jonathan: from new york city, i'm jonathan ferro. "bloomberg real yield" starts right now. ♪ jonathan: coming up, global risk appetite remains at the mercy of the next trade headline. treasuries heading for a big weekly loss. bond yields climbed to a three-month high. as credit rallies, investors waiting for the fourth biggest corporate issue on record. we begin with a big issue. the global bond market shakeout. >> it feels that in the bond market yields could go higher. >> close to 2% right now. >> certainly you can go beyond 2% likely by year-end. >> if it keeps pushing higher, then you'll start to get a

capitulation which will bring us another leg higher in yields. >> we have seen some capitulation. >> you will continue to see pressure on yields. >> lower bond yields from here the market would not like. >> if this reverses, it reflects significant deterioration in macro. >> the market has come around to the view that maybe we are not going into recession but slower growth environment. >> a substantial amount of institutional investors that perhaps have overweighted duration. >> you want to buy duration here because we have not yet seen a sustained pickup in momentum in u.s. data. jonathan: joining me are robert tipp, samantha azzarello, and krishna memani. sam, is there any more oxygen left in the treasury selloff we have seen this week? samantha: i think so. rates could continue to go up. we have seen rate volatility has been high this year and nothing will stop that. jonathan: you agree with that? krishna: it depends on your investment horizon.

the market selloff has been significant. i think by year-end, we get close to 2%, but it is getting higher from that. next year because of lots of factors, the fed balance sheet expanding, the global re-acceleration, and the overall issuance in the marketplace will be significant. all of that combined, rates will be higher not lower. jonathan: you didn't mention trade, why not? krishna: trade was an issue in the early part of 2019 but not relevant for the future as long as we don't get exacerbation of the trade issue. i think if we resolve the trade issue, that helps the economy, but modestly. one way or the other, i don't think trade is the driver at the moment and it's unlikely to be the driver in 2020. jonathan: at this point, i think it is critical for this bond market move to continue or not, to what degree is this through the last couple of months about signs of a global economy bottoming out or about the trade

story, and how independent is one from the other? krishna: we have cross signals at multiple times in this kind of rally. i think the key here is global trade, the impact of that on the economy is actually relatively modest in the near term. from a longer-term perspective, it's very important. but the impact on real growth, revival of growth is modest. it is not trade but the reacceleration already unfolding because of the central bank pivot. robert: a lot of the weakness in the economic data, the downturn has been more secular, has not been that much a result of the trade. i think the starting point, when i look around, are we getting a bounce, improvement? i hope so. could the selloff go further in the short-term? very difficult to handicap that.

but when i look at the starting point, that is the thing that will anchor us. industrial production in europe -- and it is a good sign -- is at recessionary levels. industrial production in the u.s. is down to zero year-over-year. even though decent service growth, jobs growth, on the good side you are stagnating. i think that is an environment where you are in the right zip code for rates. jonathan: sam, take us one step further. is this a trade-dependent selloff? samantha: i disagree, i think it is dependent on trade issues. the idea of a trade resolution is a moving target. we can say the data might be bottoming or not, but that being said, one week does not make a trend. this week, it's been completely induced by trade tensions looking like they are moving in the other direction. jonathan: i would go one step further and suggest something interesting is happening. the way investor's attitudes have changed on the news. on a day when you get perceived

negative trade news, the rally in the treasury market is a whole lot smaller than the selloff when the trade news is perceived to be positive. krishna: that is the proof of what the market driver is. i think the overall reacceleration of the global economy, everything bottoming out in the third quarter is the key theme. trade makes for small gyrations around it. it is not the core issue. the core issue is the bottoming out, reacceleration that will take place over the next few quarters. jonathan: the next stage of the conversation needs to go to the positive correlation that we may reestablish between treasury rates and risk assets. at the moment, it has been a negative correlation. risk assets perform well, treasuries perform lower. do you see that continuing, or do you see the treasury market become somewhat self-limiting with this selloff, that it begins to impact markets elsewhere? krishna: that is a critical point. to answer that, i go back to what jay powell said in his

press conference, which seems like eons ago. they will not even consider raising rates until they see persistent inflation, which means never. so effectively, the upside in rates is actually capped out. the correlation can continue for a while. after a while, it stops, because rates stop backing off because the front end of the commodity is not moving and there is only so much steepness you can have. jonathan: your thoughts on that, how self-limiting a treasury market selloff could be? robert: i agree. relief on the trade side, risk assets take off. one of the limiting factors on equities has been -- and you have seen this in japan and europe -- low rates do not bring you high equity prices. you drop the discount rate but if growth expectations are too moribund, you don't get the

equity upside. as we see the trade tensions come down a bit, we see equities take off. i think we just came through a period, when we talk about, are we going to get re-acceleration, we just had fiscal stimulus. we are coming into an election, are we going to get another tax cut? i don't know, but i was surprised at the rapidity with which the last one came through. if you are not going to get a tax cut, monetary stimulus, i don't see where the acceleration will come from. we have already priced the fed out of the market. krishna: we are getting monetary stimulus. it is the expansion of the balance sheet. the non-qe qe taking place in the marketplace. they can call it whatever they want. it is stimulus. if you expand the balance sheet by $50 billion a year, call it whatever you want, it is stimulus, for its impact on the various channels. jonathan: is it stimulus if it focuses just on bills? krishna: it is not stimulus if

