>> from new york city for our viewers worldwide, i am the sub romo it's in for jonathan ferro. yield startsl right now. ♪ up, inversion watch. the u.s. yield heard reporting it's -- yield curve reporting ngest flattening. and high-grade continuing to sales and new debt bonds rallying in the secondary market. we begin with the big issue, markets debating whether a flatter yield curve is here to stay. >> you have seen the flattening

of the yield curve. >> it is incrementally flatter. >> it has been catching a lot of investors off guard. >> i think it is there for a long haul. cycle, weoverall fed would anticipate the fed should steepen somewhat. >> you're seeing late micro cycle -- market cycle behavior. >> it will keep the short and suppressed, which everyone expects. >> a market priced for recession, but it is telling you there are no risks whatsoever. that is not a tenable situation. >> the launchpad controls are in the hands of politicians right now as opposed to central banks. >> if you see these deals go through, you could see a steepener. youf it happens, we think create the conditions for an upside to expectations on inflation and we think it gets manifested in the yield curve steepening.

lisa: joining us, ian steely from jp morgan, and james from standard investments. from bmo capital markets. we seen a shift with a growing number of strategist saying they expect the yield curve to steepen next year. what is your take on that? >> good to see you again. essentially we've been running the steepener all year. it's essentially the combination we like for long duration and steepening risk, we prefer the duration risk at the front end of the yield curve. certainly now, what the fed has , is notraise the bar can happen anytime soon. when you have u.s. two years trading above the funds rate, historically it tells you the market is expecting hikes, which is not likely to happen. there is a massive asymmetry

toward the front end and the combination of being long on steepeners, that can profit in a number of different scenarios. one of your guests in your clips was talking about potential inflation risks. even though i am running the steepener, i find that difficult to believe when you just look at the oil price and the base effect, notwithstanding the end of december. it seems like unless we have a massive oil rally, it will struggle to make any headway. expecting inflationary steepening of the curve but we've seen recently with bond markets, it doesn't take much of a push upwards to see the curve getting dragged steeper in a bearish environment. lisa: a pretty nuanced take, we are looking at potentially a steeper yield curve but don't get too excited. is that your take? >> i think it's basically as

james said. you have a two-year part of occurred -- of the curve that is effectively anchored. cuts priced in over the next year or so. the fed has essentially told us they will be on hold which means it will be bounced around, but what about the 10 year? it feels like we are so reliant on the outcome of trade. if we are in an environment where you do get tariffs added in mid december, i think the reality is you will see the lows in yield for the year for the 10 year, which will be a curve flattening. the flipside is if we get a rollback, good news on trade, i think you will see yields pushback toward to come and that will be a steeping. the three-year part of the curve is unlikely to move much until we see the fed talk about either moving monetary policy in either direction. lisa: i can feel the exhaustion in's voice.

do we care about the yield curve? >> the market tends to spend a great deal of time focused on the shape of the yield curve and what it means for the next two or three months of trading. but if we look at the relationship between the three-month bill and 10 year yield, there's a month and a half lag between the curve inverting and when we see a pickup in recessionary risk. it takes that long for the spread compression to work through to corporate profitability and that hits the employment sector, the consumer starts to lose momentum and that's where it will come from. there is a little late affect and it becomes a 2020 story. lisa: because we did see the inversion between the three-month and 10 year yield. i do want to talk about the exhaustion that seems to be pervading the markets, and not because it is the day after the

thanksgiving holiday, although perhaps that is part of it. james, from your perspective, do you think bond markets have generally entered a sleepy phase were central banks globally are tamping down any volatility, and that's what we will get the next few months? james: we have been in that phase for about 12 years. lisa: except for there was 2013, there has been a couple of experiences of excitement. james: sure, 2018 was much different. we had some mini cycles where we saw dramatic changes in market reactions, but what we've gotten used to is central banks in general and the federal reserve specifically just pumping painkillers into financial markets on an almost constant , by risk you get this and by safety type approach that works in almost all environments regardless of what is going on

under the hood, and it feels like we have reentered that phase where recent policies from the federal reserve, which they might call something other than q. week, but by any other definition is qe. having theseem to be impact where equities can ignore bad news and drift higher. but they can only do that in concert with falling. it feels like that environment but i expect that to change in 2020. lisa: back to the drug addiction metaphors with the market and central banks. forering what that says 2020. governmente safe bonds and risky assets, and calling it a day, will we see the same thing in 2020 or will something shake the complacency? iain: it feels a little like that. back, you mentioned

