jonathan: from new york city for our audience worldwide, i'm jonathan ferro. bloomberg "real yield" starts right now. ♪ jonathan: the rally continues , driven by lower rates and signs the global economy is bottoming. flows into u.s. credit funds for an 11th week. shaping an impressive order book for saudi aramco's debut bond sale. we begin with the big issue. the global risk continues. >> we are in a risk on environment. >> a risk on trade >>. risk on within the fixed income space. >> everything looks great in

bonds. >> credit spreads are really tight. >> the fed is no longer your enemy. >> the fed has called a truce on us bond investors. >> support for risk assets, whether it is equities or high-yield credit. >> it is allowing this reach for yield. >> reach for yield. >> reach for yield coming across all different asset classes. >> the market has maybe more upside. >> a little more upside for equities. >> more juice that can be squeezed out. >> we think there is more room to run. jonathan: joining me is subadra rajappa, the head of u.s. rates strategy at societe generale, michael collins, pgim fixed income senior portfolio manager, and bob miller, head of fixed income at blackrock. great to have you with me. let's talk about that support mechanism. low rates and why they can remain low for a whole lot longer. subadra: because the central banks want it that way. it is not just in the u.s. but globally, the ecb and the other central banks are keen on providing accommodation. if you listen to the fed speak this week, the feeling is that

2.5 is close to neutral, so they are pretty much happy keeping rates where they are for an extended period of time until they get an indication of moving policy either way. jonathan: what do you think, bob? bob: i think the fed has pivoted in a very durable fashion and will not go back to last year's game plan. instead of following the r-star methodology and trying to pin real neutral rates at some assumed level of neutral or tighter than neutral, they have clearly changed their reaction function to underwriting the expansion. they want the expansion to continue. they want to do something that most federal reserves have been unable to do, achieve a soft landing. most feds over the last three decades. i think they are dovish, will be dovish. they are sensitive to the low levels of inflation. inflation is underwhelming. i think that lowers the bar to them easing, as opposed to a high bar with them tightening.

jonathan: michael collins? michael: we are in the same camp, as you know. we have been in this long low rates call for some time. late last year we put out a piece saying the 10 year treasury would average 2.5% for the next decade. that feels high right now. we are saying now 2% will be the average 10 year treasury for the next decade. that real rate is probably too high. continue over time, to lower rates. our view is that does not cause wider spreads, not a risk of f environment. lower rates beget tighter credit spreads over the long term. jonathan: we can see your chart on the screen right now. let's get that back up for the audience. decompose the 10 year, nominal, break even, effective real yield. what does this tell you about where we have been and where we are going? michael: nominal yield on top, that is 2.5%, comprised of two components. one is the real yield, the yellow line, which is the tips yield, and the 10-year real yield is 0.6%.

the blue line is the difference between the two, the inflation rate you need to justify the valuation of the other two. the inflation rate that is priced in is 2% for the next decade. 2% inflation seems high to us. i think we are in this lower, disinflationary world. you see that every day with the competition. even today, disney, netflix. it used to be the tech guys undercutting incumbents. now it is the other way. we are in this tit-for-tat competitive pricing environment. the real yield of 0.6 has the biggest room to fall and that will probably go to zero over time. jonathan: you think it can go to zero? bob: absolutely. i think a positive real funds rate, in the world we are in today, with so much demand for income, aging people, not enough bonds out there, why should they earn a positive return over inflation far only a t-bill? subadra: i was thinking real yield this time around are a lot

higher than they were in 2016 and this year might be different than 2016. but if you look at the chart of real yield, we are pretty much tracking the same decline, lower in real yield. the market is basically saying the prospects is lowering the expectation for growth over the longer run. that to me is troubling. the one thing i find interesting is, in the u.s., inflation expectations are still pretty high, close to 2%. compare that to europe. breakeven in the five-year in -- at 1.35%, very close to the lows over the last five years. to me, that divergence gives credibility to the fed, and probably less credibility to the ecb. jonathan:, your thoughts? bob, your thoughts? bob: i think the inflation piece is important. last year, we had the