it focuses just on bills, if the curve is really steep, because of term premium. term premium, again, is nonexistent. if the curve is steeper it's because of inflation expectations more than term premium. in that regard, the impact of stimulus is going to be minimal anyway because term premium is low. that is what is unfolding. robert: i think you are right, that we have had a sea change. if you rewind 6-12 months, ecb thought that they would be done buying, could be raising rates, the fed was raising rates, rolling off their balance sheet. the bank of japan has been kind of constant in reducing their purchases. fast-forward they are injecting and liquidity. they realize they have to keep up with the liquidity needs. ecb is fine. what we have seen when you have that liquidity injection is better risk asset performance and a steeper yield curve. jonathan: quick question on u.s. duration, have you been a buyer? robert: i will not comment.

jonathan: but you have been been a buyer? robert: your range has shifted between 1% and 2%. i will be watching to see. part of that growth we had was a function of the fact that rates were so low, and supporting the interest-rate sensitive side. now we have seen rates come back up. my guess is you will roll over here. jonathan: what would you say to that, sam, the top end of the range 2% for the u.s. 10-year? samantha: i think the issue is the range of possible outcomes is quite wide. we can pontificate on the idea that rates continue to go up. it is equally likely rates could go down from here. it depends on how the trade news unfolds. krishna: i think reacceleration is unfolding in front of us. the fed is stimulating the economy. we will have a trade deal. rates are going higher. the 2% range will be pierced, if

not before year-end, close after that. jonathan: i remember your year-end target, 3100 on the s&p 500. krishna: thank you very much. jonathan: the year is not over yet. you are going to be sticking with me. coming up, the auction block. bond offerings in europe setting an annual sales record. this is "bloomberg real yield." ♪ jonathan: i'm jonathan ferro.

this is "bloomberg real yield." i would like to head to the auction block and begin right here in the united states in the treasury market.

the 30-year treasury yield, climbing to a three-month high as the market absorbs a $19 billion auction this week. in corporates, the energy sector boosting u.s. investment growth supply led by issuance from shell. next week, investors await a $20 billion issue. in europe, new sales have broken the full-year issuance record with more than seven weeks to spare. the annual tally exceeding 1.28 trillion euros. sticking with europe, investor appetite for european exposure has remained buoyant. >> with europe less bad than it has been and with sentiment already so negative, it's an interesting time to go back into europe. less bad is enough to buy risk. jonathan: still with me around the table is robert tipp, samantha azzarello, and krishna memani. "less bad" is enough to buy european risk. your thoughts? samantha: we don't like european credit at the moment. we would rather be with investment grade in the u.s., in high-yield in the u.s. jonathan: i imagine it's a

different calculation to make. from a credit perspective, europe versus the u.s. for you? krishna: if you are a cross-border investor, would you find european credit assets attractive at this point? the answer to that is no. having said that, there are a lot of european domiciled investors who can only invest in that particular continent. to them, given what's happening in europe, in terms of the reacceleration, stabilization, and the ecb balance sheet expansion, ecb easing, that bodes really well for european credit assets. robert: i think europe is attractive. the credit spreads are 90% of u.s. levels. issue by issue, some of the spreads are wider than u.s. levels, even for u.s. issuers. looking at both markets is worthwhile, relative value opportunities.

but the technicals are very favorable there as well. the demand to borrow in a place where production is actually contracting is lighter. we have a big gross number here but the net numbers in the u.s. are down in the 20's. you have the ecb as a buyer. jonathan: this is an important point for the united states. next week, abbvie coming out with this $28 billion monster issue, the fourth biggest corporate issue on record. you are saying on a net basis this year in the u.s., the numbers have not been that big? how much demand will there be for an issue like that next week? robert: i'm sure it will depend on pricing. there is a lot of money out there. i don't think there has not been any shortage of buyers for something correctly priced. krishna: $28 billion is a lot of dollars to be found. having said that, it is a large

issuer, has been a large issuer. i think the issue will actually go reasonably well. there are plenty of people who can buy substantial amounts of a large issuer because of the index weight if nothing else. jonathan: there seems to be red-hot demand for liquid issues in the investment grade space. do you expect that to continue? samantha: it probably will. if you look at passive etf's, we are not huge fans of the debt-weighted view of the world, not light cycle. we don't want to hold the issuance just because it is big and liquid. we want quality, we want companies that can pay back and have a buffer against any downturn that we might see. for us, i think quality and value, taking a factor approach with respect to investment grade, makes sense. jonathan: let's talk about the quality approach to the broader fixed income market with high-yield. the likes of triple c's have lagged the high-yield market. extremely bifurcated. do you see risk appetite picking up, and the areas that have

