jonathan: from new york city for our audience worldwide, i'm jonathan ferro. startsrg "real yield" right now. coming up, the president unleashing higher tariffs on china and the could be more to come. a rush of supply into global credit markets. issuers getting ahead of potentially escalation. soft inflation adding to trade tensions, adding fuel to rate cut debts. we begin with the big issue, a wall of uncertainty met with resilient optimism. >> i don't think we should me

moving from an exuberant to a panic mode. >> let's say we have a trade war that last for a reasonably long period of time. >> the fed is going to cut and the chinese policymakers will continue actually increasing their level of stimulus into the economy. world economy is lifting but looks resilient enough to hold up to these terrorists --tariffs. fundamentals actually look better for most of the u.s. large-cap space. >> earnings look pretty good. >> still an appetite for risk asset. >> the long game. >> the process is ongoing. >> the vulnerability with respect to trade talks is something that we cannot ignore but that is not the key point. jonathan: joining me around the henry, and joining us from london is diana moa.

i want to begin with you on why this market has been so resilient in the face of real escalation risk. >> a couple of things. krishna pointed out fairly. unlike last year, the market now believes we have a fed put. if financial conditions tightening, it growth slowed down dramatically, the fed will be ready to cut rates. the second thing is china stimulus. unlike last year when we first started getting the straight tensions, china is no longer delivering, so that is not a headwind to growth. additionally, as soon as we had the announcement monday, the first thing the chinese did was to do a triple r cut. they learn from the lesson from last year that the response to these u.s. trade escalations is actually a robust policy reaction. jonathan: a believe there are three puts. we have talked about two of them. one of them is the trump put,

the xi put, and the powell put. reliant on those three things? >> no question about it. the market is assuming there is a put, but no guarantee. what could the fed do if we have to go to zero again? remember, no one thinks we are -- some people think we're at the neutral rate but the philly not above it. it is not true with growth the way it is that the fed will oblige, especially if trump keeps challenging them to do it. >> that is a really good point. what we have to think about is how the market has not been reactive. the point we made earlier, it's been very sanguine. we are tired of this. the market is exhausted. what you are seeing is spreads are widening out. there is a paralysis in the market right now.

we will talk about credit and a little bit. investors rushing into high-quality paper. it says to me that investors are looking for liquidity and safety in the market. what we need to do is bring in your active risk. trim risk where you are not confident in positioning. right now adding risk is not really a wise choice. jonathan: do you agree, diana? diana: that is a good point in terms of the market being exhausted by these constant headline risks we are facing and actually not having too much visibility on how this story plays out. you have two parties negotiating on a trade deal, but at any point you could get a negative headline. conversely, you could also get a positive headline. bring down risks to core holdings that should reform will in most scenarios makes sense. jonathan: getting to the global story, mornings at the risk rally has come too far, too fast. expect global growth to become

subdued. this then means the current performance are risk assets such as global equities versus global sovereigns may have to retrace in the coming months. we will talk about your high-yield call later on in the program. core rates in the u.s., germany, and elsewhere. is there room for another move higher, yields lower in the price months gershon: doesn't matter when you get a shock. if we get 10% down in the s&p, we will go very negative in a 10-year as the market prices in the fed cutting rates. jonathan: the reason i ask, there is is immense faith in this market. risk assets rising that idea in. core government bond did not price of a global slowdown. in fact, they were pricing in one. i'm trying to work out how much is for yields go lower.

maybe price does not matter if we get a shock. fedy: the point is that the 's bar to raise or uses extremely high right now. real demand in gdp was soft. european data surprising on the upside. france and germany having positive fiscal impulse. my gut is that you will start to see rates up a little bit and ease pressure on the fed. i think that is the more likely outcome. if you are buying into a long core rate story right now, you need to be confident that we are going to have a shock. on not quite sure we are going to have that. at that point, when you're doing is playing for volatility to spike and a flight to quality. i don't see that right now. jonathan: do you have that confidence, diana? diana: given where we are with valuations, it is a harder story to push to buy 10-year treasuries when they are close

to 2.4%. that said, there is a lot of uncertainty out there and global core rates everywhere, u.s., european rates, japanese rates, they are pretty low. from an international sovereign investment point of view, u.s. treasuries remain attractive. uncertainty, it is hard to argue for a break higher in a more significant fashion. the one thing to add is we are talking about china and trade, but you have iran looking in the background. what happens if we see something happen in the straighter hormuz, do we see oil spike? probably. higher inflation, lower growth environment, which is great for security selections, but you have to watch. jonathan: we are talking about tail risks and not base cases. gershon: is important to remember, trade in general will not necessarily impact numbers

in the short term. it will impact confidence, slowing economies over time. that said, markets have run really fast here. there is no guarantee we get a resolution. we are still up a tremendous amount off of our lows. the global economy faces a real challenge it confidence is taking a hit. diana, when you think about the hierarchy of vulnerabilities, it is china, then europe. europe and emerging markets. you are running an em fund at the moment. it has been a tough month. what do you do? diana: you pick your stories well, look for places where the domestic story is not exposed to china, markets that have rallied, such as local markets. when everyone talks about em, they talk about the dollar side, which has had a great run to date, but local markets are barely up 2% on the year.

