jonathan: from new york city, i'm jonathan ferro. bloomberg "real yield" starts right now. ♪ jonathan: coming up, fresh trade tensions providing even more fuel for the global bond market rally. 10-year treasury yields breaking down to a new lows for the year. bund yields printing a new record. the uncertainty leaving high-yield credit a little exposed. spreads widen, funds suffer. another week of outflows. but 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. >> the flight to risk-free assets, a flight into bonds. >> the perfect storm in the treasury market. >> people are very nervous. >> people are coming around to the various factors and uncertainties. >> the combination of the safe haven demand for treasuries, plus the idea that growth is slowing. >> declining global growth. >> lackluster growth. >> trade tensions. >> rhetoric with china is not only back but escalating. >> new tariffs on mexico. >> mexico. >> new tariffs on mexico. >> the mexico escalation. >> this is a real problem. >> this is what the market is trying to do, recalibrating how

much risk we should price in. jonathan: joining us now are our guests, lale topcuoglu, krishna memani, and michael schumacher. great to see you guys. your thoughts on the big move we have seen in yields this week? lale: it is interesting, we went from goldilocks to goldilocks, to goldilocks found the bear. i think it is a little overdone, the economy is slowing but still seems to be doing well. i think it's overdone. jonathan: i know everyone around this table thinks it is overdone. michael, you definitely do. michael: i do. it is overdone. the only way we can get above 2% is if the fed steps up and says, hey, we are concerned, we are thinking about cutting. we are not balanced anymore. we see no sign this week of this happening. so we are skeptical.

jonathan: krishna? krishna: it is not just about the fed 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 vet yields can go lower,-- if you look at nominal yields, they are low. it can go lower. if we compare treasuries to bunds, we have a positive real yield still in the u.s. we have a break lower in the last week, an aggressive break lower over the last week, but still positive. spoken to multiple people over the last week that thinks that white line can go to zero. your thoughts? >> doubtful. i think there has been a

tremendous amount of skepticism about inflation over the last few weeks, months. if you look at 10-year breakevens now 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? you will probably see breaks take up. we are skeptical about the real yield argument. krishna: i wouldn't say tariffs get us to an inflationary level. on a short-term basis, yes. but from a longer-term perspective, that is really all about slowing growth. slowing growth leads to disinflation rather than inflation. i think that is the critical point. the difference between real yield in the u.s. and europe, i think, to some extent is warranted. because our real growth is

meaningfully higher than what the real growth is in europe. so the likelihood that it gets to zero, somehow i cannot square that circle. >> i will echo what everyone else said but take it from the bottom-up perspective. when you look at what companies are reporting, we are not seeing a lot of inflationary pressure. i think, conceptually, it's feasible. my gut feeling probably agrees with the panelists to say it is not going to happen. jonathan: in the global bond market, the story right now is the hunt for duration and a hunt for some kind of hedge. right now, where else do you go apart from treasuries? isn't that the argument of why you could see convergence there? we had a positive real yield. when jtps and bunds are negative? krishna: to some extent, it is flight to safety. to a larger 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 laughed me out of town. that is where we are. jonathan: and if i told you 12

months ago that we would be pricing in three rate cuts over the next 12 months. krishna: i would push you out of town. [laughter] jonathan: richard clarida weighing in. this is what he had to say. take a listen. >> we are attuned to potential risks in the outlook. and 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 comments were the window opening very slowly toward the idea of a rate cut. your thoughts on that? to me, that is a very incremental move, if that is the story. lale: i am in the same boat with you. i agree. he also emphasized data. the data does not suggest that. so unless they will fold to the winds of what is happening in the equity markets, -- we are just down 5%. let's take this into perspective. just 5%. jonathan: jpmorgan out today. the analyst looking for a rate cut in september and another 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 communication. we have seen this kind of spread before. what i'm trying to get my head around is what the catalyst is for reconciliation in the next several months, is a better data or does the fed drag us there? krishna: it is better data. what we will see is that the economy is not slowing down to the level it needs 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 the analyst's call is, then that is 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: we have more weak data out of china. pmi back in contraction territory. there is so much hope through 2019 in risk assets with the second-half recovery. there is some real doubts around the second-half recovery. rightly so?