unprecedented combination of significant fiscal policy in an economy that was at full employment. has not happened since the mid-1960's. we didn't see any meaningful price impulse. we have had wage increases without passing through to prices. the structural nature of the economy is different today. price pressures are difficult to source. look at the core cpi data released this week. if you look at core services, that is the part of core inflation that is most sensitive to domestic slack. we have a very low unemployment rate. very high capacity utilization. core services has decelerated over the past six months. core services, x salter and medical take out the pieces subject to , other factors, has declined 60, 70 basis points year-over-year for the past six months. there is no upward pressure on prices. i think that is what is different at the fed. richard clarida joining the fed last year has started to move the narrative toward a greater sensitivity to inflation

expectations and realized inflation. that tips the balance of their decision-making. jonathan: we started by talking about these support mechanisms for broader risk assets. can rates remain in this environment and simultaneously can risk asset continue performing, holding these levels? michael: if the fed is successful in extending the expansion, underwriting a soft landing from fiscally inspired 3% gdp rates a year ago, i think risk assets do well. jonathan: is that your base case? bob: >> yes. michael: i am worried that we are threading the needle. if your goldilocks growth environment is 2% to 4% growth, that is one thing, but it is really closer to 1.5% and 2%. you are playing with fire. if it gets too low, to 1%, that is what we call the stall speed in the economy. then bad things start to happen. we have all these overlevered credits. a quarter of the corporate bond market used to have leverage lever above three times and now

, it is half. those were junk bonds back in the day. jonathan: can we talk about pockets of complacency? we have this big order buildup for saudi aramco. an order book is a gauge of demand, not necessarily a reflection of actual demand. to what degree earlier this week -- many people saw that this offered by aramco was going to be oversubscribed, therefore, had to upscale their orders, because they knew it would be scaled back. then it snowballed. is that what happened this week? bob: i think it contributed to it. it was extraordinarily well delivered from the primary underwriters. i'm not sure all of the participants that bought the bonds are as happy today as they were on monday or tuesday. i do not view anything negative happening. it is just arguably people overpaid on a short-term time horizon. the capital structure looks attractive relative to other major energy complexes, but perhaps a bit rich. jonathan: the company carries no debt.

i wonder how you should value this. i want to whip through a couple of charts. if you value this against the peers, you look at shell, exxon, we trade wide. it make sense from an investment grade perspective. essentially this is triple-a credit with no debt on the balance sheet. you can see why there would be appetite for the debt of saudi aramco. from an investment grade perspective. we look at this from an em perspective, saudi arabia versus the sovereign curve. you get a different picture as to what the risk is associated with this credit. there is the aramco curve at the top, shell and exxon at the bottom. but if you switch up the chart and you have a look at it from the em perspective, this is where the risk lies. why are we trading so tight to the sovereign? in your view, are some maturities trading to tight to -- too tight to the sovereign? michael: em trades wide to investment grade for a reason. much more inherent volatility in

-- and beta associated with it. you have to price it off the sovereign. we saw the price going down. we bought some of the sovereign debt, thinking if this whole thing is going to come in, the sovereign should perform well. we generally try to avoid this. it looked really rich to us. the sovereign owns it. they can tax it, and they will in some cases, extract that entire $200 billion in earnings of ebitda as a tax, like they do in mexico. pemex trades 300 over in some parts of the curve. jonathan: do you think this was a sign of risk appetite going to -- too far or was this , idiosyncratic? bob: i think it was more idiosyncratic. a lot of people -- new issuer, a lot of people wanted the name, interesting story. as i said before, people overpaid for it. jonathan: great to have you with us. coming up, the auction block. europe's yield hungry market. that conversation is up next. this is bloomberg "real yield." ♪

