lisa: from new york city for our viewers worldwide, i am lisa abramowicz, in for jonathan ferro. "bloomberg real yield" starts right now. ♪ lisa: coming up, inversion watch. the u.s. yield curve reporting its longest stretch of flattening since november of 2015. investors don't care. with wages on a steepening yield curve gathering momentum in wall street. and momentum in high-grade continuing to build with new debt sales and 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.

>> the yield curve is incrementally flatter. >> we expect that to continue for the short term. >> it has been catching a lot of investors off guard. >> i think it is there for a long haul. >> at this point in the overall fed cycle, we would anticipate that the curve should steepen somewhat. >> you're seeing late market cycle behavior. part of that behavior is a flatter yield curve. >> if the fed is on hold and let's be economy run hot, that will keep the short end's, which everyone expects. >> a market priced for recession, but it is telling you there are no risks whatsoever. that is not really a tenable situation. >> the launchpad controls are in very much in the hands of politicians right now as opposed to central banks. >> if you start seeing some of these deals go through, you could see a steepener. >> if it happens, we think you create the conditions for an upside to expectations on inflation and we think it gets manifested in the yield curve steepening. lisa: joining us, iain stealy

of j.p. morgan asset management, ofwell as james athey aberdeen standard investments. joining me here in new york is ian lyngen from bmo capital markets. speaking of the yield curve, we have seen a shift with a growing number of strategist saying they expect the yield curve to steepen next year. james, we will start with you. what is your take on that? james: good to see you again. essentially we've been running the steepener all year. it's essentially the combination of, we would like it to be long duration and steepening risk, we prefer the duration risk at the front end of the yield curve. and certainly now, what the fed has done is raise the bar for hiking rates ridiculously high. it will not happen anytime soon. when you have two-years trading above the funds rate, historically it tells you the market is expecting hikes, which is not likely to happen.

so there is a massive asymmetry towards being positioned on 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 concerned about steepening the yield curve that way. i would say, even though i running the steepener, i find am that difficult to believe , when you just look at the oil price and the base effect, notwithstanding the end of december, which will be an upside for base effects. it seems like unless we have a massive oil rally, it will struggle to make any headway higher over the next 6-12 months. for that reason, we are not expecting any 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 ia, here, we are looking at potentially a steeper yield curve but don't get too excited. because it basically means inflation will pick up. is that your take?

ian: i think it's basically as james said. you have a two-year part of the curve that is effectively anchored to some extent by the fed on hold, a little bit of cuts priced in over the next year or so. for all intents and purposes, the fed has essentially told us they will be on hold which means it will be bounced around, but what happens to the 10 year? at the moment, it feels like we are so reliant on what the outcome of a trade talks are in the next few weeks. 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 two-year and 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 push back towards 2. 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 iain's voice.

know we have to talk about this again? why do we care? if it is not necessarily going to signal a recession, 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 -- there is a year and a half when the curve inverts, and when we start to see a pickup in a recessionary risk. it takes that long for the spread compression to work through to corporate profitability, then that hits the employment sector, the consumer starts to lose momentum and that's where it will come from. so there is a delayed effects, and it really becomes the 2020 story that i think we need to focus on. 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. but i am wondering, from your perspective, do you think bond markets have generally entered this sleepy phase where central banks globally are just 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 to what we have gotten used to experiencing. 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 just an almost constant basis and you get this, buy risk 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 with recent policies from the federal reserve, which they might call something other than qe, but by anybody else's definition, including ben doesn't in 2009, it is no seem to be having the 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. i am wondering what that implies for 2020. are we going to see the same thing in 2020, or is something going to shape this complacency? iain: it feels a little like that. 2018,ntioned earlier in

that was a tough time. we obviously had quantitative tightening and we had hikes from the federal reserve. i completely 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 again at the same time as the fed is easing policy. on top of that, you have also got the ecb back in the market again. so it does feel 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 around 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: all right, ian, how long does this go on?

ian: i think we probably have a quarter or two left of the euphoria. lisa: is it euphoria? is this as good as it gets? ian: this is as good as it gets. lisa: you heard it here. [laughter] ian: we are starting to see some indicators that the consumer is not on particular strong footing. it does take a while for it to flow through. we have seen some disappointing retail sales prints over the past few months. if we think about the amount of leverage that is in the core consuming cohort, the group, that group has a huge student debt overhang, 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? real quick? iain: i agree completely. we are seeing signs that the consumer has had the best of it,

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

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

where primary markets surged ahead of thanksgiving, with 16 issuers offering notes more than the past two sessions combined. november is the busiest month in more than two years for high-yield supply. in the u.s., junk-bond issuance slowed after last week with just nearly $1.5h 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 bonds to the market, offerings from mastercard and other banks represent the lion share of the volume. sticking with investment grade, one company is raising concerns about the valuation in the bbb space. >> a lot of investors are not allowed to go into noninvestment grade, have gone into the lowest level of investment grade and that is in turn was doing the amount of money coming in.