michael: probably not. i think the second-half recovery could be there. you think about it globally, the pboc, frankly, has more latitude to become more accommodative. they can cushion the blow. the data might be sketchy but it has got the firepower to do it. lale: i think in simplistic terms, the economy is slowing. that just means lower valuations, wider spreads. it does not mean recession, put your money under the mattress. and look, round the tape, a month ago, everybody out here were saying goldilocks, goldilocks, goldilocks. this flip-flopping is a little ridiculous. jonathan: is it a breakout into a new regime, or return to the same old story? lale: i think it is the same story. yes, the tariff story is -- there is incrementally new information, but let us see what happens. 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 in the united states. it was just enough to shake the confidence that the u.s. economy will be resilient to global weakness. next week, what are you looking for? krishna: weaker numbers. second quarter, if you look at any data point, 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. there is lots of stimulus from the tax cuts and spending package that will come through in 2019. the economy entered 2019 with enough momentum, as we saw in the first quarter numbers. that momentum carries us through the weak data in the second quarter of this year, and things get better in the second half. jonathan: where is that stimulus coming from? most people assume it fades. krishna: 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: let me put you all on the spot. you all seem to take the view that this market has right now, in terms of aggregate pricing. where do you fall on the curve? the front end, the five-year, or the 10-year? what would you be looking at? michael: front end. the futures pricing crazy. jonathan: great to have you all with us. next up, the auction block. this is bloomberg "real yield." ♪

♪ 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 publicly yen-denominated bond is redefining the phrase high-yield by being sold below a 1% yield. [laughter] in the united states, the treasury is struggling to get off of its seven-year debt auction. the notes received the weakest demand in three years, and were sold with a 1.9 basis point tail. finally, cracks forming in the u.s. corporate market. the industrial company flex that holds a triple b minus rating paid a 35-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. the pimco chief investment officer of u.s. core strategy

ringing the alarm. >> we have probably the riskiest 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: my guests are still with us. krishna, your view on that call? krishna: if he is talking about potential liquidity issues in the market, or whether the credit markets will underperform, 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 to five years. if that's the case, the credit

market may be risky. but the likelihood the risk will manifest it self in prices probably doesn't happen. jonathan: after spending some time with him, i think the view is that three to five years of mild recession. but the view is that perhaps this point that we are approaching the mid-2000's, this is where things start to build. is there any push back to that view from your side of things? krishna: 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%. so 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? i think relative to the incremental income you get, relative to what you get in treasuries, that risk is worth taking. jonathan: let's talk about that, lale, that relationship between

treasury yields and high yield notes. citigroup said that if yields fall below 2%, high-yield spreads have always been materially wider, typically north of 500 basis points 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. we have seen this level many times. should there be a natural relationship between where the two year yield is and where high yield spreads should be? lale: it is focusing on the 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 risks and tariff issues. we are going into the election cycle, and the treasury keeps issuing on the front end. all of these different factors that are changing the dynamics. so just taking one data point and extrapolating is not right.

is high-yield cheap? no. i don't think you buy high-yield until it cross-ice another 50-75 basis points from here. to krishna's point, look, we have an aging demographic. the need for income is immense. as a result, you can't tell people that they just have to put their money under the mattress. you cannot tell people that they 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. michael: if you have a reasonably good economy, you don't have a lot of default. why should spreads blowout? carry is probably ok. krishna: the relationship between treasury levels and yield levels, there doesn't have to be a relationship. however, i think people who are looking for income look at 2%. they kind of live off of 2%. if they can get 3.5%, that is a a whole hell of a lot better. there is an implied relationship

from an investor preference, even if from breakeven terms, that doesn't need to be there. jonathan: what i find fascinating is the investor bias and how they are shaped by what is happening in the treasury market. we referenced the seven-year auction earlier this week. throughout the whole year, we we have had a talk of war about risk assets that lower rates were a buffer from troubles. it is clear that the second view has won out over the last couple of weeks. what was fascinating is watching a really soft seven-year auction and then all of a sudden, risk assets turned. the idea that we are taking our cues off where yields go. and intraday move on treasury yields seems to be shaping risk appetite on a daily basis. does that make sense? lale: i think people are trying to extrapolate too many things out of little data points. i think people have been nervous. it has been an odd rally. everybody was bearish coming in