♪ jonathan: i'm jonathan ferro. this is bloomberg "real yield." i want to head to the auction block in saudi arabia. the world's most profitable company. we talked about the issue previously, aramco raising $12 billion in an unprecedented bond market debut. the state owned energy giant drawing orders over 100 billion. allowing it to borrow at a lower yield than the saudi government. in the u.s., the treasury selling 3, 10, and 30-year bonds this week. finally in europe, banko bpm bringing at first at1 two

market. seven steps below investment grade at 8.75%, getting over 600 million euros of bids. let's stick with europe. ecb president mario draghi emphasizing the balance of risk remains tilted to the downside. around the the risks euro area growth outlook remains tilted to the downside on account of the persistence of uncertainties related to geopolitical factors, the threat of protectionists and , vulnerabilities in emerging markets. jonathan: still with me is subadra rajappa, michael collins, and bob miller. subadra, the financial repression trade is back. subadra: absolutely. this is a classic financial repression trade. if the ecb is going to keep monetary policy accommodative we , know they will be introducing

tro's in september, the trade, you want to be in the peripheries. you want to be in btp's. we have seen bund spreads narrow dramatically. end of last year, 300 basis points, now between 200 to 250. look at greek debt, the lowest level it's been in over a decade. to me, it is basically a signal, the ecb being on hold is a signal to take on risk. jonathan: is that right, bob miller? a big move on the periphery. do you expect yields to go lower? bob: i think they grind lower. i don't think the ecb is in a position to increase interest rates or pursue anything but accommodative monetary policy for a very long period of time. jonathan: for the periphery, it matters whether they start start trading again. i caught up with your colleague robert, who suggested maybe we are at an inflection point. traded like credit for a long time. he thinks they can start to trade like sovereigns. why does that make sense? bob: there are two things going

-- bob: there are two things going on, one is the technicals. the demand for yield, high quality sovereign debt in europe ms. tremendous, with bund yields stuck at zero, probably forever. you have the technical. fundamentally, these countries are doing ok. we look at italy, they have a budget deficit over 2%. we are running close to 5% here. they look really austere over there as a bloc. they have a small deficit. the bloc is a strong, fiscal place. reaching a little on the margin in places like greece, spain, portugal makes sense to us. jonathan: i know it is the tail risk, but it is the specter of redenomination risk that hangs over these currencies. some of these offerings as well. with all due respect, the treasury does not have that. ultimately that is the problem , with europe, which effectively makes a trade like credit, not a sovereign. i am wondering why this is the inflection point and why this trade makes sense. bob: they should have a credit spread. if you cannot print your own currency, you have to have a credit spread.

we saw that in puerto rico. greece did effectively restructure. if you cannot print your own currency, you need to spread over bunds effectively. that is the risk-free asset. we are not saying it is going to go to zero or 10 or 20 or 30, because you have a lot of political risk. the question is what is the right spread? jonathan: what is the right spread? bob: for greece, probably tighter. they are in improving credit. they are going to continue to get upgraded. they are growing faster than expected, their primary deficit is coming in. surplus is coming in better than expected. it is improving credit. there are not that many improving credits in the world. jonathan: the use the word "forever" a little while ago about the german 10-year. at zero forever potentially. do you see that? we use the word forever very loosely here, but do you see it staying there for a long time? subadra: we have a forecast for 11 basis points far bunds next year. we say it will be close to zero,

for at least the next year given the fact that the ecb will not do much. if anything, the market is pricing in some amount of cuts for 2020, 30% probability. there is a nonzero probability that the market is thinking it might be easier monetary policy coming from the ecb by way of cuts in 2020. that means bund yields should remain close to zero. jonathan: is that within your base case? bob: i think europe has meaningful structural headwinds. the european design does not allow for a meaningful, organic growth recovery without substantial policy support. the challenge around some of the things that we were talking about earlier, credit spreads, is the binary nature of asset pricing. you have aggressive financial repression that forces through regulatory channels and other channels the yield lower, yet you have this relatively large left tail. as you move toward it, the pricing moves aggressively.

in 80% of the scenarios, spreads can grind tighter. 5% to 10% of the scenarios it's a real problem. jonathan: bob miller, great to have you sticking with us alongside michael collins, subadra rajappa. in the markets, let's get a check on where treasuries have been this week. yields shaping up on the week as follows. up five basis points on 2's and 10's. on the 30 year, up six basis points. still ahead, the final spread, the week ahead featuring a slew of fed speakers, as well as insight in the global consumer. retail sales in the u.s. and china too. , this is bloomberg "real yield." ♪

