probably opposite the volatility we saw at the end of last year. the fed is not involved in terms of the treasury curve. we're seeing the same in europe. we're left to our own devices and we're more volatile. this is the market behaving with a lot more volatility, which we're not used to over 10 years, something to get used to over again. jonathan: so luke, no surprise that people watching the program could disagree, and a subscriber is saying, the reason you would take the duration risk is you think rates will tumble from here. can you see any argument that yields could go lower from here? luke: no, i really can't. i think the employment market is pointing to growth and pointing to inflation.

it might be employment is so tight, it's hard to get extra growth, but that also doesn't cause recession either. i think this is a midcycle pause, maybe the third midcycle pause, but not the end of the cycle. jonathan: what do you think? matt: the concern is not the u.s. economy. there's a lot of strength and tailwinds in the u.s. economy. if you're very bearish, you have to look at europe and china. i'd be most nervous about, can china get its economy going? that's the pessimistic view you would have to buy into take a lot of risk in this market. jonathan: great to have you with us. you're sticking with us. coming up on this program, the auction block. brazil's president seeing his first global bond sale 48 hours after powell's dovish announcement. that conversation is coming up next. this is bloomberg real yield. ♪

jonathan: i'm jonathan ferro. this is "bloomberg real yield." i want to go to the auction now, where we begin right here in the united states, where demand continues to government debt. the treasury selling $11 billion in 10 year inflation protected notes at a yield of zero .578%, the lowest raw since january of 2018. emerging markets, chairman powell doubled down, leading brazil to its first global bond sale under bolsonaro. pricing to yield 4.7% lower than its initial target. finally in credit, glaxosmithkline joining the high-grade corporate bond issuers to issue new debt, the $3.5 billion deal priced across three trenches, three, five and

10 year notes to help purchase. still with me around the table is matt egan, jose rasco, and luke hickmore. so guys, what we have seen is the german 10-year yield drop below zero for the first time since 2016. off the back of that, luke hickmore, it means the negative yielding assets, the pool of negative yielding debt is approaching $10 trillion. how significant is that, luke? luke: it's incredibly significant. what we've seen in terms of the reaction the market has is people start hunting for alternative assets. we're starting to see that already today, even though we've got weak equity markets. credit markets, particularly some of the riskier bets of credit like hybrid in europe, picking up really well today. you can see these people hunting these yields. i wish i hadn't gone short, a little bit higher than where it

is at the moment but if i didn't have that position, i'd be putting it in very soon. jonathan: this is a point worth exploring. you can have haven assets perform well and still have risk perform well also. do you think that will continue? matt: oh, absolutely. keep in mind, the fed is easing, the ecb is easing, china, it's adding stimulus. that's good for risk assets. it's no surprise at the beginning of the year they shot out higher, high-yield up 7% today. looking at the risk premium embedded in a market like high-yield, let's say you're getting 350 basis points. given the forward-looking view and low amount of default rates, you're getting paid a fair amount for taking on that risk. and with the central bankers saying go ahead and do it, you've got them behind you. i think it's a decent trade. are you going to make a lot of money from here?

probably not, but you'll earn a higher carry, and that's significant. jonathan: people say the credit guys are bullish on credit but equities will be ok. luke, i kind of take issue with that. let's explore it. if negative yielding assets are getting back to $10 trillion, if they're up 60% or something from october, and we know that because of that, the japanese investors and european have to go in to u.s. corporate credit and as you say, they've to extend themselves to pick up yield. i'm wondering whether the credit market will lead equity into the next downturn, whether it'll provide the same signal because of the distortions that are happening in sovereigns. what are your thoughts, luke? luke: maybe, if we get a fed cutting interest rates, that sends a signal that worries about fundamentals in credit. if we see that, i could buy into that argument, credit starts selling off and equities follow. i have one of our equity guys coming out this afternoon. and they're finding flows for

the same reason we are. it's a yield hunt in equities. if you're in that yield environment, you will go for those kind of assets. it's fine. yes, if we see significant deterioration in economics, that's the case. that's not our base case. jonathan: but we are seeing a deterioration nevertheless. what i'm seeing in the broader bond market is concerns morphed into a concern for the federal reserve. the market is positioning, increasingly so, for a rate cut. jose, it's hard to find a period, historically, when the market positions for a rate cut, you get the rate cut, and risk assets perform in that environment. those two things are tough to reconcile. the federal is cutting interest rates for good reason. it's not an environment credit performs well in. jose: we have one next year. this year we have the fed doing nothing. to my point earlier, don't be surprised if something comes back on the table later in the

