jonathan: from new york city for our viewers worldwide, i'm jonathan ferro. bloomberg "real yield" starts right now. ♪ jonathan: coming up, confusion reigns following the final fed tweak before this month's rate decision. central bank officials emphasizing the need to get ahead of economic weakness with president draghi stepping up. looking ahead to the ecb next week. let's begin with the big issue.

as of july 1, the longest economic cycle in modern history. you have to pick up the camp, either we are headed toward near-term recession, or we are in a super cycle." gershon, which one? gershon: always hard to say in the short-term. some of those people calling for lower rates are those that called for a 3% 10 year a year ago. this is the only industry where you can be wrong again and again and people still want to know

your view. it is really fascinating. the reality is, what europe has taught us is there is no lower bound. in other words, if equities are weak, if the economy is weak, we can go a lot lower, even negative. on the other hand, i'm not sure we should believe this will be the equilibrium rate of inflation. and inflation will only be 1.5% over the next 10 years. rates probably should be higher in the longer run. jonathan: lisa? lisa: it depends on how you interpret bob michele's call. he said rates would go to zero over some period of time, which is probably true. jonathan: a multi-year period. lisa: over some period of time they will probably go to zero because in the next recession, they only have 250 basis points of cuts to do, so they will probably end up at zero. that is a fair assessment but i don't think it's happening in the next 12 months. jonathan: i want to view on something bob michele has also talked about. the amount of money in money market funds right now and the idea that when a rate cut comes, that money will need a new home and it will be treasuries. can you walk us through what you think of that particular call?

noelle: we think treasuries are largely priced. especially on the front end, we are calling for two cuts, and the market is calling for closer to four. we really like it a little bit more into the credit sectors. we think a lot of that money will go back into ig. valuations have come in a lot, obviously, but we think there is still room to go. and with modest growth at 2%, still above potential, inflation that is not going anywhere quickly, that will keep the fed supportive for some time. jonathan: let's work through this. the federal reserve cut interest rates. there is belief among some people that that money will go to a safer home, perhaps 10-year securities. maybe further along the curve in the treasury market. how do you frame that for our clients and viewers right now? gershon: if you believe we are going to zero, you don't want to invest anything on the risk side. you don't want to be in equities, high yields, you do not want to be in emerging

market debt. i don't know that is where people really are right now. again, we have gone so fast. we sat here nine months ago -- how many hikes are we pricing in? mohammed put out a piece earlier today about how the fed is just caving to what markets want, never going to be happy. i actually agree with that, i don't always agree with mohammed, but in this case i agree with him. the markets are not going to be happy. if they cut 50, i'm not even sure we rally. people will say we need to do another 50 in september. so i am not sure how to interpret this. jonathan: let's talk about the guidance that we have had throughout the week. john williams of the new york fed comes out and delivers a speech about living life in a lower bound. ahead of the blackout period for the federal reserve. the market runs up to the races, as you would expect it would. the vice chairman richard clarida follows up by pre-much saying, i agree with the speech from the new york fed president. and then the new york fed tries to walk it back and tells us it is purely academic. how on earth are we meant to interpret that as purely academic?

gershon: here is what is going on. this is unprecedented in my career over the past 20 years. it is not that we have this framework we are working with and we have slight disagreement on what the next move should be. we are working with different frameworks. there are people in the fed who don't believe the philips curve matters anymore, or at least that it shouldn't be on a global basis. there are people that think we should pay attention to the global economy and not just the global economy and not just the u.s. economy. one very interesting thing i think, i was always in the camp that if the economy is strong, the fed does not need to cut rates. look at where inflation expectations have gone, it means the real federal funds rate is around 75 basis points. that might argue that a little bit of a cut may be warranted if we are truly slowing. jonathan: lisa? i agree with gershon. the fed doesn't know what they are doing yet, and that is why we are hearing so many different comments. bullard said we should be cutting 25. the fed has not decided yet, so you are hearing the gamut. the important thing for me is that we have a fed that is going