stealey, your perspective on the bbb space. this turned out to be the best performing of the investment grade asset classes. where are we heading with the triple b's? iain: i think what is happening at the moment is just this grab for yield and people are looking at triple b. we don't have to go low investment grade, 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 have got our back. we are starting to hear more overseas demand coming back to some of those hedging costs, that were so painful to european or japanese investors the last year or so, 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 really focused on the notion that we should see some widening in the credit spread market,

especially as the expansion moves on and on. we just haven't met 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, floor in business spending. that is going to be a 2020 story. but until then, i think that the key issue is people really need to add any type of yield that they can. lisa: james, it seems like they both are saying that momentum is more to outperformance by triple b's. until something breaks. would you agree? james: normally we expect, the age-old saying that they don't don't fullyge -- i sign up to that. we are not going to have that end to the cycle this time. the other side of the debate is to say that there is a stock of debt globally that has gone up

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 grade credit in general, risk assets in general, because the economy has not slowed dramatically, but the fed has already 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 not just in investment grade credit, that across a number of asset classes, and a number of economies and regions, we have heard begin to see the weakest links in the chain starting to crack. iain mentioned delinquencies, we that is something we have seen continually 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 probably not there yet, it definitely 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 in aggregate. lisa: you are not buying triple b's? james: absolutely not. lisa: it is an interesting conundrum. james, you raised an interesting point a number of investors and policymakers are highlighting , which is, what are the unintended consequences of more stimulus. asset manager warning investors of a blowup in credit. warning "beyond the short-term, the trend is toward a more aggressive mix, and the extension of the credit cycle could eventually and in an explosion, although, it is unlikely to happen next year." the chart we showed earlier credit isbbb rated the highest proportion of overall investment grade credit ever, nearly half of all this kind of debt is now triple b rated.

i guess i am struggling to understand when we care about that. ian, are you still buying and trying to get the last out of bbbs, sincebuying there is no catalyst in sight? ian: i don't think that we will know the catalyst until after the fact. it is one of those situations where when it happens, we will look back and say, of course cap i, it was the retail sector, or whatever it ends up being. i would not be aggressively adding in triple b space for that reason. that is just a broader micro story. lisa: iain, what asset class is do you think is most vulnerable when we do get the blowup a lot of people are expecting will inevitably come? iain: i think you still got to look at quality. 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, where we have seen investors discriminate credit, where you are not even making your coupon ,oward the bbb end of the curve i think it is the bottom of the 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, yes, we may have slowed down and yes we may have a recession, but it is likely to be a shallow one, which means rates will pick up, but 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. lisa: are you buying triple b? and james, notan so much. iain: i think you need to look at it on a company by company basis. there are some companies out there where you look at them, in the next few years, they will probably make the journey down toward high-yield. but if you can get the right credit selection and buy good

quality bbb that will stay bbb, 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 have had good returns there this year, start looking at upping quality trade and moving of the spectrum. they would have to to go all the way through to treasuries, but there is not much yield there, so you are put in that 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 all coming up next. this is "bloomberg real yield." ♪

♪ lisa: i'm lisa abramowicz in for

jonathan ferro. this is bloomberg real yield." time now for the final spread. over the next week, on monday we get u.s. ism manufacturing numbers, and on tuesday, a right -- a rate decision from the rba, and u.s. auto sales. wednesday, euro area finance ministers meet. thursday, german factory orders. then on friday, the main event, u.s. jobs report. my guests are still with us. there is a question given the central bank support of markets right now, does it even matter what we get with respect to economic data? which is the most important data point that you are focused on? ian: at this point, i have to say, it is going to be the unemployment 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 actually will face recession in the next 12. lisa: are you also looking at the actual headline unemployment rate at this point, or does inflation matter and wage gains? iain: i think you need to be

looking at the unemployment rate. that's really what people are focusing on. if you do start to see that tick back up, i think it will be a big red light for the federal reserve. i think also we should continue to look at the manufacturing numbers. we obviously had that sharp decline a couple of months ago that has reversed. if we can get some stability there, i think people were very concerned the weakness we saw in manufacturing, was it going to roll over into services? we've had some form of stability, maybe a bottom in manufacturing, and would be good to see that flow through. lisa: james comer what would we have to see with respect to economic data to change the fed's policy path or two push -- or to push forward at least for a rate cut? james: i definitely think rate ors is a lot easier to see, are a lot easier to see, should say. there needs to be material disappointment relative to their outlook. they have got a fairly negative

growth outlook for q4 in line with market consensus. end, it hase top 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 soon, but into q1, broadly speaking if we see data on underperforming relative to their expectations, that will do it. but we also know that the federal reserve is very sensitive to the financial markets. i don't think it would take much disruption in the equity market to bring back questions about whether or not more policy is needed. i also agree with the other chaps, it is about jobs for me. jobs is very lacking. i want to see the survey, kind of the forward-looking .omponent, ism lisa: time for the rapidfire round. which will perform better next year, high-yield or investment-grade debt? iain: investment-grade. james: treasuries. ian: i'm going to go with

high-yield. we are at an interesting inflection lisa: have we already point. seen the cycle lows for u.s. treasury yields? iain: definitely not. james: absolutely not. ian: no way. lisa: will we 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. back next this is "bloomberg friday. real yield." ♪

♪ haslinda: hello, i'm haslinda amin. he was born in the soviet union, but calls singapore home. serguei beloussov is a serial entrepreneur who puts knowledge of the heart of everything he does. he has founded more than two dozen companies, among them acronis, a data protection firm valued at more than $1 billion. serguei beloussov is today's "high