jonathan: from new york city, for our viewers worldwide, i'm jonathan ferro. bloomberg "real yield" starts right now. ♪ coming up, the u.s. payrolls report coming in hot. counting down to another trade deadline, waiting for a phase one deal. twitter showing there is more than enough appetite for high-yield debt. we begin with the big issue, a blowout payrolls report. >> this was a pretty strong report. >> impressive report. >> undoubtably a really strong jobs number. it is almost unfathomable. >> the rebound in economic activity is underway. >> this endorses the fed. >> exactly what the fed is

looking for. >> it is reasonable to expect the fed to kind of be on hold. >> the front end of the curve is selling up more than the back. >> the market is saying the fed pause is warranted. >> it is probably going to remain on pause for a good portion of next year. jonathan: joining me around the table in new york, gershon distenfeld, priya misra, and krishna memani. priya, let's begin with you. what a payrolls report. priya: a good report, no way to look around it. when we take out the gm numbers, still a solid number. but i have to highlight, caution a little bit. the labor market is a lagging indicator. is global growth for sure bottoming? there are some signs that it may be. is it about to surge ahead? i am skeptical. we are not getting stimulus out of china, europe. in our view, global growth probably muddles around.

the trade uncertainty, we are so hung up on this trade deal. i don't know even if we get the phase one deal, which is not guaranteed, the fact that the president threatened tariffs on argentina and brazil, that was just a few days ago. we weaponize tariffs now, and uncertainty remains. i think the fed is likely to be on hold. we are not entirely out of the woods for the economy. the labor market may be showing signs of cracking. jonathan: i have to say, two months ago, it feels like a long time ago that we got new steel levies coming through. krishna: priya's point is a good one, that the global economy is definitely bottoming out. if there is a real acceleration unfolding, the consumption part of the economy driven by employment was never really an issue. it was always about manufacturing.

as we see the turnaround, the things to watch, where does pmi end up, where does investment end up? those are the better markers for the magnitude of the growth, rather than focusing on the employment numbers. employment numbers certainly helps, but that is not the case. jonathan: your case of the global economy bottoming out, i did not hear that from priya. she seems to be more worried than you. krishna: the global economy is certainly bottoming out. in the u.s., we are already seeing the signs. we are seeing the same signs overseas on a different magnitude, but the trend is there. gershon: as strong as the number was today, this changes absolutely nothing. we are still getting two different pictures of the market. the equity market is saying everything is all in the clear. the rates market is still saying not. this mirrors the dichotomy we are seeing in economic data. the consumer, everything we are seeing is all clear. we are not seeing anything. it comes to manufacturing,

business investment -- we are not seeing it. what are the equity markets saying? they are basically pricing in as if we are going to get a manufacturing recovery, even though it has not happened yet. the rates market is saying we are going to see a spillover of the consumer. what will ultimately be right? only time will tell. my guess is we will see it seep into to the consumer a little bit, also see manufacturing rebound a little bit. we will also see rates go a little higher. jonathan: people have picked up on what you said, they look at the treasuries market and they say we are up only a couple basis points after that. is that concern still that we are not out of the woods, or is that just a bid for income that is not going anywhere? what is that, gershon? if you had to lean into one versus the other, what would you say? gershon: you don't look at the treasury market as much. that is where you see it, that is consistent with the equity markets, still a tremendous demand for yield.

i don't see how that goes away anytime soon until you see the equity market crack. the underlying data, if you believe in the consumer story, says yields should be higher at the long end. do you believe nominal growth over 10 years will be less than 2%? i have news for you. that will not be a pretty environment for the equity market, if that's the case. krishna: as a treasury analyst, what the market is telling you is the fed had truncated the distribution. they are not hiking until we get above 2. when we talk about how high the fed funds rate can go, can you get the 10-year above 2%? as much as there is a demand for yield, if the fed is not taking back these insurance cuts -- they put insurance in. if they didn't need it, are they taking it out? they are telling us they are not.

the reason why treasuries are not reacting as much is the fed is telling us they are not about to hike anytime soon. krishna: that is the most important point with respect to the rates market. the fed has told you they will not even consider, let alone do a rate increase, until inflation gets north of 2%, which is never. if the front end of the market is not going to move, long rates move a lot, i don't think that's in the cards. even if we get economic growth back to 2 and change, even in that environment, the rates will not be 3%, 3.5%, the way they were before. jonathan: this is a quote from cibc. this year, we have had 90 rate cuts across 45 global central banks -- and here is the punchline -- the biggest easing we have had since the financial crisis. every time i read that, i think, has it really been that bad? worse than 2012, worse than

