>> from new york city, real yield starts now. jonathan: coming up, global fixed income. junk debt in the u.s. delivering the best quarterly gains s marko price doom and gloom elsewhere looking for a rate cut. the big issue. despite the tension, global bond rally. >> right now i think everything looks great in bonds. equities going up. >> magnificent.

>> the gift in the market. >> the fed is easy. ecb easy. china easy. >> signaling they are willing to stay on hold for longer. >> that is good for risk assets. no surprise they shot out higher at the beginning. hi yields up 7%. >> default rate is low. >> corporate print spread narrow. therelity single a's, will be a bid for them. we are comfortable holding. >> tremendous amount of movement in fixed income space. >> after three years of raising rates and running down balance sheet, the fed has called a truce on bond investors. jonathan: joining me, greg watson, george. marylin, it has been a

rally. something has to give. >> we are seeing a seachange. complete repricing of the fed. the fed is on hold for the rest of the year. the data has been weaker than people expected. first quarter, you would expect data to come down especially in the u.s. without fiscal stimulus. we have a rally. we have seen concerns around global growth. essentially, thanks doing nothing. -- banks doing nothing. we are not concerned. >> the direction is correct. it has been too extreme. pausing is one thing. we are pricing cuts. that is a much higher hurdle. we are in a low rate environment, flatter curve. near-term. really, we have pushed it hard. >> couldn't agree more.

50% expectation they will do two cuts by year end. long-term rates are coming down. things atlet's talk the epicenter of the rally. the yield curve, the treasury curve. decompose the things that are happening in core government bonds in the u.s. when you boil it down to the fine point where it has dropped, it is the belly of the curve, the front, has collapsed over the last month. t bills. two-tens,-two, 30's, it is extreme, the front and has moved. end has moved. loss of issuance is a driver. there has been chatter around the curve inversion. there is a lot more to it.

>> a different view, you are right, it is having more on the short. the yield curve has been a good predictor in the past of oncoming recession. it is going back and forth on three-month to 10 year, one year to 10 year, but we are not seeing inversion. 2-30's would widen, can you reconcile that? >> that is about the speed of the changes. i agree with the technical aspects in terms of issuance at the front and this bid at the back of the curve. it has to do with speed and the change people are pricing in from the beginning of the year to now. jonathan: decompose the treasury yield. if we look at it in terms of inflation and real yield, it has

been a massive move in real yields. doi think it has a lot to with the fed consistently raising rates, 10 rate hikes, a consistent path. now, we are not expecting anything. the market is expecting a cut. we think that is too far. they are going to be patient, sit on the sidelines, they want to support the economy, this expansion. it in termseed of of expectation of interest rates. jonathan: the speed of it has been too extreme? >> i think so. direction is correct. growth and inflation are rolling over. big move in a short time. that does not feel right to me. the market will continue to price in slower growth and inflation but it doesn't have to happen in three days. jonathan: let's talk

positioning. you have to imagine shorts are capitulated. how clean do you think things are now? >> you have seen that move out in fed point futures. short positioning has unwound. they have gotten cleaner. you won't necessarily have that snapback in rates. i think it has flushed the technical challenge out. jonathan: how difficult will it be to take yields much lower from here? where is the path of least resistance? the latest call. "whatn the u.s. 10 year, appears to be end to fed tightening in a shift to the longer view, changing the tail risk and the long-term risk scenario analysis." is that a call that resonates? >> that is aggressive. economy is still

expanding. a huge amount yet to be seen. second half of the year, we may see better data out of china that could have positive impact on eurozone. multitude of factors including tariffs with china and the u.s. come into play. 2.1% yield is aggressive. jonathan: would you take it that extreme? >> it is a possibility. is it plausible? absolutely. bad things have to happen. bearish outcome. that could indeed happen. bottom line for investors should be, yields are low, they're going to remain low, whether is it at 2-30, doesn't really matter at the end of the day. it is supportive from the yield perspective. >> take a long-term. short-term it was overdone.

