jonathan: from new york city, i'm jonathan ferro. yield" startsl right now. coming up, treasury yields hitting their 2019 lows driven by anxiety of a trade and growth. the latest uncertainty coming from the u.s. economy, manufacturing data showing signs of weakness. a high-yield at market, digesting the monthly supply so far this year even we begin with the big issue. what will it take to get the fed to change course? >> i think without lights where

they are right now. >> they are not going to do anything precipitously. >> nothing in the data is forcing their hand. >> to get the fed off of where they are. >> to raise rates or cut rates exceptionally high. >> if the trade talks really break down further turning of the fire here. >> further escalation of the trade tariffs. >> the growth data. >> in the end, it will be the data that drives the fed. >> if we get a slow down. >> the economy starts slowing down. have zero down in my mind coming in that environment, the fed is cutting rates. >> they are watching like the rest of us. jonathan: join me to discuss is kathy jones, michael collins, and from minneapolis, craig bishop. let's begin with you. what will it take to get the fed to cut? from what i hear so far from the fomc, no one is watching. >> in our view it starts and

ends with inflation. inflation data will drive the fed. next pce at the end of week, expected to come in below the 2% target. that will be the driving factor to us. in our view, transitory inflation is incorrect. low inflation is here to stay. the penalty of a rate cut by the end of the year. >> in addition to inflation, financial conditions, it does work to tighten significantly, that would move them faster rather than slower. also some indicators that we watch on growth. starting to see the rollover. the most important would be the plumbing numbers. we see a rise in on a plummet by .5%, that they would move quickly. we had the base case that the fed would not do anything, but the bar -- everyone talking about the hurdle -- the bar to cut has continued to come down in our minds. right now, they are definitely more predisposed to cut over the

next six months than to hike. jonathan: we have seen a massive rally in the global bond market. what was interesting and unique about this week? fueltle bit of additional coming from u.s. weakness, manufacturing data, durable goods, capital goods. a one-off or something more? is the trend. we are on a slowing growth trend over the next few years. we had the big fiscal stimulus last year in which added .7%, this year maybe a little. next year, it will detract a little bit. we will go from 2.9% growth last year, to maybe 2% this year, and that maybe below 2% next year. jonathan: this is where the anxiety is right now. overwhelmingly, the consensus view is a trade dispute, weakness abroad does not filter into the economy in a material way. the consensus view is the u.s. outperforms. the data this week pushes back against the.

craig, what are your thoughts on it? craig: absolutely it pushes back on that story. the talk of green shoots was premature. you look at what the atlanta fed gdp index is showing for second quarter gdp, 1.2%. that is down 2% from where we were in the first quarter, which was really believed by a buildup in inventories going into the trade war. trade war, tariffs that is just another wildcard potentially subtracting half a percent from gdp over the course of the year, depending on how long it goes. best case scenario in our view is we return to gdp growth of 2.25%. jonathan: some people would be screaming at the tv saying that they are just a few data points. what would you say to them? stimulusnce the fiscal buoyed the numbers, we are not

critical of the lower. now you add in the trade war and you add in other factors, it seems inevitable we will have slower growth. jonathan: that we have a treasury market with yield near 2019 lows, printed earlier this week. your view on the potential for yields to go even lower from here? 2.25 for the quarter on the downside of this year, but i can see how it could go down to 2.10. it is a bit stretched at the moment, a lot of the negative news is built in, but it would not surprise me if we get closer to 2%. japanan: when you compare , germany, and the united states, looking at real yields, you get a different picture of what is happening here. the united states is here with this nice, chunky positive real yield, compared to japan and germany. when you look at the chart, you wonder where this is heading.

can we take out the positive real yield in the united states? michael: absolutely. the real yield in the u.s. will go to zero. the real neutral fund rate we think is ultimately going to go to zero. that is where it belongs, does not belong at positive half or positive three quarters. right now at almost 60 basis points, where the real 10-year is today, we started getting long, thinking it will come down. the rally we have had the last few weeks has been driven by lower inflation expectations, not a lower real yield. we think the next move is the real yield coming down t. longer iser for intact, we have not set the lows for this year. we are more on the same sides of kathy of were yields could settle. 2%, maybe even lower depending on how the data points come in. i think this is a market that will be continued to be driven by expectations that the fed is going to do nothing.

