caroline: from new york city for our viewers worldwide, i'm caroline hyde. bloomberg "real yield" starts right now. ♪ caroline: treasury yields struggled in the latest data after surprising retail sales call the health of the u.s. consumer into question. european corporate bond spreads show signs of easing viewed and a wild week for wework. traders rattled as the future of the company continues to hang in the balance. we start with the big issue. markets weighing economic uncertainty against signs of easing geopolitical tensions.

>> there is still a lot of concern geopolitically involving the global macro backdrop. >> as soon as we get across this brexit valley and trade war valley, things will settle down effectively. >> manufacturing is weak globally. trade uncertainty, brexit uncertainty. but you are starting to see pmi and the orders inflect a bit. >> you are at this inflection point where you are starting to get better geopolitical news. the mood can improve quickly, and that means economic stabilization in 2020. >> wait it out. >> ultimately, a little bit better geopolitical news is going to cause this inflection. caroline: the key question, what will it take to resolve the macro debate? joining me around the table is bob miller of blackrock, krishna memani of invesco, and in london, james athey of aberdeen standard investment. thank you for joining us.

bob, inflection point, are we there? bob: maybe. there appears to be a decline in the headwinds associated with brexit, and with the u.s.-china trade escalation that has created headwinds over the past year. the question investors need to ask themselves is what does resolution lead to? is it stabilization at a lower level of growth, or is it re-acceleration? our bet is it is more like stabilization. when you think about the distribution amount over the next year, it still strikes me that it is pretty low odds that we will meaningfully re-accelerate global growth over the next year or two, that the good case outcome is stabilization, and there is still a risk of further deceleration, depending on other factors beyond these two specific headwinds we have. caroline: krishna, you think stabilization is the watchword

here. what about some of the other risks, geopolitical risks that do not seem to be systemic, middle east, turkey? krishna: we talk about geopolitical risk, but the markets are not worried about geopolitical risks, per se. what they are worried about are geopolitical risks that have significant implications for global growth. we don't care as much about middle east or hong kong or other places. we care about brexit and the trade deal. the implications of that are for more significant for the economy. at the end of the day, it comes down to global growth. global growth is stabilizing. bob may not think it re-accelerates but given the low levels where we are, there is a decent chance 2020 ends up being meaningfully better than how 2019 shaped up. caroline: james, give us some pushback. you are little more pessimistic on where fundamentals show we

are going. james: the glass looks rather empty, rather than half-empty to me. to me, the trade war stuff has been an irritant as opposed to the underlying cause. brexit has had an idiosyncratic impact on investment in the u k, but the bigger picture story is, the economy is running out of road in the u.s., running out of capacity, labor force. that means you cannot keep the same pace of consumption. but really the big story has been china and the domestic policy choices they have made, and continue to make. china has been a huge demander of certain sectors and goods from germany. a lot of that has been a function of chinese policy choices with respect to infrastructure. they have essentially stopped and we have seen the german economy stop and the german savings rate increasing. these things tend to feed off of

each other. confidence, sentiment are the means by which, and unemployment are the means by which the cycle feeds off itself in a positive but also negative fashion. i don't see any major reason why some improvement in some of these minor irritants is going to turn around the bigger oil tanker of the global economy. krishna: the point james is making is an important one. if there is going to be a meaningful sustained inflection in the global economy, it will happen from something that china does. the developed market is tapped out. the u.s. economy will stabilize but the growth outlook will not get to 3% anytime soon. that point is important. however, we also have to recognize that even in the context of china slowing down, we are still talking about 6% growth. maybe 20 ends up being slower than that but not a catastrophic outcome. in that context, with support from monetary policymakers, the likelihood of stabilization is good.

financial asset prices in that stabilization context can do well. if you are talking about the economy, maybe things don't work out as well as everyone expects. asset prices, things may work out better than what people expect. caroline: looking at asset prices and demand for certain areas of the market, i want to look at what this etf is showing us. money racing into it. a record amount of buying in terms of the etf. clearly, demand for duration. what is the government bond market telling us, are they worried about recession? are they saying, we need yield, and it is in the u.s.? bob: the fed pivoted earlier this year, and now the market has underwritten the pivot and expects the fed to continue to be reasonably dovish going forward. two, the treasury market, relative to other large scale developed market, sovereign bonds represents the most

attractive relative yield. yes, the ag in the u.s. is up 8.5%, long treasuries are up 22%. it will be hard for that asset class to replicate that same rate of return over the next 10 months that they have produced over the year to date period. but it still behaves as a really good portfolio hedge. the correlation to risk assets remains solidly negative. i don't think that will change anytime soon. the factors that would change that are an abrupt move higher in inflation which seems unlikely, abrupt change in monetary policy which seems very unlikely. for the next year or so, i think it's difficult to see the correlation changing. therefore, the expected return is not what it was 10 months ago, but still a good portfolio hedge. caroline: james, do you agree that the 60/40 works looking at bonds and equities?

