jonathan: from new york city, for our audience worldwide, i'm jonathan ferro. "real yield" starts now. ♪ coming up, wrapping up a monster quarter from government bonds and credit. with junk debt in the u.s. delivering the best quarterly gains since 2009 even as the market continues to price doom and gloom elsewhere looking for a rate cut. we begin with a big issue. despite all the tension, it's been a global bond rally. >> right now i think everything looks great in bonds.

>> equities going up. >> i think it's magnificent. >> the gift in the market. >> the fed is easy. ecb easy. china easy. >> all of them signaling they're willing to stay on hold for much longer. >> that's good for risk assets. no surprise they shot out higher . high yields up 7%. >> default rate is low. >> corporate credit spreads are extremely narrow right now. >> quality single a's, there will be a bid for them. we're comfortable holding those. >> tremendous amount of movement in fixed income space. >> this is wonderful. after three years of raising rates and running down balance sheet, the fed has called a truce on us bond investors. jonathan: joining me around the table is greg peters, marilyn watson, george.

marilyn, let's begin with you. it has been a rally. something has to give. marilyn: we're seeing a seachange. complete repricing of the fed. the fed is on hold for the rest of the year. the data has been much weaker than a lot of people expected. first quarter, you'd expect data to come down especially in the u.s. without fiscal stimulus. we have seen a huge rally. we've seen concerns around global growth. essentially, banks doing nothing. we're not concerned at all. jonathan: what do you think, greg? greg: i think the direction is correct but it's been too extreme. pausing is one thing. we're pricing cuts. that's a much higher hurdle. we're in a low rate environment, flatter curve. near-term. really, we've pushed it hard.

george: couldn't agree more. 50% expectation they'll do two cuts by year end. yes, long-term rates are coming down. jonathan: let's talk things at the epicenter of the global market rally. one is the yield curve, the treasury curve. i want to decompose the things that are happening in core government bonds in the u.s. and start with the treasury curve. when you boil it down to the fine point where it's dropped, it's the belly of the curve, the front, has collapsed over the last month or so. takeout t-bills. george: absolutely. you takeout fives, tens, two-tens,-two 30's, it's extreme, the front end has moved. that's driven by a multitude of factors, loss of issuance is a real driver, for sure.

there's been so much talk and chatter around the curve inversion. there's a lot more to it. greg: a different view, you're right, it's having more on the short. the yield curve has been a good predictor in the past of oncoming recession. that's something we're very concerned with. it's going back and forth on three-month to 10 year, one year to 10 year, but we're not seeing inversion. jonathan: not unusual. 2-30's would widen, can you reconcile that? marilyn: that's 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's a lot of it to do with speed and the change people are pricing in from the beginning of the year to now. jonathan: the next thing we've got to do, maryland, is decompose the treasury yield. if we look at it in terms of

inflation, in terms of real yield, it's been a massive move in real yields. marilyn: i think it's a lot to do with the fed consistently raising rates, 10 rate hikes, a pretty consistent path. now, we're not expecting anything. to your point, the market is really expecting a cut. we think that's too far. we think they're going to be patient, sit on the sidelines, not doing anything. they want to support the economy, this expansion. i think it's just the speed of it in terms of expectation of interest rates. jonathan: is that the point you're trying to make too, greg, that the speed of it's been too extreme? greg: 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 lower 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've seen that move out in fed point futures. short positioning has unwound. i think they've gotten cleaner. you won't necessarily have that snapback in rates. from our perspective, i think it's flushed the technical challenge out. jonathan: i'm wondering how difficult will it be to take yields much lower from here? where is the path of least resistance? the latest call, 2.1% on the u.s. 10 year, "what appears to be end to fed tightening in a corresponding shift in market expectations to the longer view, that changes the tail risk and the long-term risk scenario analysis." is that a call that resonates? marilyn: i think that's very aggressive.

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

george: i agree. we should take a long-term view. short-term it was overdone. longer-term, rates are going down, you're 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're at the end of the cycle, pick any data point, to tell whatever story you're like, but let's look at treasuries. look at the inversion. that's the only dog barking. fx market, aussie-yen, classic, but you would expect to move it on the back of something happening. we haven't seen anything happen over the last three months. why is it only showing up on one specific point? >> it seems like the fed is listening to what the market is saying. 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 sort of negative on the marketplace. i think that's what the bond market is sensing. the data behind it rather than

the conversation in front. jonathan: marilyn? marilyn: yeah, i think there were so many factors still to be seen, unknown. we think many things, such as global, chinese growth, there could be an uptick. i agree. the market has been focusing on the fed. jonathan: sticking with us. next up on the program coming up, the lowest rated investment grade bonds shrugging off fears and delivering a big gain. that is coming up next. this is bloomberg. ♪

jonathan: i'm jonathan ferro.

this is "bloomberg real yield." i want to head to the auction block now. firmer evidence the bond rally isn't dead yet. the treasury department selling seven year notes. german bond auction, tenure benchmarked at at negative yield. -- 10 year benchmark debt at a negative yield for the first time since 2016. the 2.3 billion euro auction, average yield of -0.05%. and incorporates, candy maker mars orders of more than $27 billion of a $5 billion deal this week. it was the largest corporate bond deal since 5 -- pfizer back three weeks ago. to the credit market we go 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 right now.

