>> i'm jonathan ferro. -- were real yield "bloomberg real yield" starts right now. coming up, a decent payrolls --ort helping to root reduce reduce investor and site he after a round of weak economic data puts investors on edge, making treasuries lower and pushing high-yield spreads wider. does a decent jobs report change anything at all? >> it didn't change anything in terms of the assessment. >> it wasn't as bad as it could have been. >> this is a muddled, middle

report. >> a bit of a mixed bag. >> it is consistent with some slowing. >> the manufacturing slowdown is continuing. >> but it is happening at a very gradual pays. >> it is not a falling out of bed moment. >> it is not flashing red, the economy is falling off a cliff number to me. >> not falling off a cliff. >> not much of anything to me. >> the market is priced in for an october rate cut. we have to pencil in a rate cut in october. >> for those looking for a decisive message, a deterministic one, they did not get it. around theoining me table to discuss in a new york are our guests. i want to discuss what changed this week. nothing has really changed on the economic backdrop. did have some week numbers there, but an on track jobs number and an upward

revision for august. we have been on this trend for a while, where revisions have been up. it is a weird environment where we are in, where an employment continues to be strong, and the probability of a fed cut winds down slightly, from around 90% to 75 or so. the fed is continuing to walk a tightrope year. slowdown orll it a continuing to grow at a slower pace -- doesn't warrant a return back to extraordinarily accommodative measures, we think not. the fed is caught in a tough spot. jonathan: what do you think, lisa? lisa: i agree with everything oksana said. the u.s. is going slow from the previous pace we saw last year. it was clearly tax induced growth. we have come down closer to 2% for this year. our view for the rest of the year is 1.5% to 2%, give or take. manufacturing is clearly in a receptio recession, that is a gl

phenomenon, but everything else seems to be fairly stable. we had the weaker service number and we have to see if that continues, but overall, this is a 1.5%, 2% u.s. economy. jonathan: and the story coming into 2019, gershon. many people have said we are doing this right now, and that payrolls growth will decelerate. when you get punched in the face by a growth scare, you get gripped by end of cycle dynamics , and of cycle anxiety. what is your message for people going through that right now? gershon: what did we learn this week? we learned that manufacturing is a lot weaker than we all thought. it is not a matter of whether we will or won't have a trade war, it is all the us turkey, because we do not know what the model -- uncertainty, because we do not know what the model will bring under the trump presidency and the ceos are hesitant to send money -- spend money. does it start to spread to the

consumer? payrolls will not tell you anything because that is a lagging indicator. the other thing we learned this week, despite what the market is saying, i do not think it is sure the fed will cut in october. if you listen to what chairman powell said last time, he said they were good for right now. there was no reason based on what they knew to cut further, but they would react and reconsider the incoming data. i think this is a clear sign that will continue to cut. jonathan: the data certainly says maybe now you should be cutting again, but listening to the officials through much of this week -- we close out the week with chair powell -- much of the week, the officials not showing their hand here, not showing their hand here at all. what gives you the conviction that in october of this month, they will make another move? gershon: it is not clear we go into a recession -- i hate using that word because we do not know what it means anymore, but if we have a protracted slowdown, it is not clear how much legroom they have using conventional policies, maybe go to qe again.

they have shown that they think being preemptive can avoid a slowdown. even if they are seeing weaker numbers, they will say, we do not know if it is spreading to the consumer. we do not have that data anytime soon, so we will continue to ease. oksana: the problem with being preempted as we have not seen it work across the pond in europe and japan. that is the big issue. is the fed frittering its ammunition away for a time when it needs it and won't have it? in terms of consumer confidence, that is an important piece that we are watching very closely, because 70% of the u.s. economy is consumer spending, and we are seeing the consumer sentiment index is starting to move down, business confidence starting to move down. in spite of some of the economic and positive surprises, frankly, we have seen if you look at the economic surprise in to see -- indices, they have trended up. this is a tough road. lisa: even though we have a

