jonathan: from new york city, for our audience worldwide, i'm jonathan ferro. "bloomberg real yield" starts right now. ♪ jonathan: coming up, investors patiently waiting for a phase one trade deal. big returns to the treasury market, yields retreating from three-month highs. u.s. credit delivering the second biggest week of issuance so far this year. we begin with the big issue. just what is feeding investor optimism? >> the fundamentals are a lot more of a driver. >> it is all about trade. >> it is 100% a data issue. >> i have to disagree with that. >> trade is becoming a secondary issue. >> i think it is dependent on trade issues. >> the real key here is the

global growth bottom. >> data has bottomed out. >> probably bottomed out. >> the data has been decelerating for the last year, 18 months. that is coming to an end. >> confidence is rebuilding. you can see it in the bottoms up numbers. >> the data has been bottoming. it is not 100%. >> all we are looking for markets to go hire is for the global economy to revive and overall trade issues do not get worse. >> if trade negotiations fall apart right now and face four tariffs go in, you cannot tell -- phase four tariffs go in, you cannot tell me that the data will not get worse. you either get a phase one deal, which is fine, or it falls apart, and we go into phase four tariffs, which is bad. jonathan: joining me around the table is matthew schumaker, kathy jones, and matthew hornbach. kathy, i have been fascinated this week. i cannot find any consensus this week as to what is driving the market. what is it? kathy: it seems like this resilience in the u.s. economy,

the belief that the global economy is bottoming, maybe we will get a trade deal -- i am little skeptical on the deal thing -- those seem to be the drivers. jonathan: i keep coming back to this question, is global growth bottoming? some people believe it is. where is matthew hornbach on that argument? matthew: in the united states, the jury is still out. you've got maybe one month of data that was not horrible, like we have had the last couple of quarters. i just don't know if one data point is enough to call us all there. mike: from our perspective, we do think trade is driving the markets. jonathan: let's talk about it, then. why isn't it driving the market this week? five weeks of being told we are close to a phase one trade deal, and now according to reports, kathy, they cannot even agree on how many agricultural purchases they should follow through on. why are we still confident this deal gets done? kathy: it beats me. we have had talks and talks and

more talks, and as you say, agriculture seems to be level one for a trade deal and we don't have that. it is much too late for the farmers this year anyway. so, i'm not really sure why there is so much optimism. perhaps we are not being pelted with a lot of negative news. they are talking, and as long as they are, there is hope that there will not be an increase in tariffs. jonathan: do you get the feeling that it is just the price setting the narrative? just feeding on itself for two months, and then we sit around on programs like this trying to rationalize things with an articulated theory as to the fundamentals underpinning the move, when there aren't any. matthew: the same thing happened back in 2018 when we had that spike above 3.12 on the 10 year note. everyone was talking about 4% 10-year yield. the market price was driving the narrative, and that was the wrong thing to be talking about. the same thing is happening today. at 1.95 on the 10-year, people started talking about 2.25, sell the bond market.

clearly, that is not the right trade at the moment. it comes back to trade to a certain extent. if we do have a trade deal and there is a rollback of the september tariffs, we are going higher in yield. if not, we are very likely going lower. jonathan: 40 basis points off of the move. let's decompose that move. let's try to understand what is behind the treasury yield push higher over the last couple of months. when you break that down, real rates, inflation expectations, what is driving it? matthew: i like to break it down into rate expectations and term premiums. when i look at what happened from september 1, really from the time that the tariffs were implemented, you see a reflation in the term component of the 10-year yield but low levels of rate expectation, which makes perfect sense. the federal reserve has cut rates 50 basis points and now there is optimism being built that we can have a trade deal. kathy: i would agree, the term premium of that has been driving

this. it got down to -84 basis points. it didn't take a lot of shift in expectations to have it bounce back to some degree. we actually think there is room for it to go higher. mike: maybe putting it slightly differently. we think about the back end being driven by global markets. on the front and, whether it is the u.s., europe, it is central bank dominated. jonathan: here is the goldman take. the outlook for the u.s. 10-year yield. we believe a major portion of the bond market selloff is behind us. 10 year treasuries will struggle to move substantially above 2.2 percent, largely on account of policy expectations having reached that level the last year and banks signaling the high threshold. this speaks to something you touched on, matt. something else goldman sachs has

