bloomberg real yield starts now. investors waiting, big returns in u.s.reasury market credit delivering the second-biggest week of issuance. .e begin with a big issue just what is feeding investor optimism. >> the fundamentals are marvin driver. >> it's a data issue. >> trade is becoming a secondary issue. >> i think it's dependent on trade issues. >> the realty is the global

growth bottom. >> the data has been decelerating for the last year or 18 months. that is, when a. confidence is rebuilding. you can see the numbers >> the data has been vomiting -- >> bottoming. all we're fours markets to go hard in the economy to revive and overall trade issues do not get worse. >> if the trade negotiations fall apart right now and they go, tell me doesn't the data get worse. >> we feel that in the uncertainty. >> it's minor at this point. you get a phase one deal or it falls apart in the to phase four which is bad. >> joining me around the table matt, york, kathy and kathy, i've been fascinated this week. i can't find any consensus as to what is driving this market right now. what is it. >> it seems like this resilience in the u.s. economy and belief

of the global economy is bottoming and maybe we'll get a trade deal. i'm skeptical on the deal thing but those seem to be the components that are driving. global growth bottoming independent of what happens with the trade truce? where is matt on that argument? >> in the united states the jury is still out on that. you've got maybe one month of data that wasn't horrible like we had for the past couple of quarters. i don't know if one data point is enough to call all is fair. >> too much of the economy is tied to trade so i think it's other simple argument. jonathan: let's talk about it then. weeks, five weeks of being told we go through phase one trade deal i know according to reports they can't even agree on how many agricultural purchases they should follow through on that. why was so confident this gets picked up? >> beats me. we've had talks and talks or talks and everything seems to be

level one free-trade deal and get we don't have -- for a trade deal and we don't have that. i'm not really sure why there are so much optimism, perhaps we're not being told, this just a lot of negative news. they are talking and there's hope as talks are going on there won't be an increase. jonathan: do you get the feeling it's just the price setting the narrative? massive sentiment shift reinforced both the price has done. and then we sit around on programs like this try to rationalize things with a nice theory as to the fundamentals that underpin this? >> the same thing happened back in 2018 when we had that spike above 312 on the 10-year note. everyone started talking about 4% 10 year yield. the market price was driving the narrative and that was the wrong thing to be talking about of the time. the same thing is happening today. at 195 on the 10 year we are looking like we would break 2%

and people started talking about two and a quarter. so the bond market, clearly that's not the trade atmosphere at the moment. i think it comes back to trade to a certain extent if we do have a trade deal and there's a rollback of the september 1 tariffs we are very likely going higher in yield. if not, we are going lower. let's try and understand what is behind the treasury yield push higher over the last couple of months. when you break that down, what's driving that? >> i like to break the curve down into rate expectations and premiums and when i look at what happened from september 1 from the time the tariffs were implemented you see this big reflation in the component of the 10 year yield but you see very low levels of rate expectation which make perfect sense because the federal reserve had cut rates 50 basis points since august 1 another's optimism being built back and we will have a trade deal. >> i would agree.

if the term premium that has been driving us. points,own to -84 basis so it didn't take a lot of shift and expectations to have it bounce back to some degree. we actually think there is some room for it to go higher. >> may be putting it differently, we thing about the back end like trade is a factor number one. and if it's the u.s. or europe, it central-bank dominated. rates go up in general. jonathan: here's the goldman take. giving his outlook, running the following grade we believe the major portion of the bond market is the highs. we will struggle to move substantially above 2.2% largely on account of policy expectations having reset lower in central banks setting a high threshold for future changes. this be something you talked about, it's something we've heard again and again through

this week. the next move. we've got to get a move on tenure from here, a lot of that comes inflation expectations. not many people think that will come through. the upside is limited on the 10 year. what you say to that? >> i agree. in order for the fed to think about raising interest rates, you have to have core pc above 2% versus stange amount of time. and it will take at least that amount of time in our estimation to get inflation expectations actually just are moving higher, which is probably another bond that has to be checked for a higher rate. jonathan: range breaker head fake? what is the conclusion here. ? i know you disagree with that. >> we think about the trade perspective a little bit differently than some folks. if you go back to may when donald trump tweeted about potentially expanding the range goods, since then

we've had three cuts by the fed, so we take down the top but something in the 210 220 range but that seems not big a leap. >> i don't think the past a two and a quarter is all that hard to get through if we get some positive news. i would argue i'm not sure that that is going to sit and wait for inflation to stay above 2% for a year before they would consider hiking rates. am not sure it may be more of case of let bygones be bygones. we have been below it but once we get sustainably, that we are tightening the labor market or getting some other inflationary pressure. i think the expectations may build sooner rather than later. [indiscernible] there -- jonathan: there's a view out there that either way the federal reserve is incredibly high. is that we stand on the issue?

the bar to hike rates is shorter. when a thing about the timing of the next possible rate hike, i'm thinking of the middle of 2021. i don't think there'll be a hike in the second half of next year not only because there is an election, which i think raises the bar for action, but was more important is in the middle of next year it's going to depend on their inflationary target. how high will they target rates after they care about missing their inflation goal. >> think about late last year. the hike in december which is one of your personal favorite moves, two weeks later it's like they had a very bad new year's party. so was there an actual shift? no. but to the markets react? of course. jonathan: are you implying i have an opinion on the federal reserve? everyone is sticking with me. coming up, the biggest investment grade deal of the

year so far. it is coming up next, 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. after pricing more than $10 billion. finally, the big one, abbvie selling a monster $30 billion in bonds to finance its acquisition of allergan.

peaking at $77 billion with 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. -- next few 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 versus the rest of the high-yield 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." ♪

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. threw two wednesday, we get the fomc minutes, and another democratic debate. look out for that on thursday. inflation and pmi data. friday, perhaps the main event, ecb president 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. think about defense spending. 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.

-- in germany you have 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: let's talk about the bond market them. do you like it in europe? mike: probably not a ton. 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 would extend duration. 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. kathy the good duration. : matthew: 1.95 on the 10-year, we were basically pricing in a bounce in manufacturing pmi. back to that is the type of 53. 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. jonathan: not a break at 2%? matthew i don't think it's a : base case possibility unless you believe we get a phase one deal that includes a september 1st rollback. that to me seems like a less likely scenario than not. jonathan: tariff rollback, if agreed, that could be the game changer in the bond market. that could be a driver of sentiment in treasuries? matthew: if we have a rollback of 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 continued 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 level 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 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 when 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. ♪

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