little bit of a disconnect between the survey data, the confidence data, and the hard data. when you look at hard data, retail sales last month were extraordinarily strong. oksana: and that is consistent with strong employment. see: we will continue to strong retail numbers, but consumer confidence is important. we have seen it hit across the pond, where the savings rate is starting to move up in europe, to fight the fact -- to fight the fact -- despite the fact that rates are negative. gershon: to be fair, i do not think the fed necessarily should cut, i am listening to what they have been saying. i think there is a danger when you get to a point where europe or japan have been in forever -- you have to be unconventional or it will be too late. thethan: let's have conversation -- the bond market picking up on the idea that they are taking another step towards a rate cut, considering the massive outperformance we saw at the front end of the treasury curve.

what did you think about that? if i thought we were going to get really bad data this week, i would not think treasury yields would do with a wouldone and bund yields do nothing, unchanged over the past five sessions. what do you make of that? gershon: this gets to the discussion we have had for a long time, is it justifiable to put yields so low? either we go into a deflationary spiral or you have negative real rates and no inflation for a decade. the more interesting thing in the u.s. was the implied breakevens and tips, which hit a 10 year low of 1.47% early in the week. you are at 0% inflation, 0% real rate baked into the next 10 years. that is a very pessimistic sign. i think one of the markets is wrong, either the treasury market is wrong or the equity markets are wrong. if we get no real rate of return , growth, or inflation, equities

are way too high. if things are fine, yields should be higher. jonathan: if you were going to take some optionality right now, what with the base case be? gershon: i think our base view is that we will have a slowdown here. i do not want to use the word recession because i do not know what it means, but a slowdown. the fed will eventually have to react. is that really a bad thing? we are 11 years into an expansion. in theory, central banks and monetary policy is supposed to keep the economy as level as possible, but that is only in theory. ofhave not repealed the laws economics, there are shocks all the time. and i probably should not say type but maybe a mini, recession clears out some of the businesses that should not be there and clear things out. jonathan: you just use that word, recession. gershon: it is a dirty word in

our firm. we do not like to use it or know what it means. it is like a line, but it does not apply internationally because china is still growing, getting a lot of rubble broke -- global growth. it is a continuum, and that is what we are seeing right now. lisa: the fact that you can go into a shallow slowdown or many recession m -- mini recession, and the markets keep going back to the banks and saying hey, help us make this go away. and we are seeing perhaps the limits of central-bank policy, because not only have u.s. rates, bunds have not really responded dramatically. and you think back to win the ecb through everything and the ,itchen sink into the market lowered the deposit rate, bund rates are higher today than they were at that point in time. perhaps we are seeing the limits

of central-bank policy, and that is important. let's bring it back to what is happening in portfolios. they are chock-full of duration that is entirely interest rate risk and moves entirely on what happens to the 10 year here, and i think the return potential is extremely limited. jonathan: lisa? lisa: i think there is a floor on bond yields, that is what i was going to say. the ecb has said they are done with monetary policy. that puts a floor to where they can go. they hit -80 basis points, but an unreasonable level, in my opinion. i think we are reaching the end and now you are starting to hear talk about more fiscal stimulus. in germany this week, there was talk about dropping the blacks zero, the ability -- black zero. you will hear more from that in the coming weeks and months. we need to move into a world of fiscal. i think that is what people are coming around to. jonathan: i think a lot of people agree with you. lisa: i think that is negative

for bond yields. jonathan: you guys are sticking with me. coming up on the auction block, the primary market remaining open despite a week of volatility. that's coming up next. this is "bloomberg real yield." ♪

jonathan: i'm jonathan ferro, this is "bloomberg real yield." i want to head over to the auction block and begin in europe, where the fourth quarter off to a hot start. a greek telephone operator became the latest junk rated borrower to capitalize on the hunger for high yield, selling debt to pay its owners dividend. in the u.s., corporate investment grade bonds was more subdued, with under $10 billion sold so far this week, a stark contrast to september's heavy volume. markets shrugging