ge and kraft heinz sent warning shots across the bow of all bbb companies and you're seeing that start to come back. the era of leveraging up the balance sheet, buying back shares, raising dividends, making acquisitions, all of that mania has died down quite a bit. jonathan: greg peters, marilyn waters, and george, still very much with us. so geroge, let's talk about it. the whole program really is about tension, contradictions. we have a market pricing in rate cuts. it's sucking up bbb's. if we're going into a recession, do i want to own bbb's in that environment? george: question is, do you want to own high-yield in that environment? we're changing our view. bbb's is very 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're seeing some improvement there. some of the fundamentals are actually improving. we don't see that improvement in high-yield market. jonathan: what do you think, greg? greg: 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. the leverage loans market is a whole different story. high-yield bonds. jonathan: why is it looking good? greg: they haven't levered up like they have in the past. these are companies that haven't taken their balance sheets to excess like previous cycles. all that has been put on the lever loan market. that's where the excess is. bbb's got religion. loans may not. jonathan: what do you think, marilyn? maryland: i think the rallies

we've been seeing and the demand we've 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 actually add spread sector. you can diversify your portfolio and get a decent level of income. i think it's very important to be selective and cautious on fundamentals. in this environment, it's good to add that risk. jonathan: i want to explore getting religion with you. typically we get religion if we don't have religion right before we die. do you go to church? for q4, do you get religion for a couple months? but when you have a rally like we just had, do they lose religion quickly again if price determines the story? george: i don't know. it's funny. from our perspective with high-yield, for them to be

reflected within the marketplace, we're 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's 7% up in the first three months. year-over-year, 3-4%, that's not enough for neutral overweight. jonathan: more broadly, people struggle with the idea that you can price cuts and have tight credit spreads at the same time. truth is, we saw that in the last cycle, as well. you can start pricing rate cuts and have spreads remain tight for a little while. how much longer? >> it's continuing to thread the needle. what the markets are looking at, credit versus rates, is that the fed is no longer the enemy. it's a support system. it's allowing the reach for yield, reach for spreads to continue longer than what was perceived three months ago. i think that's the story. they're not disconnected. it's as simple as the fed and global central banks are no longer on attack. they are here to support you.

and i think spread markets are simply reacting to that. jonathan: bob michael's point at j.p. morgan. this idea that the yield curve inversion doesn't matter because there are global distortions moving the treasury curve domestically here in the united states. i'll take that if that's the. -- that's the argument. what can you also say, the credit market in the u.s. is equally exhausted? if i can't take signal from treasury, why should i take comfort from what's happening in credit? both of those are distorting markets, aren't they? >> i don't believe that argument. i think they're too large, the markets are too sophisticated to be distorted by one single flow. what's happening is investors globally need yield. they'll do it any way they can.

that doesn't mean it's a distortion across board. spreads are tighter, yields are lower but that does not change the entire story. jonathan: do you think credit'll lead next downturn? >> yes. >> yes. >> i agree. jonathan: what gives you the confidence that that will be the case? george: 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 go into another downturn and you're going to see a lead with high-yield. marilyn: that's true. when you look at where investors are allocating money -- there's an auction. behavior has changed because central banks. but i actually think we're seeing less crowding now then -- than we have. we'll see a washout. jonathan: what i worry about is, three groups of investors.

we're going to have the economic conditions materialize that justify rate cuts. those that don't think we'll get those conditions, have taken they low yield and addressed. that is the third group goes through the middle two. it blindly things, the matter what the conditions are, the longer the federal reserve cuts rates, assets will do ok regardless of the fundamentals. how dangerous is that third group, that way of thinking? >> that third group is lunacy. the central bank is not there to rescue every single mistake. it's there for support but it's not there to rescue. on the credit side, it's important, leverage across the board, even to my beloved high-yield is high. investment grade, lever loans. and so the penalty for making a mistake this cycle is going to be much greater than the past cycles. jonathan: great to have you with us. market check on bonds. 2's, 10's, 3-'s.

another really interesting week. on the front end again to five basis points to 227. on the long end, 30 year, 2.82%. coming up, big data including u.s. retail sales and manufacturing. this is bloomberg real yield. ♪

jonathan: on jonathan ferro. -- on jonathan ferro. -- i'm jonathan ferro. 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. we get rate decisions from australia and india, as well. u.s. retail, auto sales plus manufacturing results and pmi's.

and finally on friday, it's the main event. it's the payroll report in the u.s. still with us, guys, let's begin with you george. what are you looking for on payroll friday? george: we're looking for it to go down a little bit. we think that it'll decline and not be as meaningful. marilyn: we're looking for something potentially softer than the market is expecting. in this environment, given it's a full employment economy, we've added jobs. that's positive. greg: i think it's a big week across the board. what's more important is what markets react to softer potential data. if it comes in weak and the bond market doesn't really move or sells off, that's a signal. jonathan: how do you think the market will respond to weaker data? because we have been willing to

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

jonathan: greg, this plays into your point of 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? greg: i think it's going to be hard, honestly. it'll 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 double-shifts and cuts? -- dovishness and cuts? 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? fade the rate cut or fade the strength in cuts? >> rate. >> rate. george: i'll take the other side, credit. jonathan: u.s. 10 year. have we seen the high for 2019? greg: yes. marilyn: yes.

george: yes. jonathan: high-yield. next nine months equal or beat the performance of the next three? greg: no. marilyn: it could. george: 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, much more from us next friday. because of the clock change, that will be 6:00 p.m. in london. from new york city, this was bloomberg real yield. this is bloomberg tv. ♪

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