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 further escalation. soft inflation adding to 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 exuberance to a

panic mode. >> let's say we have a trade war that lasts for a reasonably long period of time. >> a long, contracted trade war. 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 but looks resilient enough to hold up to these tariffs. >> fed policy and stimulus. those are the two that matter. >> the fundamentals actually look better for most of the u.s. large-cap space. >> earnings look pretty good. >> still an appetite for risk asset. >> a long game. >> the process is ongoing. >> the long game. >> 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 the market. jonathan: joining me around the table is gershon distenfeld, henry peabody, and joining us from london is diana amoa. diana, i want to begin with you on why this market has been so resilient in the face of real

escalation risk. >> well, i think there are a couple of things. krishna pointed it out clearly. unlike last year, the market now 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 chinese growth. additionally, as soon as we had the announcement monday, the first thing the chinese did was to do a triple r cut. so the authorities there seem to have learned from the lesson from last year that the response to these u.s. trade escalations is actually a robust policy reaction. jonathan: i believe there are three puts. we have talked about two of them. one of them is the trump put, the other is the xi put, and the powell put.

are we over reliant on those three things? >> no question about it. i definitely think the market is assuming there is a put, but no guarantee. what could the fed do if we have to go to zero again? and, remember, no one thinks we are -- some people think we're at the neutral rate, but definitely 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. >> i think 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 just tired of this. and the market is exhausted. what you are seeing is spreads are widening out. there is just a paralysis in the market right now. we will talk about credit in a little bit. you see investors rush into

high-quality paper. it says to me that investors are looking for liquidity and safety in this market. what you need to do is bring in your active risks and trim risks 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 that are negotiating on a trade deal but at any point you could get a negative headline. but conversely at any given point, you could also get a positive headline. bring down risks to core holdings that should reform will 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 subdued. significant rebound in data seems unlikely, this then means

the current outperformance of 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. do you think there room for another move higher, yields lower in the coming months? gershon: recent history 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 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, things stabilize globally. risk assets 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 therefore yields to go lower. maybe price does not matter if we get a shock.

henry: that is a fantastic point, but the point is that the fed's bar to raise or lower is ease is extremely high right now. real demand in gdp was soft. european data surprising on the upside. france, germany starting to have positive fiscal impulse. my gut more than anything 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. 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 just don't see that right now. jonathan: do you have that confidence at all, 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. so from an international sovereign investment point of view, u.s. treasuries remain attractive. and given the rate uncertainty, it is hard to argue for a break higher in a much more significant fashion. jonathan: henry? henry: the one thing to add is we are talking about china and trade, but you have iran lurking in the background. now what happens if we see something happen in the strait of hormuz. do we see oil spike? probably. higher inflation, lower growth environment, which is great for security selection, but you have to really watch because the tail risks are getting -- 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, mean slowing economies over

time. that being said though, markets have run really fast here. guarantee we get some type of resolution. we are still up a tremendous amount off of our lows. jonathan: the global economy faces a real challenge if confidence is going to take a hit. diana, when you think about the hierarchy of vulnerabilities, it is china at the top, then europe, em, and the u.s. europe and emerging markets. you are running an em fund at the moment. it has been a tough month for everybody involved. what do you do? diana: you pick your stories well. you look for places where the so exposedory is not to china. you look for 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. so those are the sorts of stories you need to concentrate on.

look for value, and look for stories were you are not exposed to china. that washat point, and point raised just now, on the impact of oil prices, what does that do 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 so aggressively. the market will be more focused on forward-looking, beyond the supply-side shock, which means we are back to talking about inversions on the curve. henry: it is possible. i think right now we had that brief inversion early in the week. right now, again, i come down to the fact that we will likely see u.s. growth glide lower and largely glideh 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 and emerging markets 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 bonobo here and has had a vulnerable here and has had a decent run 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 continent when we barely see any green shoots, yet the periphery is looking pretty good. how do you manage that? diana: it is interesting with europe. i would say there are a few things happening there. vols have not spiked 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.'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 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: diana, great to have you 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 up next. this is bloomberg "real yield." ♪

♪ jonathan: i'm jonathan ferro. this is bloomberg "real yield." i want to go to the auction

in theow, where we begin united states with the 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 with the carlyle group sold notes to extract a payout of $1.9 million from a drug research company. this sale boosted the company's debt load to 7.5 times earnings. elsewhere busy week for u.s. , a investment grade. bristol-myers selling $19 billion in bonds, only to be outmatched by ibm a day later. it was 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 risks, real macro and the investment grade is taking it pretty well.