to support market. they are more willing to yield -- more willing to ease on of lower growth and deflation rather than willing to hike, if we get stronger growth and inflation. whether they go 25, 50 in the next two weeks, probably less relevant than the fact that they are here to back it up. jonathan: they are making the argument much more so that they have limited ammunition, and therefore, they need to do more with less and go early and perhaps go harder. would that be your interpretation of what's about to happen at the federal reserve? noelle: not at all. we think going now with the 25 bps, although it is priced, at least coincides with the data on the growth and inflation side that has come out. 50 bps would get ahead of it. but again, markets are going to price in more and more and they are always going to be behind the market. it is just one of those things that you have to think about

what is priced in over the longer term. and we think it is a little bit too much at this point, given we see no signs of a recession in the near term. all of the macro indicators point to a slowing, slow growth, but with a supportive fed, that will stabilize and be a pretty positive environment going into year-end. jonathan: if you look at manufacturing worldwide, it looks like a recession. you look at services in europe and the united states, it looks fine. the worry is we bleed from one to the other. they are looking to insulate us from that. is that the prudent approach to all of this? gershon: that is what we should be focused on. lisa hit the nail on the head. smoke and mirrors here. 25 or 50 is not the issue. the issue is, are we doing this as an insurance cut, or do we truly believe that the economy is slowing and we are going back closer to zero? that is the key issue. jonathan: what is your base case? what do you think it is? because there is a real tension right now between what is priced and this idea of an insurance cut. an insurance cut is not 100 basis points of easing. can we both agree on that, that

is not what that is? what are you expecting to get? gershon: on the other hand, 25 basis points on the longer end, as we have talked about before, is a rounding error. a lot of lending happens on the longer end. so i am not sure. the totality of all the data does not seem like we are slowing that much. again, the idea that inflation expectations have come down tremendously, and it is pretty clear at this point the fed is targeting much more inflation than growth. jonathan: can we get higher inflation expectations and lower nominal yield? is that a dynamic that can emerge in the coming months? gershon: it has happened a gershon: it has happened a little bit in europe. on a very small scale.

lisa: i would agree and follow-up on one other point. look at the data that has come out recently. not even recently, but nonfarm payroll growth, 170,000 jobs per month. that is a 3-month, 6-month, and 12 month average. retail sales, consumption growth over 4%. the economy has slowed from the tax-induced fiscal stimulus, but it is not in a bad place. for me, these are insurance cuts. i think the fx is much more focused on inflation. jonathan: you mentioned the data has improved. the federal reserve is set to ease, and ten-year treasury yields cannot get away from 2%. what do you make of that? lisa: $13 trillion worth of negative yielding debt. you look at the high-yield market in europe, it is negative yielding. that is a joke in and of itself. i think there is a ton of money that is willing to be put to work and the u.s. is the highest yielding market in the world. jonathan: lisa hornby is sticking around with us, alongside gershon distenfeld, and noelle corum.

coming up, the auction block --no sign of a summer lull in the u.s. junk-bond market. we are set for our busiest july since 2014. that is next. this is bloomberg "real yield." ♪

♪ jonathan: i'm jonathan ferro. this is bloomberg "real yield." i want to go to the auction block and start in the u.s., where uncertainty surrounding the debt ceiling is weighing on market participants. the $35 billion auction of eight-week t-bills attracted the weakest demand since the treasury introduced the security back in october. sinclair dominated junk supply this week, as investors flocked to orders of $13 billion. this month is on track to be the busiest july for high-yield

insurance in five years. in europe, the corporate primary market has broken 900 billion of sales for the year, reaching a landmark. it took until mid-september in 2018, while the current rally has pushed even some junk bond into negative yielding territory. sticking with europe, jay pelosky looking ahead to new leadership at the ecb. jay: we are setting up particularly in europe for a transition from complete dependence on monetary policy to joint monetary and fiscal policy. i think the new leadership in europe is going to be on board with this. the big opportunity is setting up for this risk asset melt up outside of the u.s. particularly in europe. jonathan: still with us are lisa hornby, gershon distenfeld, and noelle corum. let's begin with you, noelle. this relentless rally in europe on the periphery and in credit. what is your exposure right now and how are you managing it? noelle: we like europe right now, not only is there value

