jonathan: from new york city for our audience worldwide, i'm jonathan ferro. bloomberg real yield starts now. coming up, rinse and now. repeat. president trump says the trade deal is close. enthusiasm dating. spreads widening, triple c junk credit rolling over. let's begin with the big issue. overlooking year-end risk. >> everything is awesome right now. >> hope is a wonderful thing. a truepotential for

bottoming of the economy in 2020. >> we are pretty constructive on 2020. >> we are just not there yet. ,> there are still some scabs wounds here. >> i don't know if there will be a trade deal. >> we don't even know how many war phases we could get. >> anything could go wrong at this point. we don't want to end the year on a mediocre note. the year is not over yet. run the table, oksana aronov, george rusnak, and greg peters. gray, let's begin with you. a real year-end field to soma discussions we've been having. how do you have a 2020 call before 2019 is even over? greg: people want to look forward just to look forward. there is such a focus on seasonality. like the calendar really matters.

why there is such a focus everything is pulled forward. it is like having christmas commercials before halloween. that is how i feel. a little premature. i am trying to ignore it, actually. oksana: don't predict, prepare. predictions unfounded. we are not in the business of macro economic predictions. but we are in the business of assessing risk in the context of current pricing. that can mean the risks are great but they are reflected in the valuations, the risks are minimal but not reflected in the valuations. are significant and not reflected in the valuations, whether you look at the rates market or credit market. jonathan: george, the u.s. is back to trend growth, i have seen evidence of the global economy bottoming out, phase one is dust and dusted.

is it a mistake and that is your view going into next year? bonds are forward to scott mechanism, so you are right, we are getting ahead of ourselves. you see rates come down a little bit, you have seen credit spreads gap out a little bit, flattening of the yield curve. they are not content with what they've been seeing. there has not been a significant movement but the trend is showing you there are concerns up ahead. jonathan: six weeks ago to the day, the president sat in the oval office alongside liu he and said we have a phase one agreement. six weeks later, we don't have a phase one agreement. but a lot of the market is reacting as if we have a trade truce. forge: stocks were down three days, and then all of a sudden we had phase one. if you rewind the clock, phase one equals back to where we started, possibly even worse

shape before we started this endeavor. i think the changing of the there did appear is critically important. the market desperately wants to put this behind them and rightfully so, but to call phase one a win is basically saying, you are winning by not losing. jonathan: there is a soft deadline, december 15, when the next set of tariffs will hit chinese imports. do you assume that gets suspended? greg: what we have learned time and again is the deadlines get pushed out. it is a risk factor, i don't mean to dismiss it, but it seems like each and every time it gets pushed out. oksana: this is really one of the issues when we talk about risk, what is reflected in valuations, whether you think about secular or technical. one of the secular issues is the trade deal. even if we assume phase one will get done, all the bigger issues remain on the table. that means we will be locked

into a trade war with tariffs which potentially means higher yield and a slower economy. higher yields, wider spreads. if you think about tactically what is going on, you have a market from a raise perspective from a spread perspective, there are no risks whatsoever. you have a lot of red flags across the credit markets telling you there is a credit slowdown, and the demand has not abated. jonathan: a big move over the last week, the flattening of the treasury curve. eight straight days. ten'sp between two's and narrowing. for people thinking that this was the way to play it for the next several months and then started to turn again. what do you read into that? >> we are in late market cycle. part of that behavior is a flatter yield curve.

we got a little bit of a head fake. we have mood more favorable on the intermediate part of the curve. when you backup the 10-year to 2%, we believe the yield will remain flat. potentially inverted. greg: i kind of don't agree with oksana, where the yield curve and rates are telling you we are in the session every rates environments. look at the u.s. relative to other jurisdictions. yields are higher in the u.s. than anywhere else in the developed market. suggesthat does not yields are calling for a recession. i think there is something fundamentally different. i don't see a reason for yields to move higher unless you get growth surprising to the upside or inflation surprising to the upside. those two things are heroic. we had discounted inflation as a risk. it therefore becomes risk. you need marginal changes on that front to actually change the sentiment.

the issue with where the 10-year is today -- by the way, if you would assess the economy based on the economic backdrop and look at where rates are, without a doubt, they are priced for recession. our growth and inflation do not make up 1.7% treasury. when you look at the curve broadly, the idea of going long is really astounding because you are earning 1.7 in 30-day libor. let's be clear by going out, we at aaking a price only bet time when the price can move against you, as it has the past month. it has no coupon cushion to protect you against the change. jonathan: are you looking for a call option on inflation? oksana: definitely not in the camp of believing inflation is upon us in any great way, but where prices and sentiment are today, you only need a few prints above expectation to have that come into the sentiment.