touched on again and again. the next move, if we are going to get a move higher in 10-year treasury yields, a lot of the heavy lifting has to come from inflation expectations. not many people think that will come through. with that in mind, the upside is limited on the 10-year yield. what do you say back to that? matthew: i agree with that. at the end of the day, in order for the fed to think about raising interest rates, you have to have core pce above 2% for a substantial period of time, likely something in the order of a year, and it will take at least that amount of time to get inflation expectations to get moving higher, which is another box that has to be checked for the fed to hike rates. jonathan: what is the conclusion here, range break or head fake? which is the conclusion here? matthew: head fake. jonathan: i know you disagree with that, mike. mike: we think about the trade perspective differently from some folks and say, all right. if you go back to may, when donald trump tweeted about expanding the range of tariffed goods, we have had three cuts by the fed.

something in the 2.10, 2.20 range if there is a deal, that seems very much in play for us. kathy: i don't think the path to 2.25 is all that hard to get to -- through if we get some positive news. and i would argue that i'm not sure the fed will wait for inflation to stay above 2% for a year before they consider hiking rates. i'm not sure -- it may be more of a case of let bygones be bygones. we have been below it, but once we get sustainably above it, especially if there are signs we are tightening in the labor market, getting other inflationary pressure, i think the expectations may build sooner rather than later. jonathan: that is the take for a lot of people. matthew hornbach, a few out there at the moment. the federal reserve is incredibly high. is that where you stand on the issue? matthew: i think that's true, but there is a tremendous level of asymmetry in the level of these bars. when i think about the timing of

the next possible rate hike, i'm thinking middle of 2021. again, i don't think the fed will hike in the second half of next year, not only because there is an election, which i think generally raises the bar for action, but more important is in the middle of next year, the fed will opine on their inflation targeting framework. how on earth are they going to hike rates after they tell us that they care about missing on their inflation goal? it doesn't make sense. mike: maybe the bar for action is tough, but think about late last year. the fed hiked in december. two weeks later, powell had a bad new year's party or something. the whole tone changed. was there an actual shift? no. but did the markets react? of course. you can have a pretty quick turnabout by the fed. jonathan: are you implying i had an opinion about a policy decision from the federal reserve? everyone is sticking with me. coming up on the program, the auction block, featuring the biggest investment grade debt deal of the year so far.

abbvie is coming up. this is "bloomberg real yield." ♪

jonathan: i'm jonathan ferro. this is "bloomberg real yield." i want to head to the auction block and begin in europe, where the primary market is showing few signs of calling. deutsche bank raising 500 million euros, helping weekly sales to pass 30 billion. no shortage of supply on this side of the atlantic. the junk-bond market set for its busiest week in two months. finally, the big one, abbvie selling a monster $30 billion in bonds to finance its acquisition of allergan. big demand to buy a piece of the

biggest debt sale so far in 2019. it took the supply to roughly $50 billion, the second-biggest week of 2019. >> rates are cheap. why wouldn't you raise as much as you can? there are flows into the fund. once you are a large issuer, everybody forgets, you become a big weight in the index. the more you issue, the bigger you get. jonathan: still with me are kathy jones, matt hornbach, mike schumacher. kathy jones, we just took down the fourth biggest bond issue. spreads the tightest since spring of 2018. what are your thoughts about that? kathy: now with the fed on hold, no risk of higher rates, everyone is optimistic, the risk appetite is up there, and so much for the debt diet. everyone wants it. everyone is loading up their plates and taking more. the issue we are concerned about

is this tremendous amount of debt hanging out in the bbb area, and the risks associated with that if the economy slows down and we start to see spreads widening. a fairly risky proposition. jonathan: the investor appetite, it sounds counterintuitive to people not in the market, but when you have an investment grade issuer, the bigger the issuer, the bigger the demand because of the indexing. kathy, when do we start to see some stresses because of those things, do we ever see that happen? kathy: probably eventually but more toward the end of the cycle and people start getting nervous about what's happening, if there is a risk of downgrades into high-yield. something like that may trigger some concern. but right now, it feels like everyone just wants a piece of the action. jonathan: what happened to the debt diet? we have talked about it so much through 2019, the dividing line between investment grade and high-yield, out on the bbb line.