2015, 2016? has this year really warrented that kind of policy response? priya: if you look at financial conditions, you would say no. if you look at monetary policy sort of running out of ammunition, that tells you why policymakers seem to have panicked. why have they changed their reaction function? they don't have that much ammunition left, so they have set the bar lower for us to ease. there has been a global slowdown, the u.s. has outperformed, but the fed also looked at global factors and said they had to ease. it depends on which market you are looking at. the headwinds have been heavy. gershon: i disagree slightly with priya on this. no question, central banks, not just the fed, no one is hiking rates soon. but this notion in the market that inflation is dead forever, and that is just not going to be the case. it was only 15 months ago that we were closing in on 3.25% on the 10-year. that is a long time. 30 is even longer. we should get curve steepness as soon as we get inflation.

real rates are still essentially negative at the long part of the curve. i don't believe that will be the case in the long run. jonathan: people are looking at this labor market, seeing a jobs print north of 200,000 and say there is more slack. if there is more slack, we can turn out payrolls growth north of that, i will not worry about inflation. this story has a long way to run. is that your take? krishna: absolutely. i think i disagree with gershon, which is not the first time. jonathan: we still got 20 minutes. krishna: the point is, inflation really has not picked up since the financial crisis. the rate increase that gershon was talking about, higher level of rates, was driven by what the fed was going to do. that is not going to be -- the fed learned its lesson in 2018. the policy tightening they implemented was a policy disaster, was not warranted, and they are regretting it today. when we talk about the rate cuts on a global basis, two different drivers.

in the u.s., it was unwind of an unwarranted policy type by the -- tightening by the fed. overseas, things have actually slowed down meaningfully. if you look at the growth rate relative to trend in emerging markets, europe, things were significantly worse. those were warranted, here it was not. the tightening was unwarranted, so it is an unwinding of that tightening. jonathan: you made one of the best calls of 2019, you said the most important thing will be the calls on policy. to underline that, you could have gone the economic call right in germany on the brink of recession, and the market call wrong. the dax ended up surging about 25%. the policy response we have had, they say it is not qe. there are so many people who look at this balance sheet and say, it's expanding, it looks like qe. for me, that looks like qe, i will trade it as it is.

krishna: you can call it what you want. at the end of the day, it's an expansion of the balance sheet of the fed, and a meaningful expansion. if you look at three things that would qualify it as qe, is the balance sheet expanding? yes. is the term premium going down -- it was already low, so it cannot go down a lot. third, what is that telling you from a forward guidance standpoint? especially after powell came out and said what he said about tightening, that is not happening. call it whatever you want, protest as much as you like, it is qe. markets are not fooled. they will assume it as such and act accordingly. jonathan: priya, there will be people screaming at the tv saying i agree with chairman powell, it is not qe. what is it, and does it matter what we call it?

priya: this is a communication challenge for the fed. they are trying to put reserves in the system. they should not have let the portfolio run off as long as they did. they are trying to unwind that. if the equity market is here because of this so-called qe, then it's a mistake. run for the hills. if the equity market is here because the consumer is resilient, then there is some merit to it. we are in this inflection point. is the consumer going to stay resilient? that should be the call for equity, not this qe balance sheet. krishna: that's an interesting point, but from an investor perspective, what matters? what matters is, are rates going to be relatively low for the foreseeable future? that is the bottom line. if that is the case -- jonathan: we are out of time. coming up, twitter borrowing at some of the lowest costs ever in high-yield. that conversation is coming up. 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 asia where dollar bond sales from the continent remain steady this week. the market chalking up a new full-year record for issuance. in the u.s., investment grade sales remain subdued this week, almost $15 billion, almost eclipsed the entire month of december 2018. in high-yield, twitter is offering, its inaugural bond issue yielding 3.57%, the lowest security in eight years or more of the u.s. junk market.

sticking with high yield, michael collins on whether it is time to start buying ccc debt. >> ccc spreads are 200 basis points wider. it's a weird relationship we have not seen. unless we are going into recession, there may be value emerging in the lower quality tears of the credit market. -- tiers of the credit market. if you can find 20 or 30 of them that have been thrown out with the bathwater, i think there is value in that part of the market. jonathan: there is a big debate. weighing in is gershon distenfeld, priya misra, krishna memani. gershon, your take on whether it is time to rotate from some of the winners to the losers in high-yield? gershon: you're going to hear that a lot from high-yield managers. they are in a difficult situation. we have 33 years of high-yield data. 23 years, it has been treasuries. in 21 of those 23 years, ccc's have been the outperformer. two exceptions, 2005, 2019. this has been an abnormal year but very good year for managers. managers can buy anything

without taking risk and outperform. that is changing. that is a joke, twitter is high-yield with a three handle? that is low yield. that is indicative of the market. the math does not work. the only way you'll make money on that is if that goes to 2.5%. that won't happen. what are you forced to do? the only way you can promise investors to make even 7, 8, 9%, let alone 12% this year, is to say ccc's are cheap. i think it is a trap. if you can pick the right 20 or 30, i agree. the question is how smart can you get that hit rate? that's a tricky thing. krishna: i like the line, that is not high-yield, that is low yield. three handle calling it high-yield, that is kind of -- jonathan: you could still call

it junk if you want, just not high-yield. krishna: the other point gershon makes is a good one, there is no alternative. the one issue i would make with the statement is the day of reckoning is going to arrive. that is not a 2020 issue anymore. the employment number to some extent proves that. the underlying economic growth has bottomed out. it is reaccelerating. the lower part of the market that was left behind because we were worried about recession now it has an opportunity to come back. is that a good trade over the next 10 years? i don't know. i'm focused on what will work in 2020. gershon: we have been talking a lot about this bifurcation of the market. i think it's become more than that. now i think there are other parts of the market. it is not just ccc's versus these sleep at night credits. there are parts of the market that are going through secular changes. take the health care market. whatever your political leanings are, neither side of the aisle has a plan.