that is where you need to look for value, stories were you are not exposed to china. the third point, which was raised just now on the impact of oil prices, what that does to core rates. if there is a supply-side driven shock and growth does not pick up, it is hard to argue that the 10-year will react. the market will be more focused on forward-looking, beyond the supply-side shock, which means we are back to talking about inversion on the curve. henry: it is possible. we had a brief inversion early in the week. right now, i come down to the fact that we will likely see u.s. growth glide lower and european growth likely glide somewhat higher, and the convergence trade is something you need to be mindful of. gershon: remember, you do not really by duration risk for the yield. you buy duration risk to protect you. i'm not predicting this will happen, but if we get a market

selloff, you'll want to own some duration. jonathan: the final thing that is vulnerable here is the periphery on europe. interesting to see how the fx market is responding throughout the week. the euro has not done a lot. we face the prospect next week of auto tariffs coming down on the confident when we barely see any green shoots, but the periphery is looking pretty good. how do you manage that? diana: it is interesting with europe, a few things happening. upbulls have not bought despite the headlines, which is surprising, given how much tension we have coming back to the markets. when you look at positioning in euros, there is a huge net short. that is a trade that could be susceptible to being shaken out, particularly if the growth outlook shifts away from the u.s. favor, back to europe and the rest of the world. the markets are

thinking, if this escalates, you could see some shift in his or currencies. that is not a base case, but something to be aware of, if you see china retaliating by reducing their exposure to the u.s., then the beneficiaries will be other reserve currencies such as the euro and the yen. on then: coming up program, the auction block. the corporate debt market recording its busiest week in eight wants despite turbulence across asset classes worldwide. that conversation is next. this is bloomberg "real yield." ♪

jonathan: i'm jonathan ferro. this is bloomberg "real yield."

i want to go to the auction block in the u.s. treasury. seeing the weakest demand for its benchmark 10-year note in a decade. the $27 billion offering coming in with the lowest bid to cover ratio since 2009. to carlyle group sold notes extract a payout of $1.9 million from a drug research come in a. this boosted the company's debt load to 7.5 times earnings. a busy week for u.s. investment grade. bristol-myers selling $19 billion in investment bond, only to be outmatched by ibm a day later. the highest volume week in eight months with $45 billion pricing. around the table is gershon distenfeld, henry peabody, and diana amoa. a weaker massive supply in the face of real map or risk, and the investment grade is taking it pretty well. likeon: journalists

yourself have been scared us for a long time. jonathan: you are saying we are part of that? gershon: 100%. certainly in this cycle there are more absolutes but it has not happened yet. whether they listen to you or not, they were selling. that market was widening out. that stuff got to. there has been a bid for it. high yield, people just need yield. jonathan: we can talk about high-yield. program, af my own lot of people have come on the program and talked about buying bbb's. not many in credit that are worried, it is those outside credit that are looking in an worried about bbb's. henry, you have a lot of triple b's. a lot of our exposure is ian corporate. they have been doing well.

year to date, u.s. triple b's lack for the most part. bmy, our analysts liked it at 20 basis points, so we didn't take part in that. you have flows into u.s. ig. flat in loans for a dog's age. as long as that continues, fundamentals don't matter, until they do, and technical takeover. that is why you need to think about the cost of that liquidity. that will increase when vol picks up. tagged under active risk and maintain your liquidity bucket. you'll have an opportunity to buy these names cheaper. jonathan: diana, your view on that, how do you frame those flows that have gone into u.s. credit this year? diana: we saw a huge allocation into cash for the end of last year as investors started to get

concerned about the trajectory of the global economy. for most of last year, concerned about where the 10-year treasury was going. investors have had cash. with the fed turning more dovish , central banks turning more dovish, they been more," putting that cash back to work. this year's rally was very quick and aggressive compared to last year. the impression we get is a lot of institutional investors did not participate. a lot of the flows we saw coming in were from the retail space. so institutional investors still have caps on they are willing to put to work. onry: while we are down yields and spreads are tight, you also need to be cognizant of games being played. the oxy deal is want to be pointed at with the financing from buffett, the governance issues. additionally, you are seeing write-downs from kraft heinz. companies that have been relied on low interest cost, low labor costs taking out cost.

