jonathan: from new york city i am jonathan ferro. bloomberg real yield starts right now. ♪ investors shaking off a week data hoping to resolve lingering macro issues as broader credit remains resilient, cracks emerging and leveraged loans. looking for clues beyond the next rate cut. we begin with the big issues, debating whether we have seen the worst of it. >> the u.s. is in a good spot. >> the u.s. is still falling and manufacturing. >> manufacturing is weak globally. >> will we see something as bad

as 2015? probably not. >> numbers are going to be weak through the balance of the year. >> you may see some signs of bottoming out. >> if we see pmi's in decline maybe there are some downsides. >> this will continue to decelerate into the first quarter. >> maybe we get good news from a trade deal out of china or out of brexit. maybe that leads to a short-term pop in yields. >> we should see growth improving by the first quarter of next year. >> this could be the bottom. it might get better. is colin joining me robertson, kathy, and jim kate in the blackrock. kathy, have we seen the worst of it? kathy: it looks like the worst is over but it does not look like it gets much better for here -- from here. we are cheering on the fact that it is not continuing to decline at a fairly rapid rate. we get a trade deal, we have

some lag from the easing from china and other central banks. is over butrst certainly going forward it is not going to be strong. jim: the data is going to be mixed. there are components of the market or different reasons that we will see weaker data or weaker news into the balance of the year. there is a variety of data that will start to stabilize and you are seeing that in corporate earnings and some parts of pmi data. you see some stabilization. i don't think this is about upside level or growth but about reducing the probability of a recessionary risk. jonathan: something we have mentioned for the whole week is sometimes how the market response to data is more useful than the data itself. the treasury market rallied on bad news -- what kind of signal is in that? >> the signal there -- and it is

troubling to me. i don't really supported, -- support it but to your point that we have seen the bottom or the worst of it, i think it is early to think there is a light at the end of the tile and we are moving forward. i think the fed is too tight. what they say next week is important. to market is setting them up positive till after the first quarter of next year but i'm not sure what they will say. i think we need to see that play out and we will have a better feeling of what things will look like after next week area -- week. kathy: the market has incorporated so much bad news that it could not continue to react to bad news any further. the fed will try to pause after this next rate cut. we think after the rate cut next week they will try to go on pause. capitale is the cost of

is not the problem hanging over the world. it is not the problem in europe or the rest of the world. it is not a problem in the u.s.. or the rate cuts may not do that much. jonathan: it hasn't been a problem for much of the year but they still cut twice and are set to cut again. kathy: they are an inverted the yield curve which was important. they got the fed funds rate 30 close to the neutral rate or below the neutral rate which takes them out of being restrictive and policy. now they can say we are neutral or accommodative. jonathan: jim? jim: you came into this year risk,yclical downside risk coming off of the 2016 rebound. you had the tightening of the fed report. the central banks, including the fed, have been easing throughout the year. if you just look at financial conditions relevant to economic activity, you're seeing a pretty big divergence.

collectively all the central banks have been easing. i think that ultimately should lead to a level of stability. there are things to be said of downside risk associated with , but i think the fed will be very reactive to that or proactive on how that looks next year. whether they stop or keep going i think is less important to me. the trend is that they will be very accommodative. some stabilization of data. that is a positive environment not only for credit but you can alternately see the equity through the end of the year. jonathan: we will talk about credit and equities later in the program. equities at an all-time high. you came on this program a long time ago when we were at 3% saying 150 on the 10 year? we have reached that level around 180. colin: i think the lowest could possibly be it for the year but i like 10 year treasuries at 180.

jonathan: you are a buyer at 180? colin: yes. if i gave you arrange for the next few months this would be the hive. to give you rough numbers, one our oneed a quarter and three quarters would be my 10 year range. jonathan: what about the economic conditions makes you bullish on a 10 year of 180? colin: negative interest rates in a lot of places. in many countries with respects to their 10 year rates. we have not dipped yet. i think the fed is too tight. we are where we were in june of last year right now. if they ease one more, to me that would be the first ease. last year i was dead set against the last two tightening's and i think they were mistakes. -- jonathan: are you a buyer at 180 kathy? kathy: we think there are values at 180 or 190 on the 10 year. if pmi's turnup instead of going down that would raise our