lagged coming with the broader market more? krishna: absolutely. this is a troughing of the overall global economic cycle. if you believe that, you cannot have triple c's out there by themselves when everything else rallies. after people get convinced, as the equity markets are getting convinced today, that things will be ok, we will have a trade deal, triple c, asset classes, and loans for that matter, asset classes that have been left behind will probably tighten as well. jonathan: you see the stock market leading this move? krishna: equity markets, because you had a lot of other options within the credit market that you could buy, you didn't have to focus on the triple c or lower end of the market. the same thing has happened in equities as well. the value part of the equity market has not rallied as much as the growth part of the equity market. if they have started to catch up in this treasury selloff, then

the same thing will happen with respect to triple c's. robert: not only have triple c's underperformed but the downside risk for names that have missed on earnings has been spectacular. no doubt it is a bond pickers market out there. looking at next year, people are expecting much higher defaults. some of the issuance of recent years may not have been as underwritten as well as others. some parts of the economy are underperforming. but in aggregate, spread sectors are likely to outperform. the defaults are likely to probably undershoot, or the disasters will be avoidable more often than not for people taking the time, putting in the effort to avoid them. you will get the outperformance. jonathan: i know how bullish you are, krishna. i want to work out how bullish

you really are. if you think this cycle will go on for a number of years and you think areas of the high-yield market can get a lift, can we test cycle tights on high-yield again? can we get anywhere near them? krishna: on the higher end of the high-yield market, we will certainly test high-yield cycle tights. we look at triple b's because of the good data theory. i think the tight was 80. 101 over the past couple of months. by the end of next year, it will be closer to 80 than 120. jonathan: i will hold you to that call. you all will be sticking with me. coming up on the program, the week ahead. speeches by donald trump and fed chair jay powell. that conversation is coming up next. this is "bloomberg real yield." ♪ jonathan: i'm jonathan ferro.

this is "bloomberg real yield." i would like to head to the final spread. coming up over the next week, what a week we have coming up. monday, the u.s. bond market closed for veterans day. things get going on tuesday. president trump giving a speech at the economic club of new york. wednesday, the house intelligence committee holding the first public hearings as part of its impeachment inquiry. fed chair jay powell addresses the joint economic committee and then we get cpi data. thursday, a slew of fed speak including richard clarida. friday, u.s. retail sales and industrial production. with me for some final thoughts are robert tipp, samantha azzarello, and krishna memani. that speech from the president next week, what are you looking for? krishna: some color on trade, aspirations with regard to trade would be good. basically articulating his agenda for the next year in some form or the other, for his reelection bid. samantha: just calming and

easing in the market. jonathan: do we need a resolution on a trade agreement, do we need to hear from the president next week that we are going to get a phase one deal? samantha: the word resolution means different things to different people. i think we are just hoping for easier conditions with respect to trade. robert: i think he has to keep it going, he has to keep the tensions going all the way through the elections. jonathan: you really think that? robert: yes, otherwise, he will be criticized for being too easy, caving before we got to the hard stuff. jonathan: the reason i ask, there are many people that think this president needs a deal going into 2020, to run on the campaign with this in the background and focus on having a good economy. krishna: they need to take the trade issue off the table. they don't have to solve everything, and it is unlikely that they will. even if they do get a phase one deal, it's really about rolling back tariffs, allowing issues to die down. the real crux of the trade issue does not get resolved anytime

soon, and that may continue for 10 more years. jonathan: what do you say to that, robert? robert: i agree. they can paper over differences, but we have seen a lot of back and forth. we have seen things come on, go off, get delayed, move forward. i think, really, the underlying substance of what is going on in the economy and the fundamentals are more of a driver than people realize. jonathan: that is a big speech next week. if there is not much success -- suspense around the fed speech next week, is that job well done? samantha: it is progress. go back to january, we were all confused. fast-forward nine months, we are in a better place. i know the futures market is still pricing in 30 bps, but the fed is making it clear they are on pause and we all seem ok with that. krishna: you remember the midcycle adjustment, how to

shoot yourself in the foot while you are trying to do good? but jay powell has learned a lot. the comments that he made in his press conference were really the most significant set of comments that have been made by a fed chair in a while. we will not even consider raising rates until we see persistent inflation, which is never. jonathan: the fed pause is underway. i wonder how long it will last. we will get to the final rapidfire round. let's begin with the first question. do we get something referred to as a phase one deal by this administration before year-end, yes or no? krishna: yes. samantha: no. robert: yes. jonathan: when to buy the u.s. 10-year, now, wait until 2.25, wait until 2.50, or 2.50 or more? now, wait until 2.25, wait until

2.50, or 2.50 or more? robert: better safe than sorry. 2. samantha: no timing. if you need duration, buy it now. krishna: 2.25. jonathan: if you have to allocate capital on a regional basis to risk assets, europe or the united states? europe or the united states? robert: that is a tough question. europe. krishna: u.s. for credit, europe for equities. samantha: allocation, u.s. if you want to be tactical, europe. jonathan: great to catch up with you guys. from new york, that does it for us. we will see you next week same time, same place. this was "bloomberg real yield." this is bloomberg tv. ♪ sometimes your small screen is your big screen.

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