jonathan: from new york city, i'm jonathan ferro. bloomberg "real yield" starts right now. ♪ jonathan: coming up, payrolls friday delivering a big downside surprise, feeding growth anxiety. uncertainty lingering over the administration's next great cash -- next trade move. the president arrives back in washington. pressure building on the federal reserve to cut rates. the treasury market rally continues. we begin with a big issue, some constructive advice after a big downside surprise. >> overreacting to one number can be dangerous. >> you are not supposed to panic over one number. >> do not overreact to 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 weak on payrolls. >> it is hard to tip the economy over if it is just a slowdown in manufacturing. >> there is no major slowing. >> at the 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 to discuss is priya misra, lisa hornsby, and bob michele. can the fed afford 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. i don't think it really has

changed. the fed is saying, if need be, we will take appropriate action. i'm not sure the economic outlook right now warrants a fed ease. yes, payrolls was weaker, but you look at ism manufacturing, nonmanufacturing, retail was ok. the economy growing at 2%, that is still above potential. the economy is ok. 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 president and premier xi talk in the g20? the fed can't afford to be patient. 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 have to hike. i think their preference is a prolonged pause. jonathan: it's become very bullish, the bond market. looking for 125 year end on the 10 year. saying, 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. we have calls from commerzbank for rate cuts, bank of america, jpmorgan, natwest, barclays. barclays up 50 basis points in july, michael. do you see that happening? michael: no, but i see a july cut. i think the fed can be patient, until a few weeks from now. after the g20 meeting, if there is no compromise, this is all about trade. what we are forgetting is today's number was the third

piece 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 here. 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 ok, if the tariffs don't go into effect, then the 10-year can go to 2.50.

lisa: you could argue it is the template of the mid-90's. they were on a hiking cycle, they cut three times, and then resumed. they alluded to it this week. could say that 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. -- with yields going lower. 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, 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 still at tight 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: that is the difficult part of the session at the moment. if i told you all what 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. they front-end loaded their inventory, and everyone is hunkering down, waiting to see what happens with trade. for us the biggest change is the tone of trade. at 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 benefit from escalating. jonathan: you are starting to sound more bearish from a month ago. something has changed with you. am i touching on something? that is what it feels like. a month ago, you were bullish the whole fixed income complex. that has changed. bob: it's true. now even more bullish the investment grade part of the complex. i see money billowing in nonstop. there is nothing to stop it now, particularly if the fed cuts.

people will panic in cash. 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? is the equity market saying, if we don't get these eases, we are going to correct significantly. are credit spreads trying to bully the fed? i am worried that going into the june meeting, you could have a big tightening in financial conditions, which would force them to ease. maybe you are looking ahead. bob: didn't they invite this on 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. they are telling you it is part of the reaction function. jonathan: not just chairman powell, the ecb is in the mix. president draghi says he does not see a recession coming, at

the same time, admitting the possibility of a rate cut. lisa, there's been a rally in btp's to end the week. on 10,of 13 basis points 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. there is a ton of money piling into not just money markets, but bonds in general. you have $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. that is part of it. 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 dovishly.

but most central banks are out of ammunition. there's not much further the ecb can go. aboutan: i want to talk the yield curve. the three year has been inverted many days now, nonstop. at the same time, a little bit of steepness 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 ammunition -- i'm shocked that people think only 100 basis points of cuts. this is not an interest rate problem. if the fed starts cutting, i am not sure they can stop. i think the two-year has a lot to go. if they start easing, they will say, the ecb said they are out of ammunition. what can the fed do if this is essentially a trade war-induced problem? jonathan: coming up, the auction block.

junk bonds rallying 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." i want to head to the auction block. we begin in europe, where sales for the year have surpassed 700 billion euros, reaching that level a month sooner than in 2018. offerings fueling a busier than expected week. in the u.s., hca tapping the high-grade market. raising $5 billion. the debt coming with a revoked -- with a robust