still left in asset prices, but you could also make money on the hedge, when you hedge it back from the euro to the dollar. we like investment grade in europe, a little bit at the periphery. for now, we are staying away from italy, though. jonathan: look at the nominal yield that you pick up in italy. before the fx hedging. 50 basis points. fewer than 50 basis points on investment grade in europe. is that sustainable? gershon: the fed has not cut -- you cannot take out that bond you just tried to delete. so to the u.s. investor, it looks pretty good. lisa: i agree with noelle, the economy is weaker, but what causes problems is not just economic weakness, it is leverage. on average, european companies have less leverage on the balance sheets than the u.s. counterparts. jonathan: that is a really interesting point. lisa? lisa: i would agree with some of that, although, at the end of the day, the base rates are so low.

yes, 50 basis points -- base rates are so low, i would rather invest in the u.s. jonathan: what about the periphery? you and i have gone back and forth about btp's in the past, the italian 10 year is week after week, the yield keep coming lower. the back end of this week, the politics just came back on the table. just a touch. are we willing to put aside the italian political situation and keep buying one of the only places left to get positive real yield in europe? lisa: the structural issues have not gone away. the debt burden is still huge, growth is too low to support that type of burden. however, to the point we are making now, italy yields significantly more than you can get in any other part of the european market. investors are piling into it, and they are ignoring these structural issues. this could go on a while a little longer. they have a budget coming due in october. we know what happened the last time around. the markets get skittish when the italians say we are not

going to comply with those european set limitations. and that is where you see italian btps come under pressure. i think that could happen again, although we do not have a position at the moment because the technicals are still very, very powerful. jonathan: gershon, we have talked about the bulk of negative debt around the world. 25 trillion there or there about. the number is massive. is that the attraction with italy at the moment and over the last month, just clamoring for anything that is left with a positive real yield on the continent? gershon: i think italy is suffering from these false lines that we draw in the market. italy is behaving like an em bond, and it should. it is riskier than many things. but the problem is, the way that markets are set up, investors look at the developed world, and the em world. i can guarantee you if it was an em credit, people would not be buying it as much. the market is oscillating here between, is this a risky asset, which it clearly is, or is it

more of a risk-free asset because it is a government bond? jonathan: hasn't that been the last story for italy the last few years? that it has been trading like a credit, not a sovereign. do you think that people will start to look at it differently now? gershon: some people are looking at it differently. the point that you started the conversation with, people need yield. people are going to convince themselves, yes, these are long-term problems. by the way, the u.s. is the same way. at the end of the day, put aside trump's tweets today, but the reality is, you look at unfunded liabilities, somewhere around 100 trillion. jonathan: 35,000 years to get to a trillion seconds. gershon: 100 trillion is a pretty large number. so we are all convinced that the dollar is a safe haven, the u.s. will find a way, but we are

setting ourselves up. we kind of miss the point when we talk about what is going to happen in two weeks with rates. it is, we have a long-term debt problem around the world. we will be talking about that a lot more in the coming decade. jonathan: and will be talking about ecb next week, an ecb decision coming around the corner. our guests will be sticking with us. let's look at where bonds have been this week, 2's, 10's, and 30's. two weeks of losses in treasuries, followed by a week of gains. u.s. yields lower. still ahead, the final spread. the week ahead featuring u.s. gdp and the ecb decision. that is next. this is bloomberg "real yield." ♪

jonathan: i'm jonathan ferro. this is bloomberg "real yield." time now for the final spread. coming up over the next week, we begin on tuesday with the imf releasing its world economic outlook, and the u.k. announcing its new prime minister.