is the hedge still working from your perspective? james: i agree with bob, the risk to bonds, there would be some large jump in inflation. it is difficult to see where that is coming from. i don't believe inflation is dead forever. the fact that that conversation occasionally pops up now is a sign that in the not-too-distant future we will see inflation come out of nowhere. caroline: even in europe? james: that is a different question. but yes, still potentially in europe. for all the wrong reasons, i don't think it's a function of tight labor markets. the sort of model the central bank is using to analyze inflation, i don't think it would be any use whatsoever. but if we have reached the limits of how much we can offshore production of low value manufacturing goods, and therefore we get inflation re-impulse from that, supply shock runs out, that could be inflationary. to me, the bond market is telling you that economies

cannot generate growth without being on the monetary support machine. the fact we are seeing flat curves and not seeing reflationary premiums in the markets, and that's telling you in the mechanics of central banks cutting rates and buying bonds is great for bonds, but they don't believe it will generate inflation. krishna: as usual, james is making an important point, especially because i agree. the fact is, the markets, the global economy is certainly dependent on monetary policy. one of the key things bob mentioned was the fact that the fed pivoted. what the bond markets are telling you is there is no way out. this is how things will be for the foreseeable future. it is not as much for returns as it is for a hedge for safety, in case things don't work out in the equity markets. bob: can i offer a quick comment

on this topic? i agree on the sentiment. what investors should be thinking about is, we have not yet seen the limit of innovation from developed market central banks. monetary policy is not dead in my opinion. think about the innovations we have seen since the crisis. negative interest rates, qe. i think we are going to move over the next several years toward greater fiscal monetary cooperation. i think in some of the large developed market economies, we will see monetization of one form or another. ultimately, i think we will witness helicopter money being used in a number of these economies, going direct to the economic actors in the economy, as opposed to by passing it through some form of fiscal monetary cooperation. krishna: if there is a place where that is needed today, it's probably europe. if there is a place where it won't happen -- bob: difficult to execute for the political issues. krishna: yes.

caroline: bob miller, krishna memani, james athey sticking with us. coming up, we are turning our attention to leverage loan investors. they are running for cover. why money managers are plunging into the least risky junk debt they can find. this is bloomberg "real yield." ♪ caroline: i'm caroline hyde in

for jonathan ferro. this is bloomberg "real yield." i want to go to the auction block, and we begin in asia, where japan's corporate debt market hit a record low yield offering a big fat zero. toyota motors will offer two tranches of ¥20 billion in three and five year bonds each on

october 25. high-yield issuance slow this week. charter communications so on investment grade notes. the proceeds of the offerings will be repaying a portion of the company's debt. in the u.s., direct hitters came out in full force at the new auction, the highest direct share on record. meantime, while investors flight to quality pushed on average prices of lower rated leverage loans. goldman sachs says riskier debt is still there. they said they are starting to find opportunities where we are willing to go down in quality. they think the market is being too bearish in quality and are finding good value and mid quality high-yield. my guests are still with me. what does that mean, mid quality?

bob: the degree to which the up and quality trade has worked this year, double-a, single-a clo versus nash and high-yield, this will be the first year where the high-yield index returns over 7% and triple-c's over perform b's. back to the original question at the start of the show, what is the gross outlook? it strikes me the other quality trade is reasonably mature, and if growth is better than expected actually get some reacceleration, the bottom of the capital structure will start to perform. it will catch up. if growth is worse and we see

some cash flows crawl into the inflection point. i think we are probably going to soft land but the risk is that we don't. if we do, there is some value down the capital structure. caroline: in terms of triple c's versus double b credit, we are starting to see the double b doing better than the triple c. why not go riskier? krishna: a couple of observations. the reasons why the lower quality has done well is it has more interest rate sensitivity. as interest rates have rallied, triple c is you buy for recovery rather than interest rates. if you strip that out, the up in quality trade has worked because the economy has slowed down, but the magnitude of that working is