2018, there was a tough time and we had quantitative tightening and hikes from the federal reserve. i agree with james, they might not want to call it qe, but they are injecting liquidity into the system and it will end up inflating asset prices against at the same time the fed is easing policy. you also have the ecb back in the market. it feels like an environment where you should be happy to buy risk assets, where yields are unlikely to go much higher. i thought it was interesting, commenting around, it's obvious the yield curve inversion. yes, it's been the greatest indicator for recessions but we've not been in this environment of quantitative easing, negative yield and the rest of the world, it has to have an impact on where 10 year treasuries are. as long as we don't get any disruption on trade, and i don't want to keep mentioning it, but as long as there's not negative news on that, it feels like a market where all assets can continue to be supported. lisa: how long does this go on? ian: i think we probably have a

quarter or two left of the euphoria. lisa: is it euphoria? ian: this is as good as it gets. lisa: you heard it here. ian: we are starting to see some indicators that the consumer is not on particular strong footing. it takes a while for it to flow through. some disappointing retail sales prince the last few months. if we think about the amount of leverage in the core consuming cohort, the 25-40-year-old group, they have a lot of loans and a fair amount of defaults as well. lisa: do you guys agree that we only have a quarter or two left? james: i agree completely viewed -- completely.

that the consumer and labor markets have seen the best of it. corporate profitability peaked five or six years ago, and this is not a healthy looking environment above and beyond the steroids from the fed. lisa: steroids, morphine, drug addiction metaphors are back. coming up, the auction block. high-yield issuance in europe posted the busiest month of supply in more than two years. that is next. this is bloomberg "real yield or ." ♪

♪ i am in for jonathan ferro and this is "bloomberg real yield." to the auction block, beginning

any europe. 16 issuers offering more than the past two sessions combined. november is the busiest month and within two years for high-yield supply. in the u.s., junk-bond issuance slowed after last week with just two deals for $1.5 billion pricing. climbing to just over $36 billion to make it the busiest months since march, 2017. a shortened week is expected to bring just over $3 billion of new u.s. investment grade on's to the market, offering mastercard representing the lion share of the volume. grade,g with investment concerns raised about the valuation in the triple b space. >> a lot of investors are not allowed to go into noninvestment grade, going into the lowest level of investment grade and that has in turn boost to the amount of money coming in. iain, your perspective on

the triple b space. this turned out to be the best performing of the investment grade asset class. where we headed with the triple b? at the moment, there is a grab for yield and people are looking at triple b. we can still buy investment grade quality bonds and get the yield pickup and it doesn't look like treasury yields will move higher anytime soon. the central banks of got our back. i think we see the demand coming in and we have more overseas demand coming back as a some of the hedging costs that were so painful to european and japanese investors are coming down as the fed has been easing policy. i think there will continue to be strong man for anything with yield, and triple b is in an ice bucket for a lot of people. ian: for a while we've been focused on the notion that we should see some widening of the

credit spread market, especially as the expansion moves on and on. we have not seen it yet. it is a grab for yield that will persist until we see something break, whether that is a specific credit event, a broader slowdown on the consumer side, or business spending. it will be a 2020 story. . keyl then, i think it is a issue, people need to add any type of yield they can. like theys, it seems are saying momentum is more to btperformance by triple until something breaks. do you agree? we expect, the age-old saying that they don't die of old age, i did not sign up to that, but we will not have that end to the cycle this time. the other side of the debate is to say that there is a stock of

upt globally that has gone immeasurably, relative to our ability to generate the necessary cash flows to pay down that debt. at the moment it is a bit of a goldilocks period for investment in general because the economy has not slowed dramatically, but the fed has begun providing support for financial markets and even more cheap or free liquidity. my concern would be when we start to see the economy slide further toward that scary looking zero number, it's always the weakest links in the chain that will fall first. i would observe globally across a number of asset classes and economies and regions, we have already begun to see the weakest links in the chain starting to crack. mentioned delinquencies, we seen that rising over a number of years. you join these pieces together and you can see there are signs of what should be early warning

signs of something more concerning going forward. we are not there yet, it is a 2020 story, but personally i don't think you are being rewarded for taking on the risks in a segment bigger than the entire high-yield market. lisa: you are not buying triple b's? james: absolutely not. lisa: a growing number of investors and policymakers are highlighting what are the intended -- the unintended consequences of more stimulus. investors have been warned of a blowup in credit. "beyond the short-term, the trend is toward a more aggressive mix, and the extension of the credit cycle could end in an explosion although it is unlikely to happen next year." the chart we showed earlier thes how triple b credit is highest proportion of overall investment grade credit ever, nearly half of all this kind of debt is now triple b rated.