off concern about an economic slowdown, three deals priced on wednesday alone, including a well-placed triple c credit with allianz holdings. high-yield bonds recorded their longest losing streak in 2019. mohamed el-erian is weighing in. muhammad: when you get to really low spreads and especially when the risk-free asset is low, at some point the investors say, i am not getting compensated for the forward risk. then you get a blowout in look at then you high-yield relative to every other asset class and say wow, that is attractive. what is underlying that is the shift between absolute and relative mindsets. i think that is going to continue for a while. jonathan: weighing around the , ox on our andrk off, lisa hornby, gershon distant felt -- gershon distenfeld. if you look at u.s. high-yield spreads, the fourth of the year around 350, the top, the feeling, around 4.50%.

is this any different than the two scares we have seen in the past so far? gershon: it is no different, investors keep coming back to they need yield and the bottom is not falling out, there are not a lot of defaults. that is what is going on at the service. dig deeper and you see some fabrication. if there is a good, solid, deal, it deal -- bb flies off the shelf. overprescribeds and traded up in the market. then you have a deal like shutterfly earlier this week, marketed at 7.5% with no buyers. the final price with a .5% and anded that -- was 8.5% traded down in the marketplace. willing tot step out and buy the riskiest in the cycle. jonathan: a difference between now and q4 of last year.

december, the market just shut down. the ideals we got some of these deals done on wednesday. is that encouraging to you, gershon on, that the market is still functioning? gershon: functioning, but the reality is that investors are showing again the need for yield. that is not going to change -- it is not just the new cycle. it might cause for a day or two, but money is still coming in and that is not going to change until it is apparent that we are i don't sayrd" -- that anymore, or the mini one. oksana: we have a tremendous amount of inflows into the high-yield, about $15 billion, and that continues to support the tremendous need for yield. if you look at under the surface, you are seeing some red flags, at least for this price level, because everything is price dependent. heeledault rate and high

is starting to calm up, about 2.5% at this point. we are seeing slow recoveries of the defaults that we did have, the dollar, $.36 on and an interesting dichotomy has developed on the high-yield market, ccc's tend to lead on the way up and the way down in double-digit years, and this has been a double-digit year for high-yield. in the third quarter, triple c yields were solidly negative, and the higher part of the market was very positive. that is a bit of a warning sign to me, because typically, whether you look back at 2016, 2017, or back in history, ccc, the first one is on the way up, the second is on the way down. the dichotomy we have in fixed income, credit spreads are saying everything is great and rates are telling us that the check engine light is on, so to speak. one or the other has to

dominate, and spreads have to widen to raise less of the r word or slowdown. then rates have to, to meet the sentiment that look, everything is fine. jonathan: i will put you on the spot. what is your base case? what needs to happen? oksana: we think everything across the board is very, very richly priced. even the fundamentals that are not terrible -- we are not seeing anything terrible from a fundamental standpoint, but pricing is very rich. jonathan: lisa hornby? ccc,, or cc to those are the most expensive that you could possibly find. we are staying away from high-yield at the moment. our portfolios have more investment grade and they have had a number of years. we are looking at investment grade, high quality -- i was discussing this last time i was on your show, they have been ying yieldies in bu

spreads. i think we are in a more uncertain economic backdrop been we were before. --economic drag drop economic backdrop than we were before. it is not an on or off, it is a slowdown. you want to become more defensive and liquid in your portfolio. jonathan: gershon on, there is a lesson for investors. gershon: either you are buying a credit fund at high-yield aura duration fund. the credit people are never going to tell you that high yield is not a good place to be, and duration people are never going to tell you that you should not buy duration. you are sponsored by pimco -- i can make a shameless plug, right? [laughter] gershon: acgyx. we balance. half of it is credit risk, half of it is rate risk. given the -- that we do not know both -- which one is