longer-term, rates are going down, you are at the end of the cycle. does the fed raise rates? maybe once. unlikely. this is the time to look into bonds. jonathan: if we are at the end of the cycle, pick any data point, let's take treasuries. look at the inversion. that is the only dog barking. aussie-yen, classic, you would expect to move it on the back of something happening. we have not seen anything happen over the last three months. why is it only showing up on one specific point? >> the bond market is listening to the fed. the fed came out with a glowing report from a conversation perspective at the press conference but the data itself, lower gdp, lower inflation, higher unemployment, all of that was negative on the marketplace. that is what the bond market is sensing. the data behind it.

there were so many factors still to be seen, unknown. asthink many things such global, chinese growth, there could be an uptick. i agree. the market has been focusing on the fed. jonathan: sticking with us. next up, the lowest rated investment grade bonds shrugging off ears and delivering a big gain. -- fears and delivering a big gain. this is bloomberg. ♪

jonathan: is bloomberg real yield. to the auction block. the united states.

firmer evidence the bond rally is not dead yet. the treasury department selling seven your notes. -- seven year notes. auction, tenure benchmarked at at negative yield. auction,illion euro average yield of -0.05%. than $27ers of more billion of a $5 billion deal this week. market after the biggest rally for triple be rated u.s. corporate since 1995. there might still be more to come. >> bbb leverage is coming down now. ge and kraft heinz sent warning

shots across the bow of all bbb companies and you are seeing that coming back. the era of leveraging up the balance sheet, buying back shares, raising dividends, acquisitions, all of that mania has died down a bit. jonathan: greg peters, marilyn waters, and george, still very much with us. let's talk about it. the program is about tengion, contradictions. we have a market pricing in rate cuts. 's.is sucking up bbb if we are going into a recession, do i want to own bbb's in that environment? >> you want to own high-yield. we are changing our view. bbb's is idiosyncratic. as bob michael pointed out, some of these firms are shifting debt balance sheets off. you see it with heinz, ge, at&t.

we are seeing improvement. fundamentals are improving. we don't see that improvement in high-yield market. >> i agree. fourth quarter was a blessing in disguise. it scared companies straight. they saw their future of not being able to issue possible downgrades. i disagree on the high-yield side. i think it looks pretty good. that is a different story. high-yield bonds. jonathan: why is it looking good? >> they have not levered up like in the past. these are companies that have not taken balance sheets to access like previous cycles. all that has been put on the lever loan market. that is where the excesses. bbb's got religion. loans may not. the demand we have seen in

the ig space, high-yield, you could extend to em as well. the fed will raise rates. this is the environment where you can add spread sector, diversify your portfolio and get a decent level of income. it is important to be selective and cautious on fundamentals. in this environment, it is good to add that risk. jonathan: i want to explore getting religion with you. die, wefore we typically get religion. do you go to church? for q4, do you get religion for a couple months? do they lose religion quickly again if price determines the story? >> from our perspective with high-yield, it is funny. for them to be reflected within the marketplace, we are seeing a little of that, but not to the

level we think it should be. high-yield will do fine this year, not necessarily compelling. it is 7% up in the first three months. 3%, that is not enough. jonathan: more broadly, people struggle with the idea that you can price cuts and have tight credit spreads at the same time. we saw that in the last cycle. you can start pricing rate cuts and have spreads remain tight for a little while. how much longer? >> it is continuing to thread the needle. what the markets are looking at, credit versus rates is that the fed is no longer the enemy. it is a support system. it is allowing the reach for spreads to continue longer than what was perceived three months ago. that is the story. they are not disconnected. it is as simple as the fed and global central banks are no longer on attack. they are here to support you. spread markets are reacting. jonathan: bob michael's point at

j.p. morgan. idea that the yield curve inversion doesn't matter because there are global distortions moving the treasury curve domestically, i will take that. what can you also say, the credit market in the u.s. is equally exhausted? if i cannot take signal from treasury, why should i take comfort from credit? both are those -- both are distorted markets. i don't believe that argument. theink they are too large, markets are too sophisticated to be distorted by one single flow. what is happening is investors globally need yield. they will get it anyway they can. that does not mean it is a distortion across board. spreads are tighter, yields are lower but that does not change