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. they are sending the same signals as the treasury market. 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 the 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 treasury market is saying things are bad enough that the fed needs to cut four times, now 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. the fed has not overdone it. 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? i say yet because 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%. credit spreads were widening 50%. 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 scenario at 450 basis points over, but if we are, you could

see spreads go to 800, 900, over. jonathan: you are not alone and 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. you have been coming on this program a number of years and have said bullish high-yield. bob: let me start by saying i am still bullish here. i think supply is low. companies are doing the right thing, trying to deal ever -- delever. you see it in the employment number. they are using that delever as well to scale back on their headcount. all of these things to extend profitability. the fed has a lot of things it can throw at the market. it is not just simply cutting rates. they can expand the balance sheet. but lisa is right, you start to worry about credit when recession is right around the

corner. if these trade wars escalate into an all out war, you have to bring forth the possibility of recession and price that into high-yield. i would probably lighten up on the next 50 basis point rally, to cut off the question that you will ask. jonathan: i was going to ask, thank you. the next move, tighter or wider? lisa: so much comes down to the next two weeks. i think it is the g20. 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. given that i don't think we are heading into recession, that is

still out. 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: let's talk about that. this week, we were looking at what was being offered in the bond market in high-yield, noticing liquidity was starting to dry up. bob, how are things functioning through the week in high-yield, in credit. any difference? bob: it feels ok now. when you look at the cash market versus the derivatives market, that is the big difference. the big holders, the crossover buyers, the levered investers, hedge funds, if they want to shift positions quickly, they go into the derivatives market and do something there. the cash market will lag a bit. 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. for now, 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 worry if there is no compromise on trade, companies will have to pull back, reorient -- jonathan: why are you waiting for the next 50 basis points of tightening to lighten up? why not go now at 420 over? bob: because we may well 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 move to dealmaker? i completely here you. -- hear you. 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 remain on the table and don't go up, you are extremely defensive, you are giving up a lot in carry. bob: president trump loves tariffs. he has said that. people close to him have confirmed that. jonathan: let's get a market check on treasuries this week. the bit at the front end continues, yields lower eight basis points. 1.84 on the two-year. new lows for 2019 as well. still ahead, the final spread, the week ahead featuring g20 finance ministers and central bank governors meeting in japan. that is next. this is bloomberg's "real yield." ♪

♪ jonathan: i'm jonathan ferro. this is bloomberg "real yield." time for the final spread. coming up over the next week, g20 finance ministers and

central bank governors meeting in japan. monday, the u.s. plans to impose 5% tariffs on all mexican goods. plus, china's trade balance, u.s. ppi tuesday, cpi on wednesday. thursday, finance ministers seeking a deal on the eurozone budget. plus, opec publishing its demand outlook. on friday, a data dump from china, and u.s. production data, too. still with me are priya misra, lisa hornsby, bob michele. the president says if we are mexico,make a deal with they could begin purchasing farm and agricultural products at very high levels starting immediately. if we are unable to make a deal, mexico will begin paying tariffs at the 5% level on monday. your view on this situation right now? priya: he is giving an out to mexico. it was sort of a non-economic issue that the president has used tariffs on.

if they can put more border patrol agents, 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. you talk about the week ahead, i think the weekend is extremely important. i will be on twitter the entire 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. now you have said we can put tariffs on any country at any time, even though there was the usmca drafted previously. i'm concerned that even if a deal is done, markets, ceos, cfos, will not know because anything is possible. jonathan: that is the risk. you might get a squeeze in the market off the back of a tweet.

it is that uncertainty that lingers. it does damage that could be quite permanent. bob: we and the market would be relieved by some sort of compromise with mexico. how long does that last before 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. three quick answers if possible. the first question, do the tariffs 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: a bit of a spread around the table. appreciate your time. what a week we have had. that does it for us. see you next friday, 1:00 new york time, 6:00 london. this was bloomberg's "real yield." this is bloomberg tv. ♪

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manus: you're watching the best of best of "daybreak: middle east." i'm manus cranny. the major stories driving the headlines this week. the u.s. and mexico failed to agree on migrants and the southern border. president trump demands more progress to avert tariffs kicking in monday. jay powell signals he is open to rate cuts if necessary. larry summers is calling for a 50 basis point reduction. after fatal crashes in five months, boeing struggles to reassure airlines over its 737 max safety. the president of emirates said they will not play again until after christmas. >> i don't think it will happen before that. the global