jonathan: from new york city for our audience worldwide, i'm jonathan ferro. bloomberg "real yield" starts right now. ♪ jonathan: coming up, the president unleashing higher tariffs on china and there could be more to come. a rush of supply into global credit markets. issuers getting ahead of potential escalation. soft inflation intensifying trade tensions, adding fuel to rate cut bets. we begin with the big issue, a wall of uncertainty met with resilient optimism. >> i don't think we should be moving from an exuberant to a panic mode. >> let's say we have a trade war that lasts for a reasonably long

period of time. >> a long, protracted trade war. >> the fed is going to cut and the chinese policymakers will continue actually increasing their level of stimulus into the economy. >> the world economy is lifting a little in some corners but looks resilient enough to hold up to these tariffs. >> fed policy and chinese stimulus. those are the things that matter in those pillars stand. >> the fundamentals actually look better for most of the u.s. large-cap space. >> earnings look pretty good. >> still an appetite for risk asset. >> it is a long game. >> 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. >> there is still clearly momentum behind this market. jonathan: joining me around the table is gershon distenfeld, henry peabody, and joining us from london is diana amoa. i want to begin with you on why this market has been so resilient in the face of real

escalation risk. diana: a couple of things. krishna pointed out earlier. the first is, unlike last year, the market now clearly believes we have a fed put. if financial conditions are tightening, if 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 these trade 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. the authorities there seem to have learned a lesson from last year that the response to these , u.s. trade escalations is actually a robust policy reaction. jonathan: there is the belief that 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.

are we over reliant on those three things? gershon: 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? unorthodox curve plays and things like that. remember, no one thinks -- i should say, some people think we are at the neutral rate but we are 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. henry: 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 in 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 -- should perform well in most scenarios makes sense. jonathan: getting to the global story, warnings that the risk rally has come too far, too fast. expect global growth to become -- to remain subdued. that seems unlikely.

this then means the current outperformance for 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. i want to talk about core rates in the u.s., germany, and elsewhere. is there room for another move higher, yields lower in the coming months? gershon: history or reason shows price doesn't matter when you get a shock. if we get 10% down in the s&p, we will go very negative in the 10 year in bunds and it will be closer to 10% as the market prices in the fed cutting rates. jonathan: the reason i ask, there is immense faith in this market. in the second half, that things stabilize globally. risk asset pricing that idea in. core government bonds did not price in a global slowdown. in fact, they were pricing in one. i'm trying to work out how much space is there for yields go lower. maybe price does not matter if we get a shock. henry: that is a fantastic the

point. point is that the fed's bar to raise or lower is 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 move 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. i'm not quite sure we are going to have that. at that point, what 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. given the rate uncertainty, it is hard to argue for a break higher in a more significant fashion. henry: the one thing to add is we are talking about china and trade, but you have iran lurking in the background. what happens if we see something happen in the straight of hormuz, do we see oil spike? probably. higher inflation, lower growth environment, which is great for security selections, but you have to watch. the taylor risks are getting a getting- tail risks are a little higher. 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 will just be off to the races again. we are still up a tremendous amount off of our lows. jonathan: the global economy faces a real challenge if confidence is taking a hit. diana, when you think about the hierarchy of vulnerabilities, it is china, then europe, em, and at the bottom, the u.s. i want to focus on the middle, 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 where things 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. those other sorts of stories where you need to concentrate

look for value, stories were you , -- stories where 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 we are not seeing growth picking up, it is hard to argue that the 10-year will react so aggressively. the market will be more focused on forward-looking, beyond the supply-side shock, which means we are back to talking about potential and version of 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 largely glide somewhat higher, and the convergence trade is something you need to be mindful of. gershon: remember, you do not really buy duration risk for the yield. you buy high-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. it has been 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 continent at a time when we barely see any green shoots, but the periphery is looking pretty good. what do you do with that kind of risk at the moment? how do you manage that? diana: it is interesting with europe. there are a few things happening. fx bulls have not bought up 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. on top of that, the markets are thinking, if this escalates, you could see some shift in this or

-- shift in reserve 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. jonathan: great to have you with us, you're going to stick with us. coming up on the program, the auction block. the corporate debt market recording its busiest week in eight months 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 head to the auction block, starting in the u.s. with 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. elsewhere, hellman and friedman together with the carlyle group sold notes to extract a payout of $1.9 million from a drug research company. this boosted the company's debt load to 7.5 times earnings. elsewhere, 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. let's talk about this. a weaker massive supply in the face of real macro risk, and the investment grade is taking it pretty well. gershon: journalists like yourself have been scaring us

for a long time. jonathan: you are saying we are part of that? gershon: 100%. jonathan: we are very responsible around this table. go on. gershon: certainly in this cycle there are more absolute debt but it has not happened yet. whether they listen to you or not, they were selling. that market was widening out. that stuff got cheap. there has been a bid for it. high yield, people just need yield. jonathan: we can talk about high-yield. i have to say, on behalf of my own program, a lot of people have come on the program and talked about buying bbb's. the interesting thing is not many in credit that are worried. it is those outside credit that are looking in and worried about bbb's. i looked at your fund, henry, you have a lot of bbb's. ofry: we have focused a lot exposure in em corporate and they have been doing well.

