jonathan: from new york city, i'm jonathan ferro. yield" startsl right now. coming up, fresh trade tension providing even more fuel for the global bond market rally. 10 year treasury yields breaking down to new lows of the year. bund yields printing a new record. uncertainty leaving high-yield credit element exposed. spreads widen, funds suffer. we begin with a big issue, more fuel for the treasury market rally. >> the bond market rally right now is a risk off trade. >> massive flight to safety.

>> rushing into treasuries. >> the perfect storm in the treasury market. >> people are very nervous. >> people are coming around to the various factors and uncertainties. >> growth is slowing. >> declining global growth. >> trade tensions. >> rhetoric with china is not only back but escalating. >> new tariffs on mexico. >> this is a real problem. >> this is what the market is trying to do, recalibrating how much risk we should price in. now are ourining us guests, great to see you guys. your thoughts on the big moves we have seen in yields this week? >> it is interesting, we went from goldilocks to goldilocks, to goldilocks found the bear. the economy is slowing but still

seems to be doing well. i think it's overdone. jonathan: i know everyone around the table things it is overdone. michael, you think it is overdone. >> i do. the only way we can get about 2% is if the fed steps up and says we are concerned, we are thinking about cutting. we are not balanced anymore. we see no scene of that happening so we are skeptical. about the fedust cutting but the fed cutting several times. that is the bigger point. the likelihood the fed cuts several times in the current environment, let alone cutting at all, i think is very small. jonathan: the potential the yield can go lower, it really phenomenal yield, it can go lower. if we compare treasuries to bunds, we have a positive real yield still in the u.s. an aggressive break lower, but still positive.

spoken to multiple people over the last week that thinks that white line can go to zero. your thoughts? >> doubtful. there's been a tremendous amount of skepticism over the last few weeks, months. if you look at 10-year breakevens in the u.s., we think they are too low. why should inflation be this low? if you think tariffs are bad, don't you think they are inflationary? we are skeptical about the real yield argument. >> i wouldn't say tariffs get us to an inflationary level. on a short-term basis, yes. longer-term, that is all about slowing growth. slowing growth leads to disinflation rather than inflation. the difference between real yield in the u.s. and europe, i think, to some extent is warranted. our real growth is meaningfully higher than what the real growth is in europe. zero,kelihood it gets to

somehow i cannot square that circle. >> i will echo what everyone else said but take it from the bottom-up perspective. what companiest are reporting, we are not seeing a lot of inflationary pressure. conceptually, it's feasible. my gut feeling probably agrees with the panelists to say it will not happen. jonathan: in the global bond market, a hunt for hedge. where do you go apart from treasuries? isn't that the argument of why you could see convergence there? we have a positive real yield. >> to some extent, it is flight to safety. to a large extent, it is flight to duration. there is a bit of a dichotomy between the bond markets of the world and the stock market. if i had told you that we would be 5% away from the top, 10 year rates would be closer to 2%, you would have left me out of town. that is where we are. jonathan: if i told you 12

months ago that we would be pricing in three rate cuts -- >> i would push you out of town. jonathan: richard clarida weighing in. this is what he had to say. >> we are a two to potential risks in the outlook. if we saw a downside risk to the outlook, then that would be a factor that could call for more accommodative policy. that is definitely something in the risk management area that we would think about. jonathan: i don't know if we are clutching at straws, but some thought that was the window opening slowly toward the idea of a rate cut. your thoughts on that? to me, that is a very incremental moving that story. >> i agree. he also emphasized data. data does not suggest that. will thought the winds of the equity markets -- we are just down 5%.

let's take this into perspective. just 5%. jonathan: jpmorgan. another one in december. this is not the first time we have seen a decent spread between what the market is looking for and what the fed is implying through the munication. what i'm trying to get -- communication. what i'm trying to get my head around is, is it better data that drives us there? >> we will see the economy is not slowing down to the level it eats to slow down for the fed to come up with a rate cut in 2019. if that is not the case, if that is what his call is, that's a different situation. our expectation is second half is better despite all the talk of tariffs on a global basis. therefore, we probably don't get that rate cut. jonathan: more data out of china. pmi back in contraction territory.

