jonathan: from new york city, i'm jonathan ferro. yield" startsl right now. coming up, payrolls friday delivering a big downside surprise, feeding growth anxiety . uncertainty lingering over the administration's next great cash trade move. pressure building on the federal reserve to cut rates. the treasury market rally continues. some constructive advice after a big downside surprise. >> over to one number can be dangerous. >> you are not supposed to panic

over one number. >> i certainly don't think the trend is as weak as 75,000. >> it is not clear that they have to ease. >> they will look for data. >> stop focusing on the fed, look at other policy instruments. >> still not week on payrolls. >> it is hard to take the economy over if it is just a slowdown in manufacturing. end of the day, the u.s. can still avoid a really bad economic outcome, but it has to stop making policy mistakes. jonathan: joining me in new york guests.ss is our can the fed up or to be patient with this? >> right now they can. when we think about that policy, it's useful to think about is the reaction function changing?

a lot of people think it has. the fed is saying, if need be, we will take appropriate action. i'm not sure the economic outlook or is a fed ease. but payrolls was weaker, you look at ism manufacturing, nonmanufacturing, retail was ok. at 2%, thatgrowing is still above potential. there is a lot of downside risk but there is a lot of uncertainty. what if the mexican tariffs don't go into effect, the talk int and premier xi the g20? if the downside risks materialize, they may have to ease, but why are we jumping the gun? lisa: the case is building for a rate cut. they said this week they think the data is still holding up, that economic growth is maintaining momentum although slowing, and they will watch it.

it feels binary to me. if trade policy works itself out, if there is some positive tweet, we could see a better outcome, and the fed does not need to hike. their preference is a prolonged cause. jonathan: it's become very bullish, the bond market. once the fed begins easing, the market will not stop there. it should account for a scenario of more aggressive preemptive steps which looks set to take u.s. yields to record lows. from commerce bank for rate cuts, bank of america, natwest, barclays. 50 basis points in july, michael. do you see that happening? michael: no, but i see a july cut. the fed can be patient, until a few weeks from now. after the g20 meeting, if there is no cover my eyes, this is all

about trade. what we are forgetting is today's number was the third keys of lousy news we have had in a week. first of all, the tariffs on mexico. mohammed got it right this morning. this is about weaponizing trade for other means. the second bit of lousy news was global manufacturing. pmi dropped below 50. that is recession, confirms what we are seeing in the yield curve. the fed has called out specifically trade. they are watching this. if they don't see improvement, they will ease, and they should. priya: a couple of unsustainable things. the 10 year at 2.1 is extremely unsustainable. if the fed is easing, it could go to 1.25, 1.50. i don't know why they have this confidence they can stop at 25, 50, or 75 basis points. i would argue if the economy is go intohe tariffs don't

effect, then the 10-year can go to 2.50. you could argue it is the template of the mid-90's. on a hiking cycle, they cut three times, and then resumed. they alluded to in this week. perhaps this is not the end of the cycle where you need to get 250 basis points of rate cuts back to zero. bob: let's not confuse the fed with yields going over. there is a tremendous amount of cash on the sidelines. since the last time we spoke, it has actually built up. if you look at the amount of money in money market funds, 3.1 trillion. the highest since the financial crisis. this is crazy. just this morning, before the employment data, i had to price three potential new mandates, two coming from overseas, one domestically, all caps, billions of dollars. god knows what they are thinking

now when you look at 75,000, and you have the fed ready to ease. suddenly leaving money in cash looks asinine. priya: if you have credit spreads appetite levels and investors are worried about recession, they should not be in credit. i would argue risk assets and the 10-year at 2.1 is also effectively unsustainable. jonathan: if i told you all with the payroll print would be ahead of time this friday morning, would you have put on the trade that would have resulted in equities up, credit spreads tighter, and a massive rally into the bond market? i spoke to so many people this week who thought that bad news would mean bad news, and it has not. what is the message from that? bob: that the recovery is stalling. we think this is all about trade . the number we have seen is what has confirmed the anecdotal evidence that we are hearing from the companies we invest in.

they don't know how to invest, if they are supposed to onshore manufacturing or leave it offshore, and they have stopped. nt-end loaded their inventory, and everyone is waiting to see what happens with trade. for us the biggest change is the tone of trade. the start of the year it seemed that both sides -- let's stay with u.s. and china for the time being -- benefited from compromise. it now feels like both sides feel like they better from escalating. jonathan: you are starting to feel more bearish from a month ago. something has changed with you. am i touching on something? a month ago, you are bullish the whole fixed income complex. that has changed. bob: it's true. even more bullish the investment grade part of the complex. i see money billowing in nonstop.