not as large minus the interest rate rally. that is point number one. second, i think people are being extraordinarily conservative with respect to the economic outlook. if the expectations turn at any point, i think the parts of the market that are left behind, that is where people will gravitate. one of the reasons they would gravitate toward that is rates would be rising in that environment and the interest rate sensitivity of that part of the market probably is not going to be as large as it would be for doubleb. caroline: if we are not going to see fundamentals improve, what then? is it a flight to the safer havens in credit quality, sticking to double b rather than triple c? james: because of the nature of how people have positioned,

presuming we are headed into a slower growth environment or recession, people have positioned in terms of the spread you described and are forced to sell because their clients choose to sell units and you can actually find high-quality stuff performs just as badly or worse. we saw that with aaa mortgages in 2008 and 2009. in terms of the spread of performance between high quality and low quality, i agree about the duration aspects. it tells you some thing about sentiment and the practicalities of the credit markets. you cannot sell out entirely out of the asset class. same thing in equities. liuidity problem, but a way of being cautious without completely selling out of an asset class you might struggle to get back in. caroline: i like that you bring up the practicalities of a credit market. here is a chart showing you that in some ways, the credit market is working as it should.

pg&e, 115 and terms of for the bond is trading because the equity is taking a hit. the equity story is the demise, bonds will be paid back. on the blue line is wework, 83% of face value in terms of bond prices. we seem to have moved past the vc enthusiasm, and the company doesn't own any assets, and the risk, about an $8 billion valuation. moving aside from this individual case, are we seeing a movement of particularly the sorts of unicorns, and riskier companies deciding we need to show profit rather than growth? bob: i think the market is raising its required return expectation to continue funding a number of different business models. you can see it in the clo space.

the weakness in the triple b, it is not sector specific. it is very idiosyncratic. it is poor business models or poorly structured clo's, or the documentation is not investor friendly. we are seeing those types of are kind ofwhich late cycle phenomenon. i think that is consistent with where we are. caroline: everyone will be sticking with me, i am pleased to say. still ahead, the final spread. mario draghi host his final news conference. ♪

caroline: i am in for jonathan ferro. this is "real yield." time for the final spread. over the next week, we have the canadian prime minister fighting to stay in power in the country's general elections. tuesday, existing home sales data out of the u.s.. wednesday, mark carney speaks at the house of lords. thursday, mario draghi's final rate decision before handing the reins to christine lagarde. still with us, my guests. i'm going to go straight to number three. the last one. the handing of the baton from draghi to christine lagarde. you sound optimistic there are still things central banks can do. what do you expect she can pull out of the bag in terms of incentivizing germany? bob: my confidence that the central banks will ultimately end up in these more innovative

operations is not really centered on the ecb being the leader of the pack. the political structure relative to the monetary policy structure is so inconsistent, the lack of coordination of political or fiscal makes it really hard for the cooperation that i referred to, the fiscal-monetary cooperation in various forms to occur. i think we will see it in japan, much more likely in japan. perhaps eventually in the u.s., if we can't generate some structural reform before it is necessary. it is harder to see in europe. i expect some movement toward fiscal, but i am suspicious that it will be a massive change in posture. caroline: james, do you expect a good handing over of the baton

to attempt fiscal policy to work? james: it's a tough one. that's one of the positives of essentially appointing a politician in the role, the specific problems and challenges in the euro zone and ecb, may be better served by someone who understands the politics. eventually, these are still democracies and we are talking about sovereign nations. germany needs to reach out to its people and explain the problem. in doing so, they will have to admit there have been half truths that have gotten them to this point, and that will be difficult. there are political specifics in germany that suggest to me a preemptive fiscal expansion is imminent. caroline: we have a rapidfire round. do you need credit ratings? are they utmost importance of -- or secondary importance? krishna: i think it's easy to

stamp on credit rating agencies, especially toward the end of the cycle, but they provide a very good -- yes. bob: they are helpful. james: absolutely not. caroline: treasury, 2% or 1.5% first? krishna: 2%. bob: 1.5%. james: 1.5%. caroline: brexit developments, are you hedging u.k. exposure or doubling down? krishna: adding u.k. exposure. bob: sterling related exposure. james: stay that way for now. caroline: it has been a joy, thank you for joining us. that was bloomberg "real yield." ♪

y95óóo scarlet: i am scarlet fu.

this is bloomberg "etf iq," where we focus on the access, risks, and rewards offered by exchange traded funds. ♪ scarlet: global headwinds persist but global opportunities abound. we'll look at where in the world offers the best growth and value for your dollar. women in etf's. jill delsignore and sharon french explain how the rise of passive investing paved the way for women to make inroads. playing defense to win. the search for haven companies draws in big dollars and starts delivering for invest