there is some real doubts around the second-half recovery. rightly so? >> probably not. i think the second-half recovery could be there. pboc has more latitude to become more accommodative. the data might be sketchy but it has the firepower to do it. >> it is simplistic. the economy is slowing. that just means lower valuations, wider spreads. it does not mean recession, put your money under the mattress. a month ago, everybody out here was saying goldilocks, goldilocks, goldilocks. this flip-flopping is a little ridiculous. jonathan: is this a switch into a new regime, or return to the same old story? story ishe tariff incremental in information, but we have not seen it in the economic data and what we hear from the companies. no need to rush to a conclusion and make grand conclusions that we are about to enter a recession or new regime. jonathan: so much anxiety out

there. last week we had a soft pmi manufacturing number, just enough to shake the confidence that the u.s. economy will be resilient. next week, what are you looking for? >> weaker numbers. point,look at any data second quarter will be weaker because it is payback for the first quarter. inventory liquidation and things like that. but the real story is the second half of the year. from is lots of stimulus the tax cuts and spending package that will come through in 2019. entered 2019 with enough momentum, as we saw in the first quarter numbers. that momentum carries us through the second quarter of this year, and things get better in the second half. jonathan: where is that stimulus coming from? >> all the spending they had planned in the budget deal, the tax cuts, the actual spending

did not take place in 2018. it was planned for and a lot is coming in 2019. jonathan: you all seem to take the view that the market overall has aggregate pricing. where do you fall? >> front end. then futures pricing easing this year, that is crazy. >> i think i would say the 10 year. it is probably the safer ratio trade. however, you cannot eat sharp ratios. >> 10 year. jonathan: great to have you all with us. up next, the auction block. junk investors fleeing as spreads hit a 15-week off. that conversation is coming up next. ♪

jonathan: i'm jonathan ferro. this is bloomberg "real yield." i want to head to the auction block and begin in japan. the nation's first yen- denominated bond is redefining the phrase high-yield by being sold below a 1% yield. in the u.s., the treasury struggling to get off of its seven-year debt auction. sold with a 1.9 basis point tail. cracks forming in the u.s. corporate market. paid 835 basis point concession in order to bring its $450 million of 10 year notes to market. that is where we begin the segment, cracks in credit.

pimco ringing the alarm. >> we have probably the risk is credit market we have ever had. it is true when you look at both the size of it, the duration of it, and the quality aspects of it there is a big vulnerability there. jonathan: krishna, your view on that call? >> if he is talking about potential liquidity issues in or where the credit markets can under for warm, i can see why he would say that. having said that, i think there's a bit of inconsistency between their views on the credit market and their views on the economy. they are not expecting recession for three 05 years. if that's the case, the credit market may be risky. after spending some time with him, the view is that three to five years of mild recession, but perhaps the view

that we are approaching the net to thousands. this is where things start to build. is there any push back to that view from your side of things? >> the pushback would be, it is the same argument we make all the time. i would rather buy treasuries at 4%. treasuries are not going to be at 4%. if you are looking for income, and there are lots of people looking for income, they have to take some level of risk. what is the magnitude of that risk in the corporate credit markets? relative to the incremental credit you can get in treasuries, that risk is worth it. thathan: let's talk about relationship between treasury yields and high yield notes. citigroup said that it yields fall below 2%, high-yield spreads have always been materially wider in the post taper tantrum period. walk me through what you think the relationship should be here. we have had 2% treasury yields a couple of times before.

should there be a natural relationship between where the two year yield is and where high spreads should be? on thes focusing two-year because it is focusing on the funding cost, indicating some sort of pressure on the economy. rates are important to watch but this is the problem in this new regime we live in, where there are all sorts of geopolitical cycle going into election , and the treasury keeps issuing on the front end. all of these different factors that are changing the dynamics. taking one data point and extrapolating is not right. is high-yield cheap? no. you do not buy until it crosses another 75 basis points. but i don't think, to krishna's point, we are an aging demographic. that they tell people just have to put their money under the mattress. jonathan: the view was the 10

year yield versus where spreads should be, but the point stands. you have a reasonably good economy, you don't have a lot of default. why should spreads blowout? carry is probably ok. >> the relationship between treasury levels and yield levels, it doesn't have to be a relationship. however, people who are looking for income look at 2%. get 3.5%, that is a lot better. there is an implied relationship from an investor preference, even from breakeven terms, it doesn't need to be there. findhan: what i fascinating is the investor by us and how they are shaped by what is happening in the treasury market. we referenced the seven-your auction. we have had a tug-of-war that lower rates were a buffer from troubles. it is clear the second you has won out over the last couple of

weeks. what was fascinating was watching a soft seven-your option, and then all of a sudden, risk assets turned. the idea that we are taking our cues from where yields go, and intraday move seems to be shaping risk appetite on a daily basis. does that make sense? >> i think people are trying to extrapolate too many things out of the data points. people have been nervous. it has been an on rally. everyone was bearish in january. people were sounding the alarm and we had a phenomenal run in equities and credit. now this is there opportunity to turn it around. i don't think it is that bad. things can be expensive or cheap but i don't see any alarm bells. >> most equity investors don't even know that i seven-year bond exists.

