jonathan: from new york city for our audience worldwide, i'm jonathan ferro. "bloomberg real yield" starts right now. ♪ jonathan: coming up, the market mood music improves. u.s.-china trade tensions soften. data looking ok. harder conflation, and the consumer is still driving economic activity. whip soaring a one-way bond market, driving treasuries lower and yields much higher. let us begin with the big issues, shall we? things looking better than you thought they were. >> what if the market has been acting like early cycle? >> and love the theory. >> there is no question you are seeing the dynamics shifting. >> what you are seeing is the pricing out of recession risk. >> we don't see recession coming

right away. >> maybe august was that peak fear. >> the fear trade peaking. >> chomped a lot of wood in august, sentiment horrible. >> investor sentiment is incredibly bearish. >> 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 we could just hold earnings here, we get a revaluation story in equities. i think that is the next trade up, and that is the pain trade. if you want the bull market to die, show me a recession. until you can produce it, you have to take me over. >> no recession, central banks in play, markets outside, going into the fall, trade deal, upside. jonathan: another big week for treasury yields, too. joining me around the table, kathy jones of charles schwab, brian rehling of wells fargo. kathy, morgan stanley star than the week asking a simple -- started the week asking a civil question, what if things are better than

we thought? are we finding out they 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? and that is so two weeks ago now, right? now everyone is worried about the upside in yields. jonathan: let's think about where we have been in the past 10 days. we have gone from in and around 1.40, which is the intraday low, and backed up all the way back towards 2% almost. that is a huge move, kathy. kathy: we use a couple of fair value models for 10-year treasuries, and we have fair 1% to 2%-ish area 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. through the weekend, it will be the big debate, into next week. brian, we are back to the 1.90 percent on the 10-year. do you frame this as 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, then risk-on, then risk-off. things are pretty good now. what is encouraging to me is the curve is steepening up a little bit. that is something we have not seen for a while. in fact, the past three months, 10's were inverted, but the rest of the curve is back to positive slope. that is fairly encouraging, but don't buy this big selloff. right? i am 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 positioning, nothing fundamental about it? brian: i mean, not really. i think fundamentally, both over the 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 camp. but i think 2% to 2.25% is a reasonable place for 10-year treasuries end up. i think 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, etc. 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 has happened with the the trade story. the trade story is totally unpredictable. if you believe that is the biggest driver of what has happened with treasury yields, i don't think you can say that the moves that we have seen are sustainable, with any level of confidence. what underpins the move, and to what degree is it all about trade? kathy: i don't think it is all about train but obviously a contributing factor. but we have seen better economic numbers, we have seen decent inflation numbers, and we had the european central bank come

in with stimulus, which actually has lifted the term premium a little bit, and lifted rates in europe. that is not something that we have had for quite some time. i think that was probably a bigger contributing factor than trade. jonathan: help me explore the question as well. compared to the chaos of three fridays ago, the tone as a whole lot better. brian: the tone is better, sentiment is better, but trade, i don't think that much can -- has changed. it can change with a tweet. we could wake up on friday and the tone could totally changed again. i do view what 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, as the greater fool out there, they'll be buying these negative yielding bonds for maybe infinity, it is hard to say. right? jonathan: depending on if the pool of available assets is less. we will discuss that later in the program. let's go over to london to catch

up with pilar gomez-bravo. from mfs international. great to have you on the program. whether you are seeing signs of that in the markets, at least we are coming out of the other side of it. what is your take? pilar: it is too early to say that we are coming out of it. the biggest factor is the data coming out of the manufacturing sector in that had been mentioned by your guests in new coming the consumer data today, retail in the u.s. and some of the global service numbers are fine, but it is a little bit too early. i think some of the data has been relatively weak and still weaker. if you look at some of the expectations numbers, they are still weak. japanese machine orders are

weak. some of the data coming from the surveys in australia points to weaker numbers as well. i think it is too early to say that we are turning the corner. but certainly, what there is to watch, u.s. consumers and consumers in general, whether they hold up, despite the fact of the manufacturing sector is certainly not doing well. jonathan: holding on to duration must be painful, given the move we had in a few days of 40 basis points to 50 basis points on the u.s. 10-year. what are you doing right now? pilar: it happens sharp move in , a august. coming down in global yield. it has been a global move, not just a treasury move. i think it was a little bit of a knee-jerk reaction, a recovery in september, as everybody came back. and again, it is all about the data, maybe it was not as bad with regards to the consumer. we are pretty much holding tight. we will wait a few days and see how the market moves and where the momentum goes in treasuries ahead of the fed next week, and

maybe early next week, we will see where we are. certainly, yields are going higher. we will definitely be tempted to add duration in the u.s. jonathan: kathy, what has been interesting is also that we reestablished the correlation between bonds and risk assets. when you look at treasuries, blink and you miss. look at high-yield, spreads are back to 3.65 on the barclays index. how are you thinking about credit right now? looking at what is tight and what hasn't and whether you want to add more risk back into the portfolio? kathy: we are still underweight high-yield. when we rode the spread widening, and now we are writing riding iting again -- tightening again, but we are not convinced at this point in the cycle that you are rewarded in high-yield for the risks that we are taking. so although we do not see it recession in the horizon in the near time, there is a lot of softness in the high-yield market in terms of the underlying quality of the companies and their ability to withstand a downturn in the economy, a slowdown in earnings growth, et cetera, so we are pretty cautious of high-yield.