all of a sudden, rates will move in that direction. if you think about the ownership of the market, you have a lot of really mutual funds, etf's, 20% of the negative yielding debt is in mutual funds and etf's. when you look you look at the ownership of the market, that will translate into dramatic changes in technical. greg: it is a risk, but how much of a tail risk versus a predominant risk? i don't envision a situation where the u.s. can see a real job in inflation. policymakers want it but they cannot get it. jonathan: just as many people believe if you are going to get a higher push in nominal yields, it has to be driven by expectations. you push 2% on the 10 year, what happens? the bid comes back in a big way. george: not only inflation, but growth. i think the idea of we are going

to normalize at a stable rate, but the stable rate is lower than we are currently. we don't see it jumping back above 2.5% gdp level or closer to 3% where we were before. roughly 1.7, 1.8 gdp level. that is not a way to stimulate the economy. i think the call here is not for rates to be rising. the call is double. central banks have telegraphed we are out of ammunition. resting in the garden stepping into her role in many on the ecb believed a negative rates situation is not tenable. fed telegraphing that they are done for the foreseeable future. sweden preparing to hike. you have the u.k. admitting negative rates is not doing anything. central banks are at their limit. the market is still believing this rhetoric that rates in the u.s. are going to want or zero, which is a gambling type call.

jonathan: we will talk about christine lagarde and whether that is a gambling type call. coming up on the program, the auction block. this is bloomberg real yield. ♪

jonathan: i'm jonathan ferro. this is bloomberg real yield. europe,o begin over in where primary market volume blew past 100 billion euros over the week with perverse yankee issuance, including a deal from fidelity international. brisk early on, telling off

going into the thanksgiving holiday. volume reaching $100 billion. in high yield, junk saw a deluge of supply. november now will encore to see the biggest monthly supply in two years. sticking with junk debt, as spreads widen, cantor fitzgerald weighs in. >> the spread between bb's and ccc's have continued to widen out. when you look at it sector by sector, more than just energy is widening. surprised, it is widening across the board as far as ccc's are concerned. jonathan: oksana, your thoughts on when we are starting to see some red flags in fixed income? oksana: we are certainly seeing red flags in fixed income. the dispersion that was mentioned between bb's nd ccc's. we are seeing in the loan market

some really significant issues. every four loan issuers is now a loan only issuer, which makes the entire senior secured argument moot. 50% of the loan market is rated b or lower. seal lows have come out for the dead and it is coming in several points below. there is no force selling yet, so there is no gridlock in the market, but these things are not going to clear where there are being marked. if you look under the hood, things are not great. 22 billion dollars into high-yield bond so far this year. the only thing that market has going for it is the chase for yield. jonathan: there is a way to be more constructive about this. you could say it is a small part of the market, a lot of it is the energy side of things, and that explains the widening we have had. that is part of it but not

complete. it's interesting that you have this bees. triple c has lackedit's interese this inverted data rally in high-yield. high-yield has done fantastically well but. , partly due to ad is unique but there is other issues as well. there is a real difficult allocation right now because you are being induced to look at triple c. the spread is four times the double b. it is looking very attractive. at the same time, late cycle triple c's rarely is a place you want to be. typically, you see the repricing concurrent with the economy. this time you see it before. what i think is a really difficult allocation but at the and time it bears watching we are seeing select opportunities. jonathan: a 1000 basis spread not for triple c's. the widest since august 2016.

is that a reason to buy or reason to be cautious? >> look at where high-yield is overall, roughly around 400 basisis that a reason to buy or reason to be point bread. it has not gapped out dramatically over all because the lobbies have rallied. when you are seeing is the split between investment grade in high-yield, the lower investment-grade triple these have done well this year. they are up 50% year to date. in high yield, you see the triple c's falloff. some of that might be linked into the leverage loan market. some of that spilling into high-yield challenges. we actually still think again you are held in the strip of the credits. we don't think spreads have widened enough from high-yield overall to represent value. jonathan: is that your message as well, oksana? oksana: we love high-yield when it is right for loving. it is not at these valuations. double bees, which is where most rocket exposure sits, 2.20.

are makingtake, you an interest-rate that when you are buying the higher-quality part of the high-yield market. when you think about triple b's, a huge cloud hanging over double bees, triple be issuance. if you apply the prior rates of fallen angels that have occurred -- i'm not talking about 2008, but if you look at prior recessions -- if you apply the percentage outstanding in a trip will be space, you get a trillion dollars of fallen angels. the amount of dry powder in the market to absorb that is worse. jonathan: the former new york president bill dudley wrote about it this week. he said when the next recession occurs, a significant portion of the debt will be downgraded to junk. force selling will create significant congestion in the market. not the first time we have heard the argument. what is interesting is the majority of people outside fixed income are preoccupied by this issue. the majority of people within

fixed income are less concerned. where are you? >> last year was a blessing in disguise. it didn't feel like it at the time but november, december, triple b companies got religion. they saw their future where they were locked out of the market and the potential to get done great. since that time, there has been a wholesale change in how these companies are managed. it's a very different capital structure if you are a triple be large-cap company because you have so many more levers to pull. it's different from investing in a leveraged loan where you are single business line, slave to the economy. us, we still believe the triple b space is the space you want to be. as companies will do what they can to protect their triple b status. i will take the other side of mr. dudley and the fear mongering. jonathan:mongering.