i am allowed to do that. is, that sort of tells you as to the state of mind of equity investors. they missed out the rally from december on. they don't want to miss out the turn. they are taking clues from the bond market to the extent that it can provide any clues for a turn. if they see something move, they will pay attention to it. jonathan: michael schumacher, a bond markets in the driver seat, should it be? >> i'm not sure that it is. jonathan: krishna, do you agree with that? >> i don't think so. >> it is friday, you can be wrong. >> i think they are kind of operating with different technicals, different risk profile of their respective investors. that is probably the difference between the markets. jonathan: krishna memani, lale

topcuoglu, michael schumacher sticking with us. yields shaping up as follows. 18 basisn a monster points on the front end of the curve. two-year yields, sub 2%. still ahead, the final spread, the week ahead featuring an ecb rate decision and a big payrolls report. that is next. this is bloomberg "real yield." ♪

jonathan: i'm jonathan ferro. this is bloomberg "real yield." time for the final spread. over the weekend, china's tariff retaliation will take place saturday. $60 billion of u.s. imports. tuesday, rate decision from australia. powell,k from chairman kaplan.

friday, a payroll report in the u.s. what are you looking for through next week? >> things being quiet? probably more of the same. the fed will echo what clarida said last week, ecb will try to calm. look at european financial stocks. italy is at the center. i think more of the same. our goal will be not to react with a knee-jerk reaction. jonathan: listening to the fed communication, even the chief comes on bloomberg, note 7 signal he wants to cut rates. there is a question from a bloomberg subscriber. do you think the federal reserve's and could be forced by the president's tactics? >> i think it could be, if the

market's take a big draw down and the economy slows down, we could see the action. again, it is very dependent on where the data shows up. it is not next week's data. my expectation is the data in the second quarter will come in relatively weak as a payback on the second -- first quarter. if the data is not we cannot, we react positively. rates rising rather than rallying on the back of that week data. toif you take a three six-month view, perhaps, but it is way too soon. jonathan: not seeing it in credit yet. yields, spreads in december were 0%.th of 5%, pushing 5.5 the primary market seized up in december. a little bit of pushback this week but it is still functioning. a key difference between now and then. >> it is. december is also and odd time.

year-end liquidity, which makes things worse. the primary market is functioning. not like there is a risk off environment in any shape or form. we are 60 basis points higher in the market today, 100 basis points still tighter year to date. it is fine. no need to ring alarm bells. are back ups another 50, 75 basis points. assuming nothing changes, we would buy credit. jonathan: is that what you are expecting to happen? on andhis craziness goes suddenly everyone is calling for recession, it is totally feasible we could back up another 50 bits. >> is that what you are looking for, getting to 4.50 over? >> i think we stabilize at these levels. the difference between december and today is material.

was theber, the risk fed gets us to recession. that got priced out. no amount of tariffs can price that back in in a hurry. jonathan: i wonder if we are moving to a place where in december, it was the view that if you hike again, that's a policy ever. now the view is forming that if you don't cut again, it is a policy error. >> not yet. the economy needs to slow down meaningfully and more so in the second half of the year as opposed to second quarter. if the fed does not react to that, we would have a policy error. jonathan: let's get to the rapidfire round. first question, let's talk about mexican tariffs that may not happen. will the president follow-through on fresh tariffs against mexico, yes or no? >> yes. >> no. >> no. jonathan: can u.s. 10 --year-olds and zero before the end of the year? >> yes. >> no.

>> no. >> high-yield spreads, which when will we see first, 3.50 or 4.50? >> 4.50. >> 3.50. >> 3.50. jonathan: thank you for the conversation, really interesting stuff. that does it for us. see you next friday. this was bloomberg "real yield." this is bloomberg tv. ♪

mark: i'm mark crumpton with bloomberg first word news. says hispresident country will not respond to president trump's threat of tariffs with the desperation but

will instead push for dialogue. president says they have been taking steps to slow illegal immigration and wants a good relationship with the united states. he has pushed for a longer-term immigration fix, focused on raising living standards and increasing opportunities so fewer people choose to leave the country. united nations atomic watchdog says iran is complying with the terms of the nuclear deal reached in 2015 with major powers. but the international atomic agency international atomic energy agency says stockpiles of low-enriched uranium and heavywater are growing. it is the first time tehran announced it is increasing low-enriched uranium production. theresa may was the first foreign leader to visit donald trump after he was born in. next week, he will become the last four leader to meet may before she resigns as the head