nothing to stop them, particularly if the fed cuts. as you start to drift below investment grade, you have to start thinking about what does recession mean, what kind of recession are you in, and how will different sectors behave. priya: is the market trying to bully the fed here? if we don't get these eases, we are going to correct significantly. our credit spreads trying to bully the fed? could have a big tightening in financial conditions, which would force them to ease. maybe you are looking ahead. invite this ony themselves, if you look at how they responded to the 20% equity drop in december? you listen to powell, clarida, they talk about financial condition indicators. these are all about falling markets. it is part of the reaction function. jonathan: not just chairman powell, the ecb is in the mix.

president draghi says he does , atsee a recession coming the same time, admitting the possibility of a rate cut. lisa, there's been a wrestler rally in btp's to end the week. 15 basis points on the two-year. that is today on the session, not the last week. are we seeing that massive clamoring for yield again and this belief we can have a soft landing, worldwide, not just the u.s.? lisa: nobody knows what to do with regard to global growth. ton of money piling into not just money markets, but bonds in general. $12 trillion of negative yielding debt. at the end of the day, there is money coming to the highest yielding investment grade market in the world, u.s. treasuries. the other part of it is, it is a place to hide out while uncertainty prevails. global central banks in some

ways, they are talking devilishly. most central banks are out of ammunition. ley.hey are talking dovish jonathan: the three year has been inverted many days now, nonstop. at the same time, a little bit of steepest between 2's and 10' s. what is going on with the yield curve? priya: when you only have insurance cuts, it is not that much further cuts that need to be priced in. if the data is starting to weaken and central banks are out of any nation -- i'm shocked that people think only 100 basis points of cuts. this is not an interest rate problem. i think the two-year has a lot to go. if the market starts easing, they will say, the ecb said they are out of ammunition. it this ise fed do essentially a trade war-induced

problem? jonathan: coming up, the auction block. junk-bond surrounding for a third day despite recording the biggest outflows since december. that conversation is coming up next. this is bloomberg "real yield." ♪

jonathan: i'm jonathan ferro. this is bloomberg "real yield." we begin in europe, where sales for the year have surpassed 700 billion euros, reaching that level a month sooner than in 2018. fueling a busier than expected week. in the u.s., hca tapping the high-grade market. the debt coming with a revoked order reaching $22 billion.

in high-yield, grubhub roasting the sale of its offering. 2027 bonds pricing at the low end of talks, 5.5%. the primary market still functioning pretty well. dallas fed president robert kaplan saying that he is taking his cues from the credit market now. priya misra, lisa hornsby, bob michele are with us. your view on that? this is not december. priya: the extent of credit spread widening, the equity move, this was fed making a policy mistake. we had heard they would let the balance sheet run on autopilot, go above neutral. i think the fed has taken that risk out of the market, so credit spreads have reacted right. what has been happening is fascinating. the credit market is saying the nowneeds to cut four times

priced in over the next year. either the treasury market is mispriced, or there is this enormous amount of confidence in the fed, that they can extend the cycle, when i would argue this is not an interest rate problem. i think this is a trade war global growth issue. i'm not sure that three or four cuts will do it. credit spreads need to be wider. jonathan: it begs the question of what rate cuts will do, if spreads are around 400 basis points and the primary market is still functioning, the availability and cost of credit. is it a problem? it may well be, but it is not now. lisa: what forced their hand in december was an equity market drawdown from peak to trough of 20%. that is not what we are seeing today. it is really the rates market driving the bus. personally, i'm a bit defensive on credit. high-yield looks attractive if we are not in a recessionary basis points50

over, but if we are, you could see them go to 800, 900, over. jonathan: that would be a big move relative to where we have been the last several years, going back to december 2016, late 2015 levels. bob, i wonder if you are in lisa's camp. saying i amstart by still bullish year. supply is low. -- i am still bullish here. you see it in the employment number. they are using that lever as well to scale back on their headcount. all of these things to extend profitability. the that has a lot of things it can throw at the market. it is not just simply cutting rates. they can work with the balance sheet.

lisa is right, you start to worry about credit when recession is right around the corner. if these trade wars escalated into an all out war, you have to bring forth the possibility of recession and price that into high-yield. i would like not on the next 50 basis point rally, to cut off the question that you will ask. jonathan: the next move, tighter or wider? lisa: so much comes down to the next two weeks. .20 i'm not as bearish on economic growth as perhaps you are, bob. 75k is not a great number on jobs, but this economy needs 90,000 to keep up with a number of new entrants into the economy. it is a weaker number but not disastrous. things are still ok but slowing. priya: when i think about credit spreads, there is the liquidity risk premium, and the default risk premium. default risk premium is extremely low because people don't think we are heading into