year, but right now we have risk assets doing well. on the other side is the dollar bull rally, which we have a stronger dollar than a year ago. that made dollar denominated assets appealing across the curve and asset classes. matt: the credit markets are well supported. when we went through this in 2015, 2016, midcycle slowdown, the big difference was credit was very exposed to certain segments, particularly the commodity-based, which got absolutely crushed. and you saw the fallout of that, increase in defaults, downgrades and so on. we look around and see, are there any areas like that, we don't see them. could corporate earnings fall off a little? yes. is that going to trash the credit markets? i don't think so. jonathan: you're going to stick with me. let's get you the market share -- market check on where treasuries have been. two, 10's, and 30's. big moves. 10 year yield, 14 basins points lower. 245 your yield in the tenure, down 13 on the 30, comfortably low, 2.8% on a u.s. 30 year.

still ahead on the program, the final spread and the week ahead, featuring mario draghi's path to normalization. under pressure as central bankers gather for the ecb and its conference. that conversation 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 in the next week, we begin in china as the development forum kicks off. the new platform for apple, the company plans to launch a video streaming service monday. academic gather in frankfurt for the ecb watchers conference. and we'll hear from president draghi himself on wednesday. elsewhere, potential trade talks as ustr, lighthizer and secretary mnuchin travel to beijing. our guests are still with us.

luke, let's start with you. the worries in europe and what president draghi can do about it. what's curious to me, we've got a market and group of investors willing to look through signs of weakness in china because there's a belief the chinese can address it. the back end to this week ended with dreadful european data. whenever we get dreadful european data, the market is increasingly sensitive to it. why, luke? luke: it's about a believe here. we've been looking for a turnaround in the european data that will be later than what we're seeing now. i had hoped we'd turn the corner in terms of economic data surprising to the downside. but even that, today's data was awful. so much of this is short-term stuff in germany, one off, that should roll off. if we get anything from china that's good news, i think it's a good sign for europe turning the corner. but again, it's not going to be exciting growth, but any growth in germany, the market will take really well. jonathan: luke, i could've said

what you said 12 months ago and put it on repeat. we were talking about the second half of last year being transitory, that it would fade as the new year began, and it got worse. why should i believe in the second half of the year it'll get better? luke: it's entirely fair. it remains difficult to see where that comes from except you've got a lot of space with fiscal boost from germany if they choose to go down that road. there are some things that can get done around europe. they're improving. and actually, if we can get brexit over the hurdle, that might calm things down around europe and improve the whole atmosphere and sentiment about forward-looking business opportunities. there's a chance things can happen but i accept what you're saying. matt: i think number one, he's got a better backdrop than we do. number two, you don't forget the trade accord which is something we talked about months ago. if it's not hanging over markets, that's a net positive. and that should help europe

where exporters are a bigger part of the market. jonathan: matt? matt: yeah, europe is beholden to the global trade. we started seeing some of the backlog slowdown, via germany and other places. that's directly tied into china and the u.s. they were feeling the brunt of that first. but i agree with luke, there's a lot of one-time issues. france had its yellowjacket issue. and that sort of thing. and those things fall through. they take some time. clearly, jonathan, one of these things they can build on themselves. the mood and weakness in the economy, the financial markets can build on pessimism and be self-fulfilling. europe's got a lot on its plate. jose: i would just add the upside to china is there, as well. we think it's palpable. looking at back tax cuts or more spending on infrastructure, 5g,

that'll boost growth into the second half of the year. jonathan: are you shorting bunds? jose: where do we go from there, right? you buy u.s. dollar-denominated. jonathan: you guys all sound very bullish about the back half of the year. matt: why not go long european banks? they're kind of the same trade. i think, look -- these are trades that six or nine months down the road will be looking good. jonathan: okay, guys, you know what to do. it's the end of the program, rapidfire round. three questions and three quick answers. the next move from the fed, rate cut or rate hike? matt: a hike. jose: we think it's going to be a cut, but next year. jonathan: luke? luke: hike. jonathan: treasuries, bull steepener or more inversion to come? matt: steeper. jose: short-term steeper. jonathan: luke?

luke: got the steeper on? jonathan: u.s. 10 year yield ends the year higher or lower than it's now? matt: higher. jose: higher. we've a range of 2.5% to 2.8%. jonathan: luke? luke: i'm happy with that one, higher. jonathan: great to catch up with you. from new york city, that does it for us. we'll see you next friday at 1:00 p.m. new york time, 5:00 p.m. in london. this was bloomberg real yield. this is bloomberg tv. ♪

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