overpriced, mixing them is good. goana: betting on rates to from all-time lows to new all-time lows is a gamble. the market has gotten is consistently wrong time and time again. when the curve looks the way it does and you can still earn 2% on the front end of the curve and you are being offered 1.6 -- you can buy the japanese bonds and hedge them back to the dollar, you end up with the rate of u.s. cash, essentially. why would you use all that risk? we are being very cautious and focusing on safe carry, and a big part of that are liquid floating structures. you can continue to be there and click a coupon and be ready for volatility, which is coming because what is going to bomb everyone out at the end of the day, rates and credits, is math. that is the new word i am introducing here, because fixed income is a mathematically bound asset class, and we are getting close to those bounds. withhan: my guest sticking

me. up next, the week ahead, featuring a new round of u.s.-china trade talks just around the corner. this is "bloomberg real yield." ♪

jonathan: i'm jonathan ferro. this is "bloomberg real yield." time for the final spread. a ton of fed speak for you, including from chair jay powell. we get pmi that of china followed by another appearance from chairman powell on tuesday. the fed releasing minutes from its september fomc meeting and on thursday, the main event. u.s.-china trade talks resuming in washington. a final word from everyone, oksana are in off, we support -- aranov, lisa hornsby, and gershon distenfeld still with us. gershon: i think the confidence

that we have a coherent policy, that it cannot just change on a dime is there. especially in politics, with the impeachment talks and who is going to be the president, what is going to happen in the election in 2020 is going to weigh on the uncertainty and does not bode well for people making long-term decisions. oksana: i do not expect anything at all. it will be a continuation of the one step forward, two steps back. there is no incentive on the part of the chinese to do anything more here. focus on the economic data and that is what will drive the markets. jonathan: lisa hornby, your take? lisa: i wish i could say something that has not already been said by these two, and we want something positive to come out, but we noticed whenever something positive comes out, we get something bad. last week it was restricting capital flows into china. i do not have high hopes. i think it's a small deal did come out of it, that would be tremendous for markets. and more a small deal tariffs potentially in the middle of october.

do you think those are avoidable at this point? lisa: we have seen that anything is possible. there was a time a few months back that we were talking about putting tariffs on mexico, it was going to happen on monday, and it got rolled back on friday. anything is possible up to the last minute. i think the president is trying to use these various negotiating tactics. i think he feels he is more in a perilous spot given the impeachment talks, and the one main thing he has had is a very strong economy. there is starting to be some recognition that things are slowing of it, and i think you are hearing more about -- slowing a bit, and i think you are hearing more about that out of the white house. stop theo investment we we have seen this year. jonathan: trying to read the investment team leaves -- that is a tough one. free kick questions, three quick answers. fed meeting, another cut? gershon, yes or no. gershon: yes. oksana: yes. lisa: yes.

jonathan: spread widening in high yield -- do you buy, or is it different this time? do you buy or is it different this time? lisa? lisa: no, don't buy. oksana: not cheap enough, don't buy. jonathan: gershon? gershon: not in the long term, but it will be in the short-term. jonathan: the german ten-year u.s. spread has narrowed quite a lot. we are around 200 basis points. will that spread be wider or narrower by the year-end? wider or narrower? lisa? lisa: narrower. oksana: wider. gershon: narrower. jonathan: we have to leave it there. a -- oksanas on ranov, lisa hornby, gershon distenfeld. this is bloomberg. enfeld. this is bloomberg.

>> what's going to happen in the future. we start with macro. >> and then you can start drilling down, looking through individual asset classes and picking bonds. i'm really focused on whether or client is going to lose money if we make this investment. >> we take that responsibility seriously and we're proud that investors reward us with their capital and do that every day. ♪ ♪ ♪ ♪

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>> i'm mark crumpton with bloomberg's first word news. backdent trump is fighting against the impeachment inquiry, speaking to reporters as he left the white house today. issaid his administration preparing a letter to house speaker nancy pelosi formally the democrats conducting their inquiry without an official vote. would cooperate with the investigation the president said quote, i don't lawyers.t's up to the an iranian government linked group of computer hackers tried to infiltrate e-mail accounts of u.s. presidential campaigns former and u.s. officials, and among others. microsoft has told the democratic national committee a group called phosphorus made more than 2,700 attempts in august and september to hack e-mail accounts. there are growing concerns that the sameelection faces dangers as the russian