recession. i am still concerned about the liquidity risk premium. it was tested in the fourth quarter in credit. should investors in credit have some liquid assets? treasury bills, money market funds, to provide that liquidity. jonathan: this week, we were looking at what was being offered in high-yield, the bond market, noticing liquidity was starting to dry up. functioning things through the week in high-yield, credit, any difference? feels ok now. when you look at the cash market versus the derivatives market, that is the big difference. the crossover buyers, the levered in esters, hedge funds, if they want to shift the dishes quickly, they can go into the derivatives market and do something there. right now there is still good liquidity, a lot of money pouring in from overseas that buys income. it may just put it into an

income fund, which will have some allocation to high-yield. until default expectations go up because recession is around the corner, credit should do ok. jonathan: do you think recession is around the corner? bob: i worried if there is no copper mine is no copper mise on trade, companies will have to pull back, reorients -- jonathan: why are you waiting for the next 50 basis points of tightening to lighten up? bob: because we may will get a compromise. this just may be game theory on both sides. you have to wait and see what happens. i don't know that i would go all in on credit here, but you have to keep an eye on the door. priya: i think we go from tariff man to dealmaker. have we seen the peak of tariff man and moved to dealmaker? the next month is critical. i don't understand why the fed needs to preempt that and get bullied by the market. i think they can rate it out.

if we come to a deal, even if tariffs are not on the table and don't go up, you are extremely defensive and giving up a lot in carry. bob: president trump loves tariffs. people close to them have confirmed that. jonathan: let's get a market check. the front end continues, yields lower eight basis voice. 1.84 on the two-year. still ahead, the final spread, the week ahead featuring g20 finance ministers and the governor's meeting in japan. bloomberg's "real yield." ♪

jonathan: i'm jonathan ferro. this is bloomberg "real yield."

next week,ver the g20 finance ministers and central bank governors meeting in japan. monday, the u.s. plane to impose 5% tariffs on all mexican goods. ppia's trade balance, u.s. tuesday, cpi on wednesday. thursday, finance ministers seeking a deal on the eurozone budget. opec publishing is demand outlook. friday, a day on china, u.s. production data, too. still with me are priya misra, lisa hornsby, bob michele. if we make a deal with mexico, they could begin purchasing farm and agricultural products at very high levels starting immediately. if we are not, mexico will begin paying tariffs at the 5% level on monday. your view on this situation right now? priya: he is giving a out to mexico. it was sort of a non-issue that

the president has used tariffs on. he is giving them an out. mexico reacted pretty significantly. they don't want it to happen. it will hurt businesses on both sides of the border. i think the weekend is extremely important. the entiren twitter weekend, not because i love it, but to see what the president is tweeting about. maybe we don't get that 5%. lisa: i think priya is right, it is an out. my worry is that it has irreparably harmed the business confidence. you have said we can put tariffs on any company at any time, even though there was the usmca drafted previously. i'm concerned that even if a deal is done, markets, cfos, will not know

because anything is possible. jonathan: it is that uncertainty that lingers. it does damage that could be quite permanent. we and the market would be relieved by some sort of compromise with mexico. how long does that last for you start worrying about, when will the focus be on german auto manufacturers? companies still have to figure out where they are going to source parts from. jonathan: let's get to the rapidfire round. three quick questions. go into effect on mexico on monday, yes or no? lisa: yes. priya: no. bob: no. jonathan: is the next 50 basis point spread move in high-yield wider or tighter from here? bob, you have already answered it. bob: tighter, under the weight of money looking for yield. priya: wider. lisa: wider. jonathan: u.s. 10-year yield

around 2% at the moment. what do we hit first, 2.50% or 1.50%? priya: 2.50%. bob: 1.50%. lisa: 2.50%. jonathan: appreciate your time, what a week we have had. that does it for us. see you friday, 1:00 new york time, 6:00 london. this was bloomberg's "real yield." this is bloomberg tv. ♪ the latest innovation from xfinity

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it's a now there's one store that connects your life like never before store. the xfinity store is here. and it's simple, easy, awesome. mark: i'm mark crumpton with bloomberg first word news. u.s. tariffs on goods from mexico are set to take effect

monday but president trump is still indicating he is willing to delay them. he tweeted "if we are able to make a deal with mexico, and there's a good chance we will, they will begin purchasing farm at -- agricultural products very high levels starting immediately. if we are unable to make a deal, mexico would begin paying tariffs at the 5% level on monday." negotiators are resuming their talks today. democrats are slamming william barr and commerce secretary wilbur ross you house oversight committee chairman elijah cummings says the two would rather be held in contempt of congress man turn documents to documents about efforts to add a citizenship question to the 2020 census. critics of the question say it inld decrease participation areas with large immigrant populations, which could reduce representational -- proportional reputation and access to federal dollars. a united nations official say