january. people were sounding the alarm and we had a phenomenal run in equities and credit. now this is their 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. krishna: most equity investors don't even know that a seven-year bond exists. [laughter] christian having said that -- jonathan: that is some real shade. [laughter] krishna fish i am allowed to do that. they make fun of bond geeks all the time, so that is ok. the point 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. and if they see something move there, they will pay attention to it. jonathan: michael schumacher, are bond markets in the driver seat, should it be? michael: i'm not sure that it is, frankly. it strikes us, if you look at the moves over the last month, it is probably bonds reacting to stocks, not the other way. jonathan: krishna memani, lale topcuoglu, michael schumacher. 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 effect saturday. with an increase of tariffs of around $60 billion of u.s. imports. tuesday, rate decisions from australia, and fed speak from chairman powell, kaplan. friday, a payroll report in the u.s. to discuss, my guests.

lale, what are you looking for through next week? lale: peace and quiet? [laughter] lale: probably more of the same. the fed will echo what clarida said last week, ecb will try to calm. europe has been under a lot of pressure. look at european financial stocks. italy is at the epicenter. i think more of the same. our goal will be not to react with a knee-jerk reaction. jonathan: listening to the fed communication so far, krishna, even the chief dove comes on bloomberg, no signal that he wants to cut rates at all. there is a question from a bloomberg terminal subscriber that essentially asks, do you think the federal reserve's hand

could be forced by the president's tariffs tactics? do you think it could be? krishna: i think it could be. if the markets 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 would be the data in the second quarter will come in relatively weak as a payback for the first quarter. however, if the data is not weak enough, they will probably react positively, that is rates rising rather than rallying on the back of that weak data. michael: if you take a three to six-month view, perhaps, but it is way too soon. jonathan: not seeing it in credit yet. you have made this point and i invite you to talk about it. yields, spreads in december were north of 5%, pushing 5.50%. we are north of 500 basis point

now. the primary market totally seized up in december. yes, there may have been a little bit of pushback this week, but it is still functioning. there is a key difference between now and then. lale: it is. it was the year-end liquidity that totally made things worse. the primary market is functioning, and we're even team aggressive companies best we are seeing aggressive companies pricing yields at the very low yield. it is not like there is a risk off environment in any shape or form. we are 60 basis points wider in the market today, 100 basis points, still tighter year to date. it is fine. no need to ring alarm bells. i will say, yield spreads are back up another 50, 75 basis points. assuming nothing else changes in the world, we would buy more credit. that is where our head is. jonathan: is that your base case, what you are expecting to happen? lale: if this craziness goes on and suddenly everyone is calling for recession, it is totally feasible that we may back up another 50 bits.

jonathan: is that what you are looking for, getting to 4.50 over? krishna: i don't think so. i think we stabilize at these levels. the difference between december and today is material. i think that in december, what the risk was that the fed gets asked to a recession, and that got priced out. no amount of tariffs can price that back in in a hurry. i think that is a big difference. jonathan: krishna, 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 error. now, there is a view forming that if you don't cut sometime soon, that is a policy error. krishna: not just yet. the economy needs to slow down meaningfully and more so in the second half of the year as opposed to second quarter. and if the fed does not react to that, then we would have a

policy error. jonathan: let's get to the rapid fire round, shall we? three quick questions and three quick answers. first question, let's talk about mexican tariffs that may not happen. will the president follow-through on fresh tariffs on mexico, yes or no? lale: yes. michael: no. krishna: no. jonathan: can u.s. 10-year real yields hit zero before the end of the year? lale: no. michael: no. krishna: i sure as hell hope not. jonathan: high-yield spreads, just north of 400 basis points, which one will we see first, 3.50 or 4.50? lale: 4.50. michael: 3.50. krishna: 4.50. jonathan: guys, really interesting stuff. lale topcuoglu, krishna memani, and michael schumacher. thank you for the conversation. that does it for us. we will see you next friday at 1:00 p.m. new york time; 6:00 p.m. in london. from new york, for our audience worldwide, this was bloomberg "real yield." this is bloomberg tv. ♪

scarlet: i'm scarlet fu. this is "etf iq," where we focus on the access, risks, and rewards offered from exchange traded funds. ♪ scarlet: searching for protection. gold may be the safest of havens in these volatile markets, but it is not getting the love that bonds are. the boston fed jumps into the debate from active to passive with a report to risks to financial stability. we speak with one of the lead authors. and, milking it. cash is king when it comes to