if you see inflation start to seep into the system -- i know everyone has left inflation to be dead and buried -- but if it comes back in and wages pick up, you will have those m&a assumptions being questioned. gershon: why are we assuming that people have varied inflation? the fed is a k-swiss it in saying they want to generate inflation. the only reason they would cut is not due to weaker growth, but because they want to generate inflation. jonathan: you can blame the journalists for that. a lot of people out there that have become increasingly complacent on the inflation story. suppressed,vol rates low, we will see a new framework coming out in june with clarida leading it. the fed needs to understand more of the same does not do it. they need to set the market up for fiscal policy expansion. orther we have a left

right-leading policy come it will be justified either way. europe will be coming out with a policy rethink shortly thereafter. what we have had does not work and we need a much more holistic rethink. jonathan: let's get back to portfolio management. you have been making an intensified call to taper down volatility in your portfolio, reduce equity risk. have you been vindicated the last few days? is this an example of what you're trying to communicate? my callsthe reality is are much longer in nature. equity strategists are saying, expect 6, 7, 8%. you usually get it in high-yield. equities have been down 3% from their highs at this point. high yield is down half a percent. jonathan: going forward, is that the allocation you want to stick increases,as risk maintaining a pro risk bias? gershon: with all the

uncertainty and where valuation is right now, you'll get these returns but there is that left tail. i'm not suggesting everyone go and throw their money into high-yield. instead of thinking about it in the traditional equities, fixed income, putting money into high-yield, take a little bit of your equity exposure. you will get similar returns and a lot less downside. jonathan: is there an argument against this, henry? trying to think about more about liquidity issues potentially down the road, how do think about that? henry: our approach is not necessarily a relative return one. equities are stretched. i also think high-yield is stretched. .he rally in your to date myself, i think there is more downside in those markets from a relative return standpoint, i can see the argument. we would rather hold an

expensive optionality in the form of cash. i can imagine a benchmark manager looking for that opportunity. jonathan: i like to give you the final word, diana. from a pure fixed income point of view, fundamentals remain strong in the u.s.. earnings coming out quite robust. well are relatively anchored, and a policy response is there to keep this cycle or going longer. the case for buying high-yield comes from that point. i would say, though, given the speed of the rally year to date, it is a much harder call them coming into january. we have had a decent move the last few days. maybe this could be the way to do it, rather than chasing a market that has such a big move. everyone is staying with us. what a week it's been in the markets. yield shaping up as follows.

down nine basis points on the 2-year. 2.85. the 30-year coming in at 2.87. coming up, the final spread, the week ahead featuring fed speak. kicking off with richard clarida. that is coming up next. this is bloomberg "real yield." ♪

jonathan: i'm jonathan ferro. this is bloomberg "real yield." time for the final spread. next week, a slew of fed speak, featuring richard clarida. tuesday, williams, and then esther george geeking in minnesota. first quarter gdp data. u.s. retail sales. midnight friday, the deadline for president trump to decide with a to move forward with putting tariffs on auto imports. back with us for final thoughts, gershon distenfeld, henry

peabody, diana amoa. what would be sufficient to get them to cut rates? that is the question in the minds of many people. do we get the after to that anytime soon? diana: not while financial conditions remain at these levels. you need to see a more aggressive tightening in u.s. financial conditions to make the thaturnaround and see there is more asymmetry and then the next move is likely to be a cut rather than a hike. gershon: we cannot just look at the short term. there is more uncertainty today where fed governors standing there anan there ever has been. 25 basis points will be market psychology. the bigger issue is where the fed goes from here. we see inflation, will they start to hike? jonathan: let's get to the final round. escalation risk next week, more or less likely to get auto tariffs slapped on europe to the

end of next week? gershon: i cannot predict politics. henry: less likely. diana: less likely. jonathan: a love for the german 10-year this yield, negative nine basis points, have we seen below? gershon: no. henry: yes. diana: no. jonathan: has the bloomberg barclays high-yield index already peaked in 2019? gershon: no. henry: yes. diana: no. jonathan: great to catch up with all of you. that does it for us from new york. we will see you next week, same time, same place. this is bloomberg. ♪

mark: i'm mark crumpton with bloomberg first word news. u.s. and chinese negotiators held trade talks today under increasing pressure after president trump raised tariffs

on $200 billion in chinese goods, and beijing promised to retaliate. talks wrapped without a deal but steven mnuchin described the discussions as constructive. china's top negotiators said the talks went fairly well. earlier today, president trump said there was no need to rush a deal. the pentagon says it is reallocating $1.5 billion to help pay for construction of 80 miles of wall at the u.s. mexico border. the money is being drawn from savings and numerous defense programs, including ones that support the afghan army and other security forces. in march, the pentagon transferred $1 billion from army personnel budget accounts to support construction. france's ambassador to the united nations said the security council is concern over the recent escalation in fighting in syria's northwestern province. he told reporters at the u.n. today that after eight