♪ jonathan: i'm jonathan ferro. this is bloomberg "real yield." it is time for the final spread. coming up over the next week, japan visiting the united states for trade talks. elsewhere, a ton of fed speak. including charles evans, robert

kaplan and patrick harker. in china, industrial production and gdp figures. in the u.s., we get the fed's beige book and retail sales for the month of march. lastly, a holiday shortened week for many of you ahead of easter. the final word from bob miller, michael collins, subadra rajappa. a lot of people looking at the export data, saying it's an improvement, things are good. then they look at credit, things are good. imports are still pretty soft. i would have thought if credit growth and stimulus was starting to bite, that is where i would see it. bob: i think you will see it. the chinese have pulled a lot of different levers over the past six to nine months to provide some support for their economy. it may well be that support is domestically focused and not a lot of the activity improvement spills out into the rest of the emerging-market complex, northern asian complex. that remains to be seen.

i think it's critical that china stabilizes in order for core europe to stabilize. europeans are particularly sensitive to the trade flows. the market wants to do the green shoots trade. people want to do this. i think it's probably the right trade. the deceleration in china was self-inflicted. it was intentional. they seem to be creating the scenario for a soft landing. i think that is the most likely outcome. the risk scenario, a much higher probability of disappointment than overshooting on the re-acceleration. jonathan: there has been the green shoots trade. it is a trade the market is increasingly position for. do you share that optimism about the bottoming out process as the year progresses, and maybe excel version through in the back half of the year? michael: the base case is, the stimulus does take hold, that you get some stabilization, maybe modest improvement.

but remember the transmission mechanism for stimulus in china is a lot different than it was. maybe that is why you're not seeing this big jump in imports. it used to be when they wanted to stimulate, they would say, we are going to build a bunch of steel plants, we are going to import a bunch of commodities and iron ore from australia, we are going to build railroads. they are not doing that. they are trying to encourage lending and borrowing at the retail, small business level. that is a much stickier transmission mechanism. i am worried it will be watered down, that this pickup will not be as robust as we have seen in the past and the data may be different than what we have seen. subadra: if you take a step back and look into coming into the year, i would say economists and strategists broadly underestimated the impact of the china slowdown on broader global economies. that is why we have had the tremendous revisions coming from the imf in january, as well as this week. to me, it is too early to read

into the data that we've gotten this week and conclude that we are on the road to recovery. we still need to see clarity on the trade negotiations between the u.s. and china. we need to see consistent improvements in data coming out of china. i personally think there is the potential for more easing coming from the pboc over the coming months based on how the data , turns out. i think it is a little too early. jonathan: next week is another important week for the data specifically in china, and the united states as well. i want to wrap it up with a rapidfire round. three quick questions and three quick answers. first question, following off -- up from that conversation, is the optimism for a second-half recovery in the global economy misplaced, yes or no? subadra: yes. michael: no. i think it will get a little better. bob: i think it gets better. jonathan: the low on the 10-year german yield this year, negative nine basis points. have we seen the low for 2019,

yes or no? subadra: yes. michael: yes. bob: no. jonathan: cain and moore attracting significant controversy around the federal reserve. do either of them get confirmed to the fed? subadra: no. michael: no. bob: yes. jonathan: interesting. subadra rajappa, michael collins, bob miller, thank you for joining us. that does it for us. this was bloomberg "real yield." this is bloomberg tv. ♪

♪ abigail: coming up on "bloomberg best," the stories that shaped the week in business around the world. a blockbuster bond sell has investors buzzing. >> right now we have orders standing at $75 billion worth. >> a lot of investors i'm talking to have questions about how real that order book was. abigail: the brexit cliffhanger will last a little longer as the eu grants the u.k. longer time to seek a deal. >> a long delay or short delay, somewhere in between. abigail: trade tensions rise