we think the fed cuts rates, the market expectations are looking for three rate cuts between now and into 2020. market expectations have been a better indicator of where it go versus the fed dots. jonathan: to pick up on mike's point, do you think real yields can come down to zero, potentially subzero? craig: yes, i think they can. jonathan: agree, kathy? kathy: i think they can but it's a little early to make that call a writt. jonathan: what time horizon are we on? michael: growth is not that bad, we are not seeing recession. ultimately, the path is being dragged down by what we're seeing around the world. sometimes the data tells you what is happening in the market. sometimes the market tells you what's happening in the world. the ability to keep real yields positive i don't think is sustainable. jonathan: we have heard a lot of dovish rhetoric but have not

seen the beginning of every cut cycle abroad. australia this week hinted at one. south africa followed. i wonder if that is the beginning of something. michael: central banks around the globe are cutting. one reason we have a bullish view on u.s. rates is relative to the rest of the world. our rates have not really kept up with the rest of the world. aussie 10-year is down 1.5% today. u.k. is below 1%. our yields are looking more attractive relative to the other broader fixed income opportunity set. it has been one of the drivers for us, the weakness in global economy, decline in global yield. when italy is the only yield that is close to the u.s. come as a global investor, what choices do you have? you can put your money in italy, or you may choose to do that in the united dates. i think more money would flow into the u.s. market that italian bonds.

michael: italian spreads are 10 basis points tighter. jonathan: you still like europe right now? i think the peripheral countries, from a fundamental perspective, notwithstanding the political risk, but spreads are pretty attractive, we still like portugal, greece, front and italy. you are still getting paid for owning credit that is moderately improving and probably more upgrade. jonathan: emphasis on the word credit. appetite for risk around the table. we discuss that next. michael collins, kathy jones, and greg bishop stay with us. chipping away at a high-yield market, digesting the most monthly supply so far in 2019. that conversation is coming up next. this is bloomberg "real yield." ♪

jonathan: i'm jonathan ferro. this is bloomberg "real yield." i want to go to the auction block, beginning in europe. the spanish treasury selling 1.5 billion euros of its 10-year debt, the lowest yield in a decade, with investors offered to buy 1.5 times the amount of securities sold. in the u.s., the treasury selling $11 billion in 10-year tips. the highest cover ratio since april of 2010. finally, the junk issuance spree continues. may is the busiest month since march of 2018. auto retailer karbala selling $50 million in 2023 notes yielding nearly 9%. kathy jones, michael collins, and from minneapolis, craig bishop. greg, that is what's been fascinating about this period of risk aversion.

, loans, high yield is still coming through, and still being eaten up. craig: demand is there. that is the pure and simple, a matter of supply and demand. a lot of it has to do with the fact that what the central bank environment that has us in right now, where they have almost sent a signal that they are going to hold rate study, provide the necessary support to the markets as needed. that has increased the confidence of both issuers and investors that they can step into the market and take advantage of the yield. in our view, high yield is a still relatively risky environment, not that we are high on at the moment. we are watching it, though. is then: kathy, that compare and contrast between now and december. that is why now is nothing like december. december, no issuance. may, potentially the biggest month of the year in terms of

supply. in terms of the spread, certainly nowhere near the risk aversion we experienced a number of months ago. kathy: i think that is the shift in the bed. in december, there were expectations the fed would keep hiking. now they're on hold and the market is discounting summary cuts. people are less afraid. i would say spreads at this level are not giving you a lot of premium for the risk involved. jonathan: you don't like 400 over? kathy: i don't. although we prefer high-yield to loans, to the leverage loan market. , ifhink as we go forward the economic data continues to show softness, we will probably see spreads widen. jonathan: do you believe the tights are behind us? michael: i do. that being said, we are more sanguine on credit spreads in general. we believe that as the realization of rates stay low in

this low range bound market, that reach for yield becomes exacerbated. we are looking at a range bound market on spreads. i was looking at high-yield spreads, corporate spreads, all about 10, 12, 13% wider from the recent tights earlier this year. we are looking for opportunities to tactically at some. fundamentals are not horrible, as long as we don't have recession, i still think we will be range bound. jonathan: pick your spots, where are you looking? michael: we like high better than investment grade corporate's, loans. fundamentals are actually not horrible in high-yield. we have seen more upgrades and downgrades by quite a multiple so far this year. i sit in on our credit meetings. a lot of decent stories. companies are generating cash. valueare plenty relative bottom of opportunities to pick

up at relatively attractive spreads. kathy, we have had some bad issues over the years. august 20 17, 1 of the stories of the week, tesla. in augustto market 2017, come with a specific maturity with a specific credit rating. a record low yield. in and around 5.3%. now an effective yield north of not present on that security. what does that tell you, what was everything doing in the summer of 2017? kathy: that's a good question. even at the time we looked at that and thought this is quite remarkable. whether it was well sold to the street or exactly what people were thinking, i'm not sure. again, the market is getting more cautious. although spreads are still pretty low, it doesn't take much to see spreads widen pretty quickly. doesn't take much in high-yield market to see a bond move the way it has. jonathan: clearly a store unique

to tesla, but it makes you wonder how many teslas are out there. how much money has been allocated to companies and barbara costs they shouldn't never been given? michael: when that deal came, the justification that the buyers were given was that you had huge equity market capitalization under you. time,cautioning at the that equity market capital can go away really fast. tesla's equity has obviously been cut in half recently. do not hang your hat on that. you have to look at free cash flow. at the end of the day, they are burning tons of cash. an exampleertainly of the attractiveness of the growth story captured by the equity. for some reason, reflected in the debt market. i keep thinking about this period and wonder, why did this happen, and could we experience able to elect once again? craig: with that individual

ofuer, certainly a lot sizzle around a name which was attractive to investors. they wanted to lend the company some money at relatively, at the time, what we thought were expensive rates. cheaper now but still unattractive. certainly, what does that say about the market? it still signals investors are looking for yield. nothing is cheap in fixed income. there is no one, glaring opportunity that you can jump into. to us, it has been for some time now, a manner of focusing on quality and being very selective and where you put your money to work, not chasing yield. we had been underweight high-yield now for a number of months. i prefer the bank loan space versus high-yield. spreads are beginning to widen out. as per kathy's comment, not overly attractive to us, that spreads are moving in the right way and we are being very patient.

