jonathan: i'm jonathan ferro. "bloomberg real yield" starts right now. ♪ jonathan: one final read of the u.s. economy ahead of next week's fed decision. economic data and china's disappointing. noble markets are looking for more stimulus as trade tensions bide. we begin with the big issue. the fed decision is up next. >> the market is expecting a rate cut. >> it's likely the fed will cut rates shown -- soon.

>> weak economic data. >> the job state was disappointing. >> pmi came out and of was not great -- and it was not great. >> the u.s. economy is showing signs of fatigue. >> an economic slowdown. >> trailing data is ok. >> growth in the states is strong. >> you have other indicators of people being nervous about trade. your very late cycle. -- you are very late cycle. >> i think we are close to the end and people have recognized. jonathan: joining me now is a eepresentation -- representativ -- the trailing data is ok. what is the outlook -- what does the outlook look like from your perspective? ok,he trailing data is

possibly more than ok depending on what you focus on. the market in general focuses on the negative. loves -- loves to focus on the negative. we have had some of the best mortgage application numbers recently. every time we get a slightly weaker avp number, at a time when we get a 50 year low in terms of unemployment, et cetera, the fact that there is a sentiment out there that persists around the fed cutting mees, it is standing to considering six months ago the market was as convinced the fed was on track to cut four times over the next 12 months. jonathan: to hike. oksana: you are correct. and now we have reversed this in the market is expecting three cuts on, essentially, similar data. something is not right here. i don't think powell will bow to the action and equity markets. jonathan: you're not the only one who thinks that. capital economics wrote, "we

continue to expect a sharper slowdown of economic growth in the coming months will convince rates, to cut interest but the retail sales data reinforces the idea that officials are likely to wait until the fomc meeting before pulling the trigger." george, thoughts? >> i think that is probably right that they will wait until september. the economy is not nearly as robust as it was last year this time, but not nearly as dire either. you are getting a lot of the gdp numbers and inflationary numbers , and they are strong overall. the fed will cut because the market is pushing them to cuts. they will have to succumb around september time. jonathan: let's talk about the treasury market. colin, you said tenure treasury yields were going at 2%, pretty much a 2%. what now? colin: i think you have a good market with perspectives because we are headed lower. i think the fed will put -- be put in a position that they do

have to lower rates by july. i would hope they would do it earlier, but in our conversations, over the months and years, we didn't feel the four hikes last year were warranted, so they went too far, and now they have to pull them back. sooner as opposed to later would be better, but i would forecast the 10 year treasuries be at 1.75 before the end of the summer. oksana: this is the challenge investors are facing. ,ven in the best case scenario which is lets hope the feds cut here, the agis already above it yield and every sector has locked in its yield. fed is mind as well, the aware of the fact that their actions are going to have on the economy. who's going to be incentivized to do at 2.25 that they aren't

doing a 2.5%? george, if you look at expectations for easing, worldwide in central banks across the federal reserve, bank, the whole lot, investors markets price for all of it. at the same time, we are also pricing for the policy effort to work. if you look at the five-year five year end essay europe, at the moment, look at inflation and growth expectations. we might be pricing in easing, but are we pricing in this stuff working? >> i don't know if we are. inflationary expectations are at lows. ofakevens are at 170 type level. overseas, it is even worse. 114 in the europe area. i think the challenges what does the fed do at this point? as challenging as it is domestically, it is more challenging overseas. this is a global phenomenon. you see this slowed him globally, and it does the fed

react? i think they have to in the u.s. and overseas as well. jonathan: the basic assumption is the fed cuts. the main question is, what are the rate cut 101 trades i need to put on right now for what the fed cuts? the problem is that all of this is determined by so many different variables, conditioned by so many different variables. how many cuts? is this a deep rate cut cycle? what about all of the other variables in the trade story? notut it together, there is much consistency in what trade you should put on and what performs. it comes down to the basic question with a complex answer, what is the outlook for growth? does it change? does it improve? do you have an answer for that? colin: i think it marginally improves, but with our forecast in my forecast, it will stay contained and muted. i'm talking about a situation where we have low inflation, or virtually no inflation, stocks this ist zero, and