jonathan: what you are looking at a couple minutes ago was this noisy chart that all the sectors in high-yield trading elective to their peers sector wise. brian, we have seen a lot of tightening in high-yield sectors with the exception of the oil sector, energy. why is that lacking still? and, are you confident that we can play catch-up? brian: the energy sector, obviously, had a tough go a few years ago. i think that is still fresh in people's minds. you have not seen the big rebound in oil. i was just looking at some other markets -- gold, we have not seen a big selloff in, inflation expectations are still relatively low. the full market is not convinced here that this is risk back on. jonathan: pilar, your final word on that? what do you think? pilar: i agree. i think it is too early to add a

a lot of risk, particularly in high-yield, and it's a risk to add too much and energy as well. it is a time to show the strength of your research analyst and pick the right names. that is really what is important, is credit risk at the end of the day. jonathan: everyone is sticking with me. coming up, the auction block. a record-breaking week for corporate credit, with investors -- week for corporate credit with investors pushing cash into u.s high-grade funds at the third-highest rate in history. that is next. this is "bloomberg real yield." ♪

jonathan: i'm jonathan ferro. this is "bloomberg real yield." i would like to head to the auction block right now and begin in the united states with another massive week in credit. high-grade bonds seeing the third largest cash inflow ever. kraft heinz, among the leading issuers to take advantage of

those inflows, selling $3 billion of longer-dated bonds to refinance debt. the u.s. treasury selling $30 -- $38 billion of free your -- of three year notes. primary dealers walking away with 37% of the auction. the largest share since may, and finally, over in europe, italy selling 1.5 billion euros of 30 year bonds this week. demand was softer than the previous auction, with yields down 150 basis points since may. sticking with europe, following what could be draghi's last big act, the ecb president was clear about what he wants to see mario -- what he wants to come next. draghi: 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. we make this case on and on even more frequently in the coming future. jonathan: with me around the table is kathy jones, brian

rehling, and joining from london, pilar gomez-bravo. i want toi -- pilar, begin with what the ecb is pushing for, and the likelihood that we will get fiscal stimulus from europe. pilar: that is the big question, i mean, there is a lot more noise around germany finally loosening up the strings. but we will have to wait to see of that is really the case. the latest noises have been that they are still holding off for new stimulus. they have projects in place, infrastructure. but it is true that if it does go into a technical recession, which is likely, maybe some of the manufacturing sector continues to worsen, we believe germany will loosen up the strings. that is a challenge for lagarde when she starts, is really playing the role with the main governments in europe to ensure that there is a fiscal reasoning. jonathan: pilar, your performance this year has been solid, some decent gains. i know you're still pretty constructive on the periphery.

i wonder if that is still the case after what you heard this week. pilar: it is. in face, if anything, we are more comforted by the periphery exposure. at the end of the day, we are seeing that the central bank is still there with a put to some some of these periphery exposures relative to germany or corps in in europe -- europe. if not, that means we are getting growth. having strong growth in europe, if it does happen, is also good for the periphery relative to germany. for now, we are comfortable with that long position in the periphery versus the corps in europe. jonathan: what do you think about that, brian? 88 basis points, italy over germany. right here right now, we have come all the way in to 1.30. any oxygen left in that trade? brian: i don't see why not. the central bank has to buy something over there, and they just announced that they are going to buy forever, essentially. i think there is perhaps more there. i do think draghi is right.

this focus on monetary stimulus past the ship to the fiscal side, i mean, what is the ecb gaining by lowering from -40 to -50? i mean, who really cares? jonathan: kathy, the most powerful aspect for a lot of people come out this week from the ecb, was that the $20 billion euro qe commitment was open-ended. but to believe it that it is in name open-ended, you also have to believe they can adapt things, switch the parameters, 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 will be able to change those parameters in the coming year? kathy: i think they will have the ability if germany goes into recession because that would be the signal that they need to say, yeah, we need to do more. but, what i was impressed with is how the market reacted to that. he saw a little bit of the steepening of the curve, we saw

the yields bounce back. what is really important, a lot of times in central banks, is the signaling. and the signal worked. despite the fact that the market has built up expectations, the signal worked, and that can be a self-fulfilling prophecy. jonathan: i would love your thoughts on that, pilar, having a program of $20 billion every single 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 a lot of the details. we don't know yet exactly what the breakdown of these purchases will be across asset-backed securities, covered bonds, and corporates. we will have to wait and see exactly. we will find out soon enough, they are buying on the first of november. we are calculating they may be able to get up to two years. after that, they run into trouble. but maybe two years is enough to get the signaling done. if we do get to the target inflation that they have of 1.5%, that would mean that they