fair value. to 1.5 or 2%closer for the next six months. jim: long-term it is ok but in the short term there is more risk. jonathan: look at the data so far. pmi is not great. german ray of hope in business expectations, kathy, do you see signs of stabilization? kathy: it is not deteriorating at a rapid rate. the slowdown has slowed down. that is somewhat stabilizing. i don't see a lot of positive upside or a reversal in the rate of economic growth. jonathan: to revisit the start of this conversation, the data in europe has not been fantastic. the spread between 10 year u.s. versus germany has started to close up, approaching 200 basis points. do you think that can go

narrower and what levels does it go to? >> i think it can go narrower and probably not a whole lot. you could see it move more . you have the weight of the bund yield sitting there, that can pull on the u.s. yield and vice versa. don't think things are turning around in europe. i think things are not getting worse in europe. >> my thoughts are that it could still lined out a little bit. starts to move down further negative in yield i think it will drag the u.s. with it. if i say i like 10 years at 180 there has to be a reason. one reason is i don't think the drag is in the market. coming up on the program, auction block. cracks emerging and leverage loans as investors pushed back. this is bloomberg real yield. ♪

jonathan: this is bloomberg real yield. i want to head to the auction block and beginning europe. italy sold 3 billion euros of two-year bond. was 1.5 times higher than the issuance resulting in a yield of -.01%. u.s. junk bonds seeing a flurry with at least seven deals pricing, netflix boosting volumes to almost one billion. leverage loans and issuance to finance the acquisition of hasress maker offered one of the highest

yields at 12.5%. trouble deals are an eye-opener. have seen recently is if you have a deal that is not the marketproperly can be pretty punishing at the bottom end. jonathan: my guests are still with me. jim, your thoughts on loans right now? jim: the loan market has structurally changed. you have a market that has shifted from maintenance --erage -- the all dynamic the credit quality has decreased. inherently the market is risk year. -- riskier. are negativethings from a long market perspective. -- loan market perspective. within the loan market there are a couple different stories. is still doing

ok, it is a lower quality part of the market that has bifurcated and is pretty negative. we continue to be cautious across markets and loans generally look a lot more like a secured high-yield bond market. there are areas and pockets where you can find good spread and risk in the loan market but it is similar to the high-yield market in that you have to be careful. kathy: we have had a light loan market for some time. why are you buying loans when rates are going down? jonathan: is this about floating rate and no appetite for it or is there some credit risk? kathy: both. you have seen a decline in credit quality and falling rates. are finally seeing investors pushed back and deals not getting done. the combination says why be in the loan market? finding the about right bonds is the most critical piece. in general i don't like leverage loans.

about hownt jim made it now looks like a high-yield market where you have to be careful and make sure you are involved in the right securities. i'm getting paid for the fact that the securities look like true high-yield. >> some of the issues we are seeing in leverage loans are quite similar to what we saw at the end of the year. what is intriguing is that the back end of 2018 more broadly, the fixed-income environment was a fix of -- a bit of an event. we are seeing issues this time around when the rest of the fixed income universe is doing decently. spreads are high, what does that tell you? colin: if you look that double the two high-yield, percentile of the last 10 years, spreads are at their tightest. when you look at triple c's and the high-yield market they are at the 75th percentile. there is a lot of bifurcation in the high-yield market. it haslook at energy

weighed down on parts of the high-yield market. you are seeing the same thing and loans but you are not seeing the differentiation of return the cousin it is a front end spread problem. in the loan market credit risk has increased. there are areas of the loan market that i think you want to it iseful of negative -- going to trade similar with downside risk like a high-yield bond. there are others, it is not about the floating rate it is about where you can find good spread risk and good securities that you can see returns. you want to fortify percent return in the loan market, i would not necessarily say by it in isolation. across the markets in credit is a lot of dispersion. if you can utilize a high-yield, loan, or different regions you can capitalize on creating good income and avoiding downside risk of bad business models. i disagree to be perfectly honest.