we came into 2019, most people in the fixed income market said it would be ok, that they would manage the situation. most have. in the past couple of months, a whole lot more issuance. mike: you could add the government to that list. there is no discipline whatsoever. you are not getting it from the current government, not from the leading candidates on the democratic side. that seems to be a fact of life for the next two years. but yes, on the corporate side, i agree with kathy. money is cheap. why not do it? as long as the faults seem like they are at bay, it is ok. jonathan: a lot of companies thinking, i can buy the growth now. we have seen headlines about kkr looking into the likes of walgreens. that would make walgreens potentially come down to high-yield. i think a discussion we have to have is the length of the cycle. the decision-making that we are seeing from corporations and what signal that gives you about how long they think this cycle will go on for. matthew: i don't think people are particularly pessimistic. if you look at indices that show you cfo optimism or ceo

optimism, yes, it's come down from the peak of the economy, but the economy has decelerated to a trend rate of growth. what is so bad about that? we've got inflation near the fed target. not exactly 2%, but still relatively elevated compared to other developed markets. why should we be so pessimistic about the outlook for next year? it might not be that bad. that is what you are seeing in investor sentiment today. kathy: i would agree with that. we seem to be in a good place, as jay powell said. that is translating into ceos and cfos saying this is an opportune time to borrow, rates are low, we can borrow long-term at low rates. why not do it? jonathan: some investors are liking what they are seeing as well. collin robertson catching up with our team and saying the following to them. i expect 2020 to look like 2019, 2018, which saw far more high

demand than the bonds issued. there is a lot of opportunity in ccc right now, you just have to find the right ones. if you could only see kathy jones smiling as i read that. kathy, ccc's. kathy: we are certainly staying away from ccc's because of the risk and reward. i know spreads have widened against the rest of the universe but we still don't think you are getting enough yield to compensate for the risk. frankly, every fund manager you talk to says there is some risk there but i have the good bonds, and it's not a problem. at this stage, we don't think the risk reward is that attractive. jonathan: everyone is always thinking they have the good bonds. kathy: and they might, but when the whole market comes down, it doesn't help. mike: you say i just want the good leads, whatever you may get, but it seems dicey to us as well. my colleagues in credit would

say probably steer clear of that. matthew: the same issue in the government bond market. you have to find the good bonds. i think for next year, it's treasuries. i don't see looking at gilts or bunds, those bonds don't look particularly good to us. as we go into 2020, treasuries do. jonathan: i had somebody tell me that investment grade was the new haven asset. what do you say to that? kathy: there are limits. there is the idea that there no boundaries, there are no limits here. these are corporations, not sovereign governments. things happen in corporate life. the idea that that is a safe haven asset is mistaken. jonathan: kathy jones, matt hornbeck, mike schumacher sticking with me around the table here in new york. still ahead, the final spread. the week ahead featuring a speech from christine lagarde is coming up next. this is "bloomberg real yield." a♪ ♪

♪ jonathan: i'm jonathan ferro. this is "bloomberg real yield." it is time now for the final spread. coming up over the next week, on tuesday, u.s. housing starts. wednesday, fomc minutes, and another democratic debate. look out for that on thursday. and inflation and pmi data. friday, perhaps the main event, christine lagarde making a policy speech. and we get u.s. and eurozone preliminary pmi for the month of november. still with me around the table, mike schumacher, matt hornbach, and kathy jones. let's talk about europe. there is a belief on this side of the atlantic that i find myself laughing at quite a lot, the belief that christine lagarde can do something mario draghi cannot, and get governments in europe, specifically germany, to spend. kathy, the good news this week is germany avoiding a recession. the bad news, the government seems to be satisfied with 0.1% gdp growth, and no signs of that

leading to fiscal loosening. kathy: no sign that they are inclined to worry about their current account surplus. from the public statements at least it doesn't look like they are inclined to make much change in the budget. things would have to get worse before they would take action on the fiscal side. mike: why would they change? i have not heard any signal out of germany that is likely to change its tack. talking about hitting the nail target. i think we can dispense with the idea. jonathan: so where is it coming from? when i speak to people in europe, they are very skeptical about germany following through on stimulus. when i speak to people in the united states, there is a belief that somehow we are going to get some fiscal stimulus from the german government. where is that coming from? mike: you look at the numbers and you say it is at least possible. in the u.s. you get a deficit of 5% of gdp, you get a surplus. you hit f9 on the spreadsheet and say, i can make this work.