one side has a plan and got no way to pay for it, and the other side has no plan. when you have sectors like that, you want to play the equity market because there will be winners and losers. then you have the u.s. energy sector. we talk about how we are still late cycle? we are now in the second downturn in a four-year period. high-yield managers are sitting there in a predicament they created themselves. they financed these companies in 2013, 2014, refinanced them again in 2017, 2018, and now are realizing that these companies don't generate cash, even in the best of times, and now they are stuck with them. if i owned none of them and somehow oil goes to 90, i will underperform. managers don't know what to do, so they are saying, let me buy these other ccc's. the economy is still pretty good. that is the only way i can get double-digit returns. high-yield managers don't know what to do.

jonathan: does this trouble you, when gershon is pointing out these risks, and then krishna is saying there is no other alternative? for a lot of people, that's the case. priya: if your treasury alternative is 1.70 five, then that is high-yield. gershon: all relative high-yield. priya: when you live in this relative world, bund yields are still negative. the problem is default risk is extremely low-priced. maybe if the economy is ok, that's fine. you should have a hedge for that. i would argue liquidity risk, just a year ago, we went to a liquidity scare in the fourth quarter. what if you have any year-end funding issues? is credit, particularly the riskiest part of credit, more susceptible? having some hedge, treasuries are cheap as a hedge or against any risk asset. jonathan: there is a cycle that keeps on coming up.

krishna, you think four more years now. you seem more conservative on this, priya, about what is happening in the cycle at the moment. gershon, i'm struggling to get my hands around where you think we are in the cycle. gershon: i don't believe in cycles. it is too simplistic a way of looking at the world. you look at some of the industrials in asia, latin america, i would argue they are early cycle. you look at the industrials in the u.s., we are later cycle, at least from a metric perspective. you have health care and retail going through secular changes. i don't like the whole cyclical talk. i think you have to decompose the parts of the economy. jonathan: you are all sticking with me. still ahead, the week ahead featuring an fomc rate decision, and another news conference from chairman jay powell. that is coming up next. 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, what a week we have coming up. saudi aramco starts trading wednesday. u.s. cpi and an fomc rate decision. thursday, the ecb and the swiss national bank making their own decisions. and the u.k. heading for its general election. friday, the consumer back in focus with u.s. retail sales. final round of thoughts with priya misra, krishna memani, gershon distenfeld. within the space of 24 hours, the federal reserve and the ecb, and a big consensus forming going into 2020, the rest of the world outperforms the u.s. where do you stand on that debate? priya: the rest of the world probably muddles along. we think the u.s. underperforms. we struggle to see, where is the growth engine for the rest of

the world? the extent of this deceleration will slow down, so you can flatline. this has big implications for the dollar. if you get this convergence in global growth -- we have certainly seen it in global yields -- but how much can the dollar weaken? you need the fed to capitulate. the fed needs to say this is a material assessment and we need to start cutting. only then will the dollar start to fall. gershon: you have to look at a couple of factors. one is the sensitivity to trade, how all that turns out. second is just a policy response. you look at europe, how much ammunition is left? even china has a lot more that they could do, should weakness emerge. krishna: i think for the overseas economies, for them to do better, basically, the dollar has to weaken. that means, as priya was indicating, the reacceleration overseas has to be far more substantial than in the u.s. there is a case to be made.

it is unclear today whether that will be the case or not. if it is unclear today, what that means is, expecting the dollar to weaken may be something we have to think about a little bit. jonathan: one of the big debates going into 2020, let's get to the rapidfire round. more 2020 calls. double-digit returns in investment grade credit in the united states through 2019, next year, either flat to negative, mid single-digit returns, or double-digit returns in 2020. what are you looking for? priya: negative. krishna: low signal digits. -- low single digits. gershon: i hate to agree with krishna, low single digits. jonathan: the 10-year this year, 2.18, the low, 2.14. do we retest the highs this year or test the lows this year next year? do we test the highs or lows in 2020?

gershon: both. krishna: highs. priya: lows. jonathan: i think we did the whole program not talking about trade. december 15, does a round of tariffs go into place or delayed and suspended? priya: delayed. gershon: delayed. krishna: delayed and suspended. jonathan: great to catch up with you all. gershon distenfeld, priya misra, krishna memani. that does it for us. this was bloomberg "real yield." this is bloomberg tv. ♪

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