jonathan: how do you think this market would respond if one of the big names dropped down? how do you think this broader market would respond to that? i stress, outside a recessionary conditions, if that happened in the next 12 months, what with the market do? i don't think it would catalyze a selloff in triple b's or double bees. we have had this issue with autos in the past, when they were downgraded, a massive part of the index. there will be some digestion problems but i don't think it's a wholesale change. george: i think you'll have a different impact short-term versus long-term. short-term, concern over the market. long-term, it will say, what is the next triple b to fall down? it could exacerbate that turn. greg makes a good point. these are financially savvy companies that have a lot of levers to pull to not get into the triple b's. it is not that we think it's a big challenge but you have had such great outperformance, you see single-a to triple b spreads

tighten over the course of the year. 2020,an: looking into greg's story could be supported by the fact that that issuance next year is expected to be down. i think we have precedence when a certain part of the market dislocate. 2016 when yound had a legitimate issues in the oil and energy sector but no fundamental issues in pharma, gaming, lodging, health care. the entire market went to a thousand over. when we had autos dropping to the high-yield space, we didn't have 10% of the market on by etf's and yields. a big part of it goes back to ownership changing. we can have recessionary pricing without a recession. jonathan: coming up on the program, the week ahead featuring a slew of u.s. economic data and a speech from jay powell. this is bloomberg real yield. ♪

jonathan: i'm jonathan ferro. this is bloomberg real yield. coming up over the next week, a lot to look for in the holiday shortened week, including a speech from fed chair jay powell on monday. we get german business data. tuesday, the u.s. consumer reporting numbers. wednesday, u.s. gdp and core pce. thursday, u.s. markets close for thanksgiving. friday, black friday, pmi from china and an early close to u.s. markets. still with me for final thoughts, oksana aronov, george rusnak, greg peters. we heard from christine lagarde this weekend. it is not gametime yet, is it?

>> it was very mosaic, laying the pattern out but nothing really -- her feet not put to the fire yet. an economist by background. she will have to negotiate more. she will have to be a political official to some extent, work to be that. from our perspective it is process and policy. from the process standpoint, she will work three more collaborative. standpoint, her challenges of lowering rates and quantitative easing have run their course, so she will look to do more fiscal policy. speaking of triple b's, prior to 2008, there was not developed market bbb rated sovereign right debt. today, italy is 40%. and on negative watch by two of the ratings agencies. christine lagarde has to contend with all of these challenges. the imf just offered a paper

where they talk precisely about how the chase for yield has pushed some very large defined benefits and insurance players in the marketplace out of the risk curve and may destabilize the market, should that technical reverse. cyclical and contributing to the destabilization. jonathan: rapidfire around. here is the first question. story ande hong kong the situation around trade has been treated as two separate tracks by the chinese so far. i wonder, in terms of the consensus view, where the market perception is right now. will they be treated as one story or two tracks? oksana: to them your tracks. greg: one story. george: one story. jonathan: treasury market, some of the buildup in enthusiasm over the last couple of months resulted in a steeper yield

curve. into year and from where we are right now, the flatter curve or steeper into year-end? george: flatter. greg: flatter. oksana: steeper. jonathan: triple c's, red flag or is the coast clear? greg: both. brett favre are closed clear respect to triple c's? red flag. george: red flag. jonathan: great to catch up with all of you. from new york city, that does it for us. this is bloomberg tv. ♪

mark: i'm mark crumpton with bloomberg first word news. says heesident trump

supports the pro-democracy demonstrations in hong kong but does not want that to prevent a trade deal with china from preventing that to get done. i stand with hong kong, freedom, all of the things we want to do but we are also in the process of making the largest trade deal in history. if we can do that, that would be great. china wants it, we want it. president also said "if it was time for me, thousands of people would have been killed in hong kong right now>president trump has not said' whether he would sign the bill that he has been sent. it passed in the senate and what support from all but one republican in the house. in israel, benjamin netanyahu is accusing law enforcement of trying to stage a coup against him. netanyahu was indicted on charges of bribery, fraud, and breach of trust. even now sticky keep leaving the country. netanyahu is the first sitting