jonathan: from new york city for our audience worldwide, i'm jonathan ferro. startsrg "real yield" right now. ♪ coming up, the market music improves. u.s.-china trade tensions often. data looking ok. the consumer is still driving economic activity, whips on a one-way bond market, driving treasuries lower and yields much higher. things looking better than you thought they were. >> what if the market has been acting like early cycle? >> there is no question you are seeing the dynamics shifting.

>> we don't see recession coming right away. >> maybe august was that peak here. >> chomped a lot of wood in august, sentiment horrible. >> maybe we are coming out of it. i think the fed needs to confirm that but maybe we have had a mini cycle. >> we are set up perfectly for a rally in risk assets into the fall. if you want the bull market to die, show me the recession. until you can produce it, you have got to take the over. >> no recession, central banks in play, markets outside, going into the fall, trade deal, upside. jonathan: another big week for treasury yields. is kathy jones and brian rehling. morgan stanley asked the simple question, what if things are better than we thought? are we finding things are ok? kathy: i think we are ok.

the big question two weeks ago is are we going to negative yield like the rest of the world? that is so two weeks ago now. now everyone is worried about the upside in yields. jonathan: let's think about where we have been in the past 10 days. in and around 1.40, and backed up all the way back towards 2% almost. that is a huge move, kathy. couple of fair value models for tenured treasuries, and we have value at 1.85% 2% anyway, so we are getting back from oversold to what would be considered fair value. jonathan: that is the big debate for people watching the program. over the weekend, it will be the big debate. brian, you do you frame this as saying this is a correction in the context of a massive move in 2019, or the beginning of something else, a new trend. brian: we have seen this story a

couple of times where you get risk off, risk on, and then risk off. what is encouraging to me is the curve steepening a little bit. that is something we have not seen for a while. wereast three months, 10's inverted, but the rest of this love is back to positive slope. that is really encouraging but i don't buy this big selloff. i'm not looking for a massive counter rally here, but i think we will talk about here pretty soon. jonathan: you think this is a short-term correction driven by technical factors, nothing fundamental about it? brian: not really. over theally, both long term and the near term, there is still a lot of uncertainty out there. jonathan: what do you think, kathy? kathy: we are in the lower for longer camp. the market just got really carried away for a while with some of the negative news from abroad.

now we have signs of consumers continuing to be supporting the economy going forward, and some of the risks of deflation, recession have abated, so we are getting back to what i would consider a reasonable level. jonathan: to understand whether this is sustainable are not, you have to talk about what is underpinning the move. and to what degree you assign what is happening to the trade story. the trade story is totally unpredictable. if you believe that is the biggest driver of traders are yields, then i don't think you can say the moves that we have seen our sustainable come with any level of confidence. what underpins the move, and to what degree is it all about train? ally: i don't think it is about train but obviously a contributing back. so much negativity around it, but we have seen some better economic numbers, we have seen decent inflation numbers. then the european central bank came in with stimulus which has

lifted the term premium a little bit, lifted rates in europe. that is not something we have had for quite some time. that was probably a bigger contributor factor than trade. jonathan: to what degree is this all about the music improving in trade over the last couple of weeks? chaos of three fridays ago, clearly, the tone is better. brian: the tone is better, sentiment is better, but trade, it can change with a tweet. we could wake up and the tone could totally change again. i view with the ecb did this week as a bit of a positive for risk markets, but it will also have the side effect of keeping european rates very low for an extended period of time. the ecb is the greater fool out there, they'll be buying these negative yielding bonds for -- it is hard to say. jonathan: depending on if the pool of available assets is less.

let's go over to london to catch -- lrh lr gomez broadview gomez broadview -- lr gomez bravo. whether you are seeing signs that in the markets at least we are coming out of the other side of it or take? pilar: it is too early to say that we are coming out of it. the biggest thing is the data coming out of the goods sector. that has been mentioned by your .uests in new york on the services sector and the consumer data coming through today, some of the other global services number are actually buying. it is a little bit too early. i think some of the data has been relatively weak and still weaker, if you look at the numbers. japanese machine orders are week. some of the data coming from the

sus in australia .2 weaker numbers as well. i think it is too early to say we are turning the corner, but certainly to watch is the ,onsumer, whether they hold up even despite the manufacturing sector not doing well. holding on to duration must be pretty painful, a move of 4250 basis points on the u.s. 10 year. what are you doing right now? been, but so was the sharp move in august, coming down in global yield. it has been a global move, not just a treasury move. i think there was a knee-jerk reaction, a recovery in september, as everybody came back. data was not as bad with regards to the consumer. we are pretty much holding tight. we will wait a few days and see where the momentum goes in treasuries ahead of the fed next