year to date, u.s. bbb's lag for the most part. this ibm deal, bmy, our analysts liked it at 20 basis points, so we didn't take part in that. you have flows into u.s. ig. flows into u.s. high-yield. flat in loans for a dog's age. as long as that continues, fundamentals don't matter, until they do and technicals takeover. that is why you need to think about liquidity and the cost of that liquidity. that will increase when vol picks up. it is best to take down your active risk and maintain your liquidity bucket. you'll have an opportunity to buy these names cheaper. jonathan: i want to spend more time on this and then we turn to high-yield. 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 have 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 cash they are willing to put to work. henry: while we are down on yields and spreads are tight, you also need to be cognizant of games being played. the oxy deal is one 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 relying 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 seep in and wages pick up, you will have those m&a assumptions being questioned. gershon: why are we assuming that people have buried inflation? the fed is being explicit in saying they want to generate inflation. i would argue 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. there was a front page on business week a few weeks ago. a lot of people out there that have become increasingly complacent on the inflation story. henry: with vol suppressed, rates low, we will see a new framework coming out of the fed 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. which you will see whether we have a left or right-leading policy, 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. buildup and allocation to high-yield. have you been vindicated the last few days? in the way this week is playing out, is this an example of what you're trying to communicate? gershon: it is easy to say yes, but the reality is my calls are much longer in nature. equity strategists are saying, expect 6, 7, 8%. you usually get it in high-yield. when things like this happen, you go down less. 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 with, even as risk increases, incrementally chopping a little equity risk off and 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. what i am saying is instead of thinking about it in the traditional equities, fixed income, putting money into high-yield, take a little bit off your equity exposure. you will end up with similar returns and have a lot less downside. jonathan: is there an argument against this, henry? how are you thinking about this? for a man going up in quality trying to think more about , liquidity issues potentially down the road, what do think about that? henry: our approach is not necessarily a relative return one. from a total return standpoint, equities are stretched. i also think high-yield is stretched. the rally in high-yield year-to-date has been substantial. there is a duration, you can buy at $.93 on the dollar some thing like that. myself, i think there is more downside in those markets from a relative return standpoint. i can see the argument. we would rather hold expensive optionality in the form of cash. i can imagine a benchmark

manager tightening up exposures and looking for that opportunity. jonathan: i'd like to give you the final word, diana. diana: from a pure fixed income point of view, fundamentals remain fairly strong in the u.s.. earnings coming out quite robust. rates are relatively well anchored, and a policy response is there to keep this cycle going longer. the case for buying high-yield i think comes from that point. i would say, though, given the speed of the rally year to date, it is a much harder call than it was 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. jonathan: great to have you with this, everyone is staying with us. what a week it's been in the markets. 2, 10, 30-year yield shaping up as follows. yields lower aggressively in the front end, down nine basis points on the 2-year. 2.85. the 30-year coming in at 2.87.

still ahead, 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. coming up over the next week, a slew of fed speak featuring vice-chairman clarida. tuesday, fed president williams, and then esther george speaking in minnesota. first quarter gdp data. u.s. retail sales. midnight friday, the deadline for president trump to decide whether to move forward with putting tariffs on auto imports. back with us for final thoughts, gershon distenfeld, henry peabody, diana amoa. diana, i want to wrap things up with some thoughts. we wake up monday morning and

immediately turn back to the trade story and the fed. what would be sufficient to get them to cut rates? that is the question in the minds of many people. do we get the answer 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 fed turnaround and see that -- and say we are looking at it and 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 different fed governors stand than there ever has been. are we at neutral? do we believe in the phillips curve anymore? the next 25 basis points will be market psychology. it doesn't make that big a difference to the economy. the bigger issue is where the fed goes from here. if we see inflation, will they start to hike? jonathan: let's get to the final round. rapidfire round. escalation risk next week, more or less likely to get auto tariffs slapped on europe to the end of next week? -- europe by the end of next

week? gershon: i cannot predict politics. henry: less likely. diana: less likely. jonathan: the low for the german 10-year this yield, negative nine basis points, have we seen the low? yes or no? 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. some interesting thoughts. that does it for us from new york. we will see you next week, same time, same place. 1:00 p.m. new york, 6:00 p.m. london. this is bloomberg. ♪

manus: you're watching "the best of daybreak: middle east." the major stories driving the headlines this week. the turkish lira tanks as the mayor are elections rerun is overturning a rarity for president erdogan. long-term damage to the country path democracy and economy. the gaza border explodes into violence as militants fire more than 200 rockets into israel, which retaliates with strikes that leave three palestinians dead. president trump ratcheted up the trade tension, impacting global and regional markets. we have the details. ♪