jonathan: from new york city for our audience worldwide, i'm jonathan ferro. "bloomberg real yield" starts right now. ♪ jonathan: coming up, rinse and repeat. president trump says the trade deal is close. enthusiasm fading. high yields spreads widening, ccc 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. >> low and contained inflation. >> the potential for a true bottoming of the economy in 2020. >> we are pretty constructive on 2020. >> people want the year to be

over. they are looking forward to next year. >> we are just not there yet. >> there are significant risks on the horizon. >> there are still some scabs, wounds here. >> december 15 is looming. >> i don't know if there will be a trade deal. >> we don't know how anymore phases we could get. -- many more phases we could get. >> anything could go wrong at this point. we don't want to end the year on a mediocre note. >> we need to see the data come through in order to pop the champagne and call the all clear. jonathan: the year is not over yet. joining me around the table, oksana aronov, george rusnak, and greg peters. greg, let's begin with you. a real year end field to so many 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. i don't think so. i don't know why there is such a focus, everything is pulled forward.

it is like having christmas commercials before halloween. that is kind of how i feel. a little premature. i am trying to ignore it, actually. oksana: don't predict, prepare. that should be the mantra this time of year. predictions abound. 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. when you look at the world through that prism -- and by the way, that can mean the risks are great but they are reflected in the valuations, the risks are minimal but not reflected in the valuations. today, we are in a place where the risks are significant and not reflected in the valuations, whether you look at the rates market or credit market. jonathan: george, it feels like a lot of people, the u.s. is back to trend growth, i have seen evidence of the global economy bottoming out, phase one is dust and dusted. -- done and dusted. is it a mistake and that is your view going into next year?

george: you have to look into the future but 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, the flattening of the yield curve. they are not content with what they are 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 the vice premier 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. george: stocks have been 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 changing of the narrative is important and 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: line in the sand, there is a soft deadline, december 15, when the next set of tariffs will hit chinese imports. do you assume that gets suspended? is that a working assumption? 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. frankly, even if we assume phase one will get done, at some point that evaporates and 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.

here you have a scenario with potentially inflation and slower growth. higher yields, wider spreads. that is more secularly. if you think about tactically what is going on, you have a market from a raise perspective price for recession, but from a spread perspective, it is telling you there are no risks whatsoever. you have a lot of red flags across the credit markets telling you to slow down and the demand has not abated. jonathan: a big move over the last week, the flattening of the treasury curve. eight straight days. the gap between two's and ten's narrowing. a flatter yield curve. for people thinking that this was the way to play it for the next several months and then things started to turn again. what do you read into that? george: 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 moved more favorable on

the intermediate part of the curve. when you backup the 10-year to 2%, we believe the yield will remain flat. and potentially invert again. greg: i kind of don't agree with oksana, where the yield curve and rates are telling you we are in a recessionary-type environment. look at the u.s. relative to other jurisdictions. yields are higher in the u.s. than anywhere else in the developed market. to me, that does not suggest 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. i think those two things are heroic. oksana: 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. but 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 that by going out, we are making a price only bet at a time when the price can move against you, as it has the past few weeks, few months. 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, which is really

important in terms of 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 think about how changed the ownership of the market is, 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 jump in inflation. policymakers want it but they cannot get it. jonathan: i think just as many people believe if you are going to get a higher push in nominal yields, it has to be driven by inflation expectations. but because it's a small risk, the buying comes back in. you push 2% on the 10 year, what happens? the bid comes back in a big way. george: not only inflation, but growth. what greg was mentioning before. the idea that 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. we will see roughly 1.7, 1.8 gdp level. that is not a way to stimulate the economy. that is not necessarily cause for rates to be rising. oksana: i think the call here is not for rates to be rising. the call is double. the call is kind of dovish. central banks have telegraphed we are out of ammunition. you have christine lagarde stepping into her role in many on the ecb believed a negative rates situation is not tenable. the fed telegraphing that they are done for the foreseeable future. you have banks, smaller economies like sweden preparing to hike. all together, 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 one or zero, which is a gambling type call. jonathan: we will talk about christine lagarde and whether

that is a gambling type call. everyone is sticking with me. coming up on the program, the auction block. a deluge of supply in the junk-bond market. that is 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 over in europe, where primary market volume blew past 100 billion euros over the week with perverse yankee issuance boosting supply, including a deal from fidelity international. bond sales risk early on, tailing off going into the thanksgiving holiday. volume reaching $100 billion. in high yield, junk saw a deluge

of supply. volume set to exceed $15 million. november on course 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 as ccc's have continued to widen out. when you look at it sector by sector, more than just energy is widening. i was actually surprised, it is widening across the board as far as ccc's are concerned. jonathan: oksana, your thoughts on whether we are starting to see some red flags in fixed income? oksana: we are certainly seeing red flags in the credit markets. certainly the dispersion mentioned between bb's and ccc's. we are seeing lower recoveries and higher defaults. we are seeing in the loan market, some really significant issues.