week, and maybe next week we will see where we are. certainly, yields are going higher. tempteddefinitely be for duration in the u.s. jonathan: what else has been tempting outside the u.s.? treasuries, blink and you miss, look at what happens with high yields. spreads are back to 3.65. how are you thinking about credit right now? whether you want to add more risk back into the portfolio? we are still underway high-yield. we are not convinced at this point in a cycle that you are rewarded in high-yield for the risk you are taking. although we don't see a recession on the horizon in the near term, there is a lot of softness in the high-yield market, in terms of the underlying quality of the their ability to

withstand a downturn in the economy, slow down and earnings growth. we are still cautious in high-yield. jonathan: what you are looking at is a noisy chart with how the different sectors within high-yield are trading respective to their peers, sector wise. we have seen a lot of tightening in high-yield sectors, with the exception of oil, energy. why is that lagging still? are you confident we can play catch-up? the energy sector had a tough go of it a few years ago, that is still fresh in people's minds. you have not seen the big rebound in oil. gold, we have not seen a big selloff in, inflation expectations are still relatively low. the full market is not convinced this is risk back on. jonathan: pilar, your final thoughts? pilar: i agree. it is too early to that a significant risk.

it is early to add a lot of risk and energy as well. it is time to show the strength your research analyst and pick the right names. that is what is important, credit risk, at the end of the day. jonathan: everyone is sticking with me. coming up, a record-breaking reek for corporate credit. that is next. ."is is bloomberg "real yield ♪

jonathan: i'm jonathan ferro. this is bloomberg "real yield." let's go to the auction block in the u.s. with another massive we can credit. high-grade bonds seeing the third-largest cash inflow ever. kraft heinz among the leading

issuers, $3 billion of longer dated bonds. the u.s. treasury selling $30 billion of free your notes. primary dealers walking away with 37% of the auction. over in europe, italy selling 1.5 billion euros of 30 year bonds this week. demand was softer than the previous auction. sticking with europe, following what could be draghi's last make act, the ecb president was clear about what he wants to see next. ,> regarding fiscal policies fiscal policy, fiscal policy, fiscal policy should become the main instrument. governments with fiscal space should act. now it is high time for the fiscal policy to take charge. even more case frequently in the coming future. jonathan: with me around the table is kathy jones, brian

rehling, and in london, pilar gomez-bravo. i want to begin with what the ecb is pushing for, and the likelihood that we will get fiscal stimulus from europe? question,t is the big there is a lot more noise around germany finally loosening up a string. we will have to wait to see if that really is the case. thatatest noises have been they are holding off for new stimulus, they have projects in place, infrastructure. it is true that if it goes into technical recession, which is likely, and maybe some of the manufacturing continues to worsen, then we believe germany will loosen the strings. that is a challenge for lagarde when she starts, playing the main role with the government in europe to make sure there is fiscal reasoning. jonathan: your performance this year has been solid, some decent gains. i know you're still pretty constructive on the periphery.

i wonder if you still think that is the case after what you heard this week? we are moreything, confident by having the periphery exposure. at the end of the day, when we are seeing, the central bank is for thesee with a put perforated exposures in germany, the core in europe. if not, that means we are getting growth. having strong growth in europe, if it happens, is also good for the periphery relative to germany. for now, we are comfortable with that long position in the periphery versus the core of europe. jonathan: what do you think about that, brian? 88 basis points, italy over germany. any oxygen left in that trade? brian: i don't see why not. the central bank has to buy something there. i think there is perhaps more there. right.ink draghi is

this focus on monetary stimulus passed the ship to the fiscal side. what is the ecb gaining by lowering from -42 -50? jonathan: the most powerful aspect for a lot of people was the fact that the $20 billion euro commitment was open-ended, but to believe it that it is in name open-ended, you also have to believe they can adapt things, change the issuer limit. they will bump up against a wall in the next 12 months or so. are you confident, given the resistance that was on the council this week, to get qe done, that they can change those parameters in the coming year? kathy: i think they will have the ability it germany goes into recession because that would be the signal they need to say we need to do more. with wass impressed how the market reacted to that.

we saw a steepening to the curve, yields bounce back. what is really important, a lot of times what central banks, is the signaling. the signal worked come despite the fact that the market had built up expectations. that can be is self fulfilling prophecy. jonathan: i would love your thoughts on that, pilar, having an open 20 billion every month. when do they run into some problems in the coming 12 months, if they do at all? pilar: we are still waiting to hear the details. we don't know yet what the breakdown of these purchases will be across asset securities, covered bonds, corporate's. we will have to wait and see exactly. we will find out soon enough, they are by on the first of november. we are calculating they may be able to get up to two years. after that, they run into trouble. two years may be enough to get the signaling done. if we get to the target inflation they have on 1.5%,