i am struggling to understand when we care about that. buyinge you still and trying to get the last out of the rally? hat we don't think t will know the catalyst until after the fact. i think we will look back and say of course it was the retail sector, or whatever it ends up being. i would not be aggressively adding in triple b space for that region -- that reason. iain, what asset class is most vulnerable when we get the blowup people are expecting will inevitably come? iain: i think you still got to look at quality pewter when you look at the high-yield market, and that is interesting because we seen the differentiation in the u.s., not so much in europe, but we seen investors to scrim

and eight between a triple c, you are not even making your coupon relative to the double b part of the curve. of the it is the bottom capital structure people will focus on, and that's where you're going to see the largest amount of spread widening. the way we look at it is we may have a slow down and even a recession, but it is likely to be shallow, which means full rates will pick up and i don't think we will get anywhere to where we got to a decade or so ago. it will be the weak hands that will have the impact and already to some extent the market has taken account of that. ?isa: are you buying triple b iain: i think you need to look at it on a company by company basis. some companies will probably make the journey down toward high-yield. but if you can get the right credit selection and buy good

quality triple b and maybe move up if they do some things and try to get leverage ratio down, i think it is an environment where that grabs the yield. i also wouldn't be surprised if you start to see some people currently sitting in high-yield credit with good returns there this year start to looking at upping quality trade and moving of the spectrum. there's not much yield and treasuries, so you kind of barbelled in the middle space to get the kick you need. lisa: everyone sticking with us. still ahead, the final spread, and the week ahead including a slew of reports. that is next. --s is "bloomberg will yield real yield." ♪

♪ i'm lisa abramowicz and for jonathan ferro.

time for the final spread. over the next week, on monday we get u.s. ism manufacturing numbers, and on tuesday, a right decision from the rba, and u.s. auto sales. wednesday, euro area finance ministers meet. friday, the main event, u.s. jobs report. question given the central bank support of markets right now, doesn't even matter what we get with respect to economic data? what is the most important data point that you are focused on? unemploymente rate, and the way it blows through at this point in the cycle matters. we see a small uptick in the next for five months and we probably will face resection -- recession in the next 12. lisa: are you also looking at the unemployment rate or does inflation matter and wage gains?

iain: i think you need to be looking at the unemployment rate. if you see that takeback of, it will be a big red light for the federal reserve. i think also we should continue to look at the manufacturing numbers, we had a sharp decline that has reversed. if we can get some stability there, i think people were very concerned the weakness we saw in manufacturing was not going to roll over into services. we've had some form of stability, may be a bottom in manufacturing, and would see -- would be good to see that flow through. lisa: what do we need to see with respect to economic data to change the fed's policy path or two push forward at least for a rate cut? james: i definitely think rate see.are a lot easier to what the fed has told you is they need to be material disappointment relative to outlook. they have a fairly negative

growth outlook for q4 in line with market consensus. the top end has probably come closer to market consensus now. we need to see some disappointment relative to that. possibly as soon as the next month, that might be a bit too , broadly into q1 speaking if we see data on performing relative to expectations, that will do it. but we also know the federal reserve a sensitive to the financial markets and i don't think it would take much disruption in the equity market to bring that questions about whether or not more policy is needed. i also agree with the other chaps, it is about jobs for me. i want to see forward-looking employment components, that they are telling us something about jobs going forward. lisa: time for the rapidfire round. which will perform better next year, high-yield or investment-grade? iain: investment-grade. james: treasuries.

ian: i'm going to go with high-yield. lisa: have we already seen the cycle lows for u.s. treasury yields? iain: definitely not. james: absolutely not. ian: no way. see a credit explosion in the next two years? iain: i don't think so. james: yes. ian: yes as well. lisa: thank you so much. from new york, that does it for us. this is bloomberg real yield. ♪ whether you're out here on lte.

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