are getting closer to 2%, just to get to that average of 1.5%. i think, for now, this open-endedness is really for a couple of years, and then we will see. jonathan: what do you think, brian? brian: listen, central banks, again, i think they are running out of ammunition. yes, there is positive reaction, but that is near-term. can it last? do they have much left to do? maybe they can get creative and find something else, but i think the focus is going to have to shift to the fiscal side. because i really think the central bankers -- there is a limit here, and they are running up against it. jonathan: a lot of people come on this program constructive about the periphery. do you hold any peripheral debt at the moment? have you got rid of it all? where are you position with them right now? brian: we do not own any developed international debt. for a u.s. investor, negative yields are very low yields don't make a lot of sense to me. jonathan: brian rehling, kathy jones, and pilar gomez-bravo are sticking with me. still ahead, the final spread, the week ahead featuring

decisions from the fed, and the boj. that is coming up next. this is "bloomberg real yield." ♪

jonathan: i'm jonathan ferro. this is "bloomberg real yield." it is time now for the final spread. coming up over the next week, data out of china, industrial production and retail sales. that will come through sunday into monday. we will hear from several ecb policymakers on tuesday. look out for that. then, the week of central bank decisions begins, starting with the fed on wednesday, the boj, and the bla coming up on thursday. kathy, let's talk about the fed going into next week, what are we looking for? kathy: we are with the consensus with a 25 basis point cut, but we think forward guidance will be cautious again. i think the fed is going to 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 wouldn't support that. jonathan: brian, we get the summary of economic projections as well. within that, the obsession over the dot plots will continue. what to look for in the dot plot this time, 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. that will be interesting to watch. but really what i'm watching, because i think they will cut a quarter, but really 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. right? and now, we are doing a mid-cycle adjustment. where are we? why are we doing what we are doing, and what are we going to do next? the fed has not done a good job of that in my opinion. jonathan: i wonder to what degree, pilar, the data right now in the united states makes it a little more comfortable. deliver a rate cut without about

more pressure to deliver a even more. what are your thoughts on that? pilar: i think that is true. 25 basis points is consensus. we agree with that. i think communication is a big challenge for them. but i think the most problematic thing is the amount of price cuts that are already still in the curve in the u.s. and the market expectations there. i know we have seen a significant move in treasuries over the last couple of weeks, but still, there are a lot of cuts priced in. i think there is room for potential disappointment there, if the fed does not give the hope that it is ready to potentially active the data does deteriorate further. we will be watching for that. basically, we think either you get a couple of cuts and things are getting better, you get a midcycle 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 very recently, which was around four or five cuts. jonathan: pilar, there a big debate over that.

deutsche bank expecting to cut rates at each and every meeting for the next four meetings. that is clearly not a midcycle adjustment. any reason to believe that they will be pushing back against those kind of calls next week? pilar: i think so. as kathy pointed out, the data, certainly since the last meeting, has has not deteriorated significantly enough to warrant a more aggressive approach. i think they will bide 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. you know, that could change tomorrow, or certainly after the first of october. i think it is too early to say for the fed to be very, very dogmatic. we just expect a little bit more of the same from july. jonathan: we end the conversation pretty much where we started it. we don't know what will happen with the trade story. we can have a look at the data and try to analyze it. in china, it is really important that at some point we see a

bottoming out process. we get more key economic data going into next week. any sign of that bottoming out process taking place in the chinese economy? kathy: very little. they had of the bit of a stimulus, sort of a trickle of stimulus here and there, and they will continue to do that. so we may start to see some bottoming out in the next couple of months, but so far, it has been flat line at best. jonathan: the ecb and europe would love to see some bottoming out in their economy. in the chinese economy as well. it is the rapidfire round. let's talk about the ecb. draghi's last meeting is next month, and then madame lagarde comes in. is her first move another rate cut, yes or no? brian? brian: yes, i think they will have to do something. kathy: no. pilar: yes. jonathan: have we seen the lows for the year on the u.s. 10-year yield, yes or no? have we seen the low for the 10 year -- the low for the year

already on the 10-year yield? pilar: no, i'll think so. kathy: yes. brian: no, i don't think so. jonathan: going into next week for the federal reserve, is the fed one more and done through year-end? yes or no? one more cut and done for 2019? yes or no? kathy: no. pilar: no. brian: no. jonathan: guys, great to have you with me. kathy jones, brian rehling, and joining us from london, pilar gomez-bravo. thank you very much for your time. that does it for us. we will see you next time, same place. next friday at 1:00 p.m. new york time. from new york, for our audience worldwide. this was "bloomberg real yield." this is bloomberg tv. ♪

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♪ ♪ taylor: i'm taylor riggs in for emily chang, this is "best of bloomberg technology" or we -- where we bring you all of our top interviews from this week in tech. coming up, oracle's ceo takes leave, announcing a leave of absence for health reasons. we discussed what it means for the company. plus, cooking it up. tim cook takes the stage in cupertino. his deputies revealed the new iphone 11 models with new colors and three cameras.