and if the market turns this differentiation is not going to help a whole lot. is ioan market being as it would say you are better off moving into high-yield then you are staying in the loan market. jonathan: looking at high-yield through this year we have had three scares. we get close to tightening around 150 and spreads blew out. we didn't get to 450, what does that tell you? kathy: the search for yield is still intent spirit -- intense. as the fed lowers rates people will pilot the thing that offers yield irrespective of quality. jonathan: any reason to believe that demand goes away, jim? every time there is a scare and spreads break out towards 450 the buying comes back in. any reason to believe that goes away? jim: not at the micro level. those are macro factors that

could pull the market into a recession. if you have a recession the broader credit spread market will selloff. we have a lower probability for that but when you think about the triple be market or the double be market it is a fear of an earnings recession or an economic recession. those are the things you want to watch. we can talk about the loan market being negative, it is still up 6% for the year which is a pretty good quality return when you think about all the negative noise. insatiable demand for fixed income, high-yield fixed income, and not like the old days when a high-yield portfolio manager in a time of stress would be worried they cannot raise enough liquidity. high-yield portfolio managers are scared they cannot get bonds back if they sell them. that is a huge transformation in the markets right now. very supportive of high-yield, we like high-yield and i think

that will continue until next year. jonathan: coming up on the program, the final spread and the week ahead featuring the fed rate decision. that conversation is coming up next. this is bloomberg real yield. ♪

jonathan: i am jonathan ferro, this is bloomberg real yield. time for the final spread. it is crunch time for brexit with the deadline coming on october 31. onwednesday rate decisions, friday vice president -- vice chairman rich klingerman will be speaking after the u.s. gdp and payrolls report. still with me colin robertson,

kathy jones, and jim keenan. colin, you are looking for a bad number next friday, why and what? colin: i think with not a lot of support that things are getting better. i think the forecast overshot where we will be. and about 85,000 i would be much more inclined to think it will be closer to zero than 85,000. i am on senior revisions because that would feed into my process that things look better than people think. jonathan: where would you look elsewhere outside of the headline number? colin: the revisions coming down. jonathan: just on the headline numbers? stuff isat other messier, i want to look at the specifics of the headline. at under are looking the consensus closer to 70 or 75 than 85 area it will be a messy report because of the gm strike and several other factors. even in the hours worked and

average hourly earnings it might be hard to parse through exactly what is happening. it is slowing down. employment growth is slowing down. because of manufacturing and some of the autos, it is going to be a week number. i would somewhat look through it the consumerhat -- has been a positive story in this whole thing. i think jobs are slowing down but the consumption and consumer is in a good place. jonathan: a decision next wednesday. 75 basis consumer has been a positive story in this whole thing. points is what most people consider the midcycle adjustment to be. if we get another cut that is 75. how does the fact communicate they may be done without upsetting the market? jim: i think they will cut and i don't think they will say they are done. fed has moved towards the language of being more data dependent. there aret six months a lot of things going on between trade uncertainty and the election that could create a variety of different outcomes. i think they will leave a lot of

different optionality open but language will be important. kathy: i would agree. i think they will try to go on positive but i don't think they will actually communicate that. i think they will communicate that they are done for now will wait and see. i think their inclination is to try to stop after this if they can. colin: i think they put themselves in a position where they have to leave the market into thinking they are still data dependent which i don't really like. i would be happier with them if they were forecasting or trusting the forecast. data dependent does not tell me a lot. when they talk after every meeting that does not tell me a lot. i think they painted themselves in a corner. they are not done or pausing. jonathan: a question that has come up so many times on this program, if they are dependent which data are they dependent on? jim: i think it is inflation or growth. -- >> i think it is inflation

or growth. kathy: i don't think anybody really knows the sum of all they are looking at. they talk about inflation being below their targets, but many it measures of inflation the fed produces are above 2% already. it is hard to narrow what data matters. they talk about the employment situation, some believe in the phillips curve and some don't area -- don't. they talk about global headwinds. those winds will be stronger at some and weaker other times. do we know what they are looking at, i don't think so? jim, do you understand the reaction function currently at this federal reserve? there is still room in capacity because the aggregate deficit -- the inflationary aspect. also what this fed is looking at his labor.

some of the inflationary data if it is labor income that is releasing and that can hold up aggregate demand i think the fed will be willing to run with inflationary data that is higher. for the last 10 years corporate profit margins have benefited -- in the next 10 years if you see labor expansion at the expense of profit margins but aggregates hold a think that is a good story from the fed perspective. jonathan: the rapidfire around. a fed twist on this. is the fed one and done for 2019? yes or no? kathy: yes. colin: no. jim: yes. jonathan: no forecast or summary of economic projections at the meeting, does that help or hinder powell's communications? colin: hinders. expectations for next

year from the fed. cuts, orone cut, to more? two cuts. kathy: one. jim: one. jonathan: colin robertson, kathy jones, jim keenan. always great to get your insight. we will see you next week. from new york for our audience worldwide this was bloomberg real yield. this is bloomberg tv. ♪

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