not just domestically, but globally. interest rates will be lower for longer, gdp growth will be lower for longer, and rates will be lowered for longer. what the market is missing is how many eases will happen in the course of this. as george mentioned, the fed has lost control. they are beholden to the market. if investors say you what is in july, they will ease in july -- you will ease in july, they will ease in july. oksana: if the fed does ease in july, we agree that will not have tremendous impacts on price action, because it is priced in. what is priced in his three more hikes. it considers an area which the fed goes through with three more hikes. what does that mean? we are sitting at a.m. playing -- sitting at an inflection point. if we get the hikes, which would be a great thing for fixed income, you will have a repricing of risk affecting areas like high yield, which are

trading rich loans. if you don't get hikes, you will have to see the market move up to what the fed is currently communicating, which is, we are not doing much of anything. you will have a repricing on interest rates. this is the time to be defensive. this is the time when defense wins championships. john, i don't think this is the time to be aggressive with any sort of positioning. that: i agree with sentiment. we are favoring duration risk. we don't like credit risk at this point. the fundamental has been weakening. you have to take type of risk -- some type of risk. you also have to go into the sectors and down into structures and do it on the individual basis. it is more detailed than the broader risk. jonathan: we will explore that later in the program. a basic exercise to how people get their heads around this bond

market is price and the question i explored earlier today, which is where will rates be in five years? take the ecb, federal reserve for instance. ecb, it's not higher than zero over the next five years. you have to ask yourself, will the polic rates be higher than it is now in five years time with the fed? george: lower. jonathan: most people would say lower. what does that mean? colin: it means it could be more attractive than some might think. in defense of george, looking at duration, i don't have a problem with that whatsoever. not only will rates go lower, as we mentioned the fed moves and that there would be more moves than currently priced in the market. i think you would have movement within the five-year timeframe. and 3/8 sounds like a decent tendency. i would also say we would have a

point where we would go below 1% before it came back to somewhere like 1.5. one of the thing i would like to point out with respect to where we are with why the fed might need to really look at the markets and think about what they will do is this three month tenure inversion. they should be worried about it. they should be seriously worried. if they can adjust and help that inversion come closure or be non-and voters serve -- come ,loser and be non-inverse that would be a good thing. jonathan: colin robinson will stick with us and george and oksana. coming up, oil prices are doing little to derail the junk bonds coming to fresh record highs. that's coming up next. this is "bloomberg real yield" . ♪

jonathan: i'm jonathan ferro and this is "bloomberg real yield." i would like to begin over in europe where governments are paying more to erase funds and several debt markets. tenure bond is yielding a record low, -0.2. warren buffett's berkshire hathaway is telling the biggest sterling bond in almost two years. they 1.7 5 billion pound deal drew 5.3 billion pounds of offers. the offering is coming in four parts with the longest portion a thirty-year security yielding 1.82 percentage points above treasury. back with me is oksana, george, and colin. let's talk about it. where should you be taking

risks? colin was taking about taking duration risk. duration risk versus credit risk right now. oksana? oksana: neither, but taking duration risk is astounding to me, considering three-month a 60 basis points above the five-year treasury. why take duration riskier? not to mention, if you think whyss the bond -- pond, would you pay the government over there for their debt? you are an investor in germany and can't earn returned by lending money to the government. in terms of which risk to take it, when i talk about defensiveness, that does not mean taking on duration, which is what it used to mean in prior cycles. it means high-quality floating-rate orientation in our portfolios. investment rate floaters, opportunities in the mortgage credit rates, opportunities tied to the consumer. the consumer is doing well as the recent retail number supports consumers. be bottom line is,

constructive on the economy, or we are economy on -- are constructive on the economy. prices don't allow for much appear she asian -- appreciation. jonathan: the bank of america wrote that the market was misreading cuts. something has to give here. risks need to mark down or rates need to go higher. which is it? oksana: rates should be higher. what are rates? the rate of inflation plus growth. currently, if you add those two, you get 40%. we sold you have inflation and we still do have growth. our rates don't reflect it because they are entirely, artificially suppressed. central banks here and across the bond. george: i agree that they are. i don't think it changes soon.

