jonathan: from new york city for our audience worldwide, i'm jonathan ferro. bloomberg "real yield" starts right now. ♪ jonathan: coming up, the market music improves. u.s.-china trade tensions soften. data looking ok. the consumer is still driving economic activity, whipsoaring 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. >> what you are seeing is a pricing out of recession risk.

>> we don't see recession coming right away. >> maybe august was that peak here. >> chomped a lot of wood in august, sentiment horrible. >> sentiment is 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, we get a reevaluation story. 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. joining me is kathy jones and brian rehling. i want to begin with you, kathy. 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 what is 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, and backed up all the way back towards 2% almost. that is a huge move, kathy. kathy: it is although we use a 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 many people watching the program. over the weekend, it will be the big debate. brian, your views. either 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. things are pretty good. what is encouraging to me is the curve steepening a little bit. that is something we have not seen for a while. the past three months, 10's were inverted, but the rest of this curve is back to positive slope. that is fairly encouraging but i don't buy this big selloff. i'm not looking for a massive counter rally here, but i think we will top out pretty soon. jonathan: you think this is a short-term correction driven by technical factors, nothing fundamental about it?

brian: not really. fundamentally, both over the very 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. i think 2% is a reasonable place for 10 year treasuries to 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 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 the move to what is happening to the trade story. the trade story is totally unpredictable. if you believe that is the biggest driver with treasury 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 trade? kathy: i don't think it is all about trade. obviously a contributing back. so much negativity around it, but we have seen some better economic numbers, we have seen some decent inflation numbers. then we have the european central bank, 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. i think that was probably a bigger contributor factor than trade. jonathan: to what degree is this all about the mood music improving in trade over the last couple of weeks? compared to the chaos of three fridays ago, clearly, the tone is a whole lot better. brian: the tone is better, sentiment is better, but trade, not that much has changed. it can change with a tweet.

we could wake up and the tone could totally change 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 those 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 head over to europe and go over to london to catch up with pilar gomez-bravo. great to have you with us. let's start with the theme around this table. we had growth scares. whether you are seeing signs of that in the markets, at least we are coming out of the other side of it ok? what is your take? pilar: it is too early to say that we are coming out of it. the biggest dichotomy is the data coming out of the goods sector. that has been mentioned by your guests in new york. on the services sector and the consumer data coming through today, retail sales in the u.s., some of the other global

services number are actually fine. 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 weak. some of the data coming from the surveys in australia point to weaker numbers as well. i think it is too early to say we are turning the corner, but certainly there is to watch for the consumer, u.s. consumers, whether they hold up, even despite the manufacturing sector is really not doing well. jonathan: how much of a duration, it must be pretty painful, a move of 40 to 50 basis points on the u.s. 10 year. what are you doing right now? pilar: it has been, but so was the very 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. again, saw maybe the data was not as bad with regards to the consumer. we are pretty much holding tight.

we are going to 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. we are going to definitely be tempted to add duration in the u.s. jonathan: we have established that negative correlation between bonds and risk assets. what else has been tempting outside the u.s.? if you look at 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? looking at what is tied into what has happened and whether you want to add more risk back into the portfolio? kathy: we are still underweight 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. so 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

companies, and their ability to withstand a downturn in the economy, slow down and earnings growth. we are still pretty 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. looking at that break down, 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? brian: the energy sector had a tough go of it a few years ago, i think that is still fresh in people's minds. jonathan: everyone is sticking with me. coming up, a record-breaking week for corporate credit. investors pushing cash into u.s. high-grade funds at the third fastest pace 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 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 to take advantage of

those, $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. the largest share since may. 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 from may.

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. 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 are making the case, on and on even more 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? pilar: that is the big question, there is a lot more noise around germany finally loosening up the strings. we will have to wait to see if that really is the case. the latest noises have been that 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 probably 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 role with the main 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 am wondering if that is still the case after what you heard this week? pilar: it is. if anything, we are more confident by having the periphery exposure. at the end of the day, when we are seeing, the central bank is still there with a put for these periphery exposures relative to germany, the core in 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 core of europe. jonathan: what are your thoughts on that, brian? 88 basis points, italy over germany. we have come all the way into 130. any oxygen left in that trade? brian: i don't see why not. the central bank has to buy something there. they just announced 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 passed the ship to the fiscal

side. what is the ecb gaining by lowering from -40 to -50? who really cares? jonathan: the most powerful aspect for a lot of people was the fact that the $20 billion euro qe commitment was open-ended, but to believe it that it is more than in name open-ended, you also have to believe they can adapt things, change the issuer limit. they will bump up against a wall at some point 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 they need to say we need to do more. but i think what i was impressed with was how the market reacted to that. we saw a little bit of steepening to the curve, yields bounce back. what is really important, a lot of times with central banks, is the signaling. and the signal worked despite the fact that the market had built up expectations. the signal worked and that can be is self fulfilling prophecy. jonathan: i would love your thoughts on that, pilar, having an open-ended program at 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 a lot of the details. we don't know yet what the breakdown of these purchases will be across asset securities, covered bonds, corporate's. therefore, 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. maybe two years is enough to get the signaling done. 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." it is time 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. the central bank, the boj and the boa. kathy jones, brian rehling, pilar gomez-bravo still with me. let's talk about the fed. going into next week, what are you 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 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. within that, the obsession over the dot plots will continue. what to look for in that dot plot 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. really what i am watching and terms of the bed because obviously they are going to cut a quarter, 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 are we going to do next? the fed has not done a good job of that in my opinion. jonathan: the data so far bails out the federal reserve going into the meeting and 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? pilar: that is true. 25 basis points is consensus. we agree with that. i think 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., and sort of the 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 and i think there is potential room for

disappointment. if the fed does not give the hope that it is potentially ready to act if the data deteriorates 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 type of recovery, or they are late to the game, and will have to cut a lot more. we find it hard to see that you get what the market was pricing, until very recently, which was four or five cuts. jonathan: there is a big debate over that. deutsche bank expecting them to cut rates at each and every meeting for the next four meetings. that is not a midcycle adjustment. any reason to believe daily pushing back against calls like that next week? pilar: i think so. as kathy pointed out, the data, certainly since the last

meeting, has not deteriorated significantly enough to warrant a much 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. that could change tomorrow or certainly after the first of october. so 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 it. we don't know what will happen with the trade story. in china, it's really important that at some point we see a bottoming out process. we get the more key economic data going into 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, a trickle 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 would love to see some bottoming out of their economy and the chinese economy as well. you know it is about. it is the rapidfire around. let's talk about the ecb. draghi's last 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 year on the u.s. 10-year yield? yes or no? have we seen the low for the 10 year yield already? pilar: 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 year end? yes or no? kathy: no. pilar: no. brian: no. jonathan: great to have you all with me. thank you very much for your time. we will see you same time, same place. from new york, for our audience worldwide. this is bloomberg. ♪

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