wednesday, pmi numbers from france and germany. thursday, rate decisions from the ecb and turkey's central bank, too. that one could be interesting. and the weekend, second-quarter gdp right here in the united states. still with me, lisa hornby, gershon distenfeld, and noelle corum. noelle, let's look ahead to the ecb. a really interesting meeting that many people expect the president, mario draghi, to be teeing up a rate cut in september. what is your base case? noelle: that he is probably likely to leave the door open, but we think we are calling for a q3 cut, and qe, too. we may get some details on the asset purchase program. that is where we would be focusing as he comes up. jonathan: any idea on what they might buy? is it the same stuff as before, or do they broaden the parameters? noelle: i think they will broaden them a little bit, because there is on the much

-- there is only much they can buy without significantly moving markets. but in terms of the underlying details, that is still yet to be seen. jonathan: what do you think, lisa? lisa: i would agree with that broadly. i think that they open the door next week to the september meeting where they unveil bigger policy. i think there is probably going to be some tiering of deposit rates, could be an extension of their programs, additional assets added to that, as noelle alluded to. i think that they realize they have to do something, and they are actually out of ammunition. the fed talking about near the zero bound, but they have 250 basis points. the ecb is definitively below the zero bound. so they are the ones who the pressure is on and the economy there is still very weak. gershon: draghi is the master of keeping his options open. i think that chairman powell should harold hamm maybe to do -- should hire him maybe to do the press conferences. maybe as a consultant. [laughter] we are going to sit here and

say, we are not sure what he said, because he is really good at that. but i think lisa is exactly right. the issue is, whether they cut the near term or not, are they going to have the wherewithal to if we show signs we are going through a recession, do they have enough firepower left, enough tools at their disposal to make an impact? jonathan: here is a question for you. if they cut interest rates, if they tee up another round of qe, the objective is to get inflation expectations up, it is ultimately to shake you out of those 10 year bunds in germany. are yields going lower on 10 year bunds, or higher if qe restarts and rates could cut? gershon: that will be dependent on how risk markets react. if we see a big global selloff in equities, it will go lower. what is the reason we went from zero to where we are now? it is because you had a lot more fear in the marketplace. that is going to be the determinant, more so whether it should or not. jonathan: how do you think this market would respond, bunds specifically, to a rate cut and

the restarting of qe? noelle: we have more of a longer-term view. because we think that bunds will be going higher toward the end of the year. that is because we think growth expectations for europe have gotten too dire here. as lisa and gershon have alluded to, the ecb doesn't have a lot in their toolkit. so they are not going to be as responsive as the market would have liked them to. we think we will get into a scenario where growth is not as bad as markets are anticipating in europe. and the ecb is reacting to that and they are going to disappoint a little bit, and that will move bunds higher. jonathan: let's wrap things up and get to the rapidfire round. you know how this works, three quick questions, three quick answers. first question, total returns to year end, you have to hold one asset class, u.s. high yield or euro-denominated high-yield? euro or u.s.? gershon: i assume you mean hedge. i will do euro.

jonathan: i knew you're going to say that. noelle: agreed. hedge, euro high-yield. lisa: u.s. jonathan: 10-year italy. in and around 1.50 on the 10 year at the moment. what is next, 1% or 2%? lisa: 1%. noelle: 1%. gershon: 2%. jonathan: federal reserve month end, 50 basis point cut, 25, or nothing at all? gershon: 37.5. [laughter] noelle: 25. lisa: 25. jonathan: there we go. why do you misbehave on every show we do? gershon: you keep on inviting me back, jon! just stop. [laughter] jonathan: i have no idea why. we will keep inviting him back. this is bloomberg "real yield." ♪

>> the stories that shaped the week in business around the world. the u.s. banks lead the way as quarterly results poor in. >> they are cutting cost. >> surprise was in fixed income trading. >> tariffs taking the toll. the eu builds -- brexit in ave good way. aree have been working and continuing to work really hard to get better.