the entire story. jonathan: do you think credit will lead next downturn? >> yes. >> yes. >> i agree. jonathan: what gives you the confidence? >> right now, greg had it right. short-term, people are grabbing yield. long-term, things get figured out. if the fed doesn't make a mistake, you will see a lead with high-yield. >> that is true. when you look at where investors -- there isng money an auction. behavior has changed because central banks. we are seeing less crowding now then we have. we will see a washout. jonathan: what i worry about is, three groups of investors. we have the economic conditions materialize that justify rate cuts.

those that don't think we will get those conditions, have taken they low yield and addressed. the third group goes through the middle. it blindly things, the matter what the conditions are, the longer the federal reserve cuts rates, assets will do ok regardless of fundamentals. how dangerous is that third group? lunacy.third group is the central bank is not there to rescue every single mistake. it is there for support. it is not there to rescue. on the credit side, it is important, leverage across the board, even to my beloved high-yield is high. investment grade, lever loans. the penalty for making a mistake this cycle will be much greater than the past cycles. jonathan: great to have you with us. market check on bonds. 3-'s.0's,

another interesting week. end, 30 year, 2.82%. data including u.s. retail sales and manufacturing. this is bloomberg. ♪

jonathan: this is bloomberg real yield. time for the final spread. next week, trade talks continuing. the chinese vice premier goes to washington after robert lighthizer and steven mnuchin visit beijing. rate decisions from australia and india. plusretail, auto sales manufacturing results and pmi's.

finally, the main event on friday. the payroll report in the u.s. guys, let's begin with you george. what are you looking for on payroll friday? >> we're are looking for it to go down. we think that will decline and not be as meaningful. >> we are looking for something potentially softer than the market is expecting. given it isronment, full employment economy, that is positive. >> big week across the board. whatis more important is markets react to softer potential data. weak and the bond market doesn't move or sells off, that is a signal. jonathan: how do you think the market will respond to weaker data? we have been willing to give the

benefit of the doubt. the ability to stabilize. is that faith being tested? >> i don't know about the faith itself. i'm not sure the bond market rallies continues now. effectse quarter end that come in and you see things back off a little. opportunity to get long. jonathan: the path of least resistance for yields might be higher? >> short-term. technically, longer-term you're going down. , vigorousket reaction to the weak pmi's in japan and europe as well, we could expect to see it back off. it is important to keep focusing on data. if you're looking to see it trough out and pick up, we need elevation. jonathan: how difficult would it be to add more fuel to the

recent bond rally? you agree with the direction. short-term, how difficult would it be to get another move out of this 10 year? >> it will be hard. it will be difficult. you priced in a lot already. you look at the front to tell you that. how much more at the front can you price in terms of dovishness? i don't see it. that makes it more challenging for rates lower, near-term. jonathan: rapidfire around. three questions, three answers. do you faith the strengthening credit or rate cut? >> rate. >> rate. >> the other side, credit. jonathan: u.s. 10 year. have we seen the high for 2019? >> yes. >> yes. >> high-yield. next nine month it could.

>> no. jonathan: great to catch up. thank you very much. from new york city, that does it. what a couple of weeks and the global bond market. much more from us next friday. 6:00 p.m. in london. from new york city, this was bloomberg nearly -- this was bloomberg real yield. this is bloomberg. ♪

>> let's get to first word news. minister's efforts to get her brexit deal through parliament have failed again. a third vote failed.

theresa may said the latest results will have great consequences. fear we are reaching the limits of this process in this house. this house has rejected no deal. it has rejected no brexit. on wednesday, it rejected all the variations of the deal on the table. and today it has rejecting approving the withdrawal agreement alone, continuing a process on the future. i will continue to press the case for the orderly brexit that the result of the referendum demands. >> there will be another chance on monday to come up with their own proposal with how or if britain leaves the european union. president trump says he will close the southern border next week unless mexico immediately stops illegal migration into the united states. he has per