we will take advantage of selective opportunities when they come up. i remember talking to bob michael a couple weeks ago, saying people are getting too greedy, waiting. what are you looking for, 4.10, 4.50? craig: i think it has to be probably when we will start getting our toes in the water. hindsight is always 2020, of course, would love to have levels of where we were at the beginning of the year. we missed a chance to put some money to work. certainly, we start moving up that is an area where we will start to put some money to work. let's get a market check on where treasuries have been through the week. coming at the front end, three basis points. 2.17. a new low on the 30 yada yada low. yields lower by seven basis points on the 30.

for the year pretty much across the curve. 2.75 on the 30-year. the week ahead, featuring another round of important economic data with china and the u.s. very much in focus. this is bloomberg "real yield." ♪

jonathan: i'm jonathan ferro. this is bloomberg "real yield." time for the final spread. next week, president trump traveling to japan to meet with prime minister abe. results from european parliamentary elections on monday. u.s. markets close for memorial day. tuesday, u.s. consumer confidence, followed by the second reading of q1 gdp. on friday.t of china kathy jones, michael collins, craig bishop. what are you looking for from the chinese data next week? craig: i think we are looking for a confirmation as to what

the economy is doing. we have had mixed signals over the past month or so. positive data, negative data. where are things really going, is this the number that sends a better signal? that is clearly what we will be looking for, either a confirmation that things are stabilizing, or they are not. that will dictate how the markets go after that. jonathan: i usually hide my face when i asked this question, is bad news good news for the markets? if pmi is soft, the restart spending narrative, that the chinese will start pulling more levers? michael: one of the reasons we are in the buy the debt mentality, we have this view that the fed put is alive and well, the trump put is alive and well, and the china put is alive and well, but i think that third one is going to work out. all of the stimulus they infused -- people thought that they were

going to grow again -- but it does not have the same force it used to have. i think the markets may look at that and say the stimulus does not have the teeth anymore. jonathan: that worries me about how they may be deployed. the trump put, you may have more appetite to push through. likewise with the fed put and chairman powell. the china put, it is not their willingness to deploy accommodation, but the effectiveness of it. will it work, will it bite? kathy: that's the question, so much weakness in the area now. that is really important for china. it is sort of a feedback loop that is becoming negative. it's very hard for them to stimulate and not approve around them, and vice versa. i'm not sure it will work. jonathan: we have seen so much stimulus injected into the economy. the character has changed somewhat.

whether they have reached their limits. the effectiveness of it has essentially diminished over the past year. talking about long-term secular changes, potential gdp, they are going through what i call the demographic delta. when the old too young ratio turns on its head. it has been in japan, europe, and it's happening in china now. their potential gdp is going from six, probably to four, and it probably to two. that will happen pretty quickly, within a decade or two. they are putting that natural trend. jonathan: we have to wrap up the program. rapid fire round, three quick with three quick answers. mike's trade. zero yield yield on ten-year treasuries by year-end, yes or no? kathy: no. michael: not by year-end but it will happen. craig: no. jonathan: u.s. 10 year right

around 2.30. what do we see first? 2% or 2.6%? kathy: 2. 2 or lower.aig: jonathan: soft data out of the u.s., a one-off or a sign of things to come? kathy: sign of things to come. michael: sign of things to come. craig: i think everybody should get ready and hold on. it's a sign of things to come. jonathan: 11 bearish around the table. up with you.h kathy jones, michael collins, craig bishop. from new york, this was bloomberg "real yield." this is bloomberg tv. ♪

ritika: let's get to bloomberg first word news this afternoon. more american troops are headed to the middle east. president trump has ordered the

deployment of about 1500 additional troops amid rising tensions with iran. the president spoke to reporters as he left the white house for japan. protection ine the middle east. we are sending a relatively small number of troops, mostly protective. some very talented people are going to the middle east right now. we will see -- we will see what happens. ritika: the president's decision follows the trump administration's claims that it is evident iran is threatening possible attacks on american interests or allies in the region. for the jewish year a committee chairman jerrold nadler says the congressman is responsive. he is getting medical attention after he appeared to almost pass out during a news conference here in new york city. nadler had given remarks at an event about speed cameras in school zones where he slumped in his chair. a spokesman says the congressman

of years you have been dehydr