three out of every four loan issuers is now a loan only issuer, which makes the entire senior secured argument moot. 55% of the loan market is rated b or lower. we are seeing clo's have come out for the bid 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. we are seeing a widespread, if you look under the hood, things are not great. but $22 billion into high-yield bond so far this year. but 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. what would you say? greg: that is part of it but not complete. it's interesting that you have this inverted data rally in

high-yield. high-yield has done fantastically well, driven by bb's. triple c has lagged partly due to that 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 ccc. the spread is four times the bb. it is looking very attractive. at the same time, late cycle ccc'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 same time it bears watching and we are seeing select opportunities. jonathan: there is a 1000 basis spread now for ccc's. i believe it is the widest since august 2016. is that a reason to buy or reason to be cautious? george: i don't think it's a

reason to buy, but look at where high-yield is overall, roughly around 400 basis point bread. what 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 almost 15% year to date. in high yield, you see the ccc's fall off. from our perspective, 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 have done really well in bbb 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. bb's, which is where most market exposure sits, 2.20. definitely no value. make no mistake, you are making

an interest rate bet when you are buying the higher-quality part of the high-yield market. when you think about bbb's, a huge cloud hanging over bb, bbb 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 downgraded to the far outstanding in a bbb space, you get a trillion dollars of fallen angels. the amount of dry powder in the market to absorb that is worse. jonathan: let's talk about bbb's. 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 corporate debt market. not the first time we have heard the argument. it won't be the last. 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? greg: last year was a blessing in disguise.

it didn't feel like it at the time but november, december, bbb companies got religion. they saw their future where they were locked out of the market and the potential to get downgrade. 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 bbb, 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. this is very different. for us, we still believe the bbb space is the space you want to be. as companies will do what they can to protect their bbb status. i will take the other side of mr. dudley and the fear mongering. jonathan: how do you think this market would respond if one of the big names dropped down? we had a fallen angel scenario.

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 would the rest of the market do? greg: i don't think it would catalyze a selloff in bbb's or bb's. 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 bbb 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 bbb's. it's not necessarily that we think it's a big challenge but you have had such great outperformance, you see a to bbb spreads tighten by 50 basis points over the course of the year. jonathan: looking into 2020, there is the belief that greg's story could be supported by the

fact that net issuance next year is expected to be down. oksana: i think we have precedence to what happens when a certain part of the market dislocate. s. we have 2015 and 2016 when you 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 owned by etf's and yields. a big part of it goes back to ownership changing. now we live in a world where we can have recessionary pricing without a recession. jonathan: coming up on the program, the final spread. 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." time for the final spread. 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. plus, german business data. tuesday, the u.s. consumer confidence numbers. also, wholesale inventories. 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 week. her first big policy speech and it reminded me of assigning at a sports club when you have press day but don't know if they are good at what they are doing, yet. it is not gametime yet, is it?

greg: it was very mosaic, laying the pattern out but nothing nothing tangible was said and her feet not put to the fire yet. george: she is not 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 to be more collaborative. from a policy standpoint, her challenges of lowering rates and quantitative easing have run their course, so she will look to do more fiscal policy. oksana: speaking of bbb'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. interestingly to what we were talking about earlier, 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. they will be cyclical and contributing to the destabilization. jonathan: let's get to the final round, rapidfire around. here is the first question. so far, the hong kong story and the situation around trade has been treated as two separate tracks by the chinese so far. i stress so far. i wonder, in terms of the consensus view, where the market perception is right now. your opinion exclusively. will they be treated as one story or two tracks? oksana: two tracks. greg: one story. george: one story. jonathan: treasury market, some of the sentiment, buildup in enthusiasm over the last couple of months resulted in a steeper yield curve. it has been flatter through the last eight sessions. into year end from where we are

right now, the flatter curve or steeper into year-end? george: flatter. greg: flatter. oksana: steeper. jonathan: ccc's, red flag or is the coast clear? greg: both. [laughter] oksana: definitely a red flag. george: red flag. jonathan: great to catch up with all of you. from new york city, that does it for us. we will be back next week. this is bloomberg tv. ♪ whether you're out here on lte.

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taylor: i am taylor riggs in for emily chang and this is the "best of bloomberg technology." coming up, cook facetime. president trump tours the austin factory at a time when the white house considers whether to exempt apple goods from the tariffs. we will have the latest. plus, senator josh hawley says a