gershon: journalists like yourself have been scaring us for a long time with this bbb debt. jonathan: you are saying we are part of that? go on. 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. people realizing that stuff got cheap. there is a difference in high-yield. high yield, people just need yield. jonathan: we can talk about high-yield. on behalf of my own program, a lot of people have come on the show and talked about buying bbb's. [laughter] jonathan: in fact, the interesting thing is there are not a lot of people in credit that are worried. it is those outside credit that are looking in and worried about bbb's. henry, you have a lot of bbb's. you have had a good year so far. ofry: we have had a lot

exposure in corporate. they have been doing well. outperformed u.s. corporate dramatically. year to date, u.s. bbb's lack for the most part. this ibm deal, bmy, our analysts at 20 basis points, so we didn't take part in that. you have flows into u.s. ig. you have 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 then technicals takeover. that is why you need to think about the cost of that liquidity. that will increase when vol picks up. it is best to take down your active risks and maintain your liquidity bucket. you'll have an opportunity to buy these names cheaper. jonathan: i want to spend more time on this, then we will turn to high-yield. diana, your view on that. how do you frame those flows that have gone into u.s. credit through much of 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. and actually for most of last

year, was concerned about where the 10-year treasury was going. so investors have had cash. with the fed turning more dovish, with global central banks turning more dovish, they have been more comfortable putting that cash back to work. now this year's rally was very quick and aggressive compared to where we were 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 these institutional investors still have cash they are willing to put to work. jonathan: henry. henry: while we are down on yields and spreads are tight, you need to also be cognizant of games being played. the occi deal is one to be pointed at with the financing from buffett, the governance issues. additionally, you are seeing write-downs from kraft heinz. there have been companies that have been relying on low interest cost, low labor costs , taking out cost. and if you do 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 some of 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. the only reason they would cut is not due to weaker growth, but because they want to generate inflation and they are not seen it. jonathan: you can blame the journalists for that. [laughter] jonathan: there are 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 clarida leading it. june. the fed needs to understand more of the same does not do it. and the fed really needs to set the market up for fiscal policy expansion. 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. so what we have had does not

work and we need a much more holistic rethink. jonathan: let's spend the next couple of minutes getting back to portfolio management. you have been making an intensified call to taper down volatility in your portfolio, reduce equity risks, and build up high-yield. have you been vindicated the last few days? is this an example of what you're trying to communicate? gershon: the reality is my calls are much longer in nature. jonathan: it is a five-year call. >> it is a five-year call. equity strategists are saying, expects 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 with, even as risk increases, incrementally chopped risk off and maintain 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.

high yield protects you better. i'm not suggesting everyone go and throw all their money into high-yield. instead of thinking about it in the traditional equities, fixed income, putting money into high-yield that i take out of duration assets, take a little bit off your equity exposure. you will get similar returns and a lot less downside. jonathan: is there an argument against this, henry? how are you thinking about this for a man trying to go up and 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. 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 inexpensive optionality in the form of cash.

i can imagine a benchmark manager looking for that opportunity. jonathan: i'd like to give you the final word, diana. diana: from a pure fixed income point of view, the fundamentals remain strong in the u.s. earnings coming out quite robust. rates are relatively well anchored, and the policy response is there to keep this cycle going for much 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 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. going to stick with us. 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 at the front end. down nine basis points on the 2-year. , five basisng 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." it is time now for the final spread. coming up over the next week, a slew of fed speak featuring richard clarida. rosengren, monday. tuesday, williams, and then esther george speaking in minnesota. first quarter gdp data. another read from germany and the eurozone on wednesday along with 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 some final thoughts, gershon distenfeld, henry peabody, diana amoa. diana, i want to wrap up some things with some thoughts.

what would be sufficient to get them to cut rates? that is the question in the minds of many people. do you think we get the answer to that anytime soon? diana: not while financial conditions remain at these levels. i think you would need to see a much more aggressive tightening in u.s. financial conditions to make the fed turnaround 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 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. 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. the rapidfire round. you know how we do this. 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: the low for the german 10-year this yield, negative nine basis points, have we seen the low? gershon: no. henry: yes. diana: no. jonathan: has the bloomberg barclays high-yield index already peaked for 2019? gershon: no. henry: yes. diana: no. jonathan: guys, 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. next friday, 1:00 p.m. new york, 6:00 p.m. london. this is bloomberg. ♪

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