when you look globally at rates, right now, our tenure looks attractive at -24 and they give 25 basis point overseas. if you have that mechanism -- -25 basis point overseas. if you have that mechanism, and that capital coming over here to get lower rates, where is that coming from? i think, for the short-term, play the duration game. the credit side is more concerning. oksana: that is likely the real reason for the inversion we are seeing, the demand from overseas. how do you square that with liking high-yield? it is not really an indicator -- if you do believe it is an indicator of slowing down, how do you square that with risk if you think the inverted curve is hardening? jonathan: you like high-yield. walk us through it. colin: this is all premised on the fact that growth stays low but doesn't go below zero. inflation stays very low and is stuck at the low level, and then interest rates are going to move

down. when i consider high-yield, and i get it, 8.9% year returns, i gets where she would come from. that is quite a returned you have had in this period of time. i would look back and think about last december and the start of the year, nobody would have forecasted we would have had a 9% your return -- year-to-date return. if you go with where rates would be on my thought process, the fed will have to move more than the market thinks and investors think. also, i don't dislike credit, of course, but we could, basically, clip that the coupon. there is a search for yield globally. if i'm going to click the coupon and high-yield -- in high-yield for the rest of the year, i like it. jonathan: that argument is an argument made on this program many times, especially the last couple of months. you can pull down the volatility within your boat folio by taking out equity and pushing and portfolio by your

taking out equality -- equity and pushing in high-yield. is that the argument you are essentially making today? colin: that is one of the arguments we always make. if you look at

point. right now, what are the fundamentals telling us? fundamentals have been weakening. you are looking at high-yield and see leverage creeping up, see coverage ratios weekend, margins weakening. the question is, does the market care? people are grabbing yield. they are grabbing yield no matter what the fundamentals are underlying. the market does not care. when does that catch up? in the next six to 12 months. along the way, you can clip coupons. it is an ok trade, but with the risk associated with it, it is pretty high. jonathan: george is sticking with us as well as oksana and collin. i want to give you a market check. treasury yields are as follows. we creep lower on the two-year by a single basis point at 24. rather unchanged going into an fomc decision. still ahead as the final spread. the week ahead featuring the fed decision and a news conference with chair powell. that is next in this is "bloomberg real yield." ♪

jonathan: i'm jonathan ferro. this is "bloomberg real yield" and over the next week, what a week ahead we got. mary of draghi speaks on monday from preacher goal -- from portugal. speaks on monday from portugal. friday, pmi data from the eurozone and from the united states as well. with me around the table is oksana, george, and collin still with us. a viewer question comes in and i want to ask, we have spent so many weeks exploring what you should and should not do when the fed starts to cut interest rates. what if they don't? what if they don't signal one next week? what happens in this market? oksana: markets react. they start to move up to what the fed is communicating all along.

-- has been communicating all along. the cuts have been priced in. to expect really dramatic price action on the back of a cut i think is overly optimistic. what we should expect is, in terms of a price reaction, if the fed does nothing, they want to continue to appear independent, but that is a different story. thethan: we will start with federal reserve. looking ahead to next week, the first question, does the fed drop the rotation from the statement going into next week? does the fed drop the word patient? george: yes. oksana: no. colin: absolutely. jonathan: five-year some now, will the fed -- five years from now, will the fed policy rate be higher or lower than now? oksana: higher. george: lower. colin: lower. jonathan: the third and final question. on credit, and i've asked this

seen the credit tides of this cycle, yes or no? no.n: a search for yield. oksana: we have not. that is why you have to sell, because it is easy to sell right now. george: i agree with that. you need to sell right now. colin,n: oksana, george, great to catch up with you. that's it from us from new york. see you next week. this was "bloomberg real yield." this is bloomberg tv. ♪

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