that would mean that you are already getting closer to 2%, just to get to that average of 1.5%. open-ended this is a couple of years, and then we'll see. jonathan: what do you think, brian? brian: central banks, again, i think they are running out of ammunition. positive reaction, near-term, but can it last? do they have much left to do? maybe they can get creative and find something else, but i think the focus will have to shift to the fiscal side. -- there isbankers a limit, and they are running up against it. jonathan: a lot of people talk about the periphery. have you gotten rid of it all, where are you positioned on it right now? brian: we don't any developed international debt. negative yields don't make a lot of sense to me. jonathan: brian rehling, kathy jones, and pilar gomez-bravo are

sticking with me. coming up, the week ahead. this is bloomberg "real yield." ♪

jonathan: i'm jonathan ferro. this is bloomberg "real yield." coming up over the next week, and data out of china, industrial production and retail sales. that will come through sunday and monday. we will hear from several ecb policymakers on tuesday. then the week of central bank decisions begins. the central bank, the doj, and the boa. kathy jones, brian rehling, pilar gomez-bravo still with me. going into next week, what are you looking for? the consensuswith

with a 25 basis point cut, but we think forward guidance will be cautious again. that that will be reluctant to signal further rate cuts because the consensus does not appear to be there at the fomc to go forward aggressively with rate cuts from here. the recent data would not support that. jonathan: we get the summary of economic projections as well. with that, the obsession over the top on will continue. what to look for, and what do you expect? brian: i think there will be more dispersion in the dot plots because there is more diversity of opinion within the fed. they will cut a corner, but what is their guiding light? a year ago, the data was not that much different from where we are now, and we were a long way from neutral. now we are doing a midcycle adjustment. where are we? why are we doing what we are doing, and what will lead to next? the fed has not a good job of that in my opinion. actually makes this

one a little bit more comfortable. deliver the rate cut without a whole lot of pressure to deliver, even more. what are your thoughts on that? points isbasis consensus. we agree with that. communication is a big challenge for them, but the most problematic thing is the amount of price cuts that are already still in the curve in the u.s., market expectations there. i know we have seen a significant move in treasuries over the last couple of weeks but still there are lots of cuts priced in, potential room for disappointment. if the fed does not give the ready to it is potentially act come if the data deteriorates further. we will be watching for that. either youwe think get a couple of cuts and things are getting better, you get a type of recovery, or they are

late to the game, and will have to cut more. we find it hard to see that you get what the market was pricing, until recently, which was four or five cuts. jonathan: deutsche bank expecting them to cut rates at each and every meeting for the next four meetings. any reason to believe daily pushing back against calls like that next week? pilar: i think so. as kathy pointed out, the data, since the last meeting, has not deteriorated significantly enough to earn a much more aggressive approach. i think they will find their time, cut, highlight the uncertainties. the uncertainties are still there. we don't know what will happen with the u.s.-china trade war. that could change tomorrow or after the first of october. it is too early to say for the fed to be very dogmatic either way. we just expect more of the same from july. jonathan: we end the conversation pretty much where

we started, we don't know what will happen with the tde story. in china, it's really important that at some point we see a bottoming out process. we get more key economic data next week. any sign of the bottoming out process taking place in the chinese economy? kathy: very little. they have had a trickle of stimulus here and there, and they will continue to do that. we may see some bottoming out in the next couple of months, but so far, it has been pretty much flat line at best. jonathan: the ecb and europe without to see some bottoming out of their economy and the chinese economy as well. it is the rapidfire around. let's talk about the ecb. meeting is next month, and then lagarde comes in. is her first move another rate cut, yes or no? brian: yes, i think they will have to do something. kathy: no. pilar: yes. jonathan: have we seen the lows for the yield on the u.s. 10-year yield?

no, i'll think so. kathy: yes. brian: no, i don't think so. jonathan: going into next week with the federal reserve, are they one more and done through the rest of the year? kathy: no. pilar: no. brian: no. jonathan: great to have you all with me. see you next week same time, same place. from new york, for our audience worldwide. this is bloomberg. ♪ [inaudible]

mark: i'm mark crumpton with bloomberg first word news. british prime minister boris johnson and european commission president jean-claude juncker will meet in brussels next week

to try to break the brexit impasse. earlier today, the prime minister was interrupted during a speech by a heckler who was angry at his decision to suspend parliament. he urged johnson to get back to parliament to sort out "the mess that you have created." must face aump lawsuit accusing him of profiting from his presidency. today's court ruling is a potential blow to his efforts to keep his finances secret. the ruling reinstates a case brought by a restaurant group that accuses the president of violating the constitution's emoluments clause is. unless an expanded panel of judges or the supreme court reverses the decision, the president will be post to open his business and personal finances to scrutiny. china plans on making some trade concessions to the united states. beijing will encourage companies to buy american farm products such as soybeans and pork, according to the editor of the most prominent state-run newspaper. he also saysna