theoretically, yes, but the political will is not there. jonathan: how about the bond market? do you like it in europe? mike: we like staying short in the u.s. we are not in the comfort zone of saying get long-duration. you think about backing up 40 basis points on a trade deal, then we will talk about getting long. until then, probably not. jonathan: 2.20 is a level you are looking for. kathy? kathy: we are looking for 2.25. we are not all short right now. we have been trying to opportunistically every time yields bump up add duration. it does not pay out to be short duration. the good duration. we have the good duration, that's right. matthew: 1.95 on the 10-year, we were basically pricing in a bounce in manufacturing pmi. that is the type of scenario we saw in 1996 when we had a big bond market selloff.

we have already had the bond market selloff. the bond markets sold off 50 basis points not just in the united states but around the world. jonathan: that 40-basis point move, you think that's it, we are out and the move is done? matthew: i will plant the flag, i think that's it. i don't think it's a base case possibility unless you believe we get a phase one deal that includes a september rollback. -- september 1 rollback. that to me seems like a less like a scenario than not. jonathan: tariff rollback, if agreed, that could be the game changer. that could be a driver of sentiment in treasuries? matthew: if we have a rollback in the september tariffs, we could break 2%. kathy: i don't think you need a rollback of the previous tariffs. i think you just need incremental good news on the economy and trade not to be a negative. again, going back to the term premium. there is room for it to bounce up another 25 basis points and

push yields back to about 2.25 without a huge change from where we are. mike: don't need to roll back, i agree. yields can go up higher without that. some sort of signed agreement to buy more soybeans or something like that, perhaps soft measures on the u.s. side. jonathan: what is it about the role that that is important, the signal or the actual substance? -- rollback that is important, the signal or the actual substance? matthew: the tariffs have been on for two months. we haven't even seen the worst of the data impact from those tariffs. it is hard to see the bond market selling off and we have not even seen the worst of the data. i don't see how it's possible, especially when the fed says the bar for hiking is so high. don't see it happening. jonathan: when will we see the weakness in the data start to clean out? many people expect it to happen in the next couple of months. when do you expect to see the worst of it? matthew: our economists are looking at the first quarter, but that is under the presumption that we have a deal. we are still trying to figure out the ag purchases after weeks

and weeks and weeks of positive spin. i don't really see it coming in the near term. we will see. jonathan: kathy, what do you make of that, we have not seen the worst of it? kathy: i think we discounted the worst of it. even if we get a slowdown in economic growth, we are looking at something around 2%, a little bit south next year. that is good enough to get yields to edge higher. jonathan: it is the rapid fire round, three quick answers. in high-yield, buy ccc's or stay away? do you buy or stay away? kathy: stay away. matthew: stay away. mike: stay away. jonathan: can we reclaim the highs of the year on the u.s. 10 year in 2020? the highs of the year were around about 2.80 in january. can we reclaim those highs in 2020, yes or no? mike: yes. kathy: no.

matthew: no. jonathan: the fed this week, chairman powell, total snooze. maybe that is good news for many of you. the fed pause, does it last six months or more, or less? fewer than six months? more or less? matthew: yes -- i don't even know. jonathan: longer or fewer than six months? matthew: longer. kathy: more. mike: fewer. jonathan: matt hornbach is going to get this game one day. i hope. from new york city, we will see you same time, same place. this was "bloomberg real yield." this is bloomberg tv. a♪ ♪

♪ taylor: this is the best of bloomberg technology, where we bring you all of our top interviews from this week in tech. coming up, disney plus, the company surpassed 10 million sign-ups in its first day. we will get details. goldman sachs controversy. we will hear from